Copyright © SmartPros (A Kaplan Company)  Thursday, June 23, 2016; 11 am – noon (EDST) Thursday, June 23, 2016; 1 pm – 2 pm (EDST) SIMPLER ACCOUNTING.

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Presentation transcript:

Copyright © SmartPros (A Kaplan Company)  Thursday, June 23, 2016; 11 am – noon (EDST) Thursday, June 23, 2016; 1 pm – 2 pm (EDST) SIMPLER ACCOUNTING STANDARDS FOR PRIVATE COMPANIES: HOW YOU AND YOUR CLIENTS CAN BENEFIT

Copyright © SmartPros (A Kaplan Company) The following program is authored by John Fleming and is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed and sold with the understanding that ADP and SmartPros Ltd. are not engaged in rendering legal, tax, accounting, investment or other expert advice. If expert assistance is required, the services of a competent professional should be sought. The views and conclusions expressed herein are those of the speaker and not necessarily those of ADP and SmartPros Ltd. 2

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2016 ADP, LLC. ALL RIGHTS RESERVED. Welcome CPE Webinar

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2016 ADP, LLC. ALL RIGHTS RESERVED.

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2016 ADP, LLC. ALL RIGHTS RESERVED. FLSA Update: What Are The Final Rule Changes? The final changes will increase the salary threshold for exempt employees from $455 per week/$23,660 per year to $913 per week/$47,476 per year. These rates are also subject to automatic increases every three years beginning January 1, Employers will need to comply with the law changes by December 1, 2016 Pre-Rule Salary LevelPost-Rule Salary Level $455 $913 $23,660 $47,476 WeeklyYearly 4.2 Million The DOL estimates that as many as 4.2 million workers may need to be reclassified as a result of the FLSA rule change

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP – A more human resource. is a service mark of ADP, LLC. Copyright © 2016 ADP, LLC. ALL RIGHTS RESERVED. How ADP ® Can Help Employers Understand FLSA Classifications HR Solutions HR HelpDesk – Our dedicated support team of HR professionals can help you understand which employees may be impacted and how to determine whether to reclassify or increase salaries. Employee Handbook – Establish an overtime policy to ensure that you are properly documenting and communicating your rules around overtime with your employees. Receive proactive updates to your current handbook policies based on state and federal law changes. FLSA Toolkit – This HR Toolkit provides best-practice steps you need to complete and document responsibilities relating to FLSA. Job Description Wizard – Create custom job descriptions to help support FLSA exempt classifications. Compliance Updates – Receive proactive alerts to help you stay on top of ever-changing state and federal employment laws, including updates on FLSA rule changes.

7 Copyright © 2016 ADP, LLC. This content provides practical information concerning the subject matter covered and is provided with the understanding that ADP is not rendering legal advice or other professional services.

Copyright © SmartPros (A Kaplan Company) EXPERT COMMENTATOR: John Fleming, CPA/MBA SmartPros (A Kaplan Company) 8

Copyright © SmartPros (A Kaplan Company) Recognize why private companies do not need GAAP financial statements Identify the process used by the Private Company Council to develop GAAP alternatives LEARNING OBJECTIVES 9

Copyright © SmartPros (A Kaplan Company) Topics GAAP and Non-GAAP Presentations History Leading Up to the PCC Private Company Decision-Making Framework Responsibilities and Operating Procedures of the Private Company Council (PCC) Accounting Standards Updates (ASUs) Resulting from PCC Projects Considerations for Adopting PCC Accounting Alternatives Reporting Issues 10

Copyright © SmartPros (A Kaplan Company) GAAP and Non-GAAP Presentations 11

Copyright © SmartPros (A Kaplan Company) GAAP and Non-GAAP Presentations GAAP based on FASB/IASB pronouncements: −Organized in the FASB/IASB Codifications Non-GAAP Presentations (Special Purpose Frameworks): −Cash −Income Tax −Regulatory (restricted use) −Regulatory (general use) −Contractual (restricted use) −Financial Reporting Framework for Small- and Medium-Sized Entities 12

Copyright © SmartPros (A Kaplan Company) History Leading Up to the PCC 13

Copyright © SmartPros (A Kaplan Company) History FASB – 1973 SAS 62 “OCBOA” – 1989 Sarbanes-Oxley – 2002 Private Company Financial Reporting Committee – 2007 Blue Ribbon Panel – 2010 Private Company Council (PCC) – 2012 – current AICPA's Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) –

Copyright © SmartPros (A Kaplan Company) History Blue Ribbon Panel Recommendations: Urgent and systemic problems in private company reporting Should focus on enhancements that retain comparability Recommended a separate autonomous standards board – Rejected by the Financial Accounting Foundation (FAF) “Differential framework” is necessary for private companies 15

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework 16

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework The primary purpose of this Guide is to assist FASB and the PCC in determining whether and in what circumstances to provide alternative: –Recognition –Measurement –Disclosure –Display –Effective date –Transition guidance 17

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework This Guide is intended to be a tool to help FASB and the PCC identify differential information needs of users of public/private companies financial statements and To identify opportunities to reduce the complexity and costs of preparing financial statements in accordance with GAAP 18

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework Identifies five “significant differential factors”: 1.The types and number of financial statement users and their access to management 2.Investment strategies of primary users 3.Ownership and capital structure 4.Accounting resources 5.Learning about new financial reporting guidance 19

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework Significant Issues: Recognition and measurement – involve modifications rather than non-recognition Disclosure – focus on relevance to users Display (presentation) – no material modifications expected 20

Copyright © SmartPros (A Kaplan Company) Private Company Decision Making Framework FASB Support: –Performing research and outreach –Preparing and providing appropriate reference and background materials –Identifying various stakeholder views –Developing possible alternatives for consideration in addressing technical issues –Participating in meeting discussions –Analyzing and summarizing public comments and other stakeholder input –Drafting due process documents 21

Copyright © SmartPros (A Kaplan Company) Responsibilities and Operating Procedures of the Private Company Council (PCC) 22

Copyright © SmartPros (A Kaplan Company) Responsibilities and Operating Procedures Members of the PCC Will Demonstrate: A keen interest in and knowledge of financial accounting and reporting matters Experience working with private companies A commitment to improving financial reporting for users of private company financial statements 23

Copyright © SmartPros (A Kaplan Company) Responsibilities and Operating Procedures Responsibilities of the PCC: The PCC is the primary advisory body to the FASB on private company matters Focuses on accounting treatment for private companies for items under active consideration and On possible alternatives within existing GAAP to address the needs of private company financial statements Any proposed changes to GAAP for private companies made by the PCC are subject to endorsement by FASB 24

Copyright © SmartPros (A Kaplan Company) Responsibilities and Operating Procedures PCC Operating Procedures: For projects under FASB's active consideration, the PCC advises the FASB about the implications for private companies There is regular communication between the PCC and FASB members and staff on FASB projects the PCC is advising The PCC will also monitor the activities of the Emerging Issues Task Force (EITF) to determine if any EITF issues impact private companies or involve separate consideration for private companies 25

Copyright © SmartPros (A Kaplan Company) Accounting Standards Updates (ASUs) Resulting from PCC Projects 26

Copyright © SmartPros (A Kaplan Company) ASU Intangibles – Goodwill and Other (Topic 350) Accounting for Goodwill 27

Copyright © SmartPros (A Kaplan Company) ASU Objective: Provide a simplified alternative for private companies' accounting for goodwill subsequent to initial recognition. ASU accomplishes this by (a) allowing goodwill to be amortized and (b) simplifying impairment testing 28

Copyright © SmartPros (A Kaplan Company) ASU Background: The benefits of current accounting for goodwill do not outweigh the costs Most users of private company financial statements generally disregard goodwill and goodwill impairment losses The current requirements for impairment testing are too costly and complex 29

Copyright © SmartPros (A Kaplan Company) ASU Provisions: The Election Amortization – 10 years or less Impairment – not automatic – based on the existence of a triggering event –Single step approach Presentation 30

Copyright © SmartPros (A Kaplan Company) ASU Provisions – Disclosures: The gross carrying amounts of goodwill, accumulated amortization, and accumulate impairment loss (if any) The total amortization expense for the period The amount of any goodwill included in assets held for sale or derecognized without having been classified as held for sale prior to disposal The amount assigned to goodwill from each major business combination as well as the weighted average amortization period for these additions 31

Copyright © SmartPros (A Kaplan Company) ASU Practical Implementation Issues: 1.Policy note disclosures 2.Entities can take a full year of amortization in year of adoption 3.GAAP departure issue 4.Book value at the date of adoption is amortized not the original goodwill amount 5.New goodwill should be assigned an amortization life with any future changes being accounted for as an accounting estimate 6.Potential impact on performance metrics 32

Copyright © SmartPros (A Kaplan Company) ASU Derivatives and Hedging (Topic 815) Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach (PCC) 33

Copyright © SmartPros (A Kaplan Company) ASU Objective: To provide a simplified accounting treatment for private entities with “plain vanilla” interest rate swaps designed to convert variable-rate debt to fixed-rate debt These arrangements are designed as cash flow hedges against interest rate risk 34

Copyright © SmartPros (A Kaplan Company) ASU Background: Interest rate swaps are derivatives Interest rate swaps eliminate interest expense variability Swap arrangement can be designated as a cash flow hedge to reduce variability Hedging rules are very complicated and non-public entities often cannot take advantage of them 35

Copyright © SmartPros (A Kaplan Company) ASU Conditions for Using the Simplified Hedge Accounting Approach: 1.Reporting entity is not a public company, a NFP, an employee benefit plan, or a financial institution 2.The simplified approach applies only to swaps that are used to convert variable-rate borrowing to fixed-rate borrowing 3.The simplified approach permits the reporting entity to assume no ineffectiveness and to use settlement value so long as all of the following conditions are met: 36

Copyright © SmartPros (A Kaplan Company) ASU Conditions for Using the Simplified Hedge Accounting Approach: The variable rate on the swap and the debt are based on the same index and reset period The terms of the swap are typical (plain vanilla) and there is no floor or cap on the variable rate in the swap unless there is a comparable floor or cap on the related debt The repricing and settlement dates for the swap and the borrowing are the same, or differ by nor more than a few days 37

Copyright © SmartPros (A Kaplan Company) ASU Conditions for Using the Simplified Hedge Accounting Approach (cont'd): The swap's fair value at inception is "at or near zero" The amount of borrowing covered under the swap (notional amount) is the same as, or less than, the principal amount of the debt All interest payments during the term of the swap are designated as hedged whether in total or in proportion to the principal amount of the borrowing being hedged 38

Copyright © SmartPros (A Kaplan Company) ASU Determining Settlement Value: Value of an interest rate swap is based on the present value of future cash flows attributable to the swap Calculation of the swap's settlement value does not consider non-performance risk −It is not "credit-adjusted" 39

Copyright © SmartPros (A Kaplan Company) ASU Hedge Documentation Required: In applying the simplified hedge accounting approach The documentation required by this ASU to qualify for hedge accounting must be completed By the date on which the first annual financial statements are available to be issued after hedge inception rather than concurrently at hedge inception – PCC relief 40

Copyright © SmartPros (A Kaplan Company) ASU Hedge Documentation Required: Date of designation The hedging relationship The hedging instrument – normally a swap agreement Hedged item or transaction – normally cash flows associated with the interest on a variable rate debt instrument The nature of the risk being hedged 41

Copyright © SmartPros (A Kaplan Company) ASU Consolidation (Topic 810) Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (PCC) 42

Copyright © SmartPros (A Kaplan Company) ASU Objective: To exempt private entities from the requirement to consolidate certain variable interest entities (VIEs) when activities are limited to leasing arrangements and the entities are under common control 43

Copyright © SmartPros (A Kaplan Company) ASU Background: Common control leasing arrangements applicable to private entities GAAP departures Income tax basis 44

Copyright © SmartPros (A Kaplan Company) ASU Criteria for Applying the Alternative – Conditions: The non-public company and the lessor must be under common control, and There must be a leasing arrangement between the entities, and Substantially all of the activity between the entities must be related to the leasing activity, and Any obligation of the lessor that is guaranteed or collateralized by the lessee could, when the obligation is first established, be adequately collateralized by the leased assets of the lessor entity 45

Copyright © SmartPros (A Kaplan Company) ASU Accounting and Disclosure Requirements if Alternative is Used: The amounts and key terms of significant liabilities of the lessor that involve significant financial support by the lessee A description of other significant “off the books” arrangements that could require significant financial support All of the other required disclosures in GAAP associated with leases, guarantees, related parties, etc. 46

Copyright © SmartPros (A Kaplan Company) ASU Practical Implementation Issues: 1.ASU – Leases 2.If prior GAAP departure to acceptable method, error correction guidance must be followed 3.If prior income tax basis to GAAP method, prior period must be converted to GAAP for comparability purposes 47

Copyright © SmartPros (A Kaplan Company) ASU Business Combinations (Topic 805) Accounting for Identifiable Intangible Assets in a Business Combination 48

Copyright © SmartPros (A Kaplan Company) ASU Objective: To provide an alternative for nonpublic entities that reduces the cost and complexity of measuring identifiable intangible assets acquired in a business combination By permitting certain intangible assets to be included in goodwill rather than valued and recorded separately 49

Copyright © SmartPros (A Kaplan Company) ASU Intangible Assets in a Business Combination: Acquisition Accounting – Identifiable Intangible Assets: Contractual or legal rights Separable 50

Copyright © SmartPros (A Kaplan Company) ASU Provisions: If ASU is elected, an entity would not recognize the following intangibles separately: Customer related intangible assets that are not capable of being sold or licensed independently from other assets of the business, and Non-compete agreements If ASU is elected, the entity must also elect ASU

Copyright © SmartPros (A Kaplan Company) ASU Practical Implementation Issues: 1.If planning to go public or be acquired by a public company, do not use this alternative 2.The alternative does not apply to “contractual-legal” intangibles 3.A company electing this alternative must still: a)Identify all the customer-related intangibles acquired and b)Determine whether or not they could be sold or licensed separate from other assets of the business 52

Copyright © SmartPros (A Kaplan Company) ASU Practical Implementation Issues (cont'd): 4.No impact on the requirements to record liabilities 5.The ASU applies to customer-related assets but not contract assets 6.This ASU excludes leases from its scope 7.Combining acquired intangibles with goodwill can eliminate a bargain purchase situation 53

Copyright © SmartPros (A Kaplan Company) ASU PCC Initiatives (Topics 350, 805, 810, and 815) Effective Date and Transition Guidance 54

Copyright © SmartPros (A Kaplan Company) ASU Objective: To amend the four PCC alternatives issued to date so that non-public entities, adopting these alternatives in periods subsequent to their original effective dates Will not be required to assess preferability or retrospectively apply the change in accounting principal requirements 55

Copyright © SmartPros (A Kaplan Company) ASU Background: ASU – Accounting for Goodwill ASU – Simplified Hedge Accounting ASU – Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements ASU – Accounting for Identifiable Intangible assets in a Business Combination 56

Copyright © SmartPros (A Kaplan Company) ASU Provisions: The four PCC initiatives are effective immediately – remove their effective dates Eliminates the requirement to assess preferability of the change in accounting principle when the ASU(s) are first elected Makes the transition guidance in the ASUs permanent: −Removes the requirement for retrospective adjustment and permits the ASU transition rules to be followed, regardless of when the alternative is first elected 57

Copyright © SmartPros (A Kaplan Company) ASU Effective Date: Effective immediately, removing all effective dates in the ASUs 58

Copyright © SmartPros (A Kaplan Company) ASU Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting (In Part) 59

Copyright © SmartPros (A Kaplan Company) ASU Issue 7: Intrinsic Value Private companies may elect to use intrinsic value in place of fair value for share-based awards classified as liabilities Intrinsic value is the difference between the exercise price and the value of the award instrument (such as exercise price versus value of shares) The intrinsic value is re-assessed at each balance sheet date and adjusted One common example – Stock Appreciation Rights (“phantom stock”) Transition: Modified retrospective 60

Copyright © SmartPros (A Kaplan Company) Considerations for Adopting PCC Accounting Alternatives 61

Copyright © SmartPros (A Kaplan Company) Overall Considerations for Adopting the PCC Accounting Alternatives Entity Considerations: 1.Not applicable for public entities 2.If the entity goes public or is acquired by a public company 3.User acceptance 4.Private company consolidating a public company 5.Applying one alternative does not cause the application of other alternatives 6.Potential comparability issues 62

Copyright © SmartPros (A Kaplan Company) Reporting Issues 63

Copyright © SmartPros (A Kaplan Company) Overall Considerations for Adopting the PCC Accounting Alternatives Reporting Considerations: EOM paragraph when adopting a PCC alternative Comparable financial statements Adopting a PCC alternative is an accounting principle change Potential need to restate prior periods and reference the restatements in the report 64