FASB Update Rahul Gupta Project Manager Financial Accounting Standards Board August 13, 2014 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process & deliberations.

Today’s Agenda Recent Standards FASB projects EITF projects PCC projects

Recent Standards

Recent Accounting Standards Updates No. Title 2013-12 Definition of a Public Business Entity 2014-01 Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the EITF) 2014-02 Accounting for Goodwill (a consensus of the PCC) 2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the PCC) 2014-04 Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the EITF) 2014-05 Service Concession Arrangements (Topic 853) (a consensus of the EITF) 2014-06 Technical Corrections and Improvements Related to Glossary Terms 2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)

Recent Accounting Standards Updates No. Title 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity 2014-09 Revenue from Contracts with Customers (Topic 606) 2014-10 Development Stage Entities (Topic 915) 2014-11 Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures 2014-12 Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the EITF)

ASU 2014-02, Accounting for Goodwill (a consensus of the PCC)

ASU 2014-02: Goodwill Final Alternative Do not amortize goodwill Current U.S. GAAP Do not amortize goodwill Test for impairment at least annually or more frequently Reporting unit level Two-step test Optional qualitative assessment Final Alternative Amortize over 10 years or less Test for impairment upon occurrence of triggering event Entity level or reporting unit level One-step test Optional qualitative assessment

& interim periods thereafter ASU 2014-02: Goodwill Transition: Amortize existing goodwill prospectively over 10 years or less if the private company can demonstrate that another useful life is more appropriate. Effective Date: Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. 1st annual period Private Companies & interim periods thereafter Q1 Q2 Q3 YE Q1 Q2 Q3 Dec. 15, 2014 2015

ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the PCC)

ASU 2014-03: Interest Rate Swaps Impact of interest rate swap Current GAAP PCC Alternative No hedge accounting Hedge accounting Combined instruments (Not pursued) Simplified hedge accounting (Final) Income statement Volatility in interest expense as result of changes in FV Interest expense approximates fixed rate debt Balance sheet Asset or liability at fair value Only disclosure of settlement value Asset or liability at settlement value (or FV) Other comprehensive income No impact Includes changes in fair value of effective portion of hedge Includes changes in settlement value (or FV) of the swap

ASU 2014-03: Interest Rate Swaps Transition: Private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption. Existing swaps as of the date of adoption may qualify for the simplified hedge accounting approach. Effective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. 1st annual period Private Companies & interim periods thereafter Q1 Q2 Q3 YE Q1 Q2 Q3 Dec. 15, 2014 2015

ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)

ASU 2014-07: Common Control Leasing & VIE Typical private company common control leasing arrangement Owner Manufacturing Company Leasing Company 100% Interest Pays Rent Leases Land & Building Bank Mortgage Debt

ASU 2014-07: Criteria to qualify for scope exception 1) Lessor entity & private company lessee (reporting entity) are under common control 2) Private company lessee has leasing arrangement with lessor entity 3) Substantially all activity between two entities is related to leasing activity between lessor entity to the private company lessee 4) If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.

ASU 2014-07: Common Control Leasing & VIE Transition: Full retrospective approach Effective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. 1st annual period Private Companies & interim periods thereafter Q1 Q2 Q3 YE Q1 Q2 Q3 Dec. 15, 2014 2015

ASU 2014-09, Revenue from contracts with customers (Topic 606)

Revenue Recognition Objective: single, principle-based revenue standard Improve accounting for contracts with customers More robust framework for recognizing revenue Increased comparability across industries & capital markets Better disclosures Excludes contributions and collaborative arrangements Substantially converged on major decisions Final standard issued on May 28, 2014

Core Principle and Application 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 1 Identify contract(s) with the customer 2 Identify performance obligations 3 Determine the transaction price 4 Allocate the transaction price to the identified performance obligations 5 Recognize revenue when performance obligation is satisfied

Disclosure requirements* 19 Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors Explain the relationship with segment disclosures Disaggregation of revenue Opening & closing balances Amount of revenue recognized from contract liabilities Explanation of significant changes in contract balances Information about contract balances Transaction price allocated to remaining performance obligations Quantitative or qualitative explanation of when amounts will be recognized as revenue Remaining performance obligations Interim requirements All quantitative disclosures in annual and interim (Public companies only) * Most quantitative disclosures are optional for nonpublic entities

Rev Rec—Issuance & Effective Dates: Timeline Issue final standard May 2014 Establish Transition Resource Group June 2014 Effective Date – Public Entity Jan. 2017 Effective Date – Nonpublic Entity Jan. 2018 A nonpublic company/not-for-profit has the option to early adopt (no earlier than a public company) Transition alternatives: Retrospective for all periods presented Apply when effective For year of adoption, disclose amounts of financial statement line items under old method accounting (to allow trend analysis)

Transition Resource Group (TRG) – Overview To solicit, analyze, and discuss stakeholder issues arising from implementation of the new guidance To inform the FASB and the IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues To provide a forum for stakeholders to learn about the new guidance from others involved with implementation TRG will not issue guidance

How to Submit an Issue Any stakeholder can submit a potential implementation issue We encourage submissions as soon as possible Issue submitted about new revenue guidance should Involve guidance that can be applied in different ways resulting in diversity in practice Be pervasive (relevant to wide group of stakeholders) Submission forms will not be public Issues may be discussed in public FASB and IASB staff will read all submissions and decide priority of discussing issues

Additional Information Additional information on TRG website Submission form and instructions Meeting dates and materials Replay of meetings Staff contact information TRG members www.fasb.com

FASB projects

Topics Current FASB projects Current Agenda Simplification Initiative Accounting for Financial Instruments

New FASB Agenda: 3 Types of Projects Foundational projects Promote transparency Promote simplification

Current FASB Agenda Framework Projects Stage Conceptual Framework: Measurement Initial Deliberations Conceptual Framework: Presentation Disclosure Framework: Board’s Decision Process Exposure Draft Redeliberations

Current FASB Agenda Recognition and Measurement Projects Stage Accounting for Financial Instruments: Classification and Measurement 2nd Exposure Draft Redeliberations Accounting for Financial Instruments: Impairment Insurance: Improvements to accounting for long-duration contracts Exposure Draft Redeliberations Leases Accounting for Goodwill for Public Business Entities and Not-for-Profits Initial Deliberations Clarifying the definition of business Consolidations: Principal Versus Agent Analysis Customer’s Accounting for Fees in a Cloud Computing Arrangement Simplifying the Subsequent Measurement of Inventory Exposure Draft Outstanding Technical Corrections

Current FASB Agenda Presentation and Disclosure Projects Stage Clarifying Certain Existing Principles on Statement of Cash Flows Initial Deliberations Disclosure Framework—Entity’s Decision Process Discussion Document Redeliberations Disclosure Framework—Disclosure Reviews - Defined Benefits Plans - Fair Value - Income Taxes - Inventory - Interim Reporting Financial Statements of Not-for-Profit Entities Going Concern Final Standard Drafting

Current FASB Agenda Presentation and Disclosure Projects Stage Government Assistance Disclosures Initial Deliberations Insurance: Disclosures about Short-duration Contracts Investment Companies: Disclosures about Investments in Another Investment Company Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items Exposure Draft Outstanding

Current FASB Agenda Research Projects Accounting Issues in Employee Benefit Plan Financial Statements Accounting for Financial Instruments: Hedging Accounting for Financial Instruments: Interest Rate Risk Disclosures Financial Performance Reporting Liabilities & Equity—Short-term Improvements Pensions—Cash Balance Plans

Reducing Complexity - Two Issues Complicated, unclear standard obscures its meaning Accounting treatment is clear, but applying it is lengthy, difficult & expensive

How FASB is Addressing the Problem Progress made and in process Developing internal Board policy on complexity Broaden thinking on complexity through outreach Research project on Simplification Initiative

Simplification Initiative Objective Objective is to reduce cost and complexity while maintaining or improving the usefulness of the information Projects would include narrow- scope items that the Board can complete in the short term Welcome input on ideas

Simplification Initiative: Tentative Decisions Measurement of inventory Inventory would be measured at the lower of cost and net realizable value. A reporting entity would no longer consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. Prospective application Eliminating extraordinary items Removed the concept of extraordinary items from U.S. GAAP Unusual or infrequent items would be retained

FI: Classification & Measurement—Model Topic Redeliberated Model (decisions since ED) Cash flow Test Current GAAP - No cash flow test. Revert to the current embedded derivative guidance in Topic 815. Keep existing bifurcation requirements that apply to hybrid financial assets and liabilities Business model Current GAAP - Retain existing separate accounting models to determine the classification and measurement of loans and securities (based on management’s intent) Equity Securities From ED - All equity securities measured at fair value through net income (except equity method and nonmarketable securities) FVO Current GAAP - Unrestricted for financial assets and liabilities subject to Topic 825 Practicability Exception Equity securities with no readily determinable fair value are measured at cost, adjusted for impairment and any observable price changes.

FI: Classification & Measurement “FAS 107” Disclosures: FV information for assets & liabilities carried at amortized cost Public Business Entities – required, either parenthetically on face of statements or in notes Excluded: receivables and payables due in less than one year, demand deposit liabilities Other Entities – no presentation or disclosure requirement Regardless of asset size or presence of derivatives

FI: Impairment (Credit Losses) Expected credit loss model reflecting more forward-looking information Immediate recognition of lifetime expected credit losses on income statement Measurement of expected credit losses (ECL) Reflects management’s expectation based on past events, current conditions, & reasonable and supportable forecasts Reflect the risk of loss (i.e., the possibility that a loss will occur) as opposed to reflecting the most likely outcome (statistical mode) Provide enhanced disclosures compared to current GAAP (still to be redeliberated)

FI: Impairment (Credit Losses) The proposal applies to the following: Debt instruments (e.g., loans and securities) measured at: Loan commitments Lease receivables Trade receivables Pledge receivables (to be redeliberated) Amortized cost FV - OCI

EITF projects

EITF―Open Issues Issue Status Issue 12-F: Pushdown Accounting Exposure Draft Redeliberations Issue 12-G: Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity Final Standard Drafting Issue 13-F: Accounting for the Effect of Federal Housing Administration Guarantee Issue 13-G: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

Pushdown Accounting (EITF Issue 12-F) Exposure Draft Issued – Comment period ended July 31, 2014 Background Current U.S. GAAP offers limited guidance about when and how pushdown accounting should be applied. Pushdown accounting governed by SEC staff guidance (for SEC registrants) Pushdown accounting required when 95% (or more) of reporting entity (SEC registrant) is acquired; optional between 80% to 95%; and prohibited below 80% ownership. Perceived as complex because of different thresholds, exceptions and other related rules. Pushdown accounting optional for entities other than SEC registrants. Exposure Draft Issued on April 28, 2014 Provides option to apply pushdown accounting when acquirer (as defined in Topic 805) obtains control of reporting entity. Utilizes existing US GAAP concepts of “control” from Consolidations (Topic 810), and “acquisition method” from Business Combinations (Topic 805) Scope and Transition An acquired entity, both public and nonpublic, that is a business or nonprofit activity. Effective only for future acquisitions after effective date (yet TBD).

Pushdown Accounting (EITF Issue 12-F) Exposure Draft Main Provisions – Comments period ended July 31, 2014 Reflect new basis of accounting established by acquirer for individual assets and liabilities of acquired entity by applying Topic 805 on business combinations (mostly fair value) Recognize goodwill that arises due to application of Topic 805 Do not recognize bargain purchase gains Disclose information that enables users to evaluate effect of pushdown accounting Elects pushdown accounting Do not elect pushdown accounting Disclose that entity has: undergone a change-in-control event, and elected to continue to prepare its financial statements using its historical basis Entities will evaluate at each period whether they’ve gone through a change-in-control event

PCC projects

Private Company Council: Open Projects Issue Status 13-01A: Accounting for Identifiable Intangible Assets in a Business Combination Exposure Draft Redeliberations 14-01: Definition of a Public Business Entity (phase 2) Initial Deliberations

Identifiable Intangible Assets (in a Business Combination): Stakeholder Feedback User Relevance Some question that the requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful information Cost & Complexity Estimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships

Identifiable Intangible Assets: Proposal At April 29 meeting, PCC discussed various alternatives, including: Recognizing & measuring only intangible assets capable of being sold or licensed independently Principle-based vs rules-based approach Next steps: directed staff to perform more analysis and outreach

Questions & Answers