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.

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

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

Accounting Standards Update Recent Standards Accounting Standards Update Effective Dates Update No. 2013-11—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, 2013. Nonpublic entities: after December 15, 2014. Update No 2013-10—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. 2013-09—Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04 Effective July 2013 Update No. 2013-08—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

Accounting Standards Update Recent Standards Accounting Standards Update Effective Dates Update No 2013-07—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. 2013-06—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 2013-05—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, 2013. Nonpublic entities: annual period beginning after December 15, 2014, and interim and annual periods thereafter

Accounting Standards Update Recent Standards Accounting Standards Update Effective Dates Update No. 2013-04—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, 2013. Nonpublic entities: fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. Update No 2013-03—Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities February 2013 Update No. 2013-02—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 2013-01—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

Going Concern

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

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)

Definition of a Public Business Entity

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  

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.

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.

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

EITF

EITF Consensuses Out for Comment Comment Deadline Proposed Accounting Standards Update—Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): 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

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

Private Company Council

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

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

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

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

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

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

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

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)

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.

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

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

Joint FASB/IASB Projects

Financial Instruments

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

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

Financial Instruments: Classification & Measurement

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

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

Classification & Measurement: FASB Proposal

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)

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

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

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.

Financial Instruments: Impairment

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

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

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

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

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

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

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

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

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

Revenue Recognition

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

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

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

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

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

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 605-35 for losses on construction and production contracts

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

Leases

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

Insurance Contracts

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

Questions & Answers