1. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. FASB Update Russ Golden FASB Chairman May 5, 2016 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations. University of Washington―12 th Anniversary Financial Reporting Conference

2.  Revenue from Contracts with Customers  Leases  Financial Instruments: Recognition and Measurement  Financial Instruments: Credit Losses  Simplification  Future Agenda  Q & A Agenda 2

3. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Revenue from Contracts with Customers 3

4. Rev Rec Five Step Model―Core Principle 4 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

5. Five Step Model―Overview 5 Unit of Account Distinct Criteria Variable consideration Significant financing Noncash consideration Consideration payable to customer 1. Identify the contract(s) with the customer 2. Identify the performance obligations 3. Determine the transaction price 5. Recognize revenue when (or as) a performance obligation is satisfied 4. Allocate the transaction price Criteria for identifying a contract Combinations Modifications Relative standalone selling price Discounts and contingent amounts Over time criteria Point in time indicators Steps to apply the core principle:

6. 6 Rev Rec―Effective Date  Public entities – 2018 (annual and interim periods)  Nonpublic entities – 2019 (annual periods); 2020 (interim periods)  Earlier adoption as of original effective date (2017) permitted Effective date is deferred for all entities by one year. The effective dates for Topic 606 and IFRS 15 for public entities are aligned.

7. TRG Activities 7 60 Discussed at TRG Meetings 31 Closed Technical Inquiries 3 Included in forthcoming Tech Corrections proposed Update Closed Submissions 100% of issues submitted to TRG to date have been closed *Statistics as of 4/18/16 TRG Submission Statistics*: 0 Open 94 Closed Input from TRG led to projects to address implementation challenges  Identifying Performance Obligations and Licensing  Principal versus Agent Considerations  Narrow-Scope Improvements and Practical Expedients Amendments aimed to clarify Board’s intent and reduce cost and complexity of implementing the new guidance

8. Clarifications to Issued Standard 8  Input from TRG led to projects to address implementation challenges -Identifying Performance Obligations and Licensing -Principal versus Agent Considerations -Narrow-Scope Improvements and Practical Expedients Amendments aimed at clarifying Board’s intent & reducing cost & complexity of implementing the new guidance Amendments aimed at clarifying Board’s intent & reducing cost & complexity of implementing the new guidance

9. 9 Identifying the Contract 1 23 54 Role of collectibility in the revenue guidance has changed: Current GAAP: Recognition constraint Topic 606 (new standard): Collection must be probable for a contract to exist Role of collectibility in the revenue guidance has changed: Current GAAP: Recognition constraint Topic 606 (new standard): Collection must be probable for a contract to exist Objective of collectibility criterion: Determining whether a genuine contract exists Assessment based on whether customer has ability & intention to pay promised consideration for goods or services that will be transferred Clarify alternative revenue recognition criteria (which is applied when unable to meet Step 1) Introduces ability to recognize revenue prior to contract “termination” Clarifications

10. Identifying Performance Obligations 10 No need to assess immaterial promised goods or services Shipping & handling practical expedient Reduce cost and complexity Rearticulate “separately identifiable” principle Is nature of promise to transfer each good or service or combined item? Clarifications Distinct Promises = Performance Obligations = Unit of Account Current GAAP―standalone value Topic 606―two ‘distinct’ criteria (1) capable of being distinct (2) separately identifiable Distinct Promises = Performance Obligations = Unit of Account Current GAAP―standalone value Topic 606―two ‘distinct’ criteria (1) capable of being distinct (2) separately identifiable 1 23 54

11. 11 Licensing (Implementation Guidance) Current GAAP includes limited, industry specific guidance on revenue recognition for licenses. New guidance includes comprehensive model to be applied to all industries. Current GAAP includes limited, industry specific guidance on revenue recognition for licenses. New guidance includes comprehensive model to be applied to all industries. Contractual Provisions Sales- or Usage- Based Royalties Nature of License: Functional or Symbolic Clarify that there is a distinction between contractual provisions that: Require transfer of control of additional goods or services to customer (multiple performance obligations) Define attributes of a single promised license Clarify scope & applicability of exception to variable consideration constraint guidance Applies when royalty completely or predominantly relates to license Royalties should not be split into portions to which exception does and does not apply Improve operability of “right to use” vs. “right to access” assessment Based on significant standalone functionality Functional: point in time recognition Symbolic: over time recognition 1 23 54

12. 12 Principal vs. Agent Considerations (Implementation Guidance) 1 23 54 Current GAAP based on risk and rewards notion New guidance is based overarching principle of control…indicators no longer weighted in guidance Current GAAP based on risk and rewards notion New guidance is based overarching principle of control…indicators no longer weighted in guidance Unit of account: each specified good or service Control of a service Indicators: Do not override control assessment; relative importance based on facts and circumstances Reframed to indicate when an entity is a principal (vs. an agent) Clarifications Principal (gross revenue) – provides specified good or service Agent (net revenue) – arranges for specified good or service to be provided

13. Determining the Transaction Price 13 1 23 54 Presentation of Sales TaxesNoncash Consideration Reduce cost & complexity Policy election: exclude all sales taxes collected from transaction price (net presentation) Note: if election not applied then principal versus agent guidance could be applied Current GAAP policy election allows net or gross presentation Clarifications Define measurement date as contract inception Changes in fair value due to form are not included in transaction price Equity instruments: Current GAAP – specific guidance Topic 606 – consistent with other noncash consideration If fair value not estimable: Current GAAP – use fair value of assets received or relinquished Topic 606 – use estimated selling price of promised goods or services Equity instruments: Current GAAP – specific guidance Topic 606 – consistent with other noncash consideration If fair value not estimable: Current GAAP – use fair value of assets received or relinquished Topic 606 – use estimated selling price of promised goods or services

14. Transition 14 Contract modifications practical expedient Retrospective approach – not required to disclose effect of accounting change in period of adoption Modified retrospective approach may be applied to all contracts or completed contracts only Reduce cost & complexity Completed contract = substantially all revenue recognized under legacy GAAP Clarifications

15. Resources for Implementation 15  Transition Resource Group Transition Resource Group  Agenda Projects Update Agenda Projects Update  FASB In Focus – Topic 606 FASB In Focus – Topic 606  FASB Technical Inquiry Service FASB Technical Inquiry Service

16. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Leases 16

17. Purpose 17 * Estimate according to the 2005 SEC report on off-balance sheet activities 1.25 trillion Lessee Lessor of off-balance sheet operating lease commitments for SEC registrants *  Lack of transparency about residual values  Consistency with leases and revenue recognition guidance  Most lease assets and liabilities are off-balance sheet  Limited information about operating leases

18. Right-of-Use Model 18 A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

19. Identifying a Lease 19 Lease contracts in the scope of Topic 842 involve An identified asset That is explicitly or implicitly specified Supplier has no practical ability to substitute and would not economically benefit from substituting the asset The right to control the use during the lease term Decision-making authority over the use of the asset The ability to obtain substantially all economic benefits from the use of the asset

20. Lessee Accounting Overview 20 Finance Operating Right-of-use (ROU) asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Right-of-use (ROU) asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments Income StatementCash Flow StatementBalance Sheet Classification is similar to the classification in Topic 840 Recognition and measurement exemption for short-term leases

21. Lessor Accounting Overview 21 Net investment in the lease Interest income and any selling profit on the lease 1 Cash received for lease payments Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments FASB: Direct Financing & Sales-Type IASB: Finance Operating Income StatementCash Flow StatementBalance Sheet 1 Selling profit recognized at lease commencement for sales-type leases, over the lease term for direct financing leases (note: selling profit is rare for direct financing leases).

22. Transition Approach and Practical Expedients 22 Modified Retrospective Approach required Definition Also, may elect to use hindsight with respect to lease renewals and purchase options Classification Initial Direct Costs Package of practical expedients: Existing leveraged leases were grandfathered

23. Effective Date 23 Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years Public Companies* Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 All Other Organizations Permitted for all organizations Early Application * “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC

24. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Financial Instruments: Recognition & Measurement 24

25. Introduction 25 Current Response Retain current GAAP with targeted improvements to classification and measurement of equity investments, fair value option for liabilities, and disclosures for financial instruments Current Response Retain current GAAP with targeted improvements to classification and measurement of equity investments, fair value option for liabilities, and disclosures for financial instruments FASB-IASB MoU on Convergence Issued in 2006 Objective Reduce complexity in accounting for financial instruments

26. Financial Assets–Amendments to current GAAP 26 Equity investments measured at each reporting period at fair value through net income, except Equity investments without readily determinable fair value; only marked to observable price changes Equity method investments Equity investments that result in consolidation of the investee Equity investment in federal home loan bank and federal reserve bank stock Ownership interest in an exchange

27. Financial Assets–Amendments to current GAAP (continued) Simplified impairment test for equity investments without readily determinable fair value Valuation allowance on deferred tax assets (DTAs) related to an available-for-sale debt security to be assessed in combination with other DTAs Current GAAP retained for all other financial assets 27

28. Financial Liabilities–Amendments to current GAAP Fair value change resulting from changes in own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income (OCI) Current GAAP retained for accounting for financial liabilities 28

29. Financial Instruments–Disclosure changes Private entities not required to disclose fair value of financial instruments not recognized at fair value on balance sheet Reduced disclosures for public entities of methods and assumptions used to estimate fair value for financial instruments not recognized at fair value on balance sheet 29

30. Financial Instruments–Disclosure changes (continued) Fair value measurements for financial instruments to be based on exit price notion (current GAAP includes practical expedient to measure fair value of certain financial instruments using entry price notion) Financial assets to be presented grouped by measurement category and form of instrument Financial liabilities to be presented grouped by measurement category 30

31. Effective Date for Final Standard 31 All Public Business Entities Annual & Interim Reporting Periods beginning after Dec. 15, 2017 Non-Public Business Entities* Annual Periods beginning after Dec.15, 2018 Non-Public Business Entities* Annual and Interim Periods beginning after Dec. 15, 2019 *Includes not-for-profit entities and employee benefit plans Entire standard is available for early application after Dec. 15, 2017 Certain provisions are available for early application upon issuance: 1.Presentation of FV changes due to entity’s own credit changes in financial liabilities in OCI 2.Non-Public Business Entities no longer required to disclose fair value of financial instruments not recognized at fair value on B/S Early Application:

32. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Financial Instruments: Credit Losses 32

33. CECL Scope 33 ■Debt instruments (amortized cost) ■Trade and lease receivables ■Reinsurance receivables ■Loan commitments ■Financial guarantees CECL ■AFS debt securities AFS Credit Loss Model (Targeted changes to Topic 320) ■Defined contribution employee benefit plan loans ■Policy loan receivables of insurance entity ■Promises to give (pledges receivable) of NFPs ■Related party loans between entities under common control CECL does not apply

34. FASB Model - Current Expected Credit Loss (CECL) Expected credit loss model reflecting more forward-looking information (lifetime expected losses) Reflects management expectations based on past events, current conditions, and reasonable and supportable forecasts. Includes changes in the estimate of expected credit losses resulting from, but not limited to: Changes in credit risk of assets held by an entity Changes in conditions since previous reporting date Changes in reasonable & supportable forecasts about the future At each reporting date, an organization recognizes an allowance for credit losses to reduce the financial asset to the amount expected to be collected Provides enhanced disclosures compared to current GAAP 34

35. Available-for-Sale Debt Securities 35 Excluded from the CECL model An allowance approach would be used for recognizing impairment losses, which would allow for credit loss reversals Allowance will be limited to the difference between amortized cost and fair value Requirement to consider the length of time that fair value of the security has been below amortized cost would be eliminated When estimating whether a credit loss exists, an entity must still consider if it will be MLTN to sell the security before recovery of amortized cost Would apply modified impairment guidance in Topic 320

36. Effective Date for Final Standard 36 Public Business Entities that are SEC Filers (Annual and Interim) Reporting Periods beginning after Dec. 15, 2018 Public Business Entities that are not SEC Filers (Annual and Interim) Non-Public Business Entities* (Annual Periods only) Reporting Periods beginning after Dec. 15, 2019 Non-Public Business Entities* (Annual and Interim) Reporting Periods beginning after Dec. 15, 2020 *Includes not-for-profit entities and employee benefit plans The entire standard is available for early application after Dec. 15, 2018 A separation was made in effective date decisions for Public Business entities to allow smaller community banks that do not file with the SEC additional time to implement the standard

37. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Simplification 37

38.  Reduce cost and complexity while maintaining or improving the usefulness of the information  Projects include narrow-scope items that the FASB can complete in the short term Simplification Initiative Objective 38 Simplification is not always simple Welcome input on ideas

39. Employee Share-Based Payments 39  Reduces complexity for both public and private companies in key areas: ‒ Accounting for forfeitures ‒ Accounting for income taxes upon vesting or settlement of awards (APIC pools) ‒ Minimum statutory withholding requirements ‒ Practical expedients for private companies  Final ASU issued March 2016

40. Nonemployee Share-Based Payments 40  Project added to agenda in December 2015  Objective: reduce cost and complexity ‒ PIR project that lead to issuance of Statement No. 123(R) Share-Based Payment included information about nonemployee model ‒ PCC input ‒ Stakeholder input received during staff outreach on potential simplification projects  Staff research is focused on aligning the accounting models for employee and nonemployee awards to the extent possible

41. Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only. Future Agenda 41

42. Surveys FASAC & members of other FASB advisory groups (EITF, PCC, IAC, NFP Advisory Committee, SBAC) Asked: What are the most needed financial reporting improvements and why? What is the problem and what are feasible alternatives? When is the solution needed, and for whom? Results discussed with each FASB advisory group FASB Future Agenda—FASAC Survey 42

43. FASAC Survey –Feedback by Stakeholder Group 43 TopicsEITFFASACIACNACPCCSBAC Financial Performance Reporting XXXXX Improving Cash Flow Classification XXXXXX Pensions and OPEB XXXX Liabilities vs Equity XXX X Intangible Assets XXX Other Comprehensive Income X XX Consolidations X Segment Reporting X Inventory and Cost of Sales Collaborative Arrangements X Equity Method X Income Taxes X

44. FASAC Survey –Feedback by Stakeholder Type 44 TopicsPreparerUserPractitionerOther Financial Performance Reporting XXXX Improving Cash Flow Classification XXXX Pensions and OPEB XXXX Liabilities vs Equity XX Intangible Assets XX Other Comprehensive Income X Consolidations X Segment Reporting X Inventory and Cost of Sales X

45. Help the FASB set its future agenda by identifying population of key projects to consider Determine priority of key projects Identify perceived financial reporting issue(s) for each topic Obtain feedback on potential alternatives or path forward Objective of the DP 45

46. Timeline and Key Dates 46 Research on Survey Results Q-4 2015 Agenda DP Board Meeting February 2016 Issue DP May 2016 Board Deliberations/ Feedback 2H 2016 Decision Future Agenda 2H 2016

47. Questions or Comments? 47