1. experience clarity // CPAs & ADVISORS ACCOUNTING RULES FOR PRIVATE COMPANIES

2. OVERVIEW Private Company Council (PCC) activities AICPA financial reporting framework Update on Big 3 convergence projects Other projects 2 // experience clarity

3. BACKGROUND Perceived weaknesses of U.S. GAAP for private companies Overly complex Compliance costs outweigh perceived benefits Irrelevant & confusing information Focused on public & larger entities 3 // experience clarity

4. PRIVATE COMPANY COUNCIL Established by FAF in May 2012 Defined responsibilities Work with FASB to develop a set of criteria to decide whether & when US GAAP alternatives are warranted for private companies Advise FASB on appropriate treatment for private companies for items under active consideration on FASB’s technical agenda FASB must endorse changes in order to become GAAP 4 // experience clarity

5. TWO QUESTIONS What is a private company? Exposure draft issued – Definition of a Public Business Entity What criteria should be used to determine when alternatives should be available? Exposure draft issued – Private Company Decision-Making Framework 5 // experience clarity

6. PRIVATE COMPANY COUNCIL ACTIVE PROJECTS Accounting for goodwill subsequent to a business combination Accounting for identifiable intangible assets in a business combination Applying variable interest entity (VIE) guidance to common control leasing arrangements Accounting for “plain vanilla” interest rate swaps 6 // experience clarity

7. ACCOUNTING FOR GOODWILL Goodwill would be amortized on a straight-line basis Life would correspond to useful life of primary asset acquired, but not longer than 10 years Impairment on occurrence of a “triggering event” Impairment based on entity as a whole Impairment measured as excess of carrying value over fair value 7 // experience clarity

8. GOODWILL STATUS PCC voted to finalize FASB will need to endorse – anticipated at November 25, 2013 board meeting Proposed effective date Fiscal years beginning after December 15, 2014 Early adoption permitted 8 // experience clarity

9. ACCOUNTING FOR IDENTIFIABLE INTANGIBLE ASSETS Recognize identifiable intangibles that arise from legal rights Trademarks, trade names & internet domain names Licensed computer software Artistic-related intangibles (musical works, plays, books, etc.) Recognize identifiable intangibles that arise from contractual rights Customer contracts with non-cancelable terms Order backlog evidenced by purchase orders Lease arrangements Employment contracts and non-compete agreements 9 // experience clarity

10. ACCOUNTING FOR IDENTIFIABLE INTANGIBLE ASSETS (CONT) All other intangibles would be treated as part of goodwill Customer lists Non-contractual customer relationships Unpatented technology Fair value for contractual rights would be based on non- cancelable term Without regard to renewal or cancelation provisions Disclosures 10 // experience clarity

11. IDENTIFIABLE INTANGIBLE ASSETS STATUS PCC has requested FASB staff evaluate additional alternatives 11 // experience clarity

12. COMMON CONTROL LEASING ARRANGEMENTS Elect not to apply variable interest entity (VIE) guidance when Lessor & private company are under common control Private company has a leasing arrangement with lessor Substantially all activity between two entities is related to leasing activity of lessor Liabilities of the lessor entity only financed the assets leased to the operating company and are not collateralized by the assets of the operating company 12 // experience clarity

13. COMMON CONTROL LEASING ARRANGEMENTS STATUS PCC voted to finalize FASB will need to endorse – anticipated at November 25, 2013 board meeting Proposed effective date Fiscal years beginning after December 15, 2014 Full retrospective application Early adoption permitted 13 // experience clarity

14. INTEREST RATE SWAPS Two alternatives Combined instrument approach Simplified hedge accounting approach 14 // experience clarity

15. COMBINED INSTRUMENT APPROACH Swap would not be recorded in financial statements if Variable rate on swap & borrowing based on same index and interest rate Swap is “plan-vanilla” Re-pricing & settlement dates for swap & borrowing are substantially the same (within a few days) Swap fair value at inception is zero Notional amount is < or = amount of principal of borrowing Swap is effective at same time as borrowing 15 // experience clarity

16. SIMPLIFIED HEDGE ACCOUNTING APPROACH Swap would be recorded on the balance sheet Valued at settlement value vs. fair value Assumption of no ineffectiveness Variable rate on swap & borrowing based on same index & interest rate Swap is “plain-vanilla” Re-pricing & settlement dates for swap & borrowing are substantially the same (within a few days) Swap fair value at inception is zero Notional amount is < or = amount of principal of borrowing Swap term is < or = the term of the borrowing 16 // experience clarity

17. INTEREST RATE SWAPS STATUS Separated combined interest approach FASB staff to conduct more research PCC voted to finalize simplified hedge accounting approach FASB will need to endorse – anticipated at November 25, 2013 board meeting Proposed effective date Fiscal years beginning after December 15, 2014 Early adoption permitted 17 // experience clarity

18. AICPA FINANCIAL REPORTING FRAMEWORK Financial Reporting Framework for Small- & Medium-Sized Entities (FRF for SMEs) issued by AICPA Issued June 2013 Effective upon issuance Non-authoritative Not U.S. GAAP Intended to satisfy needs of private company owner/managers & their business partners Intended to be less complex, less costly & more relevant 18 // experience clarity

19. EXAMPLE DIFFERENCES FROM GAAP No comprehensive income, items of other comprehensive income, or extraordinary gains or losses Numerous differences in disclosure requirements No consolidation of variable interest entities (VIE) Investment valuation based on cost, except for equity securities held for sale Goodwill amortized over same period as federal income tax or 15 years Amortized annually instead of evaluated for impairment 19 // experience clarity

20. AICPA FINANCIAL REPORTING FRAMEWORK Stakeholder acceptance of FRF for SMEs is still unknown Management must choose the appropriate basis of accounting Stakeholders should be included in making framework decision Conversion to a non-GAAP framework could be a disadvantage if GAAP statements are later required FRF for SMEs may be viable for smaller privately held clients Transition requires careful consideration, stakeholder acceptance 20 // experience clarity

21. BIG 3 CONVERGENCE PROJECTS Revenue recognition – separate session Financial instruments Leases 21 // experience clarity

22. LEASE ACCOUNTING PROJECT HISTORY Current lease accounting is determined by a four-step classification test (operating versus capital) Suggestions to lease accounting modifications date back to 2005 FASB & IASB issued initial Exposure Draft in 2010 Goal to converge lease accounting under U.S. & international accounting standards Received significant stakeholder feedback Several concerns with initial draft were raised An extensive redeliberation process was executed Small group meetings Panel discussions & seminars Webcasts 22 // experience clarity

23. EXPOSURE DRAFT ON LEASES Issued May 16, 2013 Assets & liabilities arising from a lease will be recognized on balance sheet Dual method of expense recognition Interest & amortization (generally equipment) Straight-line (generally property) 23 // experience clarity

24. POTENTIAL IMPACTS OF LEASE CHANGES ON COVENANTS Rent expense will be replaced by depreciation/amortization on a right-to-use asset & interest expense on lease obligation EBITDA-based covenants Assets & liabilities could increase significantly depending on lease volume L everage ratio definitions 24 // experience clarity

25. EXPOSURE DRAFT ON LEASES Boards will consider all feedback & redeliberate Final standard not expected to be effective until 2017 or later for private companies 25 // experience clarity

26. OTHER PROJECTS Effective in 2014 Reporting of amounts reclassified out of accumulated other comprehensive income (AOCI) (ASU 2012-02) Joint & several obligations (ASU 2013-04) In process Reporting discontinued operations Going concern Recognition of new accounting basis (pushdown) in certain circumstances Development stage entities 26 // experience clarity

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