May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager and Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S.

May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager and Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S ALLIANCE CHATTANOOGA CHAPTER Accounting Update Overview

May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S ALLIANCE CHATTANOOGA CHAPTER Accounting Update Overview Part I

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 2 Sample Balance Sheet

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 3 Sample Balance Sheet

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 4 Sample Income Statement

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 5 Financial Instruments and Certain Investments  Accounting Standards Update (ASU) 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities  Effective Date: FYBA 12-15-17/12-15-18  Main Provisions:  All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 6 Financial Instruments and Certain Investments  ASU 2016-01 - Continued  There will no longer be an available-for-sale classification (changes in fair value reported in net assets) for equity securities with readily determinable fair values.  Investments under the equity method of accounting are not within the scope of this standard.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 7  ASU 2016-01 - Continued  Entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Changes in the basis of these equity investments will be reported in current earnings. This election only applies to equity investments that do not qualify for the net asset value (NAV) practical expedient.  Observable price changes: orderly transactions for similar securities. Financial Instruments and Certain Investments

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 8 Financial Instruments and Certain Investments  ASU 2016-01 - Continued  Reminder: NAV practical expedient  The impairment model for equity investments subject to this election is a single-step model.  Under the single-step model, an entity is required to perform a qualitative assessment each reporting period to identify impairment.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 9 Financial Instruments and Certain Investments  ASU 2016-07 - Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting  Effective Date: FYBA 12-31-16  Main Provisions:  No need to restate comparative periods when an increase in ownership leads to conversion to the equity method of accounting.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 10 Other Assets  ASU 2014-08 - Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity  Effective:PBA 12-15-2014  Main Provisions:  To provide more decision-useful information to users and to elevate the threshold for a disposal transaction to qualify as a discontinued operation (since too many disposal transactions were qualifying as discontinued operations).

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 11 Other Assets  ASU 2014-08 - Continued  The new guidance requires discontinued- operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results.  The ASU also expands the scope of Accounting Standards Codification (ASC) 205-20 to disposals of equity method investments and acquired businesses held for sale.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 12 Other Assets  ASU 2014-08 - Continued  Requires entities to disclose information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations.  A strategic shift that has (or will have) a major effect on an entity’s operations and results includes the disposal of any of the following:  A major geographical area.  A major line of business.  A major equity method investment.  Other major parts of an entity.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 13 Other Assets  ASU 2015-11 - Inventory (Topic 330)  Effective Date: FYBA 12-15-2016  Main Provisions:  Simplifies the subsequent measurement of inventories by replacing today’s lower of cost or market test with a lower of cost and net realizable value test.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 14 Other Assets  ASU 2015-11 - Continued  When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities will recognize the difference as a loss in earnings in the period in which it occurs.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 15 Other Assets  ASU 2016-02 - Leases (Topic 842)  Effective Date: FYBA 12-15-18/12-15-19. Early application permitted.  Main Provisions and Historical Review:  Financial Accounting Standards Board (FASB) Statement No. 13, Accounting for Leases, was issued in 1976 and created the basic framework we currently use for lease accounting.  Statement No. 13 specifies that a lessee should recognize both an asset and a liability for a lease that transfers substantially all benefits and risks associated with the ownership of the property.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 16 Other Assets  ASU 2016-02 - Continued  Currently, this is what is known as a “capital lease”.  Criteria for capital leases (any of the following): 1)The lease transfers ownership of the property to the lessee by the end of the lease term. 2)The lease contains a bargain purchase option. 3)The lease term is equal to 75% or more of the estimated economic life of the leased property. 4)The present value of minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair value of the leased property at lease inception.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 17 Other Assets  ASU 2016-02 - Continued  The asset and liability will initially offset each other on the balance sheet.  The asset recorded under a capital lease is typically grouped in the “Property, Plant, and Equipment” (PP&E) section of the entity’s balance sheet.  The asset is depreciated (amortized) like any other depreciable fixed asset.  The liability recorded under a capital lease is typically recorded as debt.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 18 Other Assets  ASU 2016-02 - Continued

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 20 Other Assets  ASU 2016-02 - Continued  Statement No. 13 also specifies that if a lease does not transfer substantially all benefits and risks associated with the ownership of the property, it should be treated as an operating lease.  An operating lease is not recorded on the balance sheet. Rather, as lease payments are made, an entry is made to debit lease (or rental) expense  Operating lease payments for future periods are disclosed in a footnote to the financial statements.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 22 Other Assets  ASU 2016-02 - Continued  A (very) brief history of the leases joint project.  In June 2004, the International Accounting Standards Board (IASB) and the FASB agreed that lease accounting was in need of an overhaul.  In August 2010, the first Proposed Accounting Standards Update (PASU) on leases was released. Not well received  On May 16, 2013, the FASB released a revised version of the 2010 PASU on lease accounting. Many comments received on exposure draft.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 23 Response to Lease Exposure Draft September 33, 2013 Technical Director Financial Accounting Standards Board 401 Merritt 7, PO Box 5116 Norwalk, CT 06856-5116 Via email: director@fasb.org RE: Comments on Exposure Draft of the Proposed ASU — Leases (Topic 840) (File Reference No. 2013-270) Dear Sir or Madam: Community Health Systems, Inc., is writing to share our comments on the Financial Accounting Standards Board's (FASB) invitation to comment on the May 16, 2013 Exposure Draft (ED) Leases (Topic 842): A revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840). e are one of the largest publicly-held operators of hospitals in the United States (NYSE: CYH). In the execution of our business strategy to provide quality healthcare services, we are a party to a significant number of lease arrangements, from multi-year leases of hospital facilities and medical office buildings to daily rentals of mobile medical equipment. We provide these comments from the perspective of lessee as well as lessor, since we also lease and sublease space in our buildings to physicians for administrative and patient care. As noted in our previous comments to the original exposure draft, we generally support the FASB's objective to improve lease accounting. Over the last several decades, the accounting standards for leases have grown and become increasingly complex in order to address the many provisions that are used in lease arrangements, resulting in a financial statement presentation that depends more on the legal structure than on the economic substance of the transaction. While the proposals in the ED provide an approach to accounting for most leases using a rights and obligations accounting model to record leases on the balance sheet, we believe the accounting model in the revised ED to create two types of leases with different expense recognition methodologies fails to improve the income statement effect of leases with the resulting complexity and potential comparability issues. In summary, we are not supportive of the proposed accounting for leases as laid out in the ED without considerable improvements to the application guidance and the

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 24 Response to Lease Exposure Draft September 10, 2013 Ms. Susan M. Cosper, Technical Director File Reference No. 2013-270 Financial Accounting Standards Board 401 Merritt 7, PO Box 5116 Norwalk, CT 06856-5116 Re: Proposed Accounting Standards Update, Leases (Topic 842), a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840) Dear Ms. Casper: Cigna Corporation (Cigna) appreciates the opportunity to comment on the Financial Accounting Standards Board's (FASB) proposed Accounting Standards Update (Revised), Leases (Topic 842) (the proposal). Although this proposal was separately exposed for comment by the FASB and the International Accounting Standards Boards (collectively the "Boards"), we understand that the Boards will share and jointly consider all comment letters received and, therefore, have directed our comments to the FASB only. Cigna is one of the largest investor-owned health care and related benefits organizations in the United States, and has operations in selected international markets. Cigna regularly engages in lease transactions, primarily for office space as lessee and also as an investor in various entities that engage in lease transactions as lessors. Among the hundreds of leases to which we are a party are various arrangements that include services associated with the leased assets. Historically, a majority of our lease arrangements have been accounted for as operating leases. Cigna supports the goal to simplify lease accounting and to improve the transparency of financial statements. However, we believe the goal of putting all leases on the balance sheet can be accomplished in a manner that is simpler to understand, measure and report. We encourage the Boards to consider the recommendations articulated in Comment Letter No. 16 as a theoretically rational and practical solution. The following points are expanded upon therein: -The risks and rewards criteria in current GAAP should be used for lessee lease classification. Basing the lessee classification on the legal nature of the contract is simple and reflects the economic reality of the asset and obligation. That is, when the rights of ownership are transferred, a tangible asset and debt exist; when only temporary rights of use are transferred, an intangible asset and non-debt liability exist. -Lessee cost allocation should follow the balance sheet classification such that straight-line rent expense is recognized to reflect the rights of use transferred over time. - Lease classification for the lessor should be based on the business model of the lessor.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 25 Response to Lease Exposure Draft September 12, 2013 Mr. Russell Golden, Chairman Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 (Sent via e-mail to directors asb.org) Re: File Reference No. 2013-270, Proposed Accounting Standards Update (Revised), "Leases" Dear Mr. Golden: The International Business Machines Corporation ("IBM" or "the company") appreciates the opportunity to comment on the Proposed Accounting Standards Update (Revised), "Leases" (the "proposed ASU" or "exposure draft"), issued by the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB"). The company continues to support the FASB and the IASB ("the Boards") in their efforts to converge U.S. GAAP and IFRS. We also continue to support the objective of improving the accounting for leases. However, while the proposed ASU reflects improvements from the first exposure draft, we still have significant concerns regarding the model. Our concerns are focused on the overall complexity inherent in the model, the right-of-use approach, the introduction of a dual model for lease classification, the income statement attribution approach, the interaction with services arrangements, the disclosure and transition requirements and the cost to implement and maintain compliance with the requirements. While the approach in the exposure draft accomplishes the goal of recording lessee obligations on the balance sheet, the company is not fully convinced the proposed model will provide superior information for users of financial statements versus the current lease accounting model. In addition, it is very likely that the costs related to the proposed ASU will be greater than the benefits perceived to be realized. Lease Classification — Dual Model : Overall, we do not support the new approach in the exposure draft for lessees to classify leases based on the expected consumption of the economic benefits of the underlying asset. Equipment and property leases are legally and in substance the same. The proposed ASU introduces a consumption concept to determine what leases are equivalent to purchases with debt financing and which leases are not. The determination of a Type A or a Type B lease leads to a dual method of expense recognition and presentation in the financial statements. Today's two model approach — capital and operating leases — has been replaced by a different two model approach. The proposed classification of leases increases the complexity and will introduce confusion for both preparers and users of financial statements. All leases should be treated using the same principles regardless of the underlying asset. Lessee Accounting — Right-of-Use Model: The company's views regarding the right of use model have not changed from our 2010 comment letter. While we understand that the recognition of an asset representing the right to use a leased item is a necessary consequence from recognizing the liability, the company is still not convinced that the right-of-use model meets the definition of an asset in the conceptual framework, especially when renewal options are added. A lease is an executory contract

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 26 Response to Lease Exposure Draft We do not believe that options meet the definition of an asset or a liability. Contingencies of these types are not legal obligations of the lessee and do not represent enforceable rights for the lessor. While we appreciate the Boards intent on providing protection against structuring concerns, we believe that options and contingent rentals should only be recognized in the financial statements when an obligation has been created. In addition, under the proposed ASU, a significant amount of judgment would need to be applied to each contract term as it relates to options, contingent rentals and other factors in order to determine the appropriate lease term and lease payments. This assessment would need to be made each reporting period in order to ensure that changes in circumstances are properly accounted for during the lease term. This periodic reassessment of the lease term will drive significant cost on lessees. We believe the costs associated with maintaining this type of analysis far outweigh the benefits. We recommend that the lease term should be determined at lease inception and be re-evaluated only upon renewal or extension. If the Boards proceed with these requirements, we recommend that additional guidance and implementation examples be provided to ensure consistent application of these factors and what constitutes a significant economic incentive. The right-of-use model will result in the grossing up of the statement of financial position, potentially giving financial statement users a false sense of the assets that are readily available for use by the company to meet its future goals and obligations. Further, we continue to be concerned whether use of this model would give standard setters a proxy to apply similar rules to other executory contracts. We encourage the Boards to include guidance on how to distinguish leasing contracts from other executory contracts. Dual Model for Income Statement Attribution: If the Boards proceed with the dual model for lease classification, the company does not support a dual model for income statement attribution for lessees. The dual model approach introduces unnecessary complexity, especially for certain long lived equipment and integral equipment. Equipment operating leases are executory contracts where the rent payment is for the periodic use of the asset. These types of leases should have straight line expense. This approach is consistent with the current model, matches the economic nature of the lease, would not materially change an investor's view and would significantly reduce the cost of implementation of the proposed ASU. The complexity introduced with the dual model far outweighs the perceived benefits. A key objective of this project was to address deficiencies in the balance sheet with respect to operating leases. However, much of the complexity is being driven by the proposed changes in the income statement. Investors and users do not seem highly concerned with understanding the allocation between operating and financing expense for these leases. Leases and Services Arrangements : The company notes that the exposure draft includes criteria to be used to determine whether the contract is a lease or contains a lease. The factors are very judgmental and could easily result in inconsistent application especially when separating lease components from non-lease components in services arrangements for both lessors and lessees. We are concerned that the new guidance may substantially change the current guidance in both U.S. GAAP and IFRS in such a way that expands the scope of the leasing standard. Today, accounting for an operating lease and a services arrangement is very similar so there is very little pressure placed on this distinction. We encourage the Boards to revisit this topic and provide further clarification due to the increased importance of this decision under the right-of-use model.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 27 Response to Lease Exposure Draft September 13, 2013 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 File Reference: 2013-270 Exposure Draft of a Proposed Accounting Standards Update (Revised), Leases (Topic 842): a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840) Dear Ms. Cosper: The 12 Federal Home Loan Banks (the "FHLBanks") appreciate the opportunity to comment on the Financial Accounting Standards Board's (the "FASB" or "Board") Exposure Draft of a Proposed Accounting Standards Update, Leases (Topic 842): a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840) (hereinafter referred to as the "proposed Update"). The FHLBanks are government-sponsored enterprises that serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBanks are financial cooperatives and SEC registrants. The FHLBanks support the Board's objective for entities to report useful information to users of financial statements about the amount, timing and uncertainties of cash flows arising from a lease. However, we do not believe that recognizing assets and liabilities for all leases is necessary to provide the desired information. Rather, we encourage the Board to use the Leases project as a platform for its Disclosure Framework project and require preparers to clearly communicate lease information that is relevant to financial statement users through additional disclosures. We believe that by requiring additional disclosures, the Board can efficiently and effectively address the project objective and entities can provide enhanced transparency to financial statement users. Accounting Model The proposed Update would result in a lessee's recognition of an asset and liability as if all lease transactions resulted in a transfer of ownership of the leased asset. While this treatment may be appropriate for certain leases (e.g., leases classified as capital leases under Accounting Standards Codification Topic 840, Leases ("ASC 840")), requiring such treatment for lessee transactions that are currently classified as operating leases would not appropriately reflect their substance. We believe that by removing the operating lease classification, the proposed Update may unnecessarily inflate an entity's balance sheet with assets and liabilities that may not be representative of its core operations. Furthermore, we believe that the costs associated with recognizing and measuring assets and liabilities arising from leases of noncore assets could outweigh the benefits to users, as discussed in paragraph BC90. Despite the fact that the Board was initially unable to overcome the difficulties with excluding leases of noncore assets from the scope of the proposal, if the final guidance is consistent with the proposed model, we believe the Board should reconsider providing a scope exception for noncore assets. However, our preference is that the Board retains the existing model and considers making amendments to incorporate principles and eliminate the current rules. For example, if the Board is concerned with entities structuring lease terms in a manner that would permit off-balance sheet accounting,

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 28 Response to Lease Exposure Draft Date of Entry: 9/9/2013 Respondent information Type of entity or individual: Preparer Contact information: Organization: Chick-fil-A, Inc. Name: Chris Lail Email address: chris.lail@chick-fil-a.com Phone number: 4047657855 Questions and responses 1.This revised Exposure Draft defines a lease as "a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration." An entity would determine whether a contract contains a lease by assessing whether: 1. Fulfillment of the contract depends on the use of an identified asset.2. The contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. A contract conveys the right to control the use of an asset if the customer has the ability to direct the use and receive the benefits from use of the identified asset. Do you agree with the definition of a lease and the proposed requirements in paragraphs 842-10-15-2 throughl5-16 for how an entity would determine whether a contract contains a lease? Why or why not? If not, how would you define a lease? Please supply specific fact patterns, if any, to which you think the proposed definition of a lease is difficult to apply or leads to a conclusion that does not reflect the economics of the transaction. Yes, I do. 2. This revised Exposure Draft would require an entity to recognize assets and liabilities arising from a lease. When assessing how to account for a lease, a lessee and a lessor would classify a lease on the basis of whether a lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. This revised Exposure Draft would require an entity to apply that consumption principle by presuming that leases of property are Type B leases and leases of assets other than property are Type A leases, unless specified classification criteria are met. Those classification criteria are different for leases of property and leases of assets other than property to reflect the different natures of property (which often embeds a land element) and assets other than property. The Boards acknowledge that, for some leases, the application of the classification criteria might result indifferent outcomes than if the consumption principle were to be applied without additional requirements. Nonetheless, this revised Exposure Draft would require an entity to classify leases by applying the classification criteria in paragraphs 842-10-25-5 through 25-8 to simplify the proposals. Lessee Accounting A lessee would do the following: 1. For all leases, recognize a right-of- use asset and a lease liability, initially measured at the present value of lease payments(except if a lessee elects to apply the recognition exemption for short- term leases). 2. For Type A leases, subsequently measure the lease liability on an amortized cost basis and amortize the right-of-use asset on a systematic basis that reflects the pattern in which the lessee expects to consume the right-of-use asset's future economic benefits. The lessee would present the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. 3. For Type B leases, subsequently measure the lease liability on an amortized cost basis and amortize the right-of-use asset in each period so that the lessee would recognize the total lease cost on a straight-line basis over the lease term. In each period, the lessee would present a single lease cost combining the unwinding of the discount on the lease liability with the amortization of the right of use asset. Lessor Accounting A lessor would do the following: 1. For Type A leases, derecognize the underlying asset and recognize a lease receivable and a residual asset. The lessor would recognize both of the following a. The unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term b. Any profit relating to the lease (as described in paragraph 842-30-30-7) at the commencement date.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 29 Response to Lease Exposure Draft date.2. For Type B leases (and any short-term leases if the lessor elects to apply the exemption for short-term leases), continue to recognize the underlying asset and recognize lease income over the lease term, typically on a straight-line basis. Question 2: Lessee Accounting Do you agree that the recognition, measurement, and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? No, I do not agree that the recognition, measurement and presentation of expenses and cash flows should be different for different types of leases. I understand the logic involved, but I would prefer one method for presenting all leases. It would be much simpler for entities with lots of leases to have only one method. Plus, there could be a situation where leases of similar property are reported differently because the present value of lease payments relative to the fair value of the assets leased is different. In that case, some leases would be charged only as Lease Expense while other similar leases are charged off as Interest Expense and Amortization Expense. If the underlying assumption is that leases are a financing tool, why not treat them all as has been suggested for Type A leases? That method reports the component expenses of the asset and lease instead of grouping them together as Lease Expense.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 30 Response to Lease Exposure Draft We thought that the lessor accounting under the current standard is appropriate, furthermore the operating lease method is retained in the Exposure Draft for the lessee accounting. Therefore, we suggest that the Board continues to adopt the lessor accounting under the current standard, and add more disclosures requirement to fulfill the need of users of financial statements based on current IAS 17. We hope that the Board thoroughly considers the practicability of the standard and simplify the content of the Exposure Draft so as to truly improve the current lease standard. Our responses are as follows. Question 1: Identifying a lease This revised Exposure Draft defines a lease as "a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration". An entity would determine whether a contract contains a lease by assessing whether: (a) fulfilment of the contract depends on the use of an identified asset; and (b) the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. A contract conveys the right to control the use of an asset if the customer has the ability to direct the use and receive the benefits from use of the identified asset. Do you agree with the definition of a lease and the proposed requirements in paragraphs 6-19 for how an entity would determine whether a contract contains a lease? Why or why not? If not, how would you define a lease? Please supply specific fact patterns, if any, to which you think the proposed definition of a lease is difficult to apply or leads to a conclusion that does not reflect the economics of the transaction. From China Telecom To International Accounting Standards Board (the "Board") We have read the revised Exposure Draft: Leases issued by the Board on 16 May 2013. We thought that the Exposure Draft resolved the question raised by many accounting standard users regarding off- balance sheet accounting for operating lease. However, the Exposure Draft classifies a lease as either a Type A lease or a Type B lease according to whether the underlying asset is property or not. This is much more complicated than the current classification of operating lease and fiancé lease. For lessors and lessees, the Exposure Draft provides two different sets of accounting treatments, whose principles are still based on the current accounting treatments of operating lease and finance lease, but are much more complicated than the current ones. It is difficult to understand, apply and implement the standard. Moreover, the asymmetrical accounting treatments for lessor and lessee are logically unsound. We thought that the accounting treatment of lessee accounting for finance lease under the current standard is appropriate. It basically fulfills the need of users of financial statements. However, the accounting treatment for Type A lease in the Exposure Draft is too complicated. We thought that such accounting treatment is not practical for accounting staff. We suggest that the Board continues to adopt the lessee accounting treatment for finance lease under the current standard.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 31 Response to Lease Exposure Draft We thought that classifying the lessee into Type A and Type B does not give users of financial statements more relevant information. We thought that when operating lease is accounted for in the balance sheet, the need of users of financial statements can be fulfilled. Therefore, we suggest that the Board does not differentiate Type A lease and Type B lease. Type B lease should also adopt the same method of accounting as Type A lease. The right-of-use asset should also be amortized using the straight line method. If it is necessary to differentiate Type A lease and Type B lease, when reassess the lease term, it may be necessary to reassess the classification of the lease. This is Response: Basically we agree with the definition of lease in the Exposure Draft. We hope that the Board further clarifies the difference between lease and hire purchase (the nominal ownership right is transferred at the end of the last payment period, but in substance, the asset is controlled and used by the user throughout its entire life cycle). Question 2: Lessee accounting Do you agree that the recognition, measurement and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? Response: We agree with the Exposure Draft to account for operating lease in the balance sheet through right-of-use model. However, the accounting treatments of classifying property into Type A and Type B, and classifying non-property into Type A and Type B in the Exposure Draft is too complicated. It is too difficult for accounting staff to apply, so we do not agree with this classification.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 32 Response to Lease Exposure Draft treatment. If the IASB decides to require lessees to recognize operating leases on balance sheet, it is requested that the IASB give due regard so as to prevent problems occurring from the application of the Standard by, for example, simplifying and clarifying the Standard as well as enhancing guidance. 1.Comment on specific questions provided in Exposure Draft Question 4: classification of leases Do you agree that the principle on the lessee's expected consumption of the economic benefits embedded in the underlying asset should be applied using the requirements set out in paragraphs 28-34, which differ depending on whether the underlying asset is property? Why or why not? If Japanese Bankers Association We, the Japanese Bankers Association ("JBA"), are an organization that represents the banking industry in Japan; and our members comprise banks and bank holding companies operating in Japan. We would like to express our gratitude for this opportunity to comment on the Exposure Draft "Leases" published by the International Accounting Standards Board ("IASB"). We respectfully expect that the following comments will contribute to your further discussion on this issue. 1. Overall Comment The accounting model proposed by the Exposure Draft addresses issues on the current lease accounting (e.g. the off-balance sheet accounting of operating leases by lessees) raised by users of financial statements, etc. However, there still remain some practical implementation issues for preparers of financial statements such as complicated lease classification, a complicated approach to include optional periods for extension/ termination in the lease term, impractical standard for short-term leases and so forth. In finalizing the Standard, it is necessary to give careful consideration to lessees' burden in practice and other issues arising from recognizing operating leases on balance sheet or changes to accounting

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 33 Response to Lease Exposure Draft We hope that the project would be finalized as soon as possible and looking forward to have a simplified and better standard on leases. The Institute deliberated on the ED and our responses to your specific questions are as follows: 10 th September 2013 International Accounting Standards Board 30 Cannon Street London EC4M 6XII United Kingdom Dear Sir, COMMENTS ON EXPOSURE DRAFT (ED/2013/6) - LEASES The Zambia Institute of Chartered Accountants welcomes the opportunity to provide comments to the International Accounting Standards Board (IASB) on the Exposure Draft (ED/2013/6) Leases issued in May 2013, with the comment period closing on September 13, 2013. The Institute supports the revised Exposure Draft on leases and commends the International Accounting Standards Board and the Financial Accounting Standards Board for re-issuing the ED on lease accounting based on the feedback received on an earlier version (`2010 ED'). The proposed requirements for a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months would enable the users of financial statements to fully understand entity's leasing activities. We do agree that leasing is important for many entities and hence that users of financial statements should obtain a complete and understandable picture of an entity's leasing activities.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 34 Other Assets  ASU 2016-02 - Continued  What’s New  Assessing: Is this a lease? Excludes intangible assets, including license for internal use software and may be judgmental.  For leases with a maximum possible term of more than 12 months, a lessee would be required to recognize an asset and liability.  The lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term.  Lessor accounting will also be impacted.  A lease for less than 12 months would be treated in a similar fashion to how we currently treat operating leases.  The subsequent accounting for a lease greater than 12 months will be based upon its classification as either a financing or operating (not the old operating lease!) lease. The classification as financing or operating is based upon the nature of the leased asset. Classification is not reassessed unless contract is modified or other specific circumstances.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 35 Other Assets  ASU 2016-02 - Continued  Financing Leases  Transfers ownership at end of lease.  Lessee has option to purchase which it is reasonably certain to exercise.  Term is for major part of remaining economic life (ASU states reasonable to conclude 75% of remaining life is “major”).  Sum of lease payments equals or exceeds substantially all the fair value (ASU states 90% or more is substantially all the fair value).  So specialized no use to lessor at end of lease term.  If the lease is determined to be a financing lease, a lessee would: 1)Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 36 Other Assets  ASU 2016-02 - Continued  Recognize the unwinding of the discount on the lease liability as interest expense separately from the amortization of the right-of-use asset which is to be amortized.  The following are example journal entries related to recording financing leases.  To record the lease asset and liability: 1)DR Right-of-use asset XXX 2)CR Lease liability XXX

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 37 Other Assets  ASU 2016-02 - Continued  If the lessee expects to consume the right-of-use asset’s future economic benefits evenly on the straight-line basis, this entry would be recorded to recognize lease expenses (Accelerated Method): 1)DR Interest expense XXX 2)CR Lease liability XXX 3)DR Amortization expense XXX 4)CR Right-of-use asset XXX  Then: 5)Lease LiabilityXXX CashXXX (for total payment)

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 38 Other Assets  ASU 2016-02 - Continued  If the lease is determined to be an operating lease, a lessee would:  Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments (same as a financing lease).  Recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right- of-use asset, on a straight-line basis (straight-line method).  The following are example journal entries related to recording operating leases  To record the lease asset and liability: 1)DR Right-of-use asset XXX 2)CR Lease liability XXX

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 39 Other Assets  ASU 2016-02 - Continued  The following entry is made to record the lease expense when a payment is due: 1)CRLease liability (interest)YYY 2)DRRight-of-use assetYYY 3)DRLease expense (straight line) (1) XXX 4)CRRight-of-use assetXXX  Then:  Lease LiabilityXXX CashXXX (1) Add up all interest and all depreciation and recognize straight-line expense over the term of the lease.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 40 Other Assets  ASU 2016-02 - Continued  Discount rate  An entity should use the rate (either explicit or implicit) that the lessor charges the lessee as the discount rate used to initially determine the present value of lease payments or internal borrowing rate if lessor rate not known.  Options to extend the lease term  At the commencement date of a lease, an entity assesses whether the lessee is reasonably certain to exercise, or not to exercise, an option to extend (or buy).  An entity’s assessment should consider contract-based, asset- based, market-based, and entity-based factors.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 41 Other Assets  ASU 2016-02 - Continued  Reassess lease term  Significant change in circumstances.  Event written into contract requiring lessee to extend contract.  Lessee elects to exercise an option.  Lessee elects not to exercise an option which they were previously reasonably certain to do.  Modification of term.  Disclosures  An entity would be required to provide expanded disclosures to meet the objective of enabling users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.  Modified Retrospective Approach  By adopting practical expedients, the organization records the net present value of remaining lease payments as of the earliest period presented.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 42 Debt  ASU 2015-03 - Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs  Effective Date: FYBA 12-15-15, early adoption permitted  Main Provisions:  Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability.  The cost of issuing debt will no longer be recorded as a separate asset.  The costs will continue to be amortized to interest expense using the effective interest method.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 43 Fair Value Disclosures  ASU 2015-07 - Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)  Effective Date: FYBA 12-15-15/12-15-16  Main Provisions:  This ASU will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at NAV per share (or its equivalent) using the practical expedient.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 44 Fair Value Disclosures  ASU 2015-07 - Continued  Reporting entities must provide sufficient information to enable users to reconcile total investments in the fair value hierarchy and total investments measured at fair value in the statement of financial position.  The ASU will eliminate diversity in practice surrounding how investments measured at NAV under the practical expedient with future redemption dates have been categorized in the fair value hierarchy.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 45 Fair Value Disclosures Fair Value Measurements at the End of the Reporting Period Using Description12/31/20X6 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring fair value measurements Available-for-sale equity securities 50 -- Corporate bonds 20- - High-yield debt securities 80- - Residential mortgage-backed securities 35-- Investments measured at net asset value (1) 45--- Total recurring fair value measurements 2305010035 (1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.  ASU 2015-07 - Continued

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 46 Other Matters  ASU 2015-01 - Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items  Effective Date: FYBA 12-15-15. Early adoption permitted.  Main Provisions:  Eliminates the separate presentation of extraordinary items, net of tax and the related earnings per share, but still required to disclose material items that are unusual in nature or infrequently occurring.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 47 Other Matters  ASU 2015-01 - Continued  The ASU eliminates the need for entities to evaluate whether transactions or events are both unusual in nature and infrequently occurring.  Although entities no longer need to determine whether a transaction or event is both unusual in nature and infrequently occurring, they still need to assess whether items are unusual in nature or infrequent to determine if the additional presentation and disclosure requirements for these items apply.  Anything that involves a Kardashian remains unusual.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 48 Exposure Drafts  Update: Not-for-Profit Entities  Original Main Provisions:  Two net asset classes instead of three (donor restricted and without donor restrictions).  Presentation on statement of operations of two captions: Operations without donor restriction before internal transfers and operations from internal transfers/restrictions.  Direct method cash flow.  Change in cash flow designations.  Disclosure about liquidity.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 49 Exposure Drafts  Statement of Cash Flows  Main Provisions:  Additional guidance on presentation.  Items of interest include:  Distribution from equity method investees - operating.  Zero coupon bonds/maturity.  Contingent consideration payments.

May 26, 2016 Presented by Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S ALLIANCE CHATTANOOGA CHAPTER Accounting Update Overview Part II

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 51 What to Expect  A review of six recent accounting standards  One definition clarification  Two efforts towards simplification  One alternative for private companies  One new addition to accounting guidance  One complete overhaul of existing guidance

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 52 What is a Public Entity?  Accounting Standard Update (ASU) 2013-12 - Definition of a Public Business Entity - An Addition to the Master Glossary  Effective Date: “On a going-forward basis”  Essentially December 2013  Purpose:  To explicitly define what a public business entity is.  To explicitly define what is not considered to be a public business entity.  To eliminate confusion for companies applying all future ASUs.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 53 What is a Public Entity?  ASU 2013-12 - Continued  Who is affected?  All entities.  Main Provisions:  A single definition of a public business entity for use in future accounting and financial guidance.  This standard update does not affect existing accounting and financial guidance.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 54 What is a Public Entity?  ASU 2013-12 - Continued  A public business entity is:  Any entity that is required to file with the U.S. Securities and Exchange Commission (SEC), or any entity that voluntarily files with the SEC.  Any entity that is required to file with a foreign or domestic regulatory agency in preparation for the sale or issuance of securities  Any entity that is a conduit bond obligor for Securities that are traded.  Any entity with securities (not subject to contractual restrictions) that is required by law to prepare generally accepted accounting principles (GAAP) financial statements and make them publically available periodically.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 55 What is a Public Entity?  ASU 2013-12 - Continued  More importantly, a public business entity is not:  A not-for-profit entity.  An employee benefit plan.  A private consolidated subsidiary of a public business entity (except for those financial statements included in the public business entity’s filing).  A private company which consolidates a public entity into its financial statements.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 56 What is a Public Entity?  ASU 2013-12 - Continued  Key takeaways:  In the past there has been confusion surrounding not-for-profit entities.  Do they have public debt securities?  Are they a conduit bond obligor?  No longer will there be a public versus nonpublic distinction for not-for-profit entities and employee benefit plans.  Structure.  Primary users.  Needs.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 57 What is a Public Entity?  ASU 2013-12 - Continued  Key takeaways:  Going forward, new standards and updates will explicitly call out whether all, none, or some not-for-profits and employee benefit plans will be affected.  This decision will be driven by factors such as user needs and resources.  Reduced confusion or further complications  Future deliberations on whether or not to apply this definition to all accounting standards (past and future).

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 58 Simplified Deferred Taxes  ASU 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes  Effective Date:  Public business entities: FYBA 12/15/2016  All other entities: FYBA 12/15/2017  Purpose: To reduce complexity of accounting standards for long term and short term deferred taxes on the Balance Sheet.  Who is affected?: All entities.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 59 Simplified Deferred Taxes  ASU 2015-17 - Continued  Main Provisions:  Current GAAP requires the deferred tax assets and liabilities to be segregated into current and non-current amounts.  This results in little to no benefit for users of financials statements.  The classification does not align with the time period ( one year) in which deferred tax amounts are expected to be recovered or settled.  The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 60 Simplified Deferred Taxes  ASU 2015-17 - Continued  Main Provisions:  Each tax jurisdiction will now have only one net noncurrent deferred tax asset or liability.  Companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another, or vice versa.  This update can be applied prospectively or retrospectively, but must be applied to all deferred tax balances. Disclosure of the change is required.  This standard will also align US GAAP with International Financial Reporting Standards (IFRS)

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 61 Simplified Deferred Taxes  ASU 2015-17 - Continued  Key Takeaways:  Reduced costs and meaningless complexity  Entities no longer must analyze whether deferred tax items are related to specific assets or liabilities.  Entities no longer need to estimate the timing of the reversal of temporary differences.  Usefulness of the financial statements remains the same, if not better.  Future efforts to update required disclosures.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 62 Simplified Business Combinations  ASU 2015-16 - Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments  Effective Date:  Public business entities: FYBA 12/15/2015  All other entities: FYBA 12/15/2016  Purpose: To simplify the accounting for businesses within the measurement period of a business combination.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 63 Simplified Business Combinations  ASU 2015-16 - Continued  Who is affected?:  All entities…  Or rather, “all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized.”

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 64 Simplified Business Combinations  ASU 2015-16 - Continued  Main Provisions:  Acquirer is to recognize adjustments to provisional amounts identified during the measurement period in the current period.  Acquirer is to record (in the same period) the effect on earnings of changes in depreciation, amortization etc. that result from the adjustment.  Acquirer is to disclose in the notes the portion of the amount recorded in current earnings by line item which would have been recognized if the adjustment was as of the acquisition date.  Adjustments include recognizing additional assets or liabilities resulting from new information obtained about the facts and circumstances of the acquisition.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 65 Simplified Business Combinations  ASU 2015-16 - Continued  Key Takeaways:  Measurement period is not to exceed one year.  Existing GAAP required any adjustments during this period to be retrospectively stated.  This required revisions of comparative information for prior periods  This also required revisions of the prior period applicable depreciation, amortization, and all other income statement effects resulting from the adjustments.  Retrospective accounting is no longer necessary. Rather, changes are expressed through disclosure during the current period.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 66 Simplified Business Combinations  ASU 2015-16 - Continued  Example  We acquire Target on September 30, 2015.  Independent appraisal for an item of PPE is not complete. (disclose in December 31, 2015 financial statements)  We file our December 31 2015 financial statements recognizing the provisional fair value of the asset at $30,000 with a useful life as of the acquisition date of 5 years.  $30,000/60 months = $500 depreciation expense/month  6 months after acquisition date (March 31, 2016), the appraisal comes back as $40,000.  $40,000/60 months = $667 depreciation expense/month  $667 - $500 = $167  $167 X 6 months = $1,000 of additional depreciation.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 67 Simplified Business Combinations  ASU 2015-16 - Continued  Example  In current March 31, 2016 financial statements we do the following:  PPE asset -increased $10,000.  A/D asset -increased $1,000.  Carrying amount of goodwill -decreased $10,000.  Depreciation Exp. -increased $1,000.  Disclosures:  Increase to the fair value of the PPE with a corresponding decrease to Goodwill.  Additionally, the change to the provisional amount resulted in depreciation expense and accumulated depreciation of $1,000, of which $500 relates to the previous quarter.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 68 Private Intangibles  ASU 2014-18 - Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination  Effective Date: FYBA 12/15/2015  But only if elected.  Once elected, this will apply to all like transactions following.  Purpose:  To simplify accounting for intangible assets in business combinations for private business entities.  Reduce the cost and complexity associated with the measurement of identifiable intangible assets.  Prevent significantly diminishing decision useful information for the users of private business entity financial statements.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 69 Private Intangibles  ASU 2014-18 - Continued  Who is affected?:  All entities other than public business entities and not-for-profit entities (remember our first standard?) which go through a business combination.  Main Provisions:  Private companies no longer recognize separately from goodwill customer-related intangible assets and noncompetition agreements.  If this alternative is elected, then ASU 2014-02, Intangibles - Goodwill and Other (Topic 350): Accounting for Goodwill, must also be elected.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 70 Private Intangibles  ASU 2014-18 - Continued  Main Provisions:  In existing GAAP, acquirer is required to recognize all identifiable intangible assets.  Asset arising from contractual or other legal rights OR  Asset is capable of being separated or divided, and sold or licensed.  This alternative allows private companies to limit identifiable intangibles to those that are capable of being sold or licensed.  This typically will be customer-related intangible assets and noncompetition agreements.  These intangible assets no longer being recognized separately are subsumed into Goodwill.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 71 Private Intangibles  ASU 2014-18 - Continued  Main Provisions:  This update specifically calls out the following customer- related intangibles as assets which would still be recognized separately as intangible assets.  Mortgage servicing rights.  Commodity supply contracts.  Core deposits.  Customer information.  For the purposes of this standard, contract assets and leases are not considered to be customer-related intangible assets and thus, not eligible to be subsumed into Goodwill.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 72 Private Intangibles  ASU 2014-18 - Continued  Key Takeaways:  For private companies only.  Less intangible assets will be recognized, thus less intangible assets will need to be valued.  Applies to all intangible assets that fall into the described category. Entities are not allowed to pick and choose which intangible assets to recognize.  Alternative accounting update for amortizing Goodwill must be applied, as amortizable assets are now subsumed into Goodwill.  Dissension among Board members.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 73 A New Going Concern  ASU 2014-15 - Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern  Effective Date: FYEA 12/15/2016  Purpose:  Under current GAAP, going concern of an entity is presumed as the basis for preparing financial statements.  The only situation that is not the case is when an entity’s liquidation becomes eminent. If this is the case, then financial statements are issued in accordance with the Liquidation Basis of Accounting (Subtopic 205-30).

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 74 A New Going Concern  ASU 2014-15 - Continued  Purpose:  Even if liquidation is not eminent, the Financial Accounting Standards Board (FASB) believes that there could be conditions or events that raise substantial doubt about the entities ability to continue.  This ASU creates a set of amendments that should be followed to determine whether information regarding “going concern” of an entity is necessary.  Currently, accounting guidance related to Going Concern does not exist.  The going concern guidance we are all familiar with is found within auditing standards and federal securities laws.  This guidance for management is aligned with those standards.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 75 A New Going Concern  ASU 2014-15 - Continued  Purpose:  This lack of guidance in GAAP has historically created diversity in whether, when, and how an entity discloses such information.  Thus, the ultimate purpose, provide guidance about management’s responsibility to evaluate whether there is substantial doubt of an entity’s going concern, and provide the related footnote disclosures.  Who is affected?: All entities. Public, Private, NFP

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 76 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Substantial doubt defined:  Exists when conditions and events considered in aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year that the financial statements are issued or available to be issued.  The term ‘probable’ is consistent with the use in accounting for contingencies (Topic 450).  Events are likely to occur.  Typically understood as 70%-75%  The term ‘available to be issued’ means that financials are complete in a form and format that complies with GAAP and all approvals for issuance have been obtained.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 77 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Management’s evaluation each period should consider qualitative and quantitative information on relevant conditions and events that are known or reasonable knowable.  Financial condition, liquidity sources.  Obligations due within one year.  Funds required to maintain operations  Other adverse conditions  Financial trends, cash flows, w/c deficiencies.  Loan defaults, restructuring of debt, new financing methods.  Work stoppages, labor difficulties.  Legal proceedings, new legislation, loss of licenses, underinsured catastrophe.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 78 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Management’s initial evaluation should not include mitigation efforts.  If the initial evaluation points to a going concern issue, then management shall evaluate whether its plans to mitigate the adverse conditions will be effective.  Plans will be effectively implemented.  Once implemented, will alleviate relevant adverse conditions within one year.  Consider feasibility of implementation.  Specific facts and circumstances.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 79 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Management’s plans must be approved prior to the date financial statements are issued.  Disposals of asset or business segment.  Plans to borrow money or restructure debt.  Reduction or delay of expenditures.  Increase in ownership equity.  Management must consider the expected magnitude and timing of the mitigating effect of plans.  At this point there are two possible situations.  Substantial doubt is raised but is alleviated, OR  Substantial doubt is raised and not alleviated.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 80 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Disclosures if substantial doubt is raised, but is alleviated.  Conditions or events that initially raised substantial doubt of the entity’s ability to continue (before management’s mitigating efforts).  Management’s evaluation of the significance of those conditions or events in relation to the ability to meet its obligations.  Management’s plans that alleviated this substantial doubt.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 81 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  Disclosures if substantial doubt is raised and not alleviated.  Indicate in a statement in the footnotes of the financial statements that this is substantial doubt about the entity’s ability to continue as a going concern.  Conditions or events that initially raised substantial doubt of the entity’s ability to continue.  Management’s evaluation of the significance of those conditions or events in relation to the ability to meet its obligations.  Management’s plans that are intended to alleviate this substantial doubt.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 82 A New Going Concern  ASU 2014-15 - Continued  Main Provisions:  In subsequent reporting periods, if substantial doubt still exists, entity shall continue to provide these required disclosures.  As new information is available, disclosures should become more extensive.  For the period in which substantial doubt no longer exists, an entity shall disclose what changed.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 83 A New Going Concern  ASU 2014-15 - Continued  Key Takeaways:  New accounting standard applicable to all entities.  In line with existing audit standards.  Going concern analysis is management’s responsibility.  Specific disclosure requirements.  Express statement of going concern issue if applicable.  Liquidation accounting still exists.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 84 Redo of Revenue  ASU 2014-09 - Revenue from Contracts with Customers (Topic 606)  Effective Date:  Public business entities, not-for-profit entities which are conduit bond obligors, and employee benefit plans that file with the SEC - FYBA 12/15/2017  All other entities -FYBA 12/15/2018  These were deferred by one year. Originally was 12/15/2016 and 12/15/2017.  Early application is only applicable for nonpublic entities.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 85 Redo of Revenue  ASU 2014-09 - Continued  Purpose:  Current GAAP consists of numerous industry specific standards.  These specific standards were made to address narrowly scoped issues or transactions  This caused economically similar transactions across industries to yield differing revenue recognition.  GAAP’s existing revenue disclosures lack cohesion and were limited to basic information which many did not consider to be useful.  Additionally, GAAP and IFRS differed in many ways.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 86 Redo of Revenue  ASU 2014-09 - Continued  Purpose:  Remove inconsistencies and weaknesses in current revenue requirements (GAAP and IFRS).  Provide a more robust framework for addressing revenue issues.  Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.  Provide more useful information to users of financial statements through improved disclosure requirements.  Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.  Who is Affected?: All entities that enter into contracts with customers.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 87 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Applies to all contracts with customers except for:  Insurance contracts.  Lease contracts.  Financial instruments.  Nonmonetary exchanges.  Dividends.  A customer is a party that contracts with an entity to obtain goods or services that are the output of that entity’s ordinary activities.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 88 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  5 Step Approach  Step 1: Identify the contract with the customer.  Step 2: Identify the separate performance obligations in the contract.  Step 3: Determine the transaction price.  Step 4: Allocate the transaction price to separate performance obligations.  Step 5: Recognize revenue as performance obligations are satisfied.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 89 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 1: Identify the contract with the customer.  Contract can be written, oral, or even implied.  It creates enforceable rights and obligations.  Contract should include:  Approval and commitment of the parties.  Identification of the rights of the parties.  Identification of the payment terms.  The contract has commercial substance.  Collectability is ensured (probable).  Contract combinations?  Contract modifications?

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 90 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 2: Identify the separate performance obligations.  A performance obligation is a promise to transfer a distinct good or services to a customer.  Management must determine which are distinct.  Customer can benefit from the good or service on its own or with readily available resources, AND  Good or service is separately identifiable.  Indicators of a distinct good or service:  Bundled  Customize or significantly modify another good or service.  Not highly dependent on other goods or services.  Should be combined until bundle is distinct.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 91 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 3: Determine the transaction price.  The amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to the customer.  Variable consideration issues.  Expected value, OR  Most likely amount.  Constraints on transaction price.  Significant financing component.  Noncash consideration.  Consideration payable to the customer.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 92 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 4: Allocate the transaction price to separate performance obligations.  The transaction price is allocated to each performance obligation based on the relative standalone selling price of the goods or services promised.  Made at contract inception.  When there is no observable standalone price:  Expected cost plus margin.  Assessment of market price for similar goods or services  Residual approach (last resort in limited circumstances).

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 93 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 4: Allocate the transaction price to separate performance obligations.  Residual approach:  Only for high variable or highly uncertain selling prices.  Cannot be used if results in low amount.  Calculates an implied selling price.  Allocating discounts:  Proportionately to all performance obligations, Unless…  Entity regularly sells each good on a standalone basis.  Entity regularly sells a bundle of these goods at a discount.  The discount to these goods, is same as contract discount.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 94 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 4: Allocate the transaction price to separate performance obligations.  Discount example:  Product A = $40, Product B = 55, Product C = $45  Product B and C regularly sold for $60.  We enter a contract to sell A, B, and C for $100. (discount of $40).  In this case, the entire $40 discount is attributable to product B and C.  Product B: ($55/$100) X $60 = $33  Product C: ($45/$100) X $60 = $27  Product A: $100 - $33 - $27 = $40.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 95 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 5: Recognize revenue as performance obligations are satisfied.  Revenue is recognized as a good or service is transferred to the customer and the customer obtains control.  No longer is “risk and rewards” the trigger.  Over time or at a point in time?

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 96 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 5: Recognize revenue as performance obligations are satisfied.  When revenue is recognized over time.  The customer concurrently receives and consumes the benefits provided by the entity’s performance as the entity performs.  The entity’s performance creates or enhances a customer controlled asset.  The entity’s performance does not create an asset with an alternative use and the entity has a right to payment for performance to a completed date.  Output method or Input method.  Method of measurement must be reliable.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 97 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Step 5: Recognize revenue as performance obligations are satisfied.  When revenue is recognized at a point in time.  Present right to payment.  Legal title  Physical possession.  Significant risk and rewards of ownership.  Customer acceptance.  Note: Not all have to be satisfied.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 98 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Other considerations:  Licenses  Contract costs  Repurchase agreements  Principal versus agent  Rights of return  Warranties  Consignment

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 99 Redo of Revenue  ASU 2014-09 - Continued  Main Provisions:  Disclosures:  New disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and the related cash flows.  Both qualitative and quantitative.  Contracts with customers  Significant judgements  Costs to obtain or fulfill a contract\  Performance obligations  Nonpublic entities are exempt from certain disclosure requirements.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 100 Redo of Revenue  ASU 2014-09 - Continued  Methods of application:  Full Retrospective Method:  Retrospectively to each prior reporting period.  Allowed certain practical expedients.  Completed contracts do not need to be restated that begin and end in same period.  Completed contracts with variable consideration can be analyzed using hindsight and the transaction price at the date contract was completed.  Reporting periods presented before the date of initial application, not required to disclose information related to remaining performance obligations.  Provides strong trend information

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 101 Redo of Revenue  ASU 2014-09 - Continued  Methods of application:  Simplified Transition Method:  Must disclose that this method is being used.  Revenue standard is only applied to contracts not yet completed as of date of initial application.  Must disclose the amount by which each line item on the financial statements is affected by the new standard.  Which means preparing financials with old standard and this standard.  Intended to reduce time and effort related to transition.

Prepared for Accounting and Financial Women’s Alliance - Chattanooga Chapter Page 102 Redo of Revenue  ASU 2014-09 - Continued  Key Takeaways:  Overhaul of current revenue accounting guidance.  Principals based versus rules based.  Five step process.  Two application methods.  Dates of application coming soon.  FASB and IASB Joint Transition Resource Group.

PERSHING YOAKLEY & ASSOCIATES, P.C. 800.270.9629 | www.pyapc.com Trevor Brown tbrown@pyapc.com Matt Stuart mstuart@pyapc.com

May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager and Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S.

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May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager and Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S.

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Presentation on theme: "May 26, 2016 Presented by Matt Stuart, CPA, Senior Manager and Trevor Brown, CPA, Senior Pershing Yoakley & Associates, P.C. ACCOUNTING & FINANCIAL WOMEN’S."— Presentation transcript:

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