© Grant Thornton LLP. All rights reserved. FASB Update John Hepp Partner Accounting Principles June 18, 2014 The ITLC/NAFC 2014 Annual Conference & Exhibition.

© Grant Thornton LLP. All rights reserved. 2 2 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser. 2

© Grant Thornton LLP. All rights reserved. 8 ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects Option to apply a proportional amortization method that recognizes the cost of the investment as a part of income tax expense, if certain conditions are met Significantly loosens criteria that must be met Applies only to Low Income Housing Tax Credits and should not be analogized for other tax credits Effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted One-year delay for interim reporting for all other entities

© Grant Thornton LLP. All rights reserved. 9 ASU 2014-04 Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure Derecognize the loan receivable and recognize real estate property when in-substance repossession or foreclosure Occurs when either: –Lender obtains legal title to the residential property upon completion of a foreclosure –Borrower conveys all interest in the residential property to the lender to satisfy the loan through a deed in lieu of foreclosure or a similar legal document Effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted One-year delay for interim reporting for all other entities

© Grant Thornton LLP. All rights reserved. 11 ASU 2014-05 Service Concession Arrangements, continued Scope Service concession arrangements between private-sector operating entity and public-sector grantor when arrangement meets both of the following: 1.Grantor controls, or has ability to modify/approve, the services by operating entity, who provides the services, and at what price 2.Grantor controls, through ownership, beneficial entitlement or residual interest in infrastructure at end of arrangement

© Grant Thornton LLP. All rights reserved. 12 ASU 2014-05 Service Concession Arrangements, continued Operating entity cannot apply: ASC 840, Leases, accounting guidance to the service concession arrangement ASC 360, Property, Plant and Equipment, guidance to the infrastructure in a service concession arrangement Apply other guidance such as ASC 605, Revenue Recognition, to account for revenue and costs related to construction, upgrade, or operation of services

© Grant Thornton LLP. All rights reserved. 13 ASU 2014-08 Discontinued operations Scope applies to either: Component of an entity, or a group of components, that is either disposed or classified as held for sale Significant equity method investments Business or nonprofit activity classified as held for sale upon acquisition New guidance does not apply to oil and gas properties accounted for under the full-cost method.

© Grant Thornton LLP. All rights reserved. 14 ASU 2014-08 Discontinued operations Definition: Discontinued operation Component of an entity, a group of components of an entity, a business, or a nonprofit activity whose disposal marks a strategic shift that has or will have a major effect on an entity's operations and financial results Continuing involvement/cash flows no longer a factor in classification But information still needs to be disclosed

© Grant Thornton LLP. All rights reserved. 16 ASU 2014-08 Discontinued operations - presentation Balance sheet: Present separately the assets and liabilities of the discontinued operation in all periods (including prior periods when not yet classified as held for sale) Income statement: Separately report discontinued operation's results as a separate component of income before extraordinary items Present or disclose the gain or loss on disposal separately

© Grant Thornton LLP. All rights reserved. 17 New disclosures about continuing involvement A description of the nature of activities giving rise to the continuing involvement The expected duration of continuing involvement The amount of cash inflows and outflows from and to, respectively, the discontinued operation after its disposal Revenues and expenses presented in continuing operations after the disposal that were previously eliminated in the consolidation process

© Grant Thornton LLP. All rights reserved. 18 ASU 2014-08 Discontinued operations – effective date and transition Public business entities, NFP's that have issued or are conduit bond obligors for market securities, and acquisitions classified as held for sale: Effective for annual periods beginning on or after December 15, 2014 and for interim periods within those years. All other entities: Effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Prospective application Early adoption permitted for disposals or held for sale classifications not previously reported

© Grant Thornton LLP. All rights reserved. 23 FASB project update Going Concern – recent developments Early-warning disclosure requirement removed Modified SEC-filer requirement to assess for 24 months after balance sheet date All entities to assess for substantial doubt for one year from financial statement issuance (available for issuance) date Substantial doubt definition to incorporate "probable" likelihood Management to consider mitigating plans if probable to alleviate adverse conditions and be effectively implemented Disclosures when substantial doubt exists and when it has been alleviated

© Grant Thornton LLP. All rights reserved. 24 Proposed Concepts Statement Conceptual Framework for Financial Reporting Board's decision process part of disclosure framework project Help the Board identify relevant information for disclosure Address interim reporting disclosure requirements –Differences in measurement, recognition, and presentation between interim and annual statements –How interim results relate to entire year Expectations about the future would not be disclosed unless supports a measurement in the financial statements Comments due July 14

© Grant Thornton LLP. All rights reserved. 27 ASU 2014-02 Accounting for Goodwill Scope: Goodwill arising from a business combination Goodwill resulting from equity method accounting or fresh- start reporting If elected, alternative must be applied to all goodwill

© Grant Thornton LLP. All rights reserved. 28 Example: Acquisition of Entity A where Entity A's major asset is a license with a life of eight years. Entity A concludes that amortizing goodwill over the life of the license is more appropriate than over 10 years. ASU 2014-02 Accounting for Goodwill, continued Amortization (change from ED): Straight-line basis over 10 years Shorter life may be used if more appropriate

© Grant Thornton LLP. All rights reserved. 29 ASU 2014-02 Accounting for Goodwill, continued Impairment: Elect to test for impairment at either: –Entity level –Reporting unit level Test for impairment only when triggering event occurs Option to first perform qualitative assessment to determine if quantitative test is needed No impairment review of equity method goodwill

© Grant Thornton LLP. All rights reserved. 30 ASU 2014-02 Accounting for Goodwill, continued Derecognition: Allocate goodwill to business being disposed of in determining gain/loss on disposal Allocate using a "reasonable and rational approach" Presentation requirements: Separate line item in balance sheet Split amortization and impairment between continuing and discontinued operations (if any) in the income statement

© Grant Thornton LLP. All rights reserved. 31 ASU 2014-02 Effective date and transition Effective prospectively for new goodwill in annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. Goodwill existing at the beginning of the period of adoption is amortized prospectively over ten years (or less if more appropriate) Early adoption permitted including for annual or interim period for which financial statements have not been made available

© Grant Thornton LLP. All rights reserved. 32 ASU 2014-03 Simplified hedge accounting approach Scope: Private companies, other than financial institutions Receive-variable, pay-fixed interest rate swaps All the following criteria must be met: Variable rate on swap and borrowing is based on same index and reset period Swap is "plain-vanilla" interest rate swap Re-pricing and settlement dates match Swap's fair value at inception is at or near zero Swap's notional amount matches debt's hedged principal amount Interest payments are designated as hedged

© Grant Thornton LLP. All rights reserved. 33 ASU 2014-03 Simplified hedge accounting approach, continued ASU 2014-03 provides flexibility in application: 1.May apply on a swap-by-swap basis 2.May apply to arrangements where variable interest is based on an index not identified as a benchmark in existing ASC 815, Derivatives and Hedging 3.Any cap or floor in debt must have comparable cap or floor in the swap 4.Re-pricing and settlement dates do not need to match exactly; can be within "a few days" 5.Swap's fair value at inception does not have to be zero; can be "near zero"

© Grant Thornton LLP. All rights reserved. 34 ASU 2014-03 Simplified hedge accounting approach, continued Relief from existing guidance: May assume no ineffectiveness May measure at settlement value rather than fair value –Difference is that settlement value does not reflect nonperformance risk May defer completion of hedge documentation until the date when the first annual financial statements are available for issuance after hedge inception Note: At the point the hedge no longer satisfies the alternative criteria, then must prospectively account for using ASC 815

© Grant Thornton LLP. All rights reserved. 35 ASU 2014-03 Simplified hedge accounting approach, continued NO RELIEF FROM: 1.Compliance with existing cash flow hedge documentation requirements: Entity must document methods they intend to use to assess effectiveness and measure ineffectiveness –May use "critical terms match" approach to documentation Quarterly re-assessment Assess counterparty credit risk 2. Disclosure requirements under ASC 815 and ASC 820

© Grant Thornton LLP. All rights reserved. 36 ASU 2014-03 Effective date and transition Effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. Early adoption permitted Must elect, on a swap-by-swap basis: –Modified retrospective approach –Full retrospective approach

© Grant Thornton LLP. All rights reserved. 37 ASU 2014-07 VIE exemption for common control leases Scope: Lease arrangement between the two entities Private company lessee and the lessor must be under common control Leasing activity with the lessor must be substantially all of the activity between the two entities If lessee explicitly guarantees/provides collateral for any obligation of the lessor, the principal amount of the obligation at inception cannot exceed the value of the asset leased

© Grant Thornton LLP. All rights reserved. 38 ASU 2014-07 VIE exemption for common control leases, continued Accounting: Allows private companies an exemption from the requirement to consolidate the lessor under common control in existing variable interest entity (VIE) guidance Alternative must be applied to all leasing arrangements with current and future lessors under common control Disclosure: Key terms of arrangement Amount and description of lessee's exposure to lessor's liabilities Qualitative description of circumstances where lessee may need to provide financial support to lessor VIE disclosures not required

© Grant Thornton LLP. All rights reserved. 39 VIE exemption for common control leases Sale and leaseback to/from a VIE The proposal does not provide relief from sale and leaseback accounting, including continuing involvement. A "failed sale" will continue to be reflected on the balance sheet.

© Grant Thornton LLP. All rights reserved. 40 ASU 2014-07 Effective date and transition Effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. Retrospective application Early adoption permitted

© Grant Thornton LLP. All rights reserved. 48 Revenue recognition model A matter of control (even for services) Control – the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, an asset (also includes preventing others from directing the use of, or obtaining the benefits from) Revenue recognized upon satisfaction of a performance obligation (promised goods or services are transferred) Transfer occurs when the customer obtains control In the original proposal, no provision for partial performance

© Grant Thornton LLP. All rights reserved. 49 Revenue recognition model The compromise Control transfers either over time or at a point in time –Must first evaluate if over time –If not, then point in time

© Grant Thornton LLP. All rights reserved. 50 Revenue recognition model Transfer models Over time Meet at least one of the following: Customer receives and consumes benefits as vendor performs OR Customer controls asset as created OR No asset with alternative use to vendor AND vendor has a right to payment for work to date and expects to fulfill the contract At a point in time Indicators of control transfer to customer: Right to receive payment for asset Legal title to the asset Physical possession of the asset Significant risks and rewards of ownership Acceptance

© Grant Thornton LLP. All rights reserved. 51 Revenue recognition model Recognition over time Right to payment for performance completed to-date: Must be entitled to an amount that compensates for performance to-date, including a profit margin Must be enforceable Asset with no alternative use: Assessment includes effects of contractual restrictions and practical limitations –Contractual restriction: entity expects customer would enforce rights if entity tried to direct asset to another use –Practical limitation: incur significant economic losses to direct asset to another use

© Grant Thornton LLP. All rights reserved. 52 Revenue recognition model The new "percentage of completion" Recognize revenue by measuring progress toward completion Objective is to faithfully depict the entity's performance –Output methods – direct measurements of customer value such as milestones reached or units produced –Input methods – based on vendor's efforts such as costs incurred, labor hours, or time lapsed Recognize revenue to the extent of costs incurred if unable to reasonably measure progress, but expect to recover costs Update progress each reporting period

© Grant Thornton LLP. All rights reserved. 53 Revenue recognition model Effective date For a public entity: effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period –Early application is not permitted For other entities: effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 –May elect to apply this guidance earlier 2018

© Grant Thornton LLP. All rights reserved. 54 Revenue recognition model Transition Option 1 Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients: For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period. For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed. No need to provide disclosures about transaction price allocated to remaining performance obligations or an explanation of when the entity expects to recognize that amount as revenue for periods presented before the date of initial application.

© Grant Thornton LLP. All rights reserved. 55 Revenue recognition model Transition Option 2 Retrospectively with the cumulative effect recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of: The amount by which each financial statement line item is affected in the current reporting period compared to the guidance that was in effect before the change An explanation of the reasons for significant changes.

© Grant Thornton LLP. All rights reserved. 57 Type A and Type B Leases Type AType B Interest and amortization recognized similar to a financing arrangement (potential front-loading) Single Lease Expense (SLE): recognize interest the same way but recognize amortization on an increasing basis to achieve straight-line expense

© Grant Thornton LLP. All rights reserved. 58 Commentary Type B accounting for lessees achieves straight-line expense recognition but does so in a complicated way. Both Type A and Type B lease accounting may require more monitoring and reassessment than current lease accounting models. The FASB appears to be more sensitive to the reassessment issue than the IASB

© Grant Thornton LLP. All rights reserved. 59 March 18-19, 2014 Update Boards consider four lessee accounting models Approach 1 – A single approach for all leases, accounting for all leases as the purchase of a ROU asset and a loan Approach 1A – A dual approach that would permit (but not require) lessees to account for most real estate leases as Type B leases (that is, recognizing a single lease expense (the average rent) rather than amortization and imputed interest separately). Approach 2 – A dual approach, with lease classification similar to that proposed in the 2013 ED with virtually all equipment leases being Type A leases, while most real estate (including integral equipment) leases would be Type B leases. Approach 3 – A dual approach, with lease classification determined in accordance with the risks and rewards principle in existing GAAP.

© Grant Thornton LLP. All rights reserved. 60 Lessee Accounting Model A split decision Approach 1 – A single approach for all leases, accounting for all leases as the purchase of a ROU asset and a loan Approach 3 – A dual approach, with lease classification determined in accordance with the risks and rewards principle in existing GAAP. There is a conceptual difference between the IASB and the FASB as to the unit of account: the real asset or the right of use asset.

© Grant Thornton LLP. All rights reserved. 61 Commentary: Reading the tea leaves Higher probability that the FASB will conform to the IASB than the opposite BUT less urgency around convergence than there was ten years ago

© Grant Thornton LLP. All rights reserved. 62 Lessor models A radical change…or none at all A piece of cake Type B lease: Apply an approach similar to existing operating lease accounting Continue to recognize the underlying asset Recognize lease income over the lease term

© Grant Thornton LLP. All rights reserved. 63 March 18-19, 2014 meeting update A choice of models Approach 1 –Determine lessor classification (Type A vs. Type B) based on whether the lease is effectively a financing/sale using IAS 17 like classification tests Approach 2 – Determine lessor classification as Type A or Type B in the same manner as Approach 1. However, in order to recognizing selling profit at lease commencement, the lease would have to transfer control to the lessee using sale criteria per the Revenue Recognition standard. Approach 3 – An approach that would determine lessor lease classification (Type A vs. Type B) based on the lessor’s business model.

© Grant Thornton LLP. All rights reserved. 64 March 18-19, 2014 meeting update A choice of models Approach 1 –Determine lessor classification (Type A vs. Type B) based on whether the lease is effectively a financing/sale using IAS 17 like classification tests Approach 2 – Determine lessor classification as Type A or Type B in the same manner as Approach 1. However, in order to recognizing selling profit at lease commencement, the lease would have to transfer control of the asset using sale criteria per the Revenue Recognition standard.

© Grant Thornton LLP. All rights reserved. 65 Short term leases the original proposal An exception is provided for leases of up to one year with NO POSSIBILITY of renewal Those leases are accounted for as a service contract: no asset or liability on the balance sheet

© Grant Thornton LLP. All rights reserved. 66 Short term leases March 18-19, 2014 Update Should the definition of short term lease be lengthened beyond 12 months? Should the definition of short term exclude all leases with an option to renew or only renewal options where the lessee has a significant economic incentive to exercise? What should be the required disclosure?

© Grant Thornton LLP. All rights reserved. 67 Short term leases March 18-19, 2014 Update The Boards decided not to extend the term to longer than 12 months for determining if a lease is exempt due to its short term nature The Boards voted to amend the definition of lease term so that a one year lease with renewal options could qualify for the short term lease exemption if there is no economic incentive to exercise the options The Boards decided to disclose rent expense as well as explanatory information about commitments arising from short term leases

© Grant Thornton LLP. All rights reserved. 68 Commentary Far more leases will qualify for the short term exception –Investment by the lessee in leasehold improvements will preclude use of the exception –So will termination penalties The FASB was less amenable to excepting small ticket items like copiers, computers, even cars – no specific materiality exception. The IASB may go this route. The Boards also lost enthusiasm for a portfolio approach for small items (no change in practice)

© Grant Thornton LLP. All rights reserved. 69 Next steps Bound and determined to get out a standard Bound and determined that lessees will put leases on the balance sheet Little appetite for changing lessor accounting No appetite for re-exposure

© Grant Thornton LLP. All rights reserved. FASB Update John Hepp Partner Accounting Principles June 18, 2014 The ITLC/NAFC 2014 Annual Conference & Exhibition.

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© Grant Thornton LLP. All rights reserved. FASB Update John Hepp Partner Accounting Principles June 18, 2014 The ITLC/NAFC 2014 Annual Conference & Exhibition.

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