FASB/IASB Update Part II

Transcription

1 American Accounting Association FASB/IASB Update Part II Tom Linsmeier, FASB Member Mary Tokar, IASB Member August 9, 2015 The views expressed in this presentation are those of the presenters. Official positions of the FASB and IASB are reached only after extensive due process and deliberations.

2 Agenda Leasing Financial Instruments - Classification & Measurement - Impairment - Hedging FASB Agenda Overview IASB Agenda Overview 2

3 Leasing 3

4 Purpose 1.25 trillion of off-balance sheet operating lease commitments for SEC registrants * Lessee Most lease assets and liabilities are off-balance sheet Limited information about operating leases Lessor Lack of transparency about residual values Consistency with leases and revenue recognition guidance * Estimate according to the 2005 SEC report on off-balance sheet activities 4

5 Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 5

6 Definition of a Lease That is explicitly or implicitly specified Lease contracts in the scope of Topic 842 involve An identified asset The right to control the use during the lease term Supplier has no practical ability to substitute and would not economically benefit from substituting the asset Decision-making authority over the use of the asset The ability to obtain substantially all benefits from the use of the asset 6

7 Scope Reliefs Short-Term Lease Exemption for Lessees Low-Value Asset Exemption (IASB Only) Recognition and measurement exemption for leases with a term of 12 months or less Explicit recognition and measurement exemption for leases of low-value assets 7

8 Lessee Model All leases are recognized on the lessee s balance sheet Current U.S. GAAP (IFRS) Capital (Finance) Leases IFRS 16 Topic 842 Leases Finance Leases Operating Leases Leases Operating Leases All leases are accounted for like Finance Leases Classification is based on existing U.S. GAAP/IFRS 8

9 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Finance Leases Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Operating Leases Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 9

10 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement FASB: Direct Financing & Sales-Type IASB: Finance Net investment in the lease Interest income and any selling profit on the lease 1 Cash received for lease payments Operating (FASB only) Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments 1 Selling profit recognized at lease commencement for sales-type leases, over the lease term for direct financing leases (note: selling profit is rare for direct financing leases). 10

11 Lease Term and Purchase Options Initial Measurement Consider all relevant factors that create an economic incentive to exercise a renewal/purchase option Include if reasonably certain will exercise Subsequent Measurement Lessee Reassess only upon the occurrence of a significant event/significant change in circumstances that is within the control of the lessee Lessor Not required to reassess 11

12 Variable Lease Payments Initial Measurement Only include VLPs that are linked to an index or a rate or are in-substance fixed Lessee FASB: reassess only when the lessee remeasures the lease liability for other reasons (e.g., change in lease term) IASB: Also reassess when there is a change in contractual cash flows Subsequent Measurement Lessor Not required to reassess 12

13 Subleases Intermediate lessor should account for as separate contracts, unless they meet the contract combination guidance Head Lease Sublease Determine classification of the sublease with reference to: FASB: the underlying asset IASB: the ROU asset 13

14 Sale and Leaseback Transactions Determine if a sale occurred Accounting for the sale / purchase Apply Topic 606/IFRS 15 If there is a sale, apply Topic 842/ IFRS 16 to account for leaseback FASB only: Finance leasebacks preclude a sale Guidance on repurchase options: sale not precluded if option exercisable at the then-prevailing fair value, provided the asset is nonspecialized and readily available Gain on sale is recognized same as for the sale of any other nonfinancial asset Loss on the sale is recognized by seller-lessee Buyer-lessor accounts for purchase consistent with that of other nonfinancial assets IASB-only: Partial gain recognition (on residual interest only) 14

15 Other Differences between FASB & IASB Collectibility Modifications of Sales-Type and Direct Financing Leases Accounting for All Entities Other than Public Business Entities FASB Include explicit guidance on collectibility FASB Based on Topic 606 FASB Allow the use of a risk-free rate to discount lease liability IASB Relies on IFRS 15 guidance IASB Based on financial instruments guidance IASB Provide no accounting alternatives 15

16 Reducing Cost and Complexity Lessor Model Maintaining current model with only minor updates Eliminated proposed Receivable and Residual Approach Lessee Model FASB classification line is the same as current accounting IASB single model Short-term leases Aligned definition with the definition of lease term Reassessment No reassessment for lessor Limited reassessment for lessees 16

17 Next Steps Drafting Topic 842 & IFRS 16 Effective Date / Benefits and Costs Topic 842 & IFRS 16 Issued Topic 842 & IFRS 16 Effective 17

18 Accounting for Financial Instruments: Classification & Measurement 18

19 Financial Instruments a Comprehensive New Standard 10 Classification & Measurement IFRS 9 (2010) + Limited amendments Final limited amendments July 2014 IAS 39 Impairment Final July 2014 IFRS 9 General Hedge accounting New requirements published 2013 Effective date mandatory 2018 Own credit in OCI can be adopted separately Accounting for macro hedging is being deliberated separately (Discussion Paper April 2014) 19

20 Classification and Measurement IFRS 9 Step 1 Are cash flows solely Principal and Interest? Yes Form of instrument not considered (e.g. loan vs. securities) No Step 2 Hold to collect cash flows ONLY? No Hold to collect cash flows AND sell assets Yes Yes No Hold to collect Amortized Cost* Trade receivables Loans held for investment Some debt securities Senior securitization tranches Most Liabilities *No tainting Hold to collect & sell FV-OCI Debt securities Potentially some loans Other business models FV-NI Equity securities Certain debt securities Loans held for sale Convertible debt investments Residual securitization interest Certain hybrid assets Derivatives 20

21 AFI C&M: FASB Decisions Reached to Date Retain existing U.S. GAAP for Financial Instruments, except for the following. Investments in equity securities will be measured at FV-NI, except - Equity method investments - Equity securities without readily determinable fair value (Marked to observable price changes) Fair value change resulting from own credit for financial liabilities measured at FV under FV option will be recognized through OCI Valuation allowance on a deferred tax asset related to an AFS debt security to be assessed in combination with other DTAs Disclosures Changes - Private entities not required to disclose fair value of financial instruments recognized at amortized cost in Balance Sheet - Reduced disclosures for public entities about fair value information of financial instruments recognized at amortized cost in Balance Sheet 21

22 AFI C&M: FASB Only Redeliberations Reasons for retaining GAAP Little or no difference in outcomes from applying cash flow characteristics evaluation in IFRS and the clearly and closely-related embedded derivatives guidance in US GAAP - Concern that to make the cash flow characteristics evaluation operable in the U.S. would require additional guidance, perhaps resulting in as complex guidance as under the clearly and closelyrelated test while causing the reporting system to develop new systems with little or no difference in outcomes Lack of a significant increase in the usefulness of the financial information because many classification outcomes would not differ under the two models Different guidance for Financial Assets and Financial Liabilities 22

23 FASB and IASB Models Topic FASB Model IASB Model Bifurcation Cash flow test Business model Bifurcation requirements remain for both hybrid financial assets and liabilities No cash flow test retain Topic 815 guidance on embedded derivatives Retain existing separate accounting models to determine the classification and measurement of loans and securities Bifurcation requirements only apply to hybrid financial liabilities Solely payments of principal and interest (SPPI) assessment applies to financial assets Specific guidance related to beneficial interests One business model assessment for all financial assets (based on value/cash flow realization) 23

24 FASB and IASB Models Topic FASB Model IASB Model Investments in Equity Securities All investments in equity securities (except equity method investments) measured at FV-NI All investments in equity securities (except equity method investments) measured at FV-NI Equity securities without readily determinable fair values to be carried at cost adjusted for observable price changes Equity securities cannot be carried at FV-OCI In limited circumstances, cost may be an appropriate estimate of fair value. Irrevocable election can be made at inception for certain equity securities to be carried at FV-OCI 24

25 Accounting for Financial Instruments: Impairment 25

26 Financial Instruments Impairment Financial Crisis Advisory Group (FCAG) Formed in 2008 by FASB and IASB Recommendation Explore alternative to incurred loss model Reduce complexity by having a single impairment model Utilize more forward-looking information Current Response Proposals that result in more timely recognition of credit losses FASB model recognize all (lifetime) expected credit losses IASB model recognize some (12 months) expected credit losses until significant increase in credit risk threshold is met, then recognize lifetime expected credit losses 26

27 Base CECL Impairment Model for Financial Assets Measured at Amortized Cost Cumulative Credit Losses as % of Loan Balance Note: Graph is only illustrative; assumes closed pool of commercial loans with most losses emerging in periods 2 and 3, with rise in total expected loss in period 3. Current Expected Credit Loss (CECL) vs. Current GAAP At origination, recognize lifetime expected losses o Today, nothing recognized until default is probable; as typically applied = months No threshold for recognizing loss, thus expected lifetime loss incorporates a level of expected deterioration o Today, evidence of deterioration required Estimates updated each period and flows through provision o Same as today 27

28 Modified Model for Purchased Financial Assets With Credit Deterioration Definition: Acquired individual financial assets (or acquired groups of financial assets with shared risk characteristics at the date of acquisition) that have experienced a more than insignificant deterioration in credit quality since origination, based on the assessment of the acquirer PCI Model: Gross-up presentation on balance sheet Subsequent Changes in Credit Scope of Gross-Up Accounting Amortized cost would equal purchase price plus estimate of expected credit losses; no credit losses recognized at purchase Flow CECL estimate through allowance and provision in the period they occur (not through prospective adjustments to net interest income) Would be applied to all purchased assets that have experienced a more than significant credit deterioration Not intended to align with current SOP 03-3 scope 28

29 CECL Model Benefits & Concerns Benefits Preferred by users by 3:1 ratio The allowance reflects all cash flows not expected to be collected Results in more timely recognition of lifetime expected credit losses on the balance sheet Does not require a loss event to be defined Single measurement objective Concerns Day 1 losses except for purchased financial assets with credit deterioration Recognition of expected credit losses for periods beyond reasonable and supportable forecasts may not provide relevant and reliable information Does not match credit loss recognition with interest income recognition Concerns over costs to comply in a highly regulated environment 29

30 Available-for-Sale Debt Securities AFS debt securities were excluded from the CECL model during redeliberations Would apply modified impairment guidance in Topic 320 OTTI AFS Credit Loss Model that recognizes lifetime losses when triggering event has occurred An allowance approach would be used for recognizing credit losses, which would allow for credit loss reversals Requirement to consider the length of time that fair value of the security has been below amortized cost would be eliminated When estimating whether a credit loss exists, an entity would no longer be required to consider recoveries or additional declines in fair value after the balance sheet date AFS disclosures updated for CECL disclosure principles would be retained (Topic 320) 30

31 Summary of Disclosure Requirements All financial assets with credit risk (e.g., loans and securities) carried at amortized cost Objective is to enable users to understand the following: The credit risk inherent in the portfolio How management monitors the credit quality of the portfolio Management s initial and updated estimates of expected credit losses User Feedback: They want to understand actual credit results compared to original expectation of lifetime losses through disclosure. 31

32 Vintage Disclosure Current GAAP Proposed C&I As of or for the year ended December 31, Loans by risk rating 1 2 internal grade $ 49,713 $ 56, internal grade 32,417 38,751 5 internal grade 19,037 10,951 6 internal grade 2,385 2, internal grade Total retained loans $103,846 $ 109,865 % of total criticized to total retained loans 2.58% 3.04% % of nonaccrual loans total retained loans 0.28% 0.64% Loans by geographic distribution Total non-u.s. $ 34,440 $ 35,494 Total U.S. 69,406 74,371 Total retained loans $103,846 $ 109,865 Net charge-offs / (recoveries) $ 99 $ (212) % of net charge-offs / (recoveries) to end-ofperiod retained loans 0.10% -0.19% Loan delinquency Current and less than 30 days past due and still accruing $103,357 $ 109, days past due and still accruing or more days past due and still accruing Criticized nonaccrual Total retained loans $103,846 $ 109,865 C&I Prior years Revolving Loans Total $ 12,855 $10,974 $ 7,675 $ 5,525 $ 8,764 $ 1,122 $ 2,798 $ 49,713 9,856 7,053 5,564 6,432 1,560 1, ,417 6,792 5,443 1,642 1,520 1, , , $ 27,309 $22,653 $17,242 $11,211 $16,219 $ 3,756 $ 5,456 $103, % 0.54% 0.41% 0.27% 0.39% 0.09% 0.13% 2.58% 0.08% 0.06% 0.04% 0.03% 0.04% 0.01% 0.01% 0.28% $ 10,039 $ 7,222 $ 5,497 $ 3,574 $ 5,171 $ 1,197 $ 1,740 $ 34,440 20,232 $14,554 $11,078 $ 7,203 $10,420 $ 2,413 $ 3,506 69,406 $ 30,271 $21,776 $16,575 $10,777 $15,591 $ 3,610 $ 5,245 $103,846 $ 29 $ 21 $ 16 $ 10 $ 15 $ 3 $ 5 $ % 0.02% 0.02% 0.01% 0.02% 0.00% 0.01% 0.10% $ 30,128 $21,674 $16,497 $10,727 $15,518 $ 3,593 $ 5,220 $103, $ 38 $ 29 $ 19 $ 27 $ 6 $ $ 3 $ 2 $ 1 $ 2 $ 0 $ $ 62 $ 47 $ 31 $ 44 $ 10 $ $ 30,271 $21,776 $16,575 $10,777 $15,591 $ 3,610 $ 5,245 $103,846 32

33 Next Steps Board Meeting: Cost/Complexity Effective Date Fatal Flaw Review 3Q 2015 Final Standard 4Q 2015 Transition Resource Group (TRG) 33

34 IFRS 9 Impairment Change in credit quality since initial recognition Expected credit losses ( ECL ) recognised 12-month ECL Lifetime ECL Lifetime ECL Interest revenue Gross basis Gross basis Net basis Stage 1 Performing Stage 2 Under-performing Stage 3 Non-performing 34

35 Comparison with IFRS 9 Measuring Credit Loss CECL On Day 1, record an estimate of lifetime expected credit losses IFRS 9 Model On Day 1, record an estimate of 12 months of expected credit losses for financial assets that have not experienced significant credit deterioration Threshold No threshold Record lifetime expected credit loss if a financial asset is considered to have a significant increase in credit risk since initial recognition Nonaccrual Permits the application of nonaccrual practices Precludes the use of nonaccrual practices Troubled Debt Restructuring Scope Treat concession provided to troubled borrower to be a continuation of original lending agreement Will not apply to AFS Debt Securities; model modified for purchased financial assets with credit deterioration No concept of troubled debt restructuring Applicable to All Debt Securities Disclosures Credit quality indicators to be disaggregated by year of origination for financing receivables (excluding lines of credit and reinsurance receivables) Reconciliation of the allowance for credit losses from opening balance to closing balance 35

36 Financial Instruments: Hedging 36

37 Recurring Feedback on Hedge Accounting Preparers Many common risk management transactions do not qualify Component hedging of nonfinancial items would better reflect the way entities manage risks Accounting model creates arbitrary ineffectiveness for many interest rate hedging transactions Documentation and effectiveness assessments rigid criteria and extensive testing Artificial restrictions affect business practices Investors Preparers should be able to reflect their risk management strategies in their financial statements - Users do not want non-gaap disclosures on economic hedging because compliance with accounting rules is too difficult Ineffectiveness is hard to understand and difficult to compare among entities Moving in and out of hedge accounting because of failing to comply with arbitrary rules is not helpful when economics remain the same 37

38 Hedge Accounting FASB Decisions Fair Value Hedge Hedge of Nonfinancial Item Hedge of inventory Hedge of Financial Instrument Swap fixed rate debt to floating For Qualifying Hedging Relationships* Derivative marked to fair value through earnings Entire derivative gain or loss is required to be presented in the same income statement line item as hedged item Basis of hedged item adjusted for changes in FV attributable to hedged risk--also through earnings Basis adjustment offsets derivative mark to earnings Cash Flow Hedge Hedge of forecasted purchase or sale of inventory Swap floating rate debt to fixed Derivative marked to fair value Entire derivative gain or loss is deferred in OCI Gain or loss previously deferred in OCI is reclassified into earnings in the same income statement line item as hedged item in the reporting period when the hedged item affects earnings. The concept of separately recording ineffectiveness will be eliminated from hedge accounting *The highly effective qualifying threshold (80%-125%) of current GAAP will be retained 38

39 Hedges of Nonfinancial Items FASB Decisions For hedges of nonfinancial items, an entity may designate a contractually specified component linked to an index or rate as the hedged item This change extends component hedging which had previously been reserved for hedges of financial instruments to entities seeking to manage commodity price risk as they buy and sell physical items and products Safeguards will be written into the Exposure Draft to ensure the entity actually has exposure to the designated component in the contract This change is expected to expand the population of hedging activities that qualify for hedge accounting and more closely align the reported results of a nonfinancial hedge with an entity s risk management objectives 39

40 Component Hedging FASB Decisions What is an entity allowed to designate as the hedged item? Hedge of Financial Instrument Hedge of Nonfinancial Item Interest Rate Risk Credit Risk Foreign Exchange Risk Variability in total cash flows (CF Hedges) or overall changes in fair value (FV Hedges) Contractually Specified Component Variability in total cash flows (CF Hedges) or overall changes in fair value (FV Hedges) Component hedging will now be allowed for both types of hedged items 40

41 Hedges of Interest Rate Risk What rates can be hedged Current GAAP Component hedging of interest rate risk is limited to a prescriptive list of benchmark interest rates: What rates can be hedged Board Decisions Separate approach for variable rate financial instruments Benchmark definition retained for fixed rate add SIFMA to list For both variable rate and fixed rate financial instrument hedges Variable rate financial instrument hedges only Fixed rate financial instrument hedges only Allowed Not Allowed Allowed Allowed Overnight Index Swap Rate (OIS) Any Contractually Specified Rate* Overnight Index Swap Rate (OIS) SIFMA U.S. Treasury Rate LIBOR Swap Rate SIFMA Prime Rate U.S. Treasury Rate LIBOR Swap Rate *Extends cash flow hedging to Prime and SIFMA 41

42 Fair Value Interest Rate Risk Hedging Total Coupon Cash flows used in PV calculation 7% Bond Change in Fair Value of Bond Must meet highly effective threshold Change in Fair Value of Swap 5% Swap 2% Credit Spread 5% 5% 5% 105 % Principal Present Value Cash flows on fixed leg used in PV calculation 5% 5% 5% 5% Present Value Current GAAP Hedge of interest rate risk of a fixed rate coupon must include the total coupon cash flows. This requirement was criticized because it includes the credit spread which is not part of an entity s interest rate risk management strategy and creates ineffectiveness. Board Decision An entity may exclude the credit spread in the fixed rate coupon and hedge the benchmark interest rate component of the total coupon. 42

43 Fair Value Interest Rate Risk Hedging Partial Term 5 Yr Bond Change in Fair Value of Bond Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Must meet highly effective threshold Change in Fair Value of Swap 3 Yr Swap Present Value Present Value Yr 1 Yr 2 Yr 3 Current GAAP An entity is not permitted to apply fair value hedge accounting for only a portion of the term of a financial instrument. Board Decision An entity may designate a portion of the term of a financial instrument as the hedged item, which will make partial term hedges more achievable. 43

44 Fair Value Interest Rate Risk Hedging Callable Debt 5 Yr Bond Change in Fair Value of Bond Must meet highly effective threshold Change in Fair Value of Swap 5 Yr Swap Present Value Present Value Prepayment Option Effective Yr 3 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Mirror Call Option Effective Yr 3 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Current GAAP An entity must consider all factors when assessing a prepayment option, which makes hedging past the call date difficult. Board Decision An entity may now assess only the risk being hedged when considering the prepayment option (e.g., interest rate risk) 44

45 Other Simplifications A concern of many constituents relates to the complex and burdensome nature of complying with certain existing requirements. In response to these concerns, Board decisions included the following changes to Topic 815: Qualitative Testing: For all hedging relationships that do not meet the requirements for the shortcut or critical terms match methods, an initial quantitative assessment of hedge effectiveness will be required (same as current GAAP). However, in all subsequent periods an entity may qualitatively asses hedge effectiveness unless facts and circumstances change. Hedge Documentation: An entity may perform the quantitative testing portion of hedge documentation before or at the three-month effectiveness testing period. The quantitative testing does not have to be at hedge inception. The timing of the preparation of all other hedge documentation elements would not change. Shortcut Method: An entity may apply a long-haul method if use of the shortcut method was or is no longer appropriate, as long as the hedge is highly effective from inception of the hedging relationship through the assessment date. 45

46 Comparison with IFRS 9 Board Decisions IFRS 9 Model Designation of Hedged Item Nonfinancial Item Variable Rate Instrument Fixed Rate Instrument Contractually specified component linked to index Contractually specified rate List of allowable rates: U.S. Treasury, OIS, LIBOR, SIFMA All Hedging Relationships Any separately identifiable and reliably measurable risk component Qualifying for Hedge Accounting Qualitative Testing Hedge of Fixed Rate Instrument Partial Term Hedging Hedged item and hedging instrument meet highly effective threshold 80% to 125% Day 1 quantitative test required. Qualitative assessments permitted in subsequent periods unless facts and circumstances change Benchmark component of total coupon (limited to 4 acceptable rates) Allowed There is an economic relationship between the hedged item and hedging instrument Quantitative assessment not required. Benchmark component of total coupon ( separately identifiable and reliably measurable concept) Allowed Dynamic Hedging Voluntary dedesignations permitted Voluntary dedesignations prohibited, but rebalancing hedge ratio is required While wording may differ, application and outcomes are now more closely aligned 46

47 Dynamic risk management The problem(s) IAS 39/ IFRS 9 requires one-to-one designation of hedged items/ hedging instruments but positions managed on net basis positions managed on behavioural basis, not accounting measurement portfolios are open not fixed Possible responses (DP 2014) Portfolio revaluation approach remeasure portfolio for changes in managed risk Incorporate behaviouralisation (eg core demand deposit stickiness Scope: all exposures? All exposures dynamically managed? All hedged positions? Applicability: mandatory or elective? Next steps Build on feedback from DP: Focus on net interest margin management Consider disclosures first, then develop recognition and measurement proposals (including behaviouralisation) Demand for NII by source (customer margin vs net open interest position) Second DP as expected next step 47

48 Summary FASB decisions will represent significant changes to the overall hedge accounting model The decision to no longer split the gain or loss on the hedging derivative into effective and ineffective portions for presentation purposes is a significant departure from current GAAP However, due to changes in other areas (component hedging for nonfinancial items, expanding interest rate risk hedging, addressing practice issues with fair value hedges of interest rate risk) the amount of mismatch between the hedging instrument and hedge item will be reduced (sometimes significantly) Changes will allow for a greater number of hedging relationships to qualify for hedge accounting (by more closely aligning the reported results of applying hedge accounting with an entity s risk management objectives) and includes simplifications to a highly complex and nuanced area of GAAP 48

49 FASB Agenda Overview & Agenda Consultation 49

50 FASB Agenda One Way to Classify Projects and Initiatives Foundation Projects - Framework Projects - Presentation Simplification Initiative PCC Activities Post-Implementation Review Activities Other Recognition, Measurement and Disclosure Projects 50

51 Foundation and Simplification Initiatives 51

52 Accounting is complex in part because we haven t answered accounting questions consistently. Why? Incomplete conceptual framework Volatility presentation issues 52

53 Agenda Strategy Foundational projects preventing future complexity Simplification projects addressing today s complexity 53

54 Foundational Projects Projects that will have an overarching, longstanding impact on GAAP. Examples: Fixing FASB s incomplete conceptual framework Performance reporting research project Disclosure framework project NFP financial statement presentation 54

55 Simplification Initiative Objective Reduce cost & complexity while maintaining or improving the usefulness of the information Projects include narrow-scope items that the FASB can complete in the short term Not always so SIMPLE!! 55

56 Examples of Simplification Projects Subsequent measurement of inventory lower of cost & net realizable value (complete) Eliminating the concept of extraordinary items (complete) Accounting for fees in a cloud computing arrangement (complete) Measurement date for plan assets (complete) Presentation of debt issuance costs (complete) Balance sheet classification of debt (ED soon) Income taxes: intra-entity transfers and liability classification (ED) Share-based payment accounting improvements (ED) Accounting for measurement period adjustments in a business combination (ED) Simplifying the equity method of accounting (ED) 56

57 Private Company Activities & PCC 57

58 Private Company Council Established by FAF on May 30, 2012; overseen by FAF Independent chair, sets own agenda Identifies, deliberates & votes on proposed modifications to existing GAAP for private companies Based on agreed-on criteria w/fasb in Private Company Decision making Framework (PCDMF) Subject to FASB endorsement and public due process Primary private company advisory body to FASB on active FASB projects 58

59 Private Company Council (PCC) Process PCC Agenda Decision FASB final endorsement FASB issues final guidance PCC deliberation of staff analysis and vote* PCC re-deliberates and votes* FASB endorsement Exposure Draft *FASB participates in deliberations 59

60 PCDMF Fundamentals Assist in user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework Intended to facilitate decisions & drive consistency Fundamental approach retains or improves information relevant to typical users Reduce cost & complexity, but not adversely affecting reporting of relevant information 60

61 Organizations Affected Scope of PCDMF Public business entities, not-for-profits & employee benefit plans excluded from the scope FASB will determine if guidance should apply to organizations outside of the scope - And if so, whether the alternative should be required or an option 61

62 PCC Project Progress Issue Goodwill Interest Rate Swaps Common Control Leasing Development Stage Entities Identifiable Intangible Assets Status Final Alternative Final Alternative Final Alternative FASB ASU Final Alternative Application of VIE Guidance: Additional Examples Preferability and Transition Guidance for Alternatives in US GAAP for Private Companies after the Initial Effective Date PCC Research Agenda PCC Research Agenda ***PCC also advising the FASB on key agenda projects*** 62

63 Advising on FASB Projects Leases Debt Classification Stock-based Compensation Liabilities & Equity: Down-round Agreements Disclosure Framework Government Assistance Simplification Initiatives 63

64 FAF 3-Year Review of PCC February 26, 2015: FAF Board of Trustees issues Request for Comment seeking stakeholder input on PCC s effectiveness, accomplishments, & future role in setting standards for private companies - 3-year review required by May 2012 report that created the PCC - Identified PCC strengths & potential improvements Comment deadline ended May 11, 2015 Trustees reviewing comments next steps TBA 64

65 Post-Implementation Review (PIR) Activities 65

66 Completed PIR Projects Affected FASB agenda: FAS 123(R), Share-Based Payment (as part of simplification initiative and PCC) FAS 157, Fair Value Measurements (as part of disclosure framework) FAS 109, Accounting for Income Taxes (as part of simplification initiative) FAS 141(R), Business Combinations Did not affect FASB agenda: FAS 160, Noncontrolling Interests in Consolidated Financial Statements FAS 131, Segment Reporting FIN 48, Accounting for Uncertainty in Income Taxes 66

67 Other Recognition, Measurement and Disclosure Projects 67

68 Other Significant Projects not Discussed Today Accounting for Goodwill for Public Business Entities and Not-for-profit Entities Accounting for Identifiable Assets in a Business Combination for Public Business Entities and Not-for-profit Entities Clarifying the Definition of a Business Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Improving the Presentation of Postemployment Benefit Costs 68

69 Agenda Consultation 69

70 What Should the FASB Add to the Pipeline? Research on new agenda items addresses the following - Item needing financial reporting improvement(s) - Why? - What is the problem? - Feasible alternatives? - Conceptual analysis? - Stakeholders views - Research findings - When is the solution needed? Need for prioritization of possible areas for improvement - New approach this year seeking broad stakeholder input 70

71 Advisory Group Survey on Needed Improvements and Priorities Launch survey in early May Responses back early July Compile and analyze results late summer Discuss preliminary results September 29 FASAC Issue final compilation of survey results 4Q 71

72 How will the Information be Used? Survey results - Help identify, describe, and prioritize needed improvements. FASAC September meeting - Further discussion and discovery about potential solutions to top priorities FASB Discussion Paper Expanded Agenda Consultation - Focus on top areas - Further articulate problem and possible solutions - Seek public input 72

73 International Financial Reporting Standards IASB Agenda Overview The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

74 IASB agenda major projects 74 Recently issued IFRS 14 Regulatory Deferral Accounts IFRS 15 Revenue from Contracts with Customers (joint with FASB) IFRS 9 Financial Instruments IFRS for SME Update Active joint with FASB Leases Active IASB only Insurance Conceptual Framework Disclosure initiative Dynamic risk management (f/k/a macrohedging) Rate regulated activities IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

75 Rate regulated Comprehensive project Status: developing second DP Scope: defined rate regulation Focus: impact via the revenue requirement Unlikely to align with SFAS IFRS 14 Regulatory Deferral Accounts (2014) Permission (but not requirement) for first-time adopters to continue some prior accounting policies Requires segregation of the impact of rate regulation in separate line items (asset, liability, net movements in p&l; net movement in OCI (split between those to be recycled and not)) IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

76 The IFRS for SMEs 76 Separate standard for SMEs entities without public accountability (PIEs) entities can elect to use full IFRS instead accepts some diversity as the price of simpler standard (less detailed requirements) First update of this standard to be updated every 3-5 years to address: new standards/ amendments (considered only after implemented under IFRS big book ) implementation issues mandatory for 2017 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

77 Need for a global insurance standard 77 IFRS 4 Insurance Contracts is an interim Standard IFRS 4 permits continuation of a variety of diverse practice IFRS 4 includes a temporary exemption from the general requirement that accounting policies should be relevant and reliable IFRS 4 does not require transparency about the effect of insurance contracts on financial statements The new standard will require transparent information about: The effect of insurance contracts on financial performance The way an entity makes profits or losses through underwriting activity and investing premiums from customers The nature and extent of risks from insurance contracts Existing accounting makes comparisons difficult between products, companies and across jurisdictions. The new standard will replace the variety of accounting treatments that depend on type of contract and type of company that issues the contracts The new standard will make it easier to make comparisons between insurance contracts and other types of contracts IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

78 How accounting for insurance contracts will improve 78 Existing issues Variety of accounting treatments depending on type of contract and type of company that issues the contracts Estimates for long duration contracts not updated Discount rate based on estimates of investment returns does not reflect economic risks of insurance contract How our proposals improve accounting Consistent accounting for all insurance contracts by all companies (not just insurance companies) Estimates updated to reflect current market-based information Discount rate reflects characteristics of the cash flows of the contract Lack of discounting for measurement of some contracts Little information about economic value of embedded options and guarantees Measurement of insurance contract reflects discounting when significant Measurement reflects information about full range of possible outcomes IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

79 Current balance sheet measurement provides up-to-date view of entity s obligations 79 Contractual service margin (CSM) Fulfilment cash flows Future cash flows: expected cash flows from premiums and claims and benefits Risk adjustment: consideration for the uncertainty about the amount of future cash flows Discounting: an adjustment that converts future cash flows into present values Contractual service margin reflects the entity s obligation to provide insurance coverage. Measured as the difference between the risk-adjusted present value of expected inflows and outflows at inception, updated to reflect changes in future service-related estimates Fulfilment cash flows is a probability-weighted estimate of cash inflows and outflows that will arise as the entity fulfils the contract. Estimated in a way that incorporates all possible scenarios and calculated using current estimates, including current discount rates and risk adjustment IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

80 Changes in estimates Contracts without participation features 80 Contractual service margin (Expected contract profit) Release of contractual service Profit or loss: underwriting result Changes in estimates related to future service Fulfilment cash flows Changes in cash flows related to past and current services Changes in estimates related to future service Future cash flows: expected cash flows from premiums and claims and benefits Risk adjustment: consideration for the uncertainty about the amount of future cash flows Release of risk adjustment relating to current and past periods Interest expense at locked-in discount rate (unwind of discount) Profit or loss: investment result Discounting: an adjustment that converts future cash flows into present values Effect of changes in discount rates Other comprehensive income IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

81 Timetable June 2013 Revised Exposure Draft Board debates issues 25 Oct 2013 Comment letter deadline Effective date Approx. 3 years after Standard finalised IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

82 Other IASB developments implementation and maintenance 82 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

83 Other IASB developments Research agenda 83 Assessment Identify and assess reporting issues Is there a financial reporting problem? Should it be addressed? Assessment phase These projects are assessing possible practice issues to understand if there is a financial reporting problem and, if so, how to address it Definition of a business IASB discussions are planned for Discount rates IASB discussions are planned for 2015 with the next step likely to be a Research Paper. Goodwill and impairment IASB discussions are planned for Income taxes Primary Financial Statements (previously Performance Reporting) Initial IASB discussions are planned with the next step likely to be a DP. Initial IASB discussions are planned with the next step likely to be a DP. Area should be addressed Pollutant Pricing Mechanisms Post-employment benefits (including pensions) Provisions, Contingent Liabilities and Contingent Assets Share-based payment The IASB has begun discussions and the next step is likely to be a DP. IASB discussions are planned for 2015 with the next step likely to be a DP. IASB discussions in July The next steps are pending developments in the Conceptual Framework project. IASB discussions are planned for 2015 with the next step likely to be a Research Paper. Development What are the possible responses? What are their costs and benefits? Development phase Business combinations under common control Disclosure initiative The IASB has completed its initial assessment and is developing a Discussion Paper The IASB has begun discussions with the next step likely to be a DP in This initiative comprises several active projects. See also Major Projects. Equity method The IASB has begun discussions and the next step is likely to be DP in Financial instruments with characteristics of equity IASB discussions are planned for 2015 with the next step likely to be a DP. IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

84 Other consultations 84 Structure & effectiveness review every 5 years maintain relevance of IFRS consistency of application of IFRS governance and financing Agenda consultation every 3 years (?) focus is on research agenda balance with maintenance right? complements consultation with Advisory Council PIRs normally 2 years after implemented undertaken for major projects two completed (IFRS 3 and IFRS 8) next: IFRS 10/11/12; IFRS 13 consider IFRS 5? IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

85 Thank you 85 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.