Accounting Update McGladrey LLP. All Rights Reserved.

Transcription

1 Accounting Update 2014 McGladrey LLP. All Rights Reserved.

2 Carol Hubbard Biography Carol is the partner-in-charge of the audit department at Beene Garter LLP and has over 29 years of experience. She serves a variety of clients in the manufacturing, wholesale distribution, multifamily housing and non profit industries. She has a Bachelor of Science degree in business administration and accounting from Aquinas College

3 Howard Cutler Biography Howard is an audit partner and has been at Beene Garter LLP for over 20 years. He serves clients in the manufacturing, wholesale distribution, governmental and multifamily housing areas. He also oversees all the benefit plan audits performed by Beene Garter LLP. He has a Bachelor of Arts degree from Michigan State University.

4 Agenda Private Company Council activities Revenue Recognition Other FASB developments FASB/IASB Projects Accounting Standards Update

5 Private Company Council (PCC) Activities 2014 McGladrey LLP. All Rights Reserved.

6 Private Company Council Established in 2012 to improve the process for setting accounting standards for private companies Two primary responsibilities - Utilizing the private company decision-making framework, determine exceptions or modifications to existing GAAP - Act as the primary advisory body to FASB on appropriate treatment for private companies for items under active consideration on FASB technical agenda

7 ASU Definition of a Public Business Entity Provides a single definition of a public business entity (PBE) Applicable to new guidance only PBEs may not elect private company alternatives

8 ASU Definition of a Public Business Entity A PBE is a business entity meeting any of the following conditions: Required by the SEC to file or furnish financial statements, or does file or furnish financial statements, with the SEC (including other entities whose financial statements or financial information are included in a filing) Required by the Securities Exchange Act of 1934 to file or furnish financial statements with a regulatory agency other than the SEC

9 ASU Definition of a Public Business Entity A PBE is a business entity meeting any of the following conditions (continued): Required to file or furnish financial statements with a foreign or domestic regulatory agency to sell or issue securities that are not subject to contractual restrictions on transfer Has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-thecounter market Has securities that are not subject to contractual restrictions on transfer, and it is required by law, contract or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis

10 ASU Goodwill Alternative Provides private companies with a simplified approach to the subsequent accounting for goodwill Amortize goodwill over a period not to exceed 10 years Goodwill impairment testing Test only when there is a triggering event rather than annually Test at either the entity level or reporting unit level One-step test Compare the fair value of the entity (or reporting unit) to its carrying amount to measure impairment instead of performing current two-step goodwill impairment test

11 ASU Goodwill Alternative Private companies can elect to apply the alternatives early to any financial statements that have not yet been made available for issuance If alternative is elected, application is generally required to begin as of the first day of the fiscal year of adoption As a result, a full year of goodwill amortization will be required in the year of adoption Effective date and transition Effective prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.

12 ASU Goodwill Alternative FASB is currently discussing the accounting for goodwill for public business entities and not-for-profit entities FASB and PCC are also continuing to discuss a related issue, PCC Issue No 13-01A, on Accounting for identifiable intangible assets in a business combination

13 ASU Interest Rate Swaps Alternative Provides private companies with an accounting alternative for certain interest rate swaps Scopes out benefit plans, not-for-profit entities and financial institutions (banks, savings and loan associations, savings banks, credit unions, finance companies, and insurance entities) Can elect for existing and new qualifying swaps Allows up until the date on which the first annual financial statements are available to be issued to meet documentation requirements

14 ASU Interest Rate Swaps Alternative Allows simplified hedge accounting for certain swaps used to convert variable rate debt to fixed rate Assumes 100% effectiveness Permits recording swap at settlement value Criteria to apply: Swap and debt have same rate index and reset period Swap is plain-vanilla with no floor or cap on the variable interest rate unless borrowing has a comparable floor /cap Repricing and settlement dates match or differ by no more than a few days Swap s fair value at inception ~ zero Notional amount of the swap <= debt principal All debt interest payments during swap term are hedged

15 ASU Interest Rate Swaps Alternative Extends the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives Private companies can elect to apply the alternatives early to any financial statements that have not yet been made available for issuance Effective date and transition Effective retrospectively to certain types of swaps, using either a modified retrospective approach or a full retrospective approach, in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.

16 ASU Variable Interest Entities Alternative Provides private companies with an accounting alternative for certain common control leasing arrangements: A private company may elect not to apply the variable interest entity (VIE) model in assessing whether to consolidate a lessor entity if: 1. The lessor entity and the private company (reporting entity) are under common control; 2. The private company has a leasing arrangement with the lessor entity; 3. Substantially all of the activities between the two entities relate to the leasing activity; and

17 ASU Variable Interest Entities Alternative A private company may elect not to apply the variable interest entity (VIE) model in assessing whether to consolidate a lessor entity if (continued): 4. If the private company explicitly guarantees or provides collateral for any obligation of the lessor entity related to the leased asset, then the principal amount of the obligation at inception of the guarantee or collateral arrangement is not more than the value of the leased asset Disclosures required No VIE disclosures, instead requires specific information on Lessor entity

18 ASU Variable Interest Entities Alternative Other guidance, including ASC 460, Guarantees, ASC 840, Leases, and non-vie guidance in ASC 810, may be applicable Private companies can elect to apply the alternatives early to any financial statements that have not yet been made available for issuance Effective date and transition Effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.

19 Considerations for Electing Private Company Alternatives Companies should carefully consider the new public business entity definition in ASU More companies may be considered PBEs Private companies anticipating going public or eventually being acquired by a PBE should consider the difficulty involved in transitioning to public company accounting Currently no specific transition guidance provided Retrospective application would be required

20 Considerations for Electing Private Company Alternatives Private companies should discuss with their lenders, and other financial statement users, whether it is acceptable to utilize these alternatives Adoption of Private Company alternatives Establishment of Preferability upon Initial Adoption Policy Note requirements Consolidated financial statements Reporting, emphasis of a matter and change in accounting principle disclosure Impact on debt covenants

21 Revenue Recognition 2014 McGladrey LLP. All Rights Reserved.

22 Revenue Recognition What s the status? Final ASU issued May 2014, Standard No Why should you be interested? When is it effective? Revenue recognition policies of almost all entities will be affected Virtually all industry-specific guidance will be superseded 2017 for calendar year-end public companies - Early application is not permitted 2018 for calendar year-end private companies - Early application is permitted. No earlier than public companies

23 Scope All contracts with customers, except: Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges between entities in the same line of business to facilitate sales to customers 2014 McGladrey LLP. All Rights Reserved.

24 ASU Revenue from Contracts with Customers Five steps to apply standard: Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the entity satisfies a performance obligation McGladrey LLP. All Rights Reserved.

25 Identify the Contract with a Customer A contract is an agreement between two or more parties that creates enforceable rights and obligations: This standard should be applied to each contract that meets the following criteria: 1. Approval and commitment of the parties 2. Identification of the rights of the parties 3. Identification of the payment terms 4. The contract has commercial substance 5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer 2014 McGladrey LLP. All Rights Reserved.

26 Identify the Performance Obligations in the Contract A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. If an entity promises in a contract to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is distinct or substantially the same 2014 McGladrey LLP. All Rights Reserved.

27 Determine the Transaction Price The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Consider the effects of: Variable consideration Significant financing Non-cash consideration Consideration payable to customer 2014 McGladrey LLP. All Rights Reserved.

28 Allocate the Transaction Price to the Performance Obligations in the Contract Determine the standalone selling price at contract inception of the distinct goods or services May have to estimate An entity should allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes 2014 McGladrey LLP. All Rights Reserved.

29 Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation A good or service is transferred when the customer obtains control of that good or service It can happen over time or at a point in time For each performance obligation that an entity satisfies over time, an entity shall recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity s performance completed to date 2014 McGladrey LLP. All Rights Reserved.

30 Costs to Obtain or Fulfill a Contract with a Customer Incremental costs of obtaining a contract Should be recognized as an asset Can expense when incurred if the amortization period is one year or less (practical expedient) Costs to fulfill a contract Should apply requirements of other standards, if applicable Otherwise, should recognize as an asset if the costs: 1. Relate directly to a contract 2. Generate or enhance resources of the entity 3. Are expected to be recovered 2014 McGladrey LLP. All Rights Reserved.

31 Disclosures Qualitative and quantitative information should be disclosed to enable the users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue from contracts with customers Contracts with customers Significant judgments and changes in judgments Assets recognized from the costs to obtain or fulfill a contract 2014 McGladrey LLP. All Rights Reserved.

32 Other FASB Developments 2014 McGladrey LLP. All Rights Reserved.

33 Leases Why should you be interested? What s the status? What s happened recently? What s next? Accounting by lessees and lessors could change drastically Second ED issued in May 2013 Redeliberations commenced in November 2013 Joint meetings in March and April Boards did not agree on lessee model Differences also on lessor model Joint decisions on a number of items including discount rate, modifications and insubstance fixed payments Continued redeliberations

34 Financial Instruments Classification and Measurement Why should you be interested? What s the status? Have any significant decisions been reached in redeliberations? What s next? As proposed in 2013 ED, more financial assets would be measured at fair value Redeliberations are well underway Existing separate guidance for loans and debt securities will be retained with modification as well as for hybrid financial assets and liabilities Consider in addition to most equity investments, what other financial assets should be measured at FV-NI

35 Financial Instruments Impairment Why should you be interested? What s the status? Have any significant decisions been reached in redeliberations? What s next? Could significantly accelerate recognition of expected credit losses Redeliberations are in process Reaffirmed upfront recognition of lifetime expected credit losses However for FV-OCI assets, expected credit losses would only be recognized if FV is less than amortized cost and would be limited to the difference between FV and amortized cost Decide extent of impairment recognition when asset is identified for sale or MLTN requirement to sell exists

36 Other Final Accounting Standard Updates Issued in Last Half of 2013 ASU , Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No ASU , Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ASU , Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ASU , Definition of a Public Business Entity: An addition to the Master Glossary

37 Other Final Accounting Standard Updates Issued in 2014 ASU , Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects ASU , Receivables Troubled Debt Restructurings by Creditors (Subtopic ): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ASU , Service Concession Arrangements (Topic 853) ASU , Technical Corrections and Improvements Related to Glossary Terms ASU , Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity

38 ASU Discontinued Operations Changes criteria for reporting discontinued operations, including removal of requirements to evaluate whether cash flows have been eliminated from ongoing operations and whether there will be any significant continuing involvement Disposal of a component of an entity (or group of components) is a discontinued operation if considered a strategic shift resulting in a major effect on an entity s operations and financial results when any of the following occurs to the component (or group of components): Meets the criteria to be classified as held for sale Disposed of by sale Disposed of other than by sale

39 ASU Discontinued Operations A business or nonprofit activity that meets the held-forsale criteria on the date of acquisition is also considered a discontinued operation Entities can adopt the guidance early for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements Additional disclosures required Effective date and transition Effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014.

40 Other Final Accounting Standard Updates Issued in 2014 (Continued) ASC , Revenue from Contracts with Customers (Topic 606) ASC , Development Stage Entities (Topic 915): Elimination of Certain financial Reporting Requirements, including an Amendment to Variable Interest Entities ASC , Transfers and Servicing (Topic 860): Repurchase-to- Maturity Transactions, Repurchase Financing and Disclosures ASC , Compensation Stock Compensation (Topic 718):Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

41 Other Final Accounting Standard Updates Issued in 2014 (Continued) ASC , Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity ASC , Receivables-Troubled Debt Restructurings by Creditors(Topic ): Classification of Certain Government- Guaranteed Mortgage Loans Upon Foreclosure ASC , Presentation of Financial Statements Going Concern (subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern 2014 McGladrey LLP. All Rights Reserved.

42 Other Projects Expected in 4 th Quarter of 2014 Accounting for identifiable Assets in a Business Combination (PCC Issue B-01A) Consolidation: Principal vs. Agent Analysis Determining whether the Host Contract in a Hybrid Financial Instrument is More Akin to Debt or to Equity Pushdown Accounting 2014 McGladrey LLP. All Rights Reserved.

43 Questions 2014 McGladrey LLP. All Rights Reserved.

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45 About Beene Garter LLP Founded in 1949, Beene Garter quickly established a presence in the West Michigan community. Known as West Michigan s largest independently owned accounting and consulting firm, we proudly serve our clients with personal attention. Our staff includes 14 partners and over 70 employees. Located in downtown Grand Rapids and providing a range of audit, tax and advisory, employer support, and business support services, we focus on serving West Michigan businesses and organizations based right where we are. By staying close to home, we ensure providing clients with exceptional service. Follow us on: