Accounting Update The Institute of Internal Auditors Long Island Chapter January 24, 2014

Transcription

1 Accounting Update The Institute of Internal Auditors Long Island Chapter January 24, 2014 Presented by: Brian Blisard, Partner Rob Behar, Senior Manager Cheryl Tripodi, Manager

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3 Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Any similarity between any depiction in this course and any actual event, person, or entity is purely coincidental. 3

4 Agenda Introduction Recent ASUs Joint & Several Liabilities Testing Indefinite Lived Intangible Assets Use of Fed Funds Rate as a Benchmark Rate Presentation of Unrecognized Tax Benefits When NOL or Tax Carryforwards Exist Going Concern EITF Issues Issue 12-F Pushdown Issue 13-E Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring Issue 13-F Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor SEC & PCAOB Focus on Internal Controls 2013 AICPA National Conference on Current SEC & PCAOB Developments Convergence Project Update 4

5 Recent ASUs

6 Recent ASUs Issued Standard ASU , Presentation of Comprehensive Income ASU , Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU , Fees Paid to the Federal Government by Health Insurers ASU , Derecognition of in Substance Real Estate a Scope Clarification Effective for public companies Retrospectively for fiscal years, and related interim periods, beginning after 12/15/11 Prospectively for reporting periods beginning after 12/15/12 Calendar years beginning after 12/31/13 Prospectively in fiscal years, and related interim periods, beginning on or after 6/15/12 Effective for private companies Retrospectively for fiscal years ending after 12/15/12 and interim and annual periods thereafter Prospectively for reporting periods beginning after 12/15/13 Same as public entities Prospectively in fiscal years ending after 12/15/13 and interim and annual periods thereafter For more information Defining Issues Defining Issues & 13-9 Defining Issues Defining Issues

7 Recent ASUs (continued) Issued Standard Effective for public companies Effective for private companies For more information ASU , Disclosures about Offsetting Assets and Liabilities ASU , Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities Retrospectively in fiscal years, and related interim periods, beginning on or after 1/1/13 Same as public entities Defining Issues ASU , Continuing Care Retirement Communities Refundable Advance Fees Retrospectively in reporting periods beginning after 12/15/12 Retrospectively in reporting periods beginning after 12/15/13 FASB ASU ASU , Testing Indefinite-Lived Intangible Assets for Impairment Annual and interim tests in fiscal years beginning after 9/15/12, with early adoption permitted Same as for public entities Defining Issues ASU , Technical Corrections and Improvements (includes minor technical corrections related to contracts not indexed to an entity s own equity and amendments to conform certain guidance to the definition of fair value) Upon issuance for items without transition guidance. For other amendments, reporting periods beginning after 12/15/12 Upon issuance for items without transition guidance. For other amendments, reporting periods beginning after 12/15/13 Defining Issues

8 Recent ASUs (continued) Issued Standard Effective for public companies Not applicable Effective for private companies Prospectively in fiscal years, and related interim periods, beginning after 6/15/13 Same as for public entities For more information FASB ASU ASU , Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (Not-for-Profit Entities) ASU , Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution ASU , Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs ASU , Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date Prospectively in fiscal years, and related interim periods, beginning on or after 12/15/12 Defining Issues For impairment assessments performed on or after 12/15/12 For impairment assessments performed on or after 12/15/13 Defining Issues Retrospectively in fiscal years, and related interim periods, beginning after 12/15/13 Retrospectively in fiscal years ending after 12/15/14 and interim and annual periods thereafter Defining Issues

9 Recent ASUs (continued) Issued Standard Effective for public companies Effective for private companies For more information ASU , Parent s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity Prospectively in fiscal years, and related interim periods, beginning after 12/15/13 Prospectively in fiscal years beginning after 12/15/14 and interim and annual periods thereafter Defining Issues 13-5 ASU , Services Received from Personnel of an Affiliate (Not-for-Profit Entities ) Not applicable Prospectively in fiscal years beginning after 6/15/14 and interim and annual periods thereafter FASB ASU ASU , Liquidation Basis of Accounting Prospectively in fiscal years, and related interim periods, beginning after 12/15/13 Same as for public entities Defining Issues ASU , Amendments to the Scope, Measurement, and Disclosure Requirements (for Investment Companies) Prospectively in fiscal years, and related interim periods, beginning after 12/15/13 Same as for public entities Defining Issues

10 Recent ASUs (continued) Issued Standard Effective for public companies Prospectively for qualifying new or redesignated hedging relationships entered into on or after 7/17/13 Prospectively in fiscal years, and related interim periods, beginning after 12/15/13 Effective for private companies Same as for public entities For more information FASB ASU ASU , Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ASU , Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists Prospectively in fiscal years, and related interim periods, beginning after 12/15/14 FASB ASU

11 ASU , Accounting for Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date

12 ASU , Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date Issue How a reporting entity that is jointly and severally liable should account for an obligation whose total amount is fixed at the reporting date? Common examples include debt arrangements, settled litigation, and judicial rulings Scope Applies to all entities, not limited to those under common control and related parties, that are jointly and severally liable, in which the total amount of the obligation at the reporting date is fixed, except for obligations that are accounted for under the following ASC Topics: Topic 410, Asset Retirement and Environmental Obligations Topic 450, Contingencies Topic 460, Guarantees Topic 715, Compensation Retirement Benefits Topic 740, Income Taxes Conclusion Each reporting entity in the scope of this ASU that is jointly and severally liable should record a liability for the amount that it has agreed to pay pursuant to the arrangement plus any additional amount that it expects to pay on behalf of its co-obligors If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount shall be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range shall be the additional amount included in the measurement of the obligation Each party would not be required to record the full amount of the obligation as a liability 12

13 ASU , Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date Additional Considerations No prescriptive guidance on the offsetting entry Effective for fiscal years (and interim periods within those years) beginning after December 15, 2013 for public entities and for fiscal years ending after December 15, 2014 for nonpublic entities. Early adoption is permitted Modified retrospective application is required for all prior periods for obligations that exist at the beginning of an entity s fiscal year of adoption. Hindsight for comparative periods is permitted but must be disclosed Example: A hospital system borrows $5,000,000 and distributes $1,000,000 to each of the hospitals in the system. Each hospital within the system is jointly and severally liable (i.e., a co-obligor) for the $5,000,000 Each hospital would record a liability equal to the amount it agreed to pay ($1,000,000) plus any amount it expects to pay on behalf of its co-obligors 13

14 ASU , Derivatives and Hedging: Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

15 Fed Funds Rate as a Benchmark Interest Rate for Hedge Accounting Prior to 7/17/2013, US Treasury rates (UST) and LIBOR were the only acceptable benchmark rates for US markets UST risk free assumption LIBOR deemed acceptable Why was this reconsidered? Changes in financial markets Definition of a benchmark interest rate 15

16 Hedge accounting Fair Value Hedge Using Fed Funds Rate to value derivatives Accounting ineffectiveness and earnings volatility Hedging derivative FFR Hedged item LIBOR or UST 16

17 Fed Funds Rate as a Benchmark Interest Rate for Hedge Accounting When the Discount Rate Used to Value Derivative Differs From the Designated Hedged Risk (continued) Absolute changes in fair value Change in fair value of the hedging instrument Change in fair value of the hedged item (FFR as discount rate) Change in fair value of the hedged item (LIBOR as discount rate) Ineffectiveness 17

18 Fed Funds Rate Allowed as a Benchmark Interest Rate Disclosures: No additional disclosures required Transition: Prospective application to new and redesignated hedge relationships Effective Date: July 17,

19 ASU , Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

20 ASU , Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists Background When a liability for an unrecognized tax benefit (UTB) comes due, the taxing authority may require (or allow) the taxpayer to settle it with an existing NOL or tax credit carryforward rather than through cash payment. Diversity in presentation exists: Some present the deferred tax asset (DTA) for the loss or credit carryforward and the UTB liability GROSS (i.e., the DTA and the UTB liability are separate) Some present the deferred tax asset for the loss or credit carryforward and the UTB liability NET (i.e., the DTA is reduced for the UTB liability) 20

21 ASU , Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists Does tax law require the company to use the tax loss or credit carryforward to satisfy amounts payable upon disallowance of the tax position? Yes No Net Presentation Is the tax loss or credit carryforward available at the reporting date for use to satisfy amounts payable upon disallowance of the tax position? Yes No Does the company intend to use the deferred tax asset to satisfy amounts payable upon disallowance of the tax position? Gross Presentation Yes No Net Presentation Gross Presentation 21

22 ASU , Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists Example Rich Industries took a position on its 20X2 U.S. tax return that resulted in reduction of taxes otherwise payable of $100. Rich concluded it is not more likely than not that the tax position would be sustained and has recorded an unrecognized tax benefit liability of $100. At 12/31/20X2, Rich has $250 in deferred tax assets associated U.S. NOL carryforwards that are required to be used to satisfy the liability if and when it becomes due. Rich would present and disclose $150 in deferred tax assets ($250-$100). Rich would still disclose the gross $100 of unrecognized tax benefit liability in the tabular rollforward of unrecognized tax benefits. 22

23 ASU , Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists Other Items to Note Assessment based on disallowance of the tax position at the reporting date; does not consider the timing of DTA reversal relative to the expected extinguishment of the UTB liability UTB liability continues to provide a source of taxable income in evaluating DTA realization No impact to recognition or measurement 23

24 ASU , Testing Indefinite- Lived Intangible Assets for Impairment

25 ASU , Testing Indefinite-Lived Intangible Assets for Impairment ASU provides entities an option to perform a qualitative assessment to determine whether the quantitative impairment test for indefinite-lived intangible assets under ASC Topic 350, Intangibles Goodwill and Other is necessary Background FASB outreach performed while developing ASU , Testing Goodwill for Impairment, indicated that there were similar concerns for indefinite-lived intangible assets Objective To reduce the cost of testing indefinite-lived intangible assets for impairment Effective Date Annual and interim impairment tests performed in fiscal years beginning after September 15, 2012 Early adoption permitted 25

26 ASU , Testing Indefinite-Lived Intangible Assets for Impairment (continued) Assess qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount Qualitative Assessment Evaluate all relevant events and circumstances Is it more likely than not that the FV of the indefinite-lived intangible asset is less than the carrying amount? If no, STOP If yes, perform the quantitative impairment test If it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is not required 26

27 ASU , Testing Indefinite-Lived Intangible Assets for Impairment (continued) The qualitative assessment is optional for any period and may be bypassed to proceed directly to the quantitative impairment test Can resume performing the qualitative assessment in any subsequent period Test Indefinite-Lived Intangible Assets On an annual basis Between annual dates if necessary (based on triggers) Evaluate the useful life of the non-amortizing intangible asset and consider whether events and circumstances continue to support an indefinite useful life 27

28 ASU , Testing Indefinite-Lived Intangible Assets for Impairment (continued) Factors to consider: Cost factors Financial performance Legal, regulatory, contractual, political, business, or other factors, including assetspecific factors Other relevant entity-specific events Industry and market considerations Macroeconomic conditions 28

29 Going Concern

30 Overview of Proposed ASU, Disclosures of Uncertainties about an Entity s Going Concern Presumption Proposed ASU would create a new Subtopic , Going Concern under Topic 205, Presentation of Financial Statements, in ASC Why is Going Concern being addressed? As a result Going Concern ASU intended to No U.S. GAAP guidance about management s responsibilities in evaluating and disclosing going concern uncertainties Diversity in timing, nature and extent of footnote disclosure Provide guidance on management s responsibilities Clarify When/How going concern uncertainties should be disclosed Proposed amendments to Master Glossary: Definition: Going Concern Presumption Definition: Substantial Doubt The inherent presumption in preparing financial statements under U.S. GAAP that an entity will be able to continue as a going concern; that is, the entity will continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business. Substantial Doubt about an entity s ability to continue as a going concern exists when information about existing conditions and events, after considering the mitigating effect of all of management s plans (including those outside the ordinary course of business), indicates that it is known or probable that an entity will be unable to meet its obligations as they become due within 24 months after the financial statement date. 30

31 Disclosure Thresholds All Entities Assess at each annual and interim reporting period an entity s potential inability to meet its obligations as they become due within 24 months after the financial statement date. Consider all information about conditions and events that exist at: The date the financial statement are issued (public entities) The date the financial statement are available to be issued (nonpublic entities) When information about conditions and events indicate either of the following: Without taking actions outside the ordinary course of business it is: More likely than not that the entity will be unable to meet its obligations within 12 months after the financial statement date, OR Known or probable that the entity will be unable to meet its obligations within 24 months after the financial statement date Disclose information that enables users of the financial statements to understand all of the following: Principal conditions and events giving rise to the entity s potential inability to meet its obligations Possible effects of such conditions and events on the entity Management s evaluation of the significance of those conditions and events Mitigating conditions and events Management s plans to address potential inability to meet obligations 31

32 Management s Plans That Are Outside the Ordinary Course of Business In assessing the potential inability to meet its obligations, an entity would not consider the mitigating effect of management s plans that are outside the ordinary course of business. Outside the ordinary course of business: Actions inconsistent (in nature, magnitude or frequency) with those customary in carrying out ongoing business activities Entity-specific determination. The same plan can be in the ordinary course for one entity but outside for another Plans primarily intended to alleviate specific conditions or events that likely would lead to an entity s inability to meet its obligations otherwise generally are outside the ordinary course (unless they are consistent with actions customary in carrying out the entity s ongoing business activities) 32

33 SEC Filer Requirements Evaluating Whether There Is Substantial Doubt SEC filers would be required to determine whether there is substantial doubt about the entity s going concern presumption: Substantial doubt exists if it is known or probable that the entity will be unable to meet its obligations as they become due within 24 months after the financial statement date. When evaluating, consider the effect of ALL plans that are likely to be effectively implemented and likely to mitigate adverse conditions and events, including those outside the ordinary course of business. SEC filers that determine there is substantial doubt would be required to: Explicitly state in the financial statements: there is substantial doubt about the entity s ability to continue as a going concern within 24 months after the financial statement date (or similar wording) Non-SEC-filers: Separate evaluation (and disclosure) of substantial doubt would not be required. 33

34 EITF Issues

35 EITF Issue 12-F, Recognition of New Accounting Basis (Pushdown) in Certain Circumstances

36 EITF Issue 12-F, Recognition of New Accounting Basis (Pushdown) in Certain Circumstances Background Pushdown accounting is the practice of adjusting the stand-alone financial statements of an acquired entity (the acquiree ) to reflect the accounting basis of the investor (or acquirer ). Such new basis is typically the fair value of the identifiable assets acquired and liabilities assumed. Under current U.S. GAAP, there is limited guidance for determining when, if ever, pushdown accounting should be applied. The SEC has provided guidance for SEC registrants on pushdown accounting, which indicates that if a purchase transaction results in an entity becoming substantially wholly owned, its standalone financial statements should be adjusted to reflect the basis of accounting of the acquirer. 36

37 EITF November 2013 Meeting At the November 2013 meeting: The Task Force considered four alternative views: View A View B View C View D Pushdown accounting should be optional when an acquirer obtains control of the reporting entity. Pushdown accounting should be required when an acquirer obtains substantially all of the reporting entity and should be optional when acquirer obtains control of the reporting entity. Pushdown accounting should be required when an acquirer obtains control of the reporting entity. Pushdown accounting should be required only when an acquirer obtains substantially all of the reporting entity and would be otherwise prohibited. 37

38 EITF November 2013 Meeting (continued) View A View B Pushdown accounting should be optional when an acquirer obtains control of the reporting entity. (Private Companies) Pushdown accounting should be required when an acquirer obtains substantially all of the reporting entity and should be optional when acquirer obtains control of the reporting entity. (Public Companies) The Task Force indicated that their preference was View B for public companies and View A for non public companies. Additionally the Task Force tentatively decided that: Acquisition related debt incurred by acquirer should not be pushed down, unless required by other GAAP Goodwill should be pushed down to the acquired entity, and Bargain purchase gains should not be recorded in income of the acquired entity The Task Force requested the staff to identify indicators that may be appropriate to consider when determining whether to apply pushdown accounting if otherwise optional under A or B. Potential indicators and other issues to be discussed at future meetings 38

39 EITF Issue 13-E, Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring

40 EITF Issue 13-E, Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring Background This issue is specific to creditors that have made consumer mortgage loans collateralized by residential real estate properties Primary issue when should a loan be re-categorized as foreclosed real estate (commonly referred to as other real estate owned or OREO ) Current guidance refers to in substance a repossession or foreclosure by the creditor and that re-categorization occurs when the creditor has physical possession of the debtor s assets, regardless of whether formal foreclosure proceedings have taken place In substance a repossession or foreclosure and physical possession are not defined in the accounting literature, creating diversity in practice about when a loan in re-categorized to OREO 40

41 EITF Issue 13-E, Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring (continued) Final Consensus was reached by the Task Force The final Consensus defines that an in-substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either of the following: The creditor obtaining legal title to the residential real estate property. A creditor may obtain legal title to the residential real estate property through foreclosure even if the borrower has redemption rights whereby it can legally reclaim the real estate property for a period of time; or, Completion of a deed in lieu of foreclosure or similar legal agreement under which the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan. The deed in lieu of foreclosure or similar legal agreement is completed when agreed terms and conditions have been satisfied by both the borrower and the creditor 41

42 EITF Issue 13-E, Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring (continued) Creditors will be required to disclose at each balance sheet date: The carrying amount of outstanding foreclosed residential real estate; and, The recorded investment in residential real estate mortgage loans in the process of foreclosure Transition Prospective application or modified retrospective application Effective for pubic companies for interim and annual periods beginning after December 15, 2014 Effective for nonpublic companies for annual periods beginning after December 15, 2014 and interim periods thereafter. Early adoption permitted Next steps FASB will consider the proposed standard for endorsement 42

43 EITF Issue 13-F, Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor

44 EITF Issue 13-F, Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor Background This issue is specific to creditors who have residential mortgage loans that meet both of the following characteristics: The loan has a government guarantee for the full unpaid principal balance of the loan At foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover through the guarantee There is diversity in practice related to creditors classification and disclosure of foreclosed government insured residential mortgages 44

45 EITF Issue 13-F, Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor (continued) Issue: After foreclosure, how should government insured loans be classified Four alternative views were presented to the Task Force in the November 2013 meeting: View A: Record two units of account: foreclosed real estate and guarantee receivable. View B: Reclassify the loan as foreclosed real estate for the full amount of the guarantee. View C: Continue to classify as a loan for the full amount of the guarantee. View D: Reclassify the loan as a receivable from the guarantor for the full amount of the guarantee. The Task Force reached Consensus-for-Exposure on View D and no additional disclosures would be required. 45

46 EITF Issue 13-F, Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure by a Creditor (continued) Transition An option for prospective or modified retrospective is expected. Option selected must be consistent with transition approach for Issue 13-E. Effective Date The effective date of the proposed guidance was not addressed by the EITF 46

47 SEC and PCAOB Focus on Internal Controls

48 2013 National AICPA Conference Internal Control over Financial Reporting (ICFR) SEC staff emphasized the need for continued focus by management and auditors ICFR must be an iterative and ongoing process with appropriate involvement of management and support throughout the company staff highlighted the coordinated effort between SEC s different offices and divisions and the PCAOB on ICFR matters, noting: PCAOB inspection findings related to the audits of ICFR are likely indicators of similar problems with management s evaluation of ICFR... Comment letters may be issued by staff to better understand how registrants consider ICFR when they observe corrections of errors or changes in internal control staff recommended that management revisit SEC s 2007 interpretive guidance on management s reporting on ICFR staff reminded registrants that material changes in ICFR should be disclosed under item 308(b) of Regulation S-K Let s not lose ground. Let s stay focused on the importance of ICFR. 48

49 Overview of the PCAOB Staff Audit Practice Alert No. 11 PCAOB Staff Audit Practice Alert No. 11, Considerations for Audits of Internal Control Over Financial Reporting (the Practice Alert) was released on October 24, 2013 in light of deficiencies observed in the past three years related to audits of internal control over financial reporting (ICFR). The Practice Alert specifically discusses the application of PCAOB standards to address inspection findings related to: The auditor s risk assessment and the audit of internal control; Selecting controls to test; Testing management review controls; Information technology considerations, including system-generated data and reports; Roll-forward of control testing performed at an interim date; Using the work of others; and Evaluating identified control deficiencies 49

50 Increased Regulatory Interest in ICFR As discussed in the Practice Alert, the PCAOB has observed a significant increase in inspection comments in the areas of auditing ICFR. There is continued regulatory interest by both the SEC and the PCAOB in ICFR: The SEC and the PCAOB have emphasized the need for continued focus by management and auditors New COSO framework was released in May

51 Areas for Management Focus PCAOB Staff Audit Practice Alert Management s risk assessment and selection of controls to test Understand the flow of transactions and the financial reporting risks that the controls are addressing Use flowcharts to help document the flow of transactions Identify controls to test that are responsive to risks of material misstatements, including non-routine transactions Management s Review Controls Identify and document the metrics/criteria used Identify and document what constitutes outliers/exceptions and how management responds to such outliers/exceptions, including documents obtained and reviewed Document the process and manner in which outliers/exceptions have been addressed with more formality/rigor 51

52 Areas for Management Focus PCAOB Staff Audit Practice Alert Information technology application and general control considerations Understand and document the flow of transactions and information Understand and document the risks in and around the IT systems Identify and document application controls and related IT general controls System-generated data and reports Document what information is critical to the effective operation of a control Document where that critical information is obtained and how it is input into the system, stored, queried, processed and reported Document the completeness and accuracy of that information, including IT application controls and related IT general controls 52

53 Areas for Management Focus PCAOB Staff Audit Practice Alert Challenges for management in identifying and evaluating control deficiencies Identify which control failed and the root cause of that failure Assess the severity of a control deficiency includes the determination of potential magnitude and likelihood of the potential misstatement Evaluate compensating controls to determine whether they would detect a material misstatement Aggregate individual control deficiencies by significant account and COSO component and determining what a prudent official might conclude Document considerations and conclusion 53

54 Internal Controls over Financial Reporting COSO update

55 COSO Update In May 2013, the Committee of Sponsoring Organizations of the Treadway Committee (COSO) released an updated Internal Control Integrated Framework. The following table summarizes the updates included in the 2013 framework. What is not changing Core definition of internal control Three categories of objectives and five components of internal control Each of the five components of internal control are required for effective internal control Important role of judgment in designing, implementing, and conducting internal control, and in assessing its effectiveness What Is Changing Changes in business and operating environments should be considered Operations and reporting objectives expanded Fundamental concepts underlying the five components are articulated as 17 principles Additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives added 55

56 COSO Update The SEC has not set a transition date, but reiterated that the Staff is more likely to question registrants using an outdated framework with the passage of time. Registrants should specify in their filings which framework they are using in management s report as required under Item 308(b) of Regulation S-K. 56

57 2013 AICPA National Conference on Current SEC and PCAOB Developments

58 Course Agenda Accounting and Reporting Matters Disclosures and MD&A Best Practices Division of Corporation Finance Areas of Focus Income Taxes Pension and Other Post-Retirement Benefits Business Combinations Segment Identification and Aggregation Goodwill Non-GAAP Financial Measures Other Financial Statements and Financial Information for Subsidiaries Current Practice Issues 58

59 Accounting and Reporting Matters

60 Disclosures - Best Practices The Staff encourages registrants to take a fresh look at disclosures Eliminate unnecessary or immaterial matters Revisit disclosures arising from historical staff comments that are no longer material or applicable Revisit critical accounting estimates that repeat significant accounting policies in the notes Avoid repeating litigation disclosures in sections throughout the 10-K Streamline overly detailed stock compensation disclosures Highlight only those new accounting pronouncements where the expected impact is material Focus on matters that may significantly affect operating results Disclose policy elections when accounting guidance allows optionality Clearly explain known trends and uncertainties Evaluate filings for internal consistency Use precise terms as defined in U.S. GAAP 60

61 Management s Discussion and Analysis (MD&A) and Risk Factors Best Practices Best practices for preparing high-quality and meaningful MD&A: Keep overview section clear and concise, focusing on key activities for the period, use bullet points and avoid duplication Focus MD&A on why something occurred, in addition to what, when, and how Use plain English Present data in tables and limit jargon Quantify each factor when more than one factor is used to explain a change Review peer company MD&A and SEC comment letters Reminders for risk factors: Avoid overly generic risk factors Provide transparency when negative events have already happened rather than disclosing them as potential events 61

62 Division of Corporation Finance Areas of Focus

63 Income Taxes Rate Reconciliation: Clearly label items within the rate reconciliation Disclose the underlying nature of material reconciling items Disclose each material foreign jurisdiction Do not aggregate or offset material reconciling items Ensure consistency of reconciling items disclosed in the rate reconciliation with amounts reported elsewhere Evaluate whether adjustments presented as changes in estimates are more appropriately characterized as errors Valuation Allowance: Avoid use of vague or boilerplate disclosures Clearly explain key judgments made to establish, adjust, or release a valuation allowance, such as the magnitude and nature of the sources of income Indefinitely Reinvested Foreign Earnings: All evidence should be considered when registrants assert that un-repatriated earnings will be indefinitely reinvested The staff frequently identifies omitted financial statement disclosures in this area 63

64 Pension and Other Post Retirement Benefits The Staff emphasized the need for clear disclosure of policy elections such as: Method of amortizing actuarial gains or losses and whether the corridor method was applied; Periods over which actuarial gains and losses are amortized; and Expected return on plan assets (EROA) and whether the return is based on fair value or calculated value of the plan assets. If the calculated value was used, disclose how it was determined including the period over which the difference between expected and actual return is amortized. The Staff frequently requests that MD&A disclosure provide: A sensitivity analysis of how a change in EROA would affect the results of operations; The range of alternative assumptions for the EROA; The historical performance of the plan assets, both in recent years and over a longer period of time as well as disclosure of any significant limitations to the historical information used; Both the geometric mean and arithmetic mean (compounded return versus simple return, respectively) if there is a significant difference in determining historical performance; and An explanation of changes in the EROA. The staff also expects clear disclosure about any unexpected or unusual relationships in the financial statements that can result from defined benefit pension accounting. 64

65 Business Combinations The Staff continues to issue comments related to whether the transaction is an acquisition of an asset or a business. Analysis can be complex, especially in the biotech and real estate industries. Examples include acquisition of a residential or commercial property with an existing lease such as a nursing home. In determining whether a lease or other contractual arrangement represents a process (which is important to the conclusion that the acquired set meets the definition of a business under ASC Topic 805), companies must apply a market participant view. An adjustment to assets acquired or liabilities assumed in a business combination can be characterized as a measurement-period adjustment (as opposed to a correction of an error) only if: The acquirer obtains new information about facts and circumstances that existed at the time of the acquisition that, if known then, would have impacted the amounts recognized; The company s initial disclosures indicate that the accounting for the acquired assets and assumed liabilities is incomplete; and The measurement period has not ended. 65

66 Segment Identification and Aggregation The Staff continues to focus on the identification and aggregation of operating segments, particularly: Aggregation of segments in different geographies Aggregation of segments that have not experienced similar economic margins, and where convergence is not expected in the near term The effect of advancements in technology and financial reporting that have changed the way in which the CODM receives and reviews information The Staff noted we are serious about segment reporting 66

67 Goodwill When components of newly-created goodwill are not obvious from disclosures, registrants should provide additional insight FRM Topic 9510 provides disclosure considerations when there is uncertainty about recoverability of goodwill Disclose how close a reporting unit is to failing Step 1 of the impairment test Provide investors with information about the potential for a future material impairment charge Describe the types of changes in circumstances or assumptions that could affect the impairment conclusions When there are significant indicators of impairment and no impairment charge taken, the staff will likely ask why In periods when an impairment is recognized, specify the circumstances that changed that caused the impairment The Staff will often ask why now with respect to timing of recognition of impairment losses. 67

68 Non-GAAP Financial Measures Registrants should not use common U.S. GAAP terms in their non-gaap disclosures in a manner that is inconsistent with the definition in U.S. GAAP. For example, adjustments made to non-gaap measures for derivative gains and losses have been labeled in a manner the Staff believes to be inconsistent with how the derivative gains and losses were calculated under U.S. GAAP The Staff expects clear disclosure and labeling of non-gaap adjustments For example, in the mining industry, cost-per-unit extracted may be presented net of byproduct revenue. This non-gaap measures should be presented on a with and without basis, with clear disclosure on how it was measured. For example, an adjustment labeled non-cash pension expense is unclear as pension liabilities typically settle in cash. Non-GAAP adjustments that eliminate actuarial gains or losses should be clearly labeled and disclosed. If companies present these non-gaap disclosures, the Staff expects a statement that the GAAP amounts reflect: The immediate recognition of all actuarial gains and losses in the income statement, while the non-gaap amount does not; and An actual return of $X and X% along with the corresponding non-gaap measures. 68

69 Other Financial Statements and Financial Information for Subsidiaries S-X Rule 3-10 allows a registrant with guaranteed public debt to present condensed consolidating financial information in lieu of separate financial statements for each subsidiary issuer or guarantor of the debt Two of the criteria that must be met to qualify for the relief in Rule 3-10: Subsidiary guarantor is 100% owned and guarantee is full and unconditional Wholly owned is not the same as 100% owned under S-X Rule 1-02(aa) Relief provisions may be applied if release provisions are customary and the other requirements are met Release provisions should be clearly disclosed Release provision disclosures are required for all periods debt is outstanding Applies to subsidiary guarantees, not parent guarantees The Staff encourages registrants to perform significance tests as written in S-X Rules 3-05 and 3-09 to determine whether separate financial statements are required. Consult with the Staff if the results of the significance tests are impacted by unusual circumstances 69

70 Industry Specific Issues Real estate The Staff discussed changes to FRM Section 2300 which addresses the acquisition or probable acquisition of real estate The Staff noted that the purchase of a REIT or operating company falls within the definition of a business under Rule 3-05 of Regulation S-X. High technology The Staff recommends clear disclosure of whether sales of virtual goods are recorded on a gross or net basis. Critical accounting estimates should include a description of the nature of virtual goods sold (i.e., whether consumable or durable), how the virtual goods are distinguished, the timing of revenue recognition, and the significant assumptions used in estimating the lives of the virtual goods. 70

71 Industry Specific Issues Retail Certain retailers have highlighted sales through online channels as a high-growth area for their business without discussing how the online sales impact the retailer s operating results and strategy. The Staff encourages retailers to disclose why online sales channels are important to their business. When growth rates of online sales channels are mentioned, the amount of online sales revenue also be disclosed. 71

72 Current Practice Issues - Revenue Recognition In determining a best estimate of selling price for a good or service, the panelists noted that a common practice is to use a range instead of a point estimate. They recommended the following if using a range to determine their best estimate of selling price: The range should not be arbitrary but should be the result of a thoughtful analysis with supporting documentation; The range should not be so wide that it results in material differences compared to the use of a single point estimate, which is inconsistent with the objective of determining a best estimate of selling price; and If any single point within the range is a better estimate of selling price than other points within the range, consider whether using a range is appropriate. Gross versus net revenue recognition. Who is the primary obligor? Which party is deemed to have inventory risk? Who does the customer believe is responsible for fulfilling the order? How are deliverables marketed and how does registrant interact with the suppliers? 72

73 Current Practice Issues - Goodwill Impairment A change in the annual impairment evaluation date for goodwill represents a change in accounting principle that requires an assessment of preferability of the new date and retrospective application. The following factors may justify preferability: The new date coincides more closely with annual budgeting or strategic planning; and Resource constraints in connection with year-end financial reporting. Step zero qualitative assessment Develop a structured process to gather all relevant information, including the assumptions that drive the fair value of the reporting unit and the weight to attribute to information used in the analysis. Implement internal controls over the assessment process. 73

74 Current Practice Issues - Income Taxes Emerging Issues Task Force final consensus on Accounting for Investments in Qualified Affordable Housing Projects (Issue 13-B). View expressed by the panel was that deferred taxes do not need to be recognized on investments in affordable housing projects. Panelists recommended that companies have ICFR that monitor both tax law changes and court rulings. 74

75 Current Practice Issues Investments with Characteristics of Debt and Equity There is a great deal of complexity in accounting standards related to debt and equity instruments and a lack of authoritative accounting literature for a modification of equity classified warrants. General practice analogizes to the measurement guidance on accounting for modifications of share-based payment awards where the value of the award immediately before the modification is compared to the value of the award immediately after. Understanding the reason for the modification is paramount in determining whether the modification should be recognized through the income statement or as an adjustment to equity. 75

76 Convergence Project Update

77 Status of Major Convergence Projects in 2013 and Beyond Active Joint FASB/IASB Projects 1 st Half 13 2 nd Half 13 1 st Half 14 Revenue Recognition F Leases E Insurance Contracts E C Financial Instruments Classification & Measurement E,C F Financial Instruments Impairment E,C Financial Instruments Hedging TBD Investment Companies F Consolidation: Policy and Procedures TBD C - Comment Deadline E - Exposure Draft or Proposed ASU F - Final Standard 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 77

78 Revenue Recognition Project

79 Background (Based on 2011 ED and redeliberations) Joint project between the FASB and the IASB Objectives of project: Develop a single framework to deal with all types of revenue contracts and business sectors Improve comparability Improve disclosure requirements Converge IFRS and U.S. GAAP Would replace most of current U.S. GAAP and IFRS revenue recognition standards Final standard expected in first quarter of KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 79

80 Effective Date and Transition (Based on Tentative Decisions Reached at the February and March 2013 Board Meetings) Effective date Transition approaches Public entities: fiscal years, and interim periods within those years, beginning after December 15, 2016 Nonpublic entities: fiscal years beginning after December 15, 2017, interim and annual periods thereafter Early adoption prohibited for public entities. Nonpublic entities can adopt with public entities Full retrospective Retrospective using one or more practical expedients Cumulative effect at the date of adoption 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 80

81 Transition Alternatives (Based on 2011 ED and Tentative Decisions Reached at the February 2013 Board Meeting) The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public entities) Transition Approach 2015/ Date of Cumulative Effect Adjustment Full Retrospective Restate for all contracts Apply the new revenue standard to all contracts Retrospective Using One or More Practical Expedients Cumulative Effect at the Date of Adoption Restate for all contracts under the new revenue standard except for contracts covered by the practical expedients elected by the vendor No contracts restated; reported on the basis of legacy guidance Apply the new revenue standard to all contracts Apply the new revenue standard to new and existing contracts; disclose the effect of applying the new standard * Assuming public entity provided two comparative periods. January 1, 2015* January 1, 2015* January 1, KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 81

82 Transition Approach Cumulative Effect (Based on 2011 ED and Tentative Decisions Reached at the February 2013 Board Meeting) Cumulative effect at the date of adoption Cumulative effect adjustment to the opening balance of retained earnings (net assets) in year of adoption Would not restate contracts that are completed under legacy GAAP as of adoption date Existing contracts (those not completed) as of adoption date reflected in current year under the new standard; not restated for prior years New contracts (those entered into after adoption date) accounted for under the new standard Footnote disclosure in the year of adoption of both: Amount by which each financial statement line item changed in current year as a result of applying the new standard Explanation of significant changes between amounts reported under the new revenue standard versus legacy guidance 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 82

83 Implementation Timeline Assess Design Implement Sustain Business as usual First Quarter 2014: Expected issuance of revenue recognition standard Optional retrospective reporting periods 1/1/17 expected effective date for public entities (1/1/18 for nonpublic entities) /1/17 Potential Scenarios: Cumulative effect adjustment Retrospective adopter Key: Assess Design Implement Sustain 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 83

84 FASB/IASB Leases Project

85 Leases for Lessees May 16, 2013: ED published and comment period began September 13, 2013: Comment period ended (over 600 comment letters received) Proposed date of transition Proposed date of adoption Earliest annual financial statements in which proposals would apply Leases on balance sheet Overview Dual lease model: accelerated (Type A) or straight-line (Type B) expense pattern Lease classification tests based on nature of asset (property / nonproperty) and extent of consumption by lessee during lease term Simplified requirements for some short term leases 12 months More disclosure of leasing arrangements How to apply Right-of-use (ROU) asset and lease liability recognized at lease commencement Initially recognize and measure lease liability based on expectations about lease term, purchase options, residual value guarantees, etc., and monitor / reassess each reporting period Lease liability subsequently measured at amortized cost; carrying amount modified for certain reassessments ROU asset subsequent measurement and expense recognition depends on lease classification 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 85

86 FASB/IASB Financial Instruments Project

87 FASB/IASB Financial Instruments Project Timeline Project Phase Classification and measurement FASB Original ED issued in May 2010 Revised ED issued February 2013, comment period ended May 15, 2013 Joint redeliberations began in July 2013 Final Document expected 1 st half 2014 Impairment of Financial Assets Original EDs issued November 2009 (IASB) and May 2010 (FASB) Joint supplementary document issued January 2011 FASB ED issued in December 2012, comment period ended May 31, 2013 IASB ED issued in March 2013, comment period ended July 5, 2013 Joint redeliberations began in July 2013 Final Document expected 1 st half KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 87

88 Financial Instruments Classification and Measurement Business Model Assessment for Financial Assets Amortized Cost FV-OCI FV-NI Held and managed within a business model whose objective is to hold assets to collect contractual cash flows Held within a business model whose objective is both to hold the assets to collect contractual cash flows and to sell the assets Residual category (i.e., all other assets and includes assets that do not meet the solely principal and interest (SPPI) test as well as those that are held for sale) 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 88

89 Financial Instruments Impairment - Scope Would apply to the following financial instruments that are not measured at FV-NI: Debt instruments (e.g. debt securities and loans) measured at amortized cost or FV-OCI Receivables that result from revenue transactions Reinsurance receivables Lease receivables recognized by a lessor Loan commitments Would not apply to equity instruments 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 89

90 FASB s Current Expected Credit Loss Model Based on a single measurement objective No recognition threshold (e.g., probable) Reflects an entity s current estimate of contractual cash flows that it does not expect to collect Based on all relevant information (past events, current conditions, and reasonable and supportable forecasts) Would reflect the time value of money Other acceptable methods of estimating expected credit losses could be used Impairment recognized as a contra-asset (i.e., allowance) Any changes in the allowance (increases and decreases) would be recognized immediately 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and 90

91 Thank you!