FASB Update. Jaime Dordik. Assistant Project Manager, FASB. March 27, 2017

Transcription

1 FASB Update Jaime Dordik Assistant Project Manager, FASB March 27, 2017

2 FASB Staff Disclaimer Expressions of individual views by members of the FASB and staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberations. 2

3 Topic Summary Projects Accounting for Financial Instruments o Hedging Consolidations Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Disclosure Framework Conceptual Framework Government Assistance Simplifying the Balance Sheet Classification of Debt Stock Compensation Modifications Nonemployee Share-Based Payments Liabilities and Equity (Targeted Improvements) PCC Agenda Invitation to Comment (ITC) Intangible assets (including R&D) Pensions and Other Postretirement Benefit Plans Distinguishing Liabilities from Equity Reporting Performance and Cash Flows Other Cloud Computing Arrangements (Pre-Agenda Research) 3

4 Accounting for Financial Instruments (AFI): Hedging

5 Project History May 2007 Added project May 2010 Issued ED Sept. 8, 2016 Issued ED June 2008 Issued ED Q1 Q Project reactivated Redeliberations and issuance of final ASU

6 Hedge Accounting Proposed ASU Hedge of Nonfinancial Item Hedge of Financial Instrument For Qualifying Hedging Relationships Fair Value Hedge Hedge of inventory Swap fixed rate debt to floating NEW: 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 NEW: Entire derivative gain or loss is deferred in OCI except for amounts excluded from the assessment of effectiveness. (Under current GAAP, only the effective portion is deferred in OCI). NEW: Gain or loss previously deferred in OCI is reclassified into 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

7 Hedged Item Hedged Item Component Hedging Nonfinancial Items Eligible Hedged Risks for Non-Financial Items Existing Guidance Proposed Amendments Variability in total cash flows or overall changes in fair value New: Variability in a contractually specified component OR Variability in total cash flows or overall changes in fair value Note: The proposed amendments do not modify the guidance on hedges of foreign exchange risk

8 Component Hedging Indexes Eligible to be Designated in a Hedge of Interest Rate Risk * The contractually specified rate and Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate are newly allowed based upon the proposed amendments

9 Other Simplifications Hedge Documentation Up to three months to perform initial quantitative effectiveness test. Qualitative Testing Allowed after an initial quantitative test at hedge inception if certain conditions are met. Shortcut Method Long-haul method may be used if use of the shortcut method was not or no longer is appropriate. Critical Terms Match When hedging a group of forecasted transactions, the timing of the derivative and transactions can be considered to match, if the transactions occur and derivative matures within a 31-day period.

10 Proposed Disclosure Amendments Board decided to amend disclosure requirements to align information provided with changes to the overall hedging model and provide information to users that focuses on the magnitude of the effect of hedging on financial statements 1 2 Certain tabular disclosures required in Topic 815 would be amended to focus on the impact of hedge accounting on income statement line items. An entity would be required to provide additional disclosure related to cumulative basis adjustments for fair value hedges. Users understand impact and magnitude of hedging activities on financial statements

11 Consolidations

12 Background Stakeholder feedback indicates that consolidation guidance in Topic 810 is difficult to navigate and, thus, apply. Private company stakeholders continue to express difficulty applying variable interest entity (VIE) guidance to common control arrangements. Stakeholders requested that the Board address certain areas of the VIE guidance for related parties under common control. 12

13 Board Project Consolidation: Reorganization and Targeted Improvements Reorganize consolidation guidance in Topic 810 into a new Topic Topic 812 Separate Subtopics for VIEs and voting interest entities Controlled by contract guidance moved to Topic 958: Not-for-Profit Entities Educational materials on application of certain complex concepts associated with VIE guidance Not expecting change to current outcomes reached under

14 Board Project Consolidation: Targeted Improvements to Related Party Guidance for VIEs Private companies have alternative to not apply VIE guidance to common control arrangements Indirect interests through a related party under common control considered on proportionate basis for determining whether decision-making fee is a variable interest When evaluating whether a related party under common control must consolidate a VIE: - Require consolidation when substantially all of the activities of a VIE are conducted on behalf of that related party. - Provide criteria for a reporting entity to consider when determining whether it must consolidate the VIE - Removes required consolidation in all cases at commonly controlled entity level 14

15 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

16 Board Decisions Net Periodic Benefit Costs Presentation of net benefit cost in the income statement (retrospective application) Service cost in the same line item or items as other current employee compensation costs Remaining components separated from service cost and outside a subtotal of income from operations, if one is presented Capitalization of only service cost in assets (prospective application) 16

17 Effective Date Public Business Entities Other Entities Early Adoption Annual periods after December 15, 2017 including interim periods Annual periods after December 15, 2018 and interim periods after December 15, 2019 Permitted at the beginning of an annual reporting period for which financial statements have not been issued Should be within first interim period if interim financial statements are issued 17

18 Disclosure Framework

19 Disclosure Framework: Two Components Improving the effectiveness of notes requires both: Consistent considerations by the Board in each standard-setting activity Appropriate exercise of discretion by reporting entities when assessing disclosure requirements Phase I: Board s Decision Process Phase II: Entity s Decision Process 19

20 Board s Decision Process Issues Addressed in ED Comment period ended July 14, 2014 Purpose of notes General limitations Relevance Costs Some information oriented toward the future Information that could be appropriate for inclusion in notes Considerations for interim reporting 20

21 Entity s Decision Process Provide to the extent material Changes to the Codification Eliminate language that limits discretion Add guidance on applying materiality 21

22 Fair Value Measurement Remove Add Retain Clarify Forward-looking information Process and policies Gains and losses Level 3 rollforward Sensitivity information 22

23 Defined Benefit Plans Disclosures added for all entities General characteristics Interest crediting rate of cash plans NAV disclosures Reasons for significant gains/losses Private cos.: Change in healthcare cost trend rates 23

24 Income Taxes Disaggregation of: Income taxes paid Pretax income (loss) and income tax expense (benefit) Expanded carryforward disclosures Valuation Allowance Rate Reconciliation 24

25 Income Taxes Undistributed Foreign Earnings Unrecognized Tax Benefits Change in Tax Law Government Assistance 25

26 Inventory Disaggregation by component and measurement basis Effect of last-in, first-out (LIFO) liquidations on income Changes other than purchase, manufacture or sale Replacement cost for LIFO inventory Qualitative description of costs capitalized Retail Inventory Method (RIM) Segment reporting for public business entities 26

27 Inventory Remove Add Retain Substantial and unusual threshold Redundant requirements Duplicative language Relationship between recognized measurement method and standard costs Impairment losses facts and circumstances Firm purchase commitment losses income statement presentation Significant estimates 27

28 Next Steps Roundtable - Entity s Decision Process - Board s Decision Process Redeliberate Concepts, Materiality and Topics Interim Considerations 28

29 Conceptual Framework

30 Project Objective Not a new conceptual framework - Try to address deficiencies - Try to clarify and improve understanding - Make amendments that experience in application have suggested are necessary Started as a joint project, now working seperately 30

31 Overview of Past and Current Presentation Efforts Address deficiencies in Concept Statement 5 related to presentation - How should individual items be included in line items? - How should line items be grouped? - No conceptual basis for other comprehensive income Research project on performance reporting added in July 2014 Exposure draft issued related to Presentation in August Comment period ended November

32 Presentation Considerations in determining financial statement line items and individual items to include in each: Event that caused an item to be recognized Activity with which an item is associated Similarities and differences in frequency Expected time until realization/settlement of asset or liability Expected form of realization/settlement of an asset, liability, or equity instrument Tend to be more useful in grouping items in comprehensive income and cash flows Relate to assets and liabilities Types of changes in economic conditions that can affect the cash flows Similarities and differences in measurement methods Relate to line items in comprehensive income and assets and liabilities 32

33 Measurement Intended to address measurement attributes and measurement issues Considerations in determining financial statement line items and individual items to include in each: - Measurement of assets is controversial. Event that caused an item to be recognized Activity with which an item is associated especially Similarities and for differences nonfinancial frequency liabilities. We seldom Expected time really until realization/settlement measure of anything; we make calculations. asset or liability Expected form of realization/settlement of an asset, liability, or equity instrument - Present value of expected cash flows Tend to be more useful in - Measurement of liabilities seems to pose even more issues, - Best estimate grouping items in comprehensive income and cash flows Relate to assets and liabilities Types of changes in economic conditions that can affect the cash flows Similarities and differences in measurement methods Relate to line items in comprehensive income and assets and liabilities 33

34 Measurement The Board previously decided that the following general categories of methods should be discussed in the chapter: Considerations in determining financial statement line items and individual items to include in each: - Prices in transactions in which the entity participated Event that caused an item to be recognized - Current prices observed or estimated by the entity Activity with which an item is associated Expected time until realization/settlement of asset or liability allocations, Expected form and of realization/settlement allowances of for an impairment. asset, liability, or equity instrument Tend to be more useful in grouping items in comprehensive - Discounted Similarities and estimates differences in frequency of future cash flows other than estimates income and cash flows of market prices - Other adjustments to carrying amount: accruals, systematic Relate to assets and liabilities Types of changes in economic conditions that can affect the cash flows Similarities and differences in measurement methods Relate to line items in comprehensive income and assets and liabilities 34

35 Decisions Reached at Last Meeting Considerations in determining financial statement line items and individual items to include in each: Three categories of initial measurement are: - Entry price Event that caused an item to be recognized - Exit price Activity with which an item is associated Similarities and differences in frequency - Estimated future cash flows. Expected time until realization/settlement of Overall asset objective or liability in identifying costs to be included in the Relate to assets and liabilities Expected form of realization/settlement of initial carrying amount of an asset at entry price asset, liability, or equity instrument can affect the cash flows Similarities and differences in measurement methods Tend to be more useful in grouping items in comprehensive income and cash flows - Decision included categories that help identify the types of Types of changes in economic conditions that Relate to line items in costs that would be included consistent with this objective comprehensive income and assets and liabilities 35

36 Next Steps Subsequent measurement of assets Subsequent measurement of liabilities Adjustments to entry price 36

37 Government Assistance Disclosures

38 Scope A legally enforceable agreement in which a company receives from the government: cash, nonmonetary assets, or benefits that reduce or eliminate an entity s expenditures. Excluded Transactions - The government is legally required to provide a nondiscretionary level of assistance because the company eligibility met requirements without specific agreement between the government and the entity. - In which the government is solely a customer 38

39 Annual Disclosures Nature of the Assistance, Related Accounting Policies, and Effect on Financial Statement Amounts o Nature of the assistance, including general description significant categories (ex. grants, loans) and the form in which the assistance has been received o Accounting policy used to account for government assistance o Which line items on the balance sheet and income statement are affected, and the amounts applicable to each line item 39

40 Annual Disclosures Significant Terms and Conditions of the Agreement, including, but are not limited to, any of the following: o The duration/period of the agreement o Commitments made by both the reporting entity and the government o Provisions, if any, for recapturing government assistance, including the conditions under which recapture is allowed o Other contingencies. 40

41 Transition Effective Date Apply to all agreements: A o Existing at the effective date o Entered into after the effective date B Retrospective Application Permitted Existing Agreements New agreements 41

42 Simplifying the Balance Sheet Classification of Debt (Current vs. Noncurrent)

43 Simplification Initiative Objective Reduce cost and complexity while maintaining or improving the usefulness of the information Projects include narrow-scope items Exposure Draft issued January 10, 2017 Comment period ends May 5,

44 Simplifying the Balance Sheet Classification of Debt (Current vs. Noncurrent on a Classified Balance Sheet) What? Current Guidance Narrow scope rules on specific types of debt arrangements Proposed Change Overriding principle for the classification of debt that can apply to all arrangements* How? Mix of guidance using contractual maturity and management judgments Increase focus on contractual maturity and borrower s rights less focus on judgment or intent When? Some circumstances considered as of the financial statement issuance date, while others use the reporting date Criteria considered as of the reporting date This proposed change is simpler and more transparent than current GAAP Includes convertible debt and liability classified mandatorily redeemable instruments Waivers of Debt Covenant Violations are an exception to the proposed principle 44

45 Simplifying the Balance Sheet Classification of Debt Proposed Classification principle Debt would be classified as a noncurrent liability if either of the following criteria are met as of the balance sheet date: - Liability is contractually due to be settled more than one year (or operating cycle, if longer) after balance sheet date. - Entity has contractual right to defer settlement of liability for at least one year (or operating cycle, if longer) after balance sheet date Key Impacts: - Waivers of Debt Covenant Violations - Refinancing - Subjective Acceleration Clauses 45

46 Waivers of Debt Covenant Violations Current Guidance A liability will be classified as noncurrent unless: A violation that gives the lender the ability to call the debt has occurred at the balance sheet date or would have occurred absent a loan modification It is probable that the borrower will not be able to cure the default at measurement dates within the next 12 months Proposed Guidance A liability will be classified as noncurrent if: The liability is contractually due to be settled or can be deferred for at least a year after the balance sheet date A waiver of the violation has been obtained before financial statement issuance The waiver does not result in an extinguishment or troubled debt restructuring It is not probable that any other covenants will be violated within 12 months of the balance sheet date There is an exception in GAAP today for waivers and there will still be an exception in GAAP under the proposal, but there are some differences

47 Examples of Key Changes: Refinancing Current Guidance Short-term debt at the balance sheet date that is refinanced to long-term debt (or replaced by an equity issuance) after the balance sheet date but before the financial statements are issued should be classified as a noncurrent liability Proposed Guidance An entity cannot consider a subsequent refinancing when determining the classification of debt because these transactions are Type 2 subsequent events The subsequent refinancing provides evidence about conditions that did not exist at the balance sheet date A subsequent refinancing of short term debt with the issuance of equity securities would no longer affect the classification of debt

48 Examples of Key Changes: SACs Under current guidance, the balance sheet classification of debt depends on the likelihood of acceleration of the due date based on the triggering clauses. Reclassification or disclosure are not required if the likelihood of acceleration is remote. Under proposed guidance, because the probability assessment would be removed, these clauses would impact the balance sheet classification of debt only when the acceleration clause is triggered

49 Stock Compensation Modifications

50 Scope of Modification Accounting (Topic 718) Subsequent Measurement An entity should account for the effects of a modification unless all the following conditions are met: The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique the entity uses for the award, then the entity is not required to estimate the value immediately before and after the modification. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Disclosure The disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting

51 Transition and Effective Date Transition Prospective application No transition disclosures Effective Date Annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017 for all entities, Early adoption is permitted for all entities, including adoption in any interim period 51

52 Nonemployee Share-Based Payments

53 Nonemployee Share Based Payments Identified as an area for improvements through the 718 Simplification initiative that arose out of: - PIR Report (response to 123R) - The Private Company Council s (PCC) - Ideas submitted by FASB staff members as part of the Simplification Initiative Exposure Draft issued on March 7, Expands the scope of Topic 718 to include payments for goods and services to nonemployees 53

54 Model Comparisons 54

55 Liabilities and Equity (Targeted Improvements)

56 EITF 07-5 Requires liability classification for instruments with down round features (strike price adjusts down based on the pricing of future equity offerings) For instruments in the scope of Subtopic , GAAP requires an evaluation of whether an instrument is indexed to and settled in own stock. A down-round feature precludes an instrument (or embedded feature) from being indexed to an entity s own stock. The instrument (or embedded feature) requires mark-tomarket accounting under Topic 815. Sources of Complexity Fair value measurement (initially and at each subsequent reporting period) Accounting may not reflect economics (for example, P&L impacts are recorded as stock price increases, even if down round is to protect investor from declines in price) Example 1: Convertible Instruments with a Down- Round in an Embedded Conversion Option* Debt recorded at fair value on Day 1 and accreted up to par value Conversion option marked-to-market with changes in value recorded in net income Example 2: Warrant with a Down-Round Instrument marked-to-market with changes in value recorded in net income * Assume embedded conversion option meets the definition of a derivative 56

57 Tentative Board Decision: Down Rounds Current Accounting Proposed Accounting Classification Liability Down round* does not impact classification; May be equity or liability based on instrument and other features Initial Measurement Subsequent Measurement Overall instrument Fair value Overall instrument Remeasured at fair value each reporting period; P&L Impact Recorded at proceeds and no accounting for the down round feature on Day 1 accounting for instrument depends on if its equity or liability classified Ongoing accounting depends on whether instrument is liability or equity classified only account for the down round feature when triggered: If equity classified, then dividend If liability classified, then P&L impact *A standard anti-dilution provision is not considered a down round feature. 57

58 Private Company Council

59 PCC: Continuing Success PCC Culture Like FASB, transcends any individual member Focused on improvement and collaboration among members & with Board First phase: successfully ID d solutions to existing problems Second phase (now entering): proactively address private company issues as part of the process (before standards issued, not after) 59

60 PCC Project Progress Issue Goodwill Interest Rate Swaps Leasing Arrangements under Common Control Development Stage Entities Identifiable Intangible Assets Preferability and Transition Guidance for Alternatives in US GAAP for Private Companies after the Initial Effective Date Status Final Alternative Final Alternative Final Alternative FASB ASU Final Alternative Final Alternative ***PCC also advising the FASB on key agenda projects*** 60

61 Invitation to Comment (ITC)

62 Objective of the Invitation to Comment (ITC) about Future Agenda Help the FASB set its future agenda by identifying population of key projects to consider Determine priority of key projects Identify perceived financial reporting issue(s) for each topic Obtain feedback on potential alternatives or path forward 62

63 ITC Topics On the basis of the FASAC survey and other input from stakeholders, the FASB identified the following topics to include in the ITC: - Intangible assets (including research and development) - Pensions and other postretirement benefit plans - Distinguishing liabilities from equity - Reporting performance and cash flows (including income statement, segment reporting, other comprehensive income, and statement of cash flows) 63

64 Relative Rank of All Topics by Respondent Type Project Overall Preparer Practitioner User Other Liabilities and Equity Performance Reporting Intangibles Pensions and OPEB

65 Why Constituents Ranked Projects Distinguishing Liabilities and Equity Frequently Cited: - Guidance is overly complex and internally inconsistent - Guidance is path dependent and form based - Leads to frequent restatements and diversity in practice Performance Reporting Frequently Cited: - Rise of Non-GAAP information - Investors want/need more information and more comparability - Development of new technology changes the way information is consumed 65

66 Why Constituents Ranked Projects Intangible Assets Frequently Cited: - Inconsistent treatment of acquired vs. internally generated intangibles - Market capitalization of some companies is driven by items not reflected on the balance sheet Pensions and OPEB Frequently Cited*: - Current DB plan accounting guidance may not faithfully represent the employer s obligation for new or emerging plans - Differences between US GAAP and IFRS *There were 3 actuary companies/actuary associations that responded to the ITC 66

67 Implementation Costs incurred in a Cloud Computing Arrangement

68 Implementation Costs incurred in a Cloud Computing Arrangement Issue Accounting Standards Update No did not provide guidance on accounting for implementation, setup and other upfront costs (implementation costs) incurred in a cloud computing arrangement that is considered a service contract. Current Status Discussed at November 2016 Agenda Prioritization Meeting Board asked EITF Chairman to establish an EITF Working Group Working Group meeting held January 27,

69 Stakeholder Feedback Prevalent Issue Amounts Material Diversity in Practice Questions on Internal vs. Third Party Implementation Costs 69

70 Implementation Costs incurred in a Cloud Computing Arrangement Next Steps Staff in process of performing additional outreach / research with certain advisory groups to address Board concerns Will bring back to the Board to decide on adding to the agenda 70

71 Questions? 71