Select FASB projects. May 24, 2017

Transcription

1 Select FASB projects May 24, 2017

2 Agenda Phase 1 - Clarifying the definition of a business (ASU ) Phase 2 - Sale of nonfinancial assets (ASU ) Phase 3 Aligning the differences in assets and businesses (Initial deliberations) Financial instruments Impairments Classification Hedging (exposure draft) Page 2

3 Definition of a business ASU Page 3

4 Clarifying the definition of a business Overview The standard provides guidance to help entities analyze when a set of transferred assets and activities (set) is a business Current definition New guidance Requires evaluation of threshold Does not matter whether all the (e.g., a set is not a business when value is attributable to a single substantially all of the fair value of asset or group of similar assets gross assets acquired is concentrated in a single asset or group of similar assets) Requires inputs and at least one Requires inputs and processes substantive process Requires evaluation of whether a market participant could replace Eliminates requirement any missing elements Outputs defined broadly as ability to provide a return Narrows definition to focus on revenue-generating activities Page 4

5 Clarifying the definition of a business Substantially all threshold An acquired set is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets The following are single assets for the purpose of applying the threshold: A tangible asset that is attached to and cannot be physically removed and used separately from another tangible asset (or an intangible asset representing the right to use a tangible asset) without incurring significant cost or significant diminution in utility or fair value to either asset In-place lease intangibles and the related leased assets The following are not considered similar assets for the purpose of applying the threshold: A tangible asset and intangible asset A financial asset and a non-financial asset Different major classes of financial assets, tangible assets, or intangible assets Identifiable assets within the same major asset class that have significantly different risk characteristics Page 5

6 Clarifying the definition of a business Illustration Substantially all threshold Utility Co. purchases a partially contracted power plant for $200 million and incurs $5 million of transaction costs. The assets and their fair values include land ($40m), power plant ($145m) and PPA contract asset (PPA) of ($15m). The PPA is not a lease. Legacy guidance: Business combination the continuation of outputs indicates processes are embedded in the set. Utility Co. would expense the transaction costs and record each asset at fair value. ASU : Asset acquisition the set meets the substantially all threshold (because the power plant and the land are considered a single asset and are substantially all of the fair value). Utility Co. would capitalize the transaction costs and allocate the consideration transferred on a relative fair value basis. Page 6

7 Clarifying the definition of a business Substantive process An acquired set must include an input and a substantive process that together significantly contribute to the ability to create outputs For a set generating outputs, a process is substantive if it includes any of the following: Employees that form an organized workforce or an acquired contract that provides access to an organized workforce A process that cannot be replaced without significant cost, effort or delays A process that is considered unique or scarce For a set not generating outputs, a process is substantive if it includes employees that form an organized workforce An acquired contract that provides access to an organized workforce would not be considered a substantive process when the set is not generating outputs Page 7

8 Clarifying the definition of a business Substantive process Power Co. purchased a portfolio of solar projects and the substantially all threshold was not met. Power Co. assumes the existing outsourced security and maintenance contracts in the acquisition. Legacy guidance: Business combination Power Co. determines the continuation of outputs indicates processes are embedded in the acquisition. ASU :??? Power Co. would need to evaluate whether the processes acquired are substantive processes. Are the processes unique, critical or scarce or could be replaced with little cost, effort or delay in set s ability to generate outputs? Page 8

9 Clarifying the definition of a business Effective date and transition Early adoption permitted, including for interim or annual periods in which the financial statements have not been issued or made available for issuance Early adoption FAQs Effective dates for calendar year ends Transition method PBE Non-PBE Early adoption? Prospective Yes Can the guidance be early adopted for interim periods? If early adopted, should the guidance be applied to specific transactions in the period adopted or all transactions in the period adopted? If a transaction was disclosed as a business combination in a subsequent events disclosure, is that transaction considered to have been previously reported in financial statements that were issued? Page 9

10 Sale of nonfinancial assets ASU Page 10

11 Sale of nonfinancial assets Overview Clarified the scope of ASC on the sale of nonfinancial assets or in substance nonfinancial assets (ISNFA) For example, sale of real estate, ships, windmills, patents Excludes transactions with customers and businesses Defined ISNFA Provided additional derecognition and measurement guidance for nonfinancial assets in its scope, including guidance on the partial sales of nonfinancial assets Page 11

12 Sale of nonfinancial assets In substance nonfinancial assets Defines ISNFA Financial asset that is in a group of assets in which substantially all of fair value is concentrated in nonfinancial assets For example, selling real estate and operating lease receivables In substance nonfinancial assets v. in substance real estate Likely a higher threshold Would generally not include equity method investments Would require consideration of all assets, including those not previously recognized by the seller Page 12

13 Sale of nonfinancial assets Scope of ASC Counterparty a customer? No Business or nonprofit activity? No Scope of other guidance? No Nonfinancial assets (and ISNFA)? No Transferring ownership interest in subsidiary? No Separate parts and apply relevant US GAAP Yes Yes Yes Yes Yes Apply ASC 606 Apply ASC 810 Apply other GAAP Apply ASC Apply ASC to subsidiaries with nonfinancial assets or ISNFA. Apply other guidance to remaining subsidiaries/parts. Page 13

14 Sale of nonfinancial assets Illustration - scoping Facts Company A enters into a contract to sell an entity that contains nonfinancial assets (i.e., power plant) and financial assets (i.e., receivables). The entity does not meet the definition of a business under ASU and sale is to a non-customer (not in the scope of ASC 606). Substantially all of the FV of the assets of the entity concentrated in the real estate rather than its financial assets such as receivables. Analysis All of the assets promised in the contract, including the receivables, are in the scope of ASC Page 14

15 Sale of nonfinancial assets Derecognition and measurement Derecognition criteria Step 1: evaluate if there is a controlling financial interest under ASC 810 If control is retained under ASC 810, equity transaction If control is not retained under ASC 810, go to Step 2 Step 2: Evaluate whether control of asset transfers under ASC 606 Measurement Apply guidance in ASC 606 Measure variable consideration at fair value Measure any noncontrolling interest retained at fair value Include any liabilities transferred as a component of consideration Measure at carrying value Significant changes for real estate transactions Page 15

16 Sale of nonfinancial assets Illustration - Measurement Facts Parent controls a Subsidiary (100% equity) whose only assets are land and windmills with a combined carrying amount of $15 million Selling land and windmills are not an output of its ordinary activities Parent sells a 60% controlling interest in Subsidiary for $18 million in cash Fair value of the retained 40% investment is $12 million Transaction is with a noncustomer and is not the sale of a business and within scope of ASC Control is lost under both ASC 810 and ASC 606 and therefore, derecognition guidance applies Page 16

17 Sale of nonfinancial assets Illustration - Measurement Current GAAP (ASC ) ASC Cash proceeds $18m $18m Carrying value/fair Value of retained interest $6m* $12m Less: Carrying value of retained interest ($15m) ($15m) Gain $9m $15m * Calculated as $15m carrying value x 40% retained interest Page 17

18 Sale of nonfinancial assets Sales to equity method investees or joint ventures Current guidance: Gain or loss on sale of nonfinancial assets (including inventory) to or from an investor or investee (downstream or upstream transaction) is eliminated until realized by the investor or investee in a transaction with third parties ASC Sale of nonfinancial assets to an investee (downstream transaction) will result in full gain or loss recognition That is, the ASU amended ASC 323 and ASC so that there will be no elimination of intra-entity profits on downstream transactions Upstream transactions are not affected by the ASU No change in sale transactions that are in scope of ASC 606 (profit eliminated until realized in a transaction with third parties) Page 18

19 Sale of nonfinancial assets Transition Transition aligned with ASC 606 When is it effective? 2018 for calendar-year end public entities 2019 for all other calendar-year end entities Early adoption permitted in 2017 What are the transition provisions? Full retrospective or modified retrospective Transition method for transactions with customers and noncustomers does not have to be the same, but date of adoption does Page 19

20 Aligning the accounting for assets and businesses Page 20

21 Select differences in accounting for business combinations vs. asset acquisitions Item Business combination Asset acquisition Measurement of acquired assets Fair value, with limited exceptions Cost in accordance with other GAAP** (cost allocated based on relative fair value if a group of assets, with limited exceptions) Measurement of previously held interest would generally remain at cost **Unless the entity is initially consolidating a VIE, then ASC 810 requires an entity to apply ASC 805 Page 21

22 Select differences in accounting for business combinations vs. asset acquisitions Item Business combination Asset acquisition Transaction costs Expensed as incurred Capitalized as part of assets acquired Contingent consideration In-process research and development (IPR&D) assets Recognized at its acquisitiondate fair value as part of the consideration transferred Capitalized as an indefinitelived intangible asset Generally recognized when the contingency is resolved (i.e., when the contingent consideration is paid or becomes payable) Expensed, unless the IPR&D has an alternative future use Page 22

23 Select differences in accounting for business combinations vs. asset acquisitions Item Business combination Asset acquisition Measurement period Push down accounting Acquirer allowed up to a year to finalize valuations Option provided to push down new basis to subsidiaries acquired N/A N/A Cost exceeds fair value of assets Recognize goodwill No goodwill Page 23

24 Financial instruments Page 24

25 Financial instruments impairment ASU overview Affects all entities, not just those in financial services Transition method Modified retrospective Effective dates for calendar-year companies PBE (SEC filer) In scope Trade receivables Debt securities Loans Off balance sheet credit exposure Net investments in leases PBE (non-sec filer) Non-PBE Q Q YE 2021 Early adoption? Yes (Q1 2019) Out of scope Equity instruments Related party loans Intercompany receivables Participant loans made by a defined contribution plan Page 25

26 Financial instruments impairment ASU (continued) Receivables, loans, held-to-maturity debt securities Current GAAP ASU Incurred losses Expected credit losses Considers current Estimates the risk of loss information and events even when risk is remote Probable recognition Losses estimated over threshold remaining contractual life Considers past events, current conditions and reasonable and supportable forecasts No recognition threshold Page 26

27 Financial instruments C&M (ASU ) What s staying the same? Classification and measurement models for loans and debt securities Accounting for equity method investments What s changing? Equity investments measured at fair value through net income New measurement alternative available for equity investments without readily determinable fair values Today s cost method accounting is eliminated Page 27

28 Financial instruments (ASU ) Transition guidance Effective dates of ASU for calendar year ends Transition method PBE Non-PBE Early adoption? Generally modified retrospective Permits early adoption only for: Q PBE: generally no Non-PBE: Q Recognition of change in fair value from change in own credit risk in other comprehensive income for financial liabilities measured under the fair value option Elimination of fair value disclosures for financial instruments not recognized at fair value (non-pbes only) Record cumulative-effect adjustment to retained earnings Prospectively account for equity investments without readily determinable fair values Page 28

29 Hedging Exposure draft What would stay the same? All aspects of ASC 815 not related to hedge accounting Types of accounting hedges Need to assess hedge effectiveness prospectively and retrospectively Highly effective threshold Requirement to contemporaneously document hedging relationship Page 29

30 Hedging Exposure draft What s changing Expands ability to hedge risk components Allows for hedging of contractually specified components in cash flow hedges of: Nonfinancial items (e.g., market index or price) Variable-rate financial instruments (e.g., non-benchmark interest rates) Aligns recognition and presentation of hedging instruments and hedged items Generally recognize entire effect of hedging instrument in income statement line item in period(s) that it affects earnings No longer require separate measurement and reporting of hedge ineffectiveness Page 30

31 Hedging Exposure draft proposed changes (continued) Other amendments Addresses issues with applying the long-haul method for fair value hedges of interest rate risk Eases certain documentation and assessment requirements New and modified disclosure requirements Transition Modified-retrospective basis Certain one-time transition elections for existing hedges Page 31

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