FASB Update NEWLY EFFECTIVE & RECENTLY ISSUED PRONOUNCEMENTS, & BEYOND. FALL CPE DAY 2016 MARIE BRILMYER, DIRECTOR

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1 FASB Update NEWLY EFFECTIVE & RECENTLY ISSUED PRONOUNCEMENTS, & BEYOND FALL CPE DAY 2016 MARIE BRILMYER, DIRECTOR

2 Overview Issued 2016 Effective 2016 Effective 2017 & Beyond On the Horizon..

3 Standards Effective in 2016 ASU Compensation Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ASU Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern ASU Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ASU Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council) ASU Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ASU Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs

4 Standards Effective in 2016 ASU ASU ASU ASU ASU Intangibles Goodwill and Other Internal Use Software (Subtopic ): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement Earnings per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions Plan Accounting: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans: (Part I) Fully Benefit- Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient Interest Imputation of Interest (Subtopic ): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements Intangibles Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council)

5 Standards Effective in 2016 Key Words Stock Compensation Going Concern Business Combinations Extraordinary and Unusual Items Debt Issuance Costs Pension Plan Accounting PCC Alternatives

6 Key Words Stock Compensation ASU Compensation Stock Compensation (Topic 718): Accounting for Share- Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Previous guidance: Share-based awards with a performance target that could be achieved after required service period no specific guidance before. Some accounted for the award regardless of the performance target (vest over requisite service period). Others accounted for the award when target achieved. New guidance: Compensation cost recognized in the period it becomes probable the target will be achieved for which service has already been provided. Recognize remaining compensation over remaining required service period.

7 Key Words Stock Compensation (Continued) Example Facts Non-Public Technology Company (TC) grants unvested shares to employees with a 3-year service condition. The Shares will only be transferred if TC completes an IPO within 10 years of the grant date. If there is no IPO by that date, the shares will expire worthless. After 3 years of service are provided, employees may still receive the underlying's shares if the IPO occurs with the 10-year period. Assume the awards are equity classified, there are no expected (or actual) forfeitures, and the IPO occurs in Year 4. The grant date fair value of the awards is $100 thousand if the terms of the award are a performance condition. The grant date fair value of the award is $70 thousand if the terms of the award are considered a post-vesting restriction.

8 Key Words Stock Compensation (Continued) Example, continued Facts, continued Terms of the award are treated as a performance condition. Grant date fair value does not consider probability of performance condition being met. Compensation cost recognized only when achievement of the performance condition is probable. Analysis No compensation cost is recognized during the 3-year service period as the IPO is not deemed to be probable. Compensation cost of $100 thousand is recognized in year 4 when the IPO occurs.

9 Key Words Going Concern ASU Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern Current guidance: Nothing in GAAP about management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern or to provide related disclosures. New guidance: Requires management to evaluate, each reporting period, whether there are conditions / events that raise substantial doubt about a company s ability to continue as a going concern within one year from the date of the financial statements being issued or available to be issued. Effective for years ending after December 15, Early application permitted.

10 Key Words Business Combinations ASU Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council) Previous guidance: An acquirer recognizes most assets acquired and liabilities assumed in a business combination at their acquisition-date fair values, including identifiable intangible assets. New guidance: Do not separately identify customer-related intangible assets not capable of being sold or licensed independently from other assets of a business (customer lists) and non-compete agreements. Instead, include them with goodwill. Adopt ASU ? Then adopt ASU to amortize goodwill (but not vice-versa).

11 Key Words Extraordinary and Unusual Items ASU Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items Previous guidance: Events or transactions both unusual in nature and infrequency of occurrence = extraordinary items. Segregate the item(s) from ordinary operations/show separately (net of tax) below income from continuing operations. New guidance: Eliminates the concept of extraordinary items from US GAAP. If a material unusual and / or infrequent event, report as a separate component of income from continuing operations and / or disclose. Examples include material damage by rare weather events (i.e. hail storm where hail storms rarely occur). Implement retrospectively or prospectively.

12 Key Words Debt Issuance Costs ASU Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs Previous guidance: Present debt issuance costs (loan fees) as a deferred charge (asset). Amortize over life of the loan and record to amortization expense. New guidance: Deduct from carrying value of the financial liability (not as a separate asset; similar to a debt discount). Record amortization to interest expense. Does not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. ASU : SEC - no objection to such costs being recorded as an asset and amortized over the term of the arrangement. Apply retrospectively.

13 Key Words Debt Issuance Costs (Continued) Example Company A, has $100 million revolving credit facility, maturing in December 2020, with $25 million in outstanding borrowings against it and $1 million in unamortized initial, upfront commitment fees that were incurred to secure the facility. Additionally, Company A has $200 million in term notes due in December of 2020 and $3 million in unamortized debt issuance costs that were incurred as a part of the debt transaction. How should Company A reflect the impact of adopting pre and post ASU and ASU adoption?

14 Key Words Debt Issuance Costs (Continued) Pre-Adoption Balance Sheet Assets: Other long term assets Liabilities: Long term debt $4 million $225 million Post Adoption Balance Sheet Assets: Other long term assets $1 million Liabilities: Long term debt $222 million * * Reflects a reduction of $3 million related to the reclassification of the unamortized debt issuance costs related to the term notes.

15 Key Words Debt Issuance Costs (Continued) Balance Sheet Presentation Post Adoption Footnote Presentation Post Adoption

16 Key Words Pension Plan Accounting ASU Plan Accounting: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans: (Part I) Fully Benefit- Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient Previous guidance: Fully benefit-responsive investment contracts are measured at fair value for presentation and disclosure (but contract value to determine EBP net assets). New guidance: Fully benefit-responsive investment contracts at contract value. Do not disaggregate investments (do not split SDA s and do not disclose investments > 5% of net assets). Can measure investments at month-end closest to the plan s fiscal year, when the fiscal period does not coincide with a month-end. Apply retrospectively for Part I and II and prospectively for Part III.

17 Key Words PCC Alternatives ASU Intangibles Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council) Previous guidance: Follow the effective dates in ASU , , and (private company alternatives). New guidance: Provides a one-time option to elect an existing PCC alternative (not separately identifying intangible assets in a business combination; amortizing goodwill; not consolidating certain VIE s; simplified accounting for plain vanilla hedges). For some, effective dates were removed and no initial preferability assessment required for others.

18 Standards Effective in 2017 & Beyond ASU ASU ASU ASU ASU ASU ASU ASU ASU Revenue from Contracts with Customers Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity Consolidation (Topic 810): Amendments to the Consolidation Analysis Compensation Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) Financial Services-Insurance (Topic 944): Disclosures about Short- Duration Contracts Inventory (Topic 330): Simplifying the Measurement of Inventory Deferral of the Effective Date Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments

19 Standards Effective in 2017 & Beyond ASU ASU Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities ASU Leases (Topic 842) ASU Liabilities Extinguishments of Liabilities (Subtopic ): Recognition of Breakage for Certain Prepaid Stored-Value Products ASU ASU Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments ASU Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting ASU Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

20 Standards Effective in 2017 & Beyond ASU ASU ASU ASU ASU ASU ASU Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Identifying Performance Obligations and Licensing Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates and Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)

21 Standards Effective in 2017 & Beyond ASU ASU Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control

22 Standards Effective 2017 & Beyond Key Words Revenue Recognition Consolidation Defined Benefit Plan Obligation Net Asset Value (NAV) Inventory Deferred Taxes Leases Equity Method Investments Not-for-Profit Entities Cash Flows

23 Key Words Revenue Recognition ASU Issue Date ASU Revenue from Contracts with May 2014 Customers ASU Deferral of the Effective Date August 2015 ASU , Principal versus Agent Considerations March 2016 (Reporting Revenue Gross versus Net) ASU Identifying Performance Obligations April 2016 and Licensing ASU Revenue Recognition (Topic 605) and May 2016 Derivatives and Hedging (Topic 815) ASU Revenue from Contracts with May 2016 Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

24 Key Words Revenue Recognition (Continued) Entity Public companies Non public companies Early adoption Effective Date Annual reporting periods beginning after 12/15/2017, including interim periods within that period Annual reporting periods beginning after 12/15/2018 and for interim periods within that period after 12/15/2019 Annual reporting periods beginning after 12/15/2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in

25 Key Words Revenue Recognition (Continued) Current guidance Recognize revenue only when realized or realizable and earned. Industry-specific and transaction-specific standards. Limited required disclosures. Why new guidance? Remove inconsistencies and weaknesses. Provide more robust framework for revenue recognition issues. Improve comparability of revenue recognition practices. More useful information to users of financial statements. Simplify the preparation of financial statements.

26 Key Words Revenue Recognition (Continued) Identify contracts with customers Identify separate performance obligations Determine transaction price Allocate transaction price Recognize revenue as obligations satisfied

27 Key Words Revenue Recognition (Continued) Impact on Financial Reporting & Business Performance obligations Long-term contracts Customer acceptance and satisfaction guarantees Bill and hold arrangements Methods for measuring progress on contracts Contract costs Extensive Disclosures Transition Retrospective presentation to all periods. Recognize a cumulative effect to opening balance of retained earnings at date of initial application. Entity would have to include certain additional disclosures about the financial statement line items affected.

28 Key Words Consolidation ASU Consolidation (Topic 810): Amendments to the Consolidation Analysis Current guidance: Different consolidation analysis for certain entities (such as VIE s). New guidance: All reporting entities are included within Topic 810, Consolidations. Affect evaluation to consolidate certain legal entities: Limited partnerships and similar legal entities must have substantive kick-out or participating rights over the general partner to meet the requirement; not presumed that a general partner should consolidate a limited partnership. Eliminates some criteria to determine if fees paid by to a decision maker or service provider represent a variable interest, and some fees excluded. Reduce extent that related party arrangements cause an entity to be a primary beneficiary. Scope exception for certain investment funds from Topic 810. Effective for nonpublic entities for years beginning after December 15, Early adoption permitted, with a modified or full retrospective approach.

29 Key Words Defined Benefit Plan Obligation ASU Compensation Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets Current guidance: A reporting entity with a fiscal year-end that is not a month-end must measure the fair value of their plan assets of a defined benefit pension or other postretirement benefit plan at their year-end. Typically, information from the third party is reported as of monthend, so adjustment is necessary. New guidance: Allows measurement of plan assets and obligations as of the calendar month-end closest to the fiscal year-end when a company has a noncalendar year-end. Effective for years beginning after December 15, Early adoption permitted, applied prospectively.

30 Key Words Net Asset Value (NAV) ASU Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) Current guidance: Investments for which fair value is measured at NAV using the practical expedient in Topic 820 is categorized within the FV hierarchy using criteria that differs from criteria used to categorize other FV measurements. New guidance: Investments at NAV using the practical expedient should not be categorized in the fair value hierarchy. Reconcile the FV hierarchy disclosure to the balance sheet by disclosing the amount of investments measured at NAV. Effective for years beginning after December 15, Early adoption permitted, applied retrospectively.

31 Key Words Inventory ASU Inventory (Topic 330): Simplifying the Measurement of Inventory Current guidance: Measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. New guidance: Inventory will be measured at the lower of cost or net realizable value. NRV = the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal, and transportation. Does not apply to inventory valued using LIFO or the retail inventory method. Effective for years beginning after December 15, Early adoption permitted, applied prospectively.

32 Key Words Deferred Taxes ASU Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes Current guidance: Separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. New guidance: Requires all deferred tax assets and liabilities be classified as noncurrent on the balance sheet. Will not change the requirement to offset all deferred tax assets and liabilities and present them as a single amount. Effective for nonpublic entities for periods beginning after December 15, Early adoption permitted, applied retrospectively or prospectively.

33 Key Words Leases ASU Leases (Topic 842) Main difference between current guidance and new guidance: Treatment of operating leases. Will require entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Response to requests from investors and other financial statement users for a more faithful representation of companies leasing activities. Requires more disclosure relating to leasing transactions. Effective for most entities for fiscal years beginning after December 15, 2019.

34 Key Words Equity Method Investments ASU Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting Current guidance: Cumbersome! Must adjust the investment, results of operations and retained earnings retrospectively. New guidance: Simplifies accounting when an investment qualifies for equity method accounting as a result of increased ownership percentage or increased degree of influence. Requires the entity to add the additional interest to the current basis and adopt the equity method as of the date the investment becomes qualified for equity method no retrospective adjustment. Effective for years beginning after December 15, Early adoption permitted.

35 Key Words Not-for-Profit Entities ASU Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities Current guidance: Issued over 20 years ago. New guidance (that is not available within current GAAP): Minimum requirement is two net asset categories: 1) with donor restrictions and 2) without donor restrictions. Show underwater donor-restricted endowment funds as with restrictions vs. unrestricted. Investment return is net of related external and direct internal expenses, and don t disclose netted expenses. Still choose direct or indirect method of cash flows, but if choose direct method, then don t need to reconcile indirect method.

36 Key Words Not-for-Profit Entities (Continued) ASU Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities Other new requirements (but available within current GAAP): Gifts of cash restricted for acquisition or construction of PP&E, use a placed-in-service approach vs. releasing over an asset s useful life. Report qualitative and quantitative information on how an organization manages its liquid resources to meet its cash needs over the next year. Simplest way is to present classified statement of financial position. Report expenses by nature and function on the face of the financial statements, as a separate statement (not a supplemental), or in the notes. Disclose allocations made. Effective for fiscal years beginning after December 15, /31, then 12/31/18 financial statements. 6/30, then 6/30/19 financial statements. Early adoption permitted, with retrospective application (a few caveats).

37 Key Words Cash Flows ASU Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) Currently: Diversity in practice in reporting certain items on the cash flow statement. New guidance: Provide guidance on eight specific cash flow issues (five relate to our practice). Applies to all entities, including business entities and not-forprofit organizations. Effective for nonpublic entities for years beginning after December 15, Early adoption permitted, but must adopt them all.

38 Key Words Cash Flows (Continued) Cash Flow Issue Debt Prepayment or Debt Extinguishment Costs Contingent Consideration Payments Made after a Business Combination Proceeds from the Settlement of Insurance Claims Proceeds from the Settlement of Corporate-Owned Life Insurance Policies (including Bank-Owned) Distributions from Equity Method Investees Summary of Amendments Cash outflows for financing activities. Cash payments made up to the liability recorded at acquisition date are financing activities; excess is operating. Classified on the bases of the related insurance coverage. Cash inflows from investment activities. Policy election needs to be made.

39 Key Words Cash Flows (Continued) Cash Flow Issue Settlement of Zero-Coupon Debt Instruments Beneficial Interests in Securitization Transactions Separately Identifiable Cash Flows and Application of the Predominance Principle Summary of Amendments Cash payments for the settlement of zero coupon debt instruments, including other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal. Disclosed as a noncash activity. Reasonable judgement should be used to separate cash flows based on nature of the source.

40 On the Horizon Relevant Items Accounting for Financial Instruments: Hedging Accounting for Goodwill Impairment Clarifying the Definition of a Business Clarifying When a NFP that is a General Partner Should Consolidate a For-Profit Limited Partnership Consolidation: Interests Held Through Related Parties That are Under Common Control Liabilities & Equity Targeted Improvements Nonemployee Share-Based Payment Accounting Improvements Revenue Recognition of Grants and Contracts by NFP s EBP Master Trust Reporting Financial Statements of NFP Entities (Phase 2) Restricted Cash Simplifying the Balance Sheet Classification of Debt The End!