FASB Update Private Company Focus

Transcription

1 FASB Update Private Company Focus RKL Accounting & Auditing Conference Michael Cheng, PCC Coordinator The views expressed in this presentation are those of the presenters. Official positions of the FASB and PCC are reached only after extensive due process & deliberations

2 What We Will Discuss Today Private Company Council Update Current PCC/FASB Focus - VIEs Select FASB Projects 2

3 Private Company Council (PCC) Structure FAF oversight Private company practitioners (4), users (3), preparers (3) Identifies, deliberates & votes on proposed GAAP alternatives for private companies Advisory body to FASB 3

4 FASB and PCC Consider Private Company Decision-Making Framework Differential Factors Number of primary users and their access to management Investment Strategies Ownership and Capital Structure Accounting Resources Learning about new financial reporting Modules Recognition & Measurement Display (Presentation) Disclosures Effective Date Transition Method Principle: Consider cost and complexity but focus on user relevance 4

5 New PCC Chair (as of January 1, 2016) Candace Wright Director Postlethwaite & Netterville (Louisiana-based accounting and business advisory firm) More than 30 years of experience in the accounting profession Member, FASB Small Business Advisory Committee; Practice Monitoring of the Future Task Force of the American Institute of CPAs (AICPA); and the Society of Louisiana CPAs Financial Institutions Committee Previously, chair of the AICPA Private Company Practice Section s Technical Issues Committee, and a member of the Governmental Audit Quality Center s Executive Committee. 5

6 New PCC Members (as of January 1, 2016) Timothy J. Curt (Preparer) Managing director and partner of Warburg Pincus LLC David S. Lomax (User) Assistant vice president and underwriting officer of Liberty Mutual Insurance Company Harold L. Monk, Jr. (Practitioner) Partner of Carr, Riggs & Ingram LLC 6

7 Finalized PCC ASUs (Endorsed by FASB) 7

8 Goodwill: Solution (ASU ) Current U.S. GAAP Final Alternative Do not amortize goodwill Test for impairment at least annually or more frequently Reporting unit level Two-step test Optional qualitative assessment Amortize over 10 years or less Test for impairment upon occurrence of triggering event Entity level or reporting unit level One-step test Optional qualitative assessment Transition: Prospective existing goodwill amortized over next 10 years (or less) 8

9 Identifiable Intangible Assets: Solution (ASU ) Current U.S. GAAP Recognize intangibles separately from goodwill in a business combination if contractual-legal or separable Very broadly interpreted today Final Alternative Do not recognize non-competition agreements Do not recognize customer related intangibles unless they are capable of being sold or licensed independently Transition - prospective application 9

10 Interest Rate Swaps: Solution (ASU ) Impact of interest rate swap No hedge accounting Current GAAP Hedge accounting Alternative Simplified hedge accounting (Final) Income statement Volatility in interest expense as result of changes in FV Interest expense approximates fixed rate debt Interest expense approximates fixed rate debt Balance sheet Asset or liability at fair value Asset or liability at fair value Asset or liability at settlement value (or FV) Other comprehensive income No impact Includes changes in fair value of effective portion of hedge Includes changes in settlement value (or FV) of the swap 10

11 Common Control Leasing Arrangements (ASU ) Typical private company common control leasing arrangement Owner 100% Interest 100% Interest Manufacturing Company Debt Pays Rent Leases Land & Building Leasing Company Mortgage Bank Bank 11

12 Common Control Leasing: Solution (ASU ) Lessees may elect alternative not to apply VIE guidance when certain conditions are met. Not require VIE disclosures instead require specific information on Lessor Important Note Not meeting the criteria above does not automatically result in consolidation. Transition - retrospective application 12

13 Common Control Leasing: Solution (ASU ) Criteria to qualify: 1) Lessor & private company lessee (reporting entity) are under common control 2) Private company lessee has leasing arrangement with lessor 3) Substantially all activity between two companies is related to leasing activity between lessor to the private company lessee 4) If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor. 13

14 Effective Date and Transition Guidance (ASU ) Removed the effective dates from ASUs , , , and No preferability assessment the first time an alternative is elected Transition guidance extended indefinitely 14

15 Current PCC Issue VIE Guidance PCC Issue No , Applying Variable Interest Entity Guidance to Entities under Common Control 15

16 Consolidations - Existing GAAP VIE Guidance Recap Does VIE Guidance Apply? Legal Entity? Scope Exception? Variable Interest? Variable Interest Entity? Who has Controlling Financial Interest? Primary Beneficiary Related Party Tiebreaker? 16

17 Variable Interest Entities Under Common Control: Problem? Concerns Widespread diversity in private company practice when VIE guidance is applied to entities under common control. VIE guidance is difficult to understand and apply to private companies in general. Lack of implementation guidance and illustrations relevant to typical private company scenarios. - Most examples within the guidance pertain to VIEs involved in securitization, asset-backed securities, or structured investment vehicles. 17

18 Engine Co. Example OWNER 100% Equity 100% Equity Car Co. Purchases 90% of Engines Produced Engine Co. $15k Loan Engine Co. has insufficient equity (Equity = 5% of funding) Industry standard for sufficient equity is 20% Loan to Engine Co. represents 15% of funding Engine Co financed remaining 80% with Bank ABC Car Co. makes significant decisions Arms-length pricing 18

19 Current Status PCC Issue No PCC agreed that common control consolidation issues are very pervasive among private companies At April 12, 2016 PCC Meeting, PCC voted to recommend FASB add this project to its own agenda Members felt the project needed to be more comprehensively addressed than just at the private company level FASB will consider this recommendation at a future Board meeting 19

20 Select FASB Projects 20

21 FASB Simplification Initiatives Objective: - Reduce cost and complexity - Maintaining or improving the usefulness of the information 21

22 Concept of Extraordinary Items Objective (ASU ) Current GAAP Solution Items that are unusual in nature and are infrequent in occurrence to be presented as extraordinary items Preparer, auditor, and regulator costs Eliminate the concept of extraordinary items Reduce cost and complexity of income statement presentation Maintain or improve the usefulness of the information required to be reported by an entity by retaining presentation and disclosure guidance for items that are unusual in nature or occur infrequently Effective Date and Transition: All entities: fiscal years beginning after December 15, 2015, and interim periods within those fiscal years Early adoption permitted; Prospective or Retrospective application 22

23 Simplifying the Presentation of Debt Issuance Cost (ASU ) Current GAAP Solution Capitalized as a deferred financing cost (asset) Amortized using the effective interest method over the period of the loan Presented as a direct deduction to the liability Similar treatment to discounts and premiums Effective Date and Transition: Public business entities: fiscal years beginning after December 15, 2015, and interim periods within those fiscal years All other entities: fiscal years beginning after December 15, 2015, and interim periods after December 15, 2016 Early adoption permitted; Retrospective application 23

24 Simplifying the Measurement of Inventory (ASU ) Current GAAP Solution Lower of cost or market Measures for market value include: Replacement cost Net realizable value Net realizable value less a normal profit margin Inventory will be measured at the lower of cost or net realizable value Reduce cost and complexity of the subsequent measurement Maintain or improve the usefulness of the information required to be reported by an entity Effective Date and Transition: Public business entities: fiscal years beginning after December 15, 2016, and interim periods within those fiscal years All other entities: fiscal years beginning after December 15, 2016, and interim periods after December 15, 2017 Early adoption permitted; Prospective application 24

25 Income Taxes: Classify Deferred Taxes (ASU ) Current GAAP Solution Deferred taxes classified as current or noncurrent based on classification of related asset or liability (if there is one) Classify all deferred tax assets and liabilities as noncurrent Effective Date and Transition: Public business entities: annual periods beginning after December 15, 2016, and interim periods within those annual years All other entities: annual periods beginning after December 15, 2017, and interim periods after December 15, 2018 Early adoption permitted; Prospective or Retrospective application 25

26 Simplifying the Equity Method of Accounting Current GAAP Possible Solutions Basis difference The difference between the cost of an investment and the amount of underlying equity in net assets Currently amortized Increase in ownership Entities previously accounted for on otherthan-equity-method of accounting which now qualify to for equity method Board Decisions: Remove consideration of basis difference (removed from FASB agenda) Remove retroactive application requirement (ASU ) Currently must use retroactive application of the equity method 26

27 Simplifying the Balance Sheet Classification of Debt (In Progress) Current GAAP Solution The term current liabilities is defined in Topic 210 (Balance Sheet) but the term noncurrent is not explicitly defined Topic 470 (Debt) includes narrowscope guidance on various debt transactions Balance sheet classification is based on facts and circumstances as of the financial statement issuance date for some debt transactions and as of the balance sheet date for others Current GAAP allows the application of judgement about intent and probability Debt would be classified as noncurrent if one or both of the following criteria are met as of the balance sheet date: ü The liability is contractually due to be settled more than 12 months (or operating cycle, if longer) after the balance sheet date ü The entity has a contractual right to defer settlement of the liability for at least 12 months (or operating cycle, if longer) after the balance sheet date Project Stage: Exposure Draft expected Q

28 Select FASB Projects 28

29 Accounting for Goodwill Impairment (All entities Final ASU expected) Remove Step 2 of goodwill impairment test Removed the requirements for Reporting Unit (RU) with negative carrying value Disclose them Prospective Transition: - Effective date of years beginning after December 15, 2019, for public business entities that are SEC filers, - December 15, 2020, for other entities. - Early adoption would be allowed for all entities as of January 1, Private companies that elected (and not ) can apply this approach w/out assessment of preferability 29

30 Going Concern (ASU )

31 Going Concern: Background The presumption that an entity will continue as a going concern (GC) is critical to financial reporting. - F/S measurements & classifications are based on this presumption Auditors have responsible for assessing GC uncertainties. - U.S. GAAP had no guidance on management s responsibility and disclosures of GC uncertainties in F/S footnotes 31

32 Going Concern: ASU Summary of Main Provisions Single threshold model similar in principle to current auditing standards (AU 341). Disclosures required when there is substantial doubt, or when substantial doubt has been alleviated primarily by management plans. Substantial doubt exists when it is probable that entity will not meet obligations for a period of one year from the financial statement issuance date. Applies to both public and nonpublic entities. Effective prospectively for annual periods ending after December 15, 2015, and interim periods thereafter. Early adoption permitted.

33 Financial Instruments: Recognition & Measurement (ASU ) 33

34 Introduction FASB-IASB MoU on Convergence Issued in 2006 Objective Reduce complexity in accounting for financial instruments Current Response Retain current GAAP with targeted improvements to classification and measurement of equity investments, fair value option for liabilities, and disclosures for financial instruments 34

35 Financial Assets Amendments to Current GAAP Equity investments measured at each reporting period at fair value through net income, except Equity investments without readily determinable fair value; only marked to observable price changes Equity method investments Equity investments that result in consolidation of the investee Equity investment in federal home loan bank and federal reserve bank stock Ownership interest in an exchange 35

36 Financial Liabilities Amendments to Current GAAP (continued) Fair value change resulting from changes in own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income (OCI) Current GAAP retained for accounting for financial liabilities 36

37 Financial Instruments Disclosure Changes Private entities not required to disclose fair value of financial instruments not recognized at fair value on balance sheet Reduced disclosures for public entities of methods and assumptions used to estimate fair value for financial instruments not recognized at fair value on balance sheet 37

38 Financial Instruments Disclosure Changes (continued) Fair value measurements for financial instruments to be based on exit price notion (current GAAP includes practical expedient to measure fair value of certain financial instruments using entry price notion) Financial assets to be presented grouped by measurement category and form of instrument Financial liabilities to be presented grouped by measurement category 38

39 Effective Date for Final Standard All Public Business Entities Annual & Interim Reporting Periods beginning after Dec. 15, 2017 Non-Public Business Entities* Annual Periods beginning after Dec.15, 2018 Non-Public Business Entities* Annual and Interim Periods beginning after Dec. 15, 2019 Early Application: Entire standard is available for early application after Dec. 15, 2017 Certain provisions are available for early application upon issuance: 1. Presentation of FV changes due to entity s own credit changes in financial liabilities in OCI 2. Non-Public Business Entities no longer required to disclose fair value of financial instruments not recognized at fair value on B/S *Includes not-for-profit entities and employee benefit plans 39

40 Questions? 40