Maryland Association of CPAs Nonprofit Organizations Conference

Transcription

1 Financial Accounting Standards Board Maryland Association of CPAs Nonprofit Organizations Conference Jeffrey D. Mechanick Assistant Director April 26, 2013 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process & deliberations.

2 FASB Update Projects of Central Importance to NFPs - Leases - NFP Reporting: Financial Statement Presentation - NFP Reporting: Other Financial Communications (MD&A) (research project) - Disclosure Framework Other Projects of Note for NFPs - Revenue Recognition - Accounting for Financial Instruments - Going Concern - Definition of a Nonpublic Entity - Government Assistance (pre-agenda research) 2

3 FASB Update Some Recently Issued Standards - Cash Flow Presentation of Sale of Donated Financial Assets (ASU ) - Personnel Services from Affiliates (ASU ) - Joint and Several Liability Arrangements (ASU ) Other Activities Potentially Affecting NFPs - International - Private Company Council Q&A Appendices 3

4 Financial Accounting Standards Board Leases 4

5 Why a Leases Project? Existing Lease Accounting Does Not Meet Users Needs Accounting depends on classification Contractual rights & obligations (assets & liabilities) are off balance sheet Many users adjust financial statements 5

6 Why a Leases Project? Concerns about off-balance sheet accounting In 2005, SEC identified lease accounting as an area that needs to be addressed Structuring Opportunities Lease classification often based on bright lines Significant difference in accounting on either side of operating/finance lease line 6

7 Leases Increase transparency & comparability among organizations that lease assets, by recognizing assets & liabilities that arise from lease transactions on a lessee s balance sheet. Boards have remained converged on major decisions. Revised Exposure Draft expected in second quarter of

8 Proposed Right of Use Model A lease contract is one in which the right to control the use of an asset (for a period of time) is transferred to the lessee. Lessor Right of Use Lessee Largely converged on decisions 8

9 The Rationale (Lessee) What the lessee obtains Right to use asset Obligation to pay for that right Importance of leased asset Not all leases are the same How best to reflect those contracts in lessee s income statement Amortization on ROU asset Straight-line lease expense 9

10 Classification (Lessee & Lessor) Lessee consumes more than insignificant portion of leased asset Leases of assets other than property unless: Lease term is insignificant relative to economic life of asset or PV of lease payments is insignificant relative to FV of asset Lessee does not consume more than insignificant portion of leased asset Leases of property (land and/or a building) unless: Lease term is major part of remaining economic life of asset or PV of lease payments is substantially all of FV of asset 10

11 Classification of leases examples Vessel (20yrs) 1 More than insignificant Car (3yrs) 4 Truck (4yrs) 3 Airplane (8yrs) 2 Vessel (5yrs) 1 Comm. Property (30yrs) 1 Comm. Property (10yrs) 1 Insignificant Assumed economic life of: 1 40 years 2 25 years 3 10 years 4 6 years 11

12 Redeliberations Lessee Model Balance sheet Income statement Dr. ROU asset 2 Cr. Lease liability 1 Lessee consumes more than insignificant portion of leased asset Amortization expense Interest expense Lessee does not consume more than insignificant portion of leased asset Lease expense 1 Measured at present value of lease payments 2 Initially measured at same amount as liability, plus prepayments and initial direct costs 12

13 Redeliberations Lessor Model Asset subject to lease Lessee acquires more than insignificant portion of leased asset Lessee does not acquire more than insignificant portion of leased asset Receivable & residual approach Approach similar to operating lease accounting 1 Measured at present value of lease payments 2 Initially measured at same amount as liability, plus prepayments and initial direct costs 13

14 Leases Where We Are Now TBD August 2010 Exposure Draft Leases 1H 2013 Second Exposure Draft Leases Consultation TBD Final Standard Leases Comment period: 4 months 786 comment letters received Contained proposals for both lessees and lessors Re-expose proposals Comment period 120 days Focus on revisions to 2010 proposals Will contain proposals for both lessees & lessors Outreach Working group meetings Redeliberations Effective date: TBD Will contain guidance for both lessees & lessors 14

15 Preparing for an (Eventual) Leases Standard Inventory all leases Donated space (no or nominal rent) excluded Assess capitalization threshold Monitor the continued developments in the project at fasb.org Depending on final decisions: Understand any potential impact on debt financial covenants (debt/equity ratios) and any other key financial metrics by which the organization is measured. Understand any potential impact on cost recovery agreements (primarily, equipment leases). The FASB is very aware of these issues for NFPs, as well as other Government contractors, etc. 15

16 Financial Accounting Standards Board NFP: Financial Statement Presentation (FSP) 16

17 Why a NFP: FSP Project? Recommended by NAC, part of improving financial reporting Revisit net asset classifications/ terminology Improve liquidity portrayal More clearly communicate NFP performance Enhance relevance & clarity of NFPspecific disclosures Provide framework for commentary & analysis on operations / financial health 17

18 FASB Initiatives Standards: NFP Statement Presentation Improve net asset classifications Reexamine NFP statement standards Research: NFP Other Communications The use of such commentary and analysis (MD&A) in conjunction with NFP GAAP statements to tell a financial story 18

19 NFP: Financial Statement Presentation What work has been done to date? Formed 21-member resource group Presented plan, scope & approach to resource group, NAC, Board (which approved plan) First topic: operating measures - Completing initial deliberations Second topic: net asset classes - Beginning discussions with Board Recent liaison meeting with NACUBO - Blank slate project: many similar ideas 19

20 Modules Financial Performance (especially operating measure), Net Asset Classification, Liquidity Cash Flow Statement Other potential statements or required schedules Implementation questions Improvements to NFP note disclosures Consequential amendments, transition & effective date 20

21 Some Challenges What transactions & events define performance? Can the Board develop a notion of operations that is seemingly sought by users & preparers of NFP financial statements but for which consensus has been elusive? Current operations Available for current operations Made available for current operations Performance indicator business-oriented HC entities Others 21

22 Operating/Nonoperating Distinction What did we hear at the most recent NAC meeting? NAC members generally expressed support for: - Using relation to mission as a factor to distinguish an intermediate operating measure but not as the sole basis - Excluding current period gifts if restricted for purposes other than current period activities - Including prior period restricted support when available/ used in current period - Excluding capital gifts (e.g., gifts for endowment) - Excluding items business entities report as part of other comprehensive income (rather than net income) 22

23 Operating/Nonoperating Distinction What did we hear at the most recent NAC meeting? Some NAC members expressed support for: - Reflecting in operations amounts made available/ unavailable by board policies (e.g., bequests, quasiendowment), but in a transparent way 23

24 Some Challenges Net asset classification: donor-imposed restrictions Do fiduciary duties and restrictions on use of donated assets require special distinctions? - If yes, how and where notes or face of financial statements? Should required net asset classes be modified to help meet user needs for information about: - Liquidity and cash flows? - Financial performance? 24

25 Some Challenges How might we improve the statement of cash flows? Can indirect method of presenting cash flows from operations be improved? - Perhaps aligned with a required intermediate measure of operations Should all NFPs be required to use the direct method for presenting cash flows from operations? 25

26 Some Challenges What other statements or schedules should be required? Should NFPs other than voluntary health and welfare organizations be required to present a statement of functional expenses (matrix of expenses by nature & function)? - AICPA NFP Expert Panel recommended this for all NFPs for which contributions are a significant pct. of revenue - NAC members have expressed mixed views about the utility of this statement 26

27 Next Steps Board deliberations (2013) Ongoing outreach with project resource group, NAC and others ASU proposal expose for comments Comment period: more outreach, field visits, testing, roundtables, etc. Redeliberations by Board ASU issuance 27

28 Financial Accounting Standards Board Research: Other Financial Communications (MD&A) 28

29 NFP: Other Financial Communications (MD&A) What work has been done to date? Formed 21-member resource group Developed research plan Conducted outreach & initial research Shared findings & observations with resource group, NAC and others, and FASB Board 29

30 Current Practice Observations Existence varies; where available, often shared via website Respondents cite: variable quality & consistency, lack of liquidity & forward-looking information Findings coincide with NAC recommendations; framework needed for NFP directors & managers to provide commentary & analysis on financial health & operations 30

31 Recent and Next Steps 4 th Quarter 2012 Discussed findings, observations & NAC feedback with project resource group 1 st half of 2013 Additional research Discuss findings, observations, and staff s recommendations with Board Seek Board decision for next step/objective (possible issuance of an ITC to garner broader public input) 31

32 Financial Accounting Standards Board Disclosure Framework Project 32

33 Disclosure Framework Project Objective Improve effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements. Reducing volume of notes not primary focus (audit, legal, regulatory considerations) but sharper focus on important information will result in reduced volume in most cases. 33

34 DF Invitation to Comment Major components - A decision process for the Board - A decision process for reporting entities - Organization & formatting of notes to financial statements Other items Interim disclosures 34

35 DF Decision Process Board Purpose: Help the Board identify disclosures with broad relevance Help the Board in setting variable (flexible) disclosure requirements Entity Provide judgment guidance to help entities Identify disclosures that are and are not relevant in their financial statements Facilitate improvements in organization & formatting of notes 35

36 Disclosures Previous NAC Discussions Key disclosure consideration: information needs of NFP statement users are often different from equity investors, especially public company equity investors NFP stakeholders (donors, creditors, regulators, etc.) are interested in the entity s fiscal sustainability and its ability to repay debts, not the value of the entity for the purpose of trading shares They also have other concerns that go beyond assessing the prospect for future cash flows (next slide) 36

37 Recent NAC Discussions on Disclosure Framework Project NAC supports objective, focus on information of most importance to users. Concerns Information for assessing prospects for net cash flows to entity appropriate; may not be sufficient for other donor needs - Stewardship/accountability - How resources have/are being used 37

38 Next Steps Address concerns of comment letter respondents Perform additional outreach 38

39 Financial Accounting Standards Board Revenue Recognition 39

40 Revenue Recognition Objective: single, principle-based revenue standard Improve accounting for contracts with customers - More robust framework for recognizing revenue - Increased comparability across industries & capital markets - Better disclosures Converged with IASB on major decisions up to now Final standard expected in mid

41 Revenue Recognition Project status June 2010 Exposure draft November 2011 Revised exposure draft March 2012 Comment letter deadline H Final standard (ASU / IFRS) Revenue from Contracts with Customers 974 comment letters Re-exposure of Revenue from Contracts with Customers 358 comment letters April 2012 Roundtables May 2012 onwards Redeliberations In June/ July Effective: c/y 2017 (public entities) c/y 2018 (nonpublic entities) 41

42 Revenue Recognition Core Principle Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 42

43 Revenue Recognition Proposed Model Identify contract(s) with the customer Identify separate performance obligations Determine transaction price Allocate transaction price Recognize revenue when performance obligation is satisfied 43

44 Revenue Recognition: Impact on NFPs Scope is contracts with customers. Both contributions and collaborative arrangements are outside scope. Many NFP transactions may be scoped out as being contributions or collaborative arrangements. Timing of revenue recognition of those transactions that do fall within scope may not change significantly for many NFPs, though underlying thought pattern (new model) would be different. - Industry most to focus on: healthcare Most significant change could be the additional disclosures, though nonpublic entities are exempt from many of these 44

45 Financial Accounting Standards Board Financial Instruments: Classification & Measurement 45

46 Objective Make financial statements more useful to decision makers Make GAAP for liability classification & measurement easier to understand, use & audit Increase comparability with IFRS 46

47 FI: C&M: FASB Proposal 47

48 How Financial Assets are Categorized Step 1 Are cash flows solely Principal and Interest? Yes Form of instrument not considered (e.g. loan vs. securities) No Step 2 Hold to collect cash flows ONLY? No Hold to collect cash flows AND sell assets Yes Yes No Hold to collect Amortized Cost Trade receivables Loans held for investment Some debt securities Senior securitization tranches Hold to collect & sell FV-OCI* Debt securities Potentially some loans Other business models *Distinction between these two categories is generally not important for non-healthcare NFPs FV-NI* Equity securities Certain debt securities Loans held for sale Convertible debt investments Residual securitization interest Certain hybrid assets Derivatives 48

49 Practicability Exception Nonmarketable Equity Securities Cost less impairment plus upward & downward adjustments in FV when price change observable 49

50 Amortized Cost For financial assets & financial liabilities measured at amortized cost, public entities would be required to disclose their fair values parenthetically on the face of the balance sheet (except for receivables and payables due in less than a year and demand deposit liabilities). Nonpublic entities would not be required to disclose such fair value information either parenthetically or in the notes to the financial statements. 50

51 AFI C&M: Impact on NFPs Generally similar result to current GAAP (see table in Appendix) but different underlying thought process. Primary changes: - Nonmarketable equity interests: FV with practicability exception instead of cost alternative - No instrument-by-instrument FV option, though the FASB has proposed to retain the portfolio-wide alternative for equity method investments (for non-healthcare NFPs) - No FAS 107 disclosures for nonpublic NFPs, and parenthetical presentation of such information on the face of the balance sheet for public NFPs 51

52 FI: Classification & Measurement FASB Exposure Draft issued Feb. 14, 2013; Comment period concludes May 15,

53 Timeline May 2010 Exposure Document Sept 2010 Comment period ends 1Q 2013 ED issued; comment period & outreach June Sept 2010 Outreach Fall 2010 Fall 2012 Board redeliberations & outreach 2H 2013 Board redeliberations 53

54 Financial Accounting Standards Board Financial Instruments: Impairment 54

55 Project Objectives Timely Recognition of Credit Losses - Address concerns re: delayed recognition of losses under incurred loss approach - PV of cash flows an entity expects to collect consistent with measurement objective for assets held for collection (C&M proposals) 55

56 Basics of Proposed Current Expected Credit Losses (CECL) Model Every reporting period, expected credit losses would be re-estimated; favorable and unfavorable changes would be reported in earnings Current estimate of expected credit losses based on: - current risk ratings of the assets - historical loss experience for assets with similar risk ratings and remaining lives adjusted for changes in current circumstances - reasonable & supportable expectations about the future 56

57 Basics of FASB Model (continued) FASB used term full rather than lifetime to avoid suggesting that projections through the remaining life are necessary. Rather, we expect estimates will start with historical information, and be adjusted using available information that indicates that current expectations differ from past experience 57

58 Implications of CECL Model for NFPs Recent Discussion of Exposure Draft with NAC NAC members expressed observations and concerns - Proposed Current Expected Credit Loss (CECL) model could result in accounting outcome similar to current practices for loans receivable (explicitly included) and pledges receivable (not explicitly scoped out) - Credit quality disclosures under CECL model and current U.S. GAAP are not be sufficiently useful for student loans and program-related loans. 58

59 CECL Model... Next Steps* Issue Exposure Draft Dec 2012 Get comments on IASB s proposal and highlight remaining differences Comment period ends May 31, 2013 Joint FASB-IASB Redeliberations 3Q13-4Q13 New Standard Issued 2H13 New Standard Effective? *All dates are estimates 59

60 Going Concern 60

61 Going Concern Background Today, auditors are primarily responsible for GC assessments U.S. GAAP has no guidance on management s disclosures 61

62 Going Concern Background Project objective: standardize disclosures by giving management guidance on when & how to disclose GC uncertainties FASB issued first ED in 2008 Next ED expected May

63 Management Assessment of G.C. Proposed model: Management at each reporting period would assess an entity s potential inability to meet its obligations Look forward period: 12 months from the B/S date + probable GC events between 12 and 24 months 63

64 Management Assessment of G.C. Proposed model (continued) If likelihood is more-likely-than-not absent actions outside the normal course of business, start disclosures If likelihood reaches probable, declare substantial doubt (SEC filers only) 64

65 Financial Accounting Standards Board Definition of a Nonpublic Entity 65

66 Nonpublic Entity Definition Previous NAC discussions of where NFPs fall on the public/private continuum NAC members agree that NFPs share some attributes of private companies (more limited resources), but in many ways, they are generally far more public Generally, broader user base with less access to management Public accountability created via donations and tax exemptions Generally, governing boards are considered part of management, but nonprofit boards have a special role in ensuring public accountability and should be considered as users of financial statements 66

67 Nonpublic Entity Definition Recent NAC Discussions: Are distinctions among NFPs necessary? If not, might one or more be helpful? Bright-line between public & private NFPs based on public accountability notion unlikely to be helpful Bright-line used in GAAP based solely on issuance of publicly traded debt questionable FASB should perhaps consider other factors when determining whether a requirement should apply to all or only certain NFP organizations 67

68 Nonpublic Entity Definition Are distinctions among NFPs necessary? If not, might one or more be helpful? NFP statement users prefer consistency in accounting requirements that promote key metrics & comparability FASB should consider whether practical expedients permitted for private companies are appropriate Users may be more flexible for disclosures & deferred effective dates 68

69 Financial Accounting Standards Board Government Assistance 69

70 Government Assistance Research effort for potential project. Scope would include all entities, not just NFPs. (Unlike IFRS, GAAP lacks guidance for business entities.) Key Issues Recently Discussed with the NAC: - Pervasiveness of government assistance in the NFP sector and diversity of practices - Possible scope of project, with respect to: Levels of government (federal, state and local, foreign) Forms of assistance (income taxes, property taxes, cost-sharing arrangements, grants, many others) 70

71 Financial Accounting Standards Board Some Recently Issued Standards 71

72 Classification of Sales Proceeds of Donated Financial Assets (EITF Issue 12 A) Final ASU (ASU ) issued in October 2012 Provides that an NFP should classify cash receipts from the sale of financial assets that upon receipt are directed without any NFP-imposed limitations for sale, and which were converted nearly immediately into cash, as operating or financing activities in the statement of cash flows, rather than as investing activities - Operating unless restricted to a long-term purpose, e.g., endowment or plant, then classified as financing activities - Consistent with cash contributions Effective for f/y beginning after , with early adoption permitted 72

73 Services Received from Personnel of an Affiliate (EITF Issue 12 B) Final ASU (ASU ) issued in April 2013 Personnel services received from an affiliate (parent/sub or common control) for which the affiliate doesn t charge the recipient NFP should be recognized in the recipient NFP s financial statements, measured at the actual costs incurred by the affiliate - Contributed services criteria no longer applicable - FV practicability exception in certain circumstances - Entities under Topic 954 (healthcare) would report as equity transfer Effective for f/y beginning after , with early adoption permitted 73

74 Obligations Resulting from Joint and Several Liability Arrangements (EITF Issue 12 D) Final ASU (ASU ) issued in February 2013 Requires an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of: (a) amount the entity agreed to pay on the basis of its arrangement among its co-obligors, and (b) any additional amount the entity expects to pay on behalf of its co-obligors. Also requires disclosures about nature and amount of obligation and other information about those obligation Effective date: - Public entities: f/y beginning after Nonpublic entities: f/y ending after Early adoption permitted 74

75 Financial Accounting Standards Board International Developments 75

76 SEC Decision July 13, 2012 SEC staff issues final paper on possible incorporation of IFRS into U.S. GAAP No recommendation on how U.S. should proceed Describes positive aspects of IFRS Identifies continuing concerns Costs of transition Inconsistent application Permanent funding mechanism 76

77 What It Means to the U.S. FASB s mission is to ensure capital providers benefit from the highest quality standards that can be consistently applied, interpreted and enforced to provide best financial reporting FASB will focus on continuing to improve U.S. GAAP FASB will continue to work with national, regional and international standard setters to develop more comparable global accounting standards Member of IASB s new Accounting Standards Advisory Forum 77

78 Gaps in IFRS * some of which the IASB is or may be working on filling Broker/Dealers Extractive Industries* Insurance Companies* Rate- Regulated Industries* Employee Benefit Plans NFPs 78

79 SEC Decision and NFPs Even if SEC decides to adopt IFRS, FASB would likely need to retain specialized industry guidance This would include NFP guidance NFPs still affected by convergence for non-specialized NFP accounting 79

80 Financial Accounting Standards Board Private Company Developments 80

81 Private Company Council Established by FAF on May 30, 2012; overseen by FAF Identifies, deliberates & votes on proposed modifications to existing U.S. GAAP for private companies - Based on agreed on criteria w/fasb - Subject to FASB process Primary advisory body to FASB on active agenda issues 81

82 PCC Agenda What issues will the PCC be addressing? (Those with an * are also being monitored by the NAC and the FASB staff for potential applicability to NFPs) February PCC adds three project to its agenda - Consolidating VIEs - Accounting for plain vanilla interest rate swaps* - Accounting for various intangibles in a business combination (likely including goodwill)* Proposed private company decision-making framework (joint with the FASB) Research: development stage entities and stock-based compensation 82

83 PC Decision Making Framework Not intended to be entirely new conceptual framework Intended to help facilitate decisions & drive consistency Fundamental approach retains & improves information relevant to typical users Seeks to reduce cost & complexity where appropriate, but not in a way that adversely affects reporting of relevant information 83

84 Private Companies (scope considered in FASB Nonpublic Entity Definition project) U.S. GAAP applies to: Public companies Private companies Not-for-profit organizations Decision-making Framework potential differences based on: Types and number of users Access to management Investment strategies Ownership structures Accounting resources Education (learning cycle) U.S. GAAP for Private Companies potential differences in: Recognition and measurement Disclosure Display (Presentation) Transition Effective date Note: Not all differences may be applicable to all private companies 84

85 PCC vs. AICPA SMEs Project AICPA Framework: Self-contained, non-gaap standards (blend of accrual income tax and other traditional accounting methods) PCC/FASB: A better cost-benefit balance within GAAP for private companies thru appropriate exceptions and modifications 85

86 Staying Current See FASB Technical Plan for latest on current projects 86

87 Staying Current FASB Online Key resources at - FASB webcast series - Projects - Nonpublic entities resources - Codification Twitter: FAFNorwalk sign up for Action Alert 87

88 Financial Accounting Standards Board Questions / Comments? 88

89 Financial Accounting Standards Board Appendices: Some Changes to GAAP, Details of AFI Classification & Measurement Proposal 89

90 Some 2011 Changes to US GAAP 2011 Fair Value Measurement (Topic 820) Intangibles: Goodwill & Other (Topic 350) Health Care Entities (Topic 954) Compensation: Retirement Benefits; Multiemployer Plans (Subtopic ) Amendments to Achieve Common Fair Value Measurement & Disclosure Requirements in U.S. GAAP & IFRSs Testing Goodwill for Impairment Presentation & Disclosure of Patient Service Revenue, Provision for Bad Debts, & the Allowance for Doubtful Accounts for Certain Health Care Entities Disclosures about an Employer s Participation in a Multiemployer Plan 90

91 Some 2012 Changes to US GAAP 2012 Health Care Entities (Topic 954) Intangibles; Goodwill & Other (Topic 350) Technical Corrections & Improvements Statement of Cash Flows (Topic 230) Continuing Care Retirement Communities Refundable Advance Fees Testing Indefinite-Lived Intangible Assets for Impairment Includes corrections to Topics: 954 Health Care Entities; 958 NFP NFPs: Classification of Sales Proceeds of Donated Financial Assets (see presentation slide) 91

92 Some 2013 Changes to US GAAP 2013 Liabilities (Topic 405) Not-for-Profit Entities (Topic 958) Presentation of Financial Statements (Topic 205) Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (see presentation slide) NFPs: Services Received from Personnel of an Affiliate (see presentation slide) Liquidation Basis of Accounting See FASB website for complete list 92

93 AFI Classification & Measurement Current U.S. GAAP Proposed Approach What's Changing Investments in Debt Securities Corporate and government Fair value bonds (U.S. government bonds, municipal bonds, etc.) Fair value or amortized cost depending on the bond's cash flow characteristics and the business model in which it is managed Likely no change. Most bonds would continue to be measured at fair value because typically an NFP's objective is not simply to collect principal and interest Investments in Equity Interests (entity cannot exert significant influence) Marketable equity interests Fair value Fair value No change Non-marketable equity interests, including partnership and similar interests Beneficial interests in an outside trust Amortized cost(or other measure) or Fair Value (if part of an investment portfolio measured entirely at fair value per ASC ) Fair value, unless entity elects the practicability exception (in which case, measure at cost less impairment plus or minus changes in observable price) No change for equity interests carried at fair value. An entity can elect the practicability exception (which is different from amortized cost) Fair value Generally fair value Likely no change 93

94 AFI Classification & Measurement Current U.S. GAAP Proposed Approach What's Changing Receivables/Payables Pledges receivable/payable Loans and other receivables Own Debt and other payables Split-interest payables Initially measure at fair value. Subsequently adjust for changes in value per ASC (receivables)/ ASC (payables) Generally amortized cost, unless held for sale (in which case, measure at lower of cost or FV) Initially measure at fair value. Subsequently adjust for changes in value per ASC / ASC Fair value or amortized cost depending on the loan's cash flow characteristics and the business model in which it is managed Amortized cost Amortized cost No change Initially measure at fair value. Subsequently adjust for changes in value per ASC Initially measure at fair value. Subsequently adjust for changes in value per ASC No change. Pledges are excluded from the scope of the proposed approach Likely no change. If loan is held for sale, it would be carried at fair value (rather than at lower of cost or fv) No change 94

95 AFI Classification & Measurement Current U.S. GAAP Proposed Approach What's Changing Investments in Equity Interests (entity exerts significant influence or control) Equity interests which qualify for equity method under ASC 323 Equity interests which represent a controlling financial interest under ASC 810 Equity method or Fair Value (if part of an investment portfolio measured entirely at fair value per ASC ) Consolidate or Fair value if entity is a general partner in a limited partnership and investment is part of a portfolio measured entirely at fair value in accordance with ASC Equity method or Fair Value (if part of an investment portfolio measured entirely at fair value per ASC ) Consolidate (Not Subject to the Proposed Approach) No change. However, if equity method investment is held for sale (that is, NPE has an exit strategy), proposed approach requires investment to be carried at fair value No change in most cases. However, current exception to carry at fair value - and not consolidate - general partnership interests in a portfolio (which is rare) is eliminated. 95

96 AFI Classification & Measurement Current U.S. GAAP Proposed Approach What's Changing Investments in Non-Financial Interests Real estate, oil and gas interests, etc. Cost(adjusted per applicable GAAP) or Fair Value (if part of an investment portfolio measured entirely at fair value per ASC ) Cost(adjusted per applicable GAAP) or Fair Value (if part of an investment portfolio measured entirely at fair value per ASC ) (Not Subject to the Proposed Approach) No change. Existing GAAP retained. 96

97 AFI Classification & Measurement Current U.S. GAAP Proposed Approach What's Changing Other Areas Fair Value Option (FVO) ASC 825 provides an unconditional FVO for certain financial instruments There is no unconditional FVO. A conditional FVO is provided for certain hybrid financial liabilities, and when an entity manages the net exposure of a group of financial assets and financial liabilities at FV Bifurcation is required for a hybrid financial liability but is prohibited for a hybrid financial asset Entities that previously elected FVO (for example, with split interest liabilities) may no longer be able to do so Embedded Derivatives An entity is required to bifurcate an embedded derivative from a hybrid financial instrument if it meets the criteria in ASC Hybrid financial assets must be classified based on the underlying asset's classification. Bifurcation of the embedded derivative is not permitted for hybrid financial assets 97