Private Company Financial Reporting Update

Transcription

1 Welcome to the Ac sense Private Company Financial Reporting Update The presentation will begin shortly. For technical difficulties, please contact Learn Live Customer Support at: (888) or Page 1 Private Company Financial Reporting Update February

2 REMINDERS In order to receive participation credit, you must: Be appropriately registered for Webcast #92236 within the BDO Online CPE Network Be logged in for the entire webcast Be responsive to at least 75% of all pop-up polls Handouts are accessible by clicking on the handout button on your screen. Page 3 Q&A FEATURE Technical questions may be submitted via the Q&A Feature on your screen. Time permitting, presenters will respond to these at the end of the session. Please submit as much information as possible (e.g., slide number reference, presenter, etc.). Submit Technological Support Issues to LiveChat under the Support tab. Page 4 2

3 Learning Objectives Upon completion of this course participants will be able to: Discuss the Private Company Council s (PCC s) background, purpose and current agenda Interpret the definition of a Public Business Entity per ASU Implement recently released final standards applicable to private company reporting Explain current PCC projects and potential agenda items Evaluate applicability of standards and proposals to both private and public entities. Page 5 Discussion Outline Private Company Council Background and Purpose Definition of a Public Business Entity New ASUs Goodwill and Hedging PCC Current Agenda Projects PCC Potential Agenda Projects Practical Considerations and Adoption of Standards Page 6 3

4 Presenters Chris Smith Partner, Accounting & Audit Professional Practice Leader Adam Brown Partner, National Assurance Page 7 Private Company Council Background and Purpose Established by FAF in May 2012 Two-fold purpose: 1. To determine whether exceptions or modifications to existing standards are necessary to meet the needs of private company financial statement users - E.g., accounting for goodwill; hedge accounting 2. To serve in an advisory capacity to the FASB - E.g., development stage entities proposal; related party loan impairment FASB & PCC issued Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (December 2013) - Guide for determining whether and when to provide alternative guidance Page 8 4

5 ASU , Definition of a Public Business Entity Update No Definition of a Public Business Entity An Addition to the Master Glossary Will be used to determine the scope of PCC accounting alternatives and future standards by the FASB and EITF. - No change to existing U.S. GAAP (e.g., segments and EPS) Became effective in connection with ASUs and related to the PCC alternatives for goodwill and hedging. - See definition on next slide. BDO Financial Reporting Letter Page 9 ASU , Definition of a Public Business Entity A public business entity (PBE) is one that meets any of the following criteria. a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing). b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC. c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer. d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion. Page 10 5

6 ASU , Definition of a Public Business Entity Neither a not for profit entity or an employee benefit plan is a PBE. An entity may meet the definition of a PBE solely because its financial statements or financial information is included in another entity s filing with the SEC. In that case, the entity is only a PBE for purposes of financial statements that are filed or furnished with the SEC. Page 11 ASU , Definition of a Public Business Entity Final definition confirms the following are public business entities: a. Broker dealers b. Equity method investees whose financial statements are including in a filing under Rule 3-09 of Regulation S-X c. Equity method investees whose financial information is included in a filing under Rule 4-08(g)of Regulation S-X d. An acquired business whose financial statements are included in a filing under Rule 3-05 of Regulation S-X e. Entities whose securities trade on an over-the-counter (OTC) market, such as OTC Markets Group Inc., OTC Pink Markets or the OTC Bulletin Board. Page 12 6

7 ASUs and January 2014: FASB issued ASUs and , Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill , Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Simplified Hedge Accounting Approach Early adoption permitted for calendar 2013 year-end if financial statements are not yet available for issuance BDO Financial Reporting Letter: Page 13 ASU , Accounting for Goodwill Key provisions Option to amortize goodwill (GW) on straight-line basis over 10 years or shorter life if appropriate If adopted, entity must also amortize fresh-start goodwill (Topic 852) and equity method goodwill (Topic 323) Entity may revise useful life if circumstances change; remaining GW to be amortized over revised useful life (prospective) Page 14 7

8 ASU , Accounting for Goodwill Key provisions (continued) Simplified one-step impairment test: - Test goodwill for impairment only when a triggering event occurs - Elect to perform the test either at entity-wide level or reporting unit level - Optional qualitative assessment ( Step 0 ) - Amount of impairment, if any, would be determined by comparing the fair value (FV) of the entity/reporting unit to its carrying amount Equity method investments still reviewed for impairment under Topic 323. Page 15 ASU , Accounting for Goodwill New disclosures required: Amount of GW in total and by major business combination or fresh-start reorganization Weighted average amortization period in total and by major business combination or fresh-start reorganization Gross amount of GW, accumulated amortization and accumulated impairment losses The aggregate amortization for the period GW included in a disposal group classified as held for sale and GW derecognized during the period without having previously been reported in a held for sale disposal group Information related to GW impairments and the affected financial statement line items, except those related to Step 2 of existing GW impairment guidance. Page 16 8

9 ASU , Accounting for Goodwill Example Entity A, a private company, elects to early adopt ASU for the year ended 12/31/13. Entity A has $100K of GW recorded as of 1/1/13 (its effective date of adopting the ASU). Entity A elects 10 years as the useful life for its GW (vs. a shorter period). Thus, Entity A does the following: Recognizes $10K of GW amortization in the 2013 income statement - Note: no cumulative effect of adoption with respect to GW Includes the following in the 2013 financial statement footnotes: - New disclosures required by ASU Standard disclosures in paragraphs through 50-3 regarding the effects of adopting a new accounting principle Page 17 ASU , Accounting for Goodwill Frequently Asked Questions: Early adoption Pushdown accounting Useful life determination Impairment matters Deferred tax matters Disclosures Changes in accounting principle and preferability Impact on the auditor s report FRL: Page 18 9

10 ASU , Simplified Hedge Accounting Approach Three key provisions 1. Option to assume no ineffectiveness for a plain-vanilla receivevariable, pay fixed interest rate swap (i.e., detailed hedge effectiveness testing not required) if specific criteria are met 2. Documentation requirements also relaxed may be prepared any time prior to issuing the financial statements 3. Option to record swap at settlement value vs. FV If adopted, resulting P&L charge for interest expense will approximate that of a fixed-rate borrowing Page 19 ASU , Simplified Hedge Accounting Approach Option to assume no ineffectiveness for a plain-vanilla receive-variable, pay fixed interest rate swap if the following criteria are met: a. Both the variable rate on the swap and the borrowing are based on the same index and reset period (e.g., both the swap and borrowing are based on one-month LIBOR). Not limited to benchmark interest rates described in paragraph A. b. The terms of the swap are typical (i.e., the swap is what is generally considered to be a plain-vanilla swap), and there is no floor or cap on the variable interest rate of the swap unless the borrowing has a comparable floor or cap. c. The repricing and settlement dates for the swap and the borrowing match or are within a few days. d. The swap s FV at inception (that is, at the time the derivative was executed to hedge the interest rate risk of the borrowing) is at or near zero. e. The notional amount of the swap matches the principal amount of the borrowing being hedged. In complying with this condition, the amount of the borrowing being hedged may be less than the total principal amount of the borrowing. f. All interest payments occurring on the borrowing during the term of the swap (or the effective term of the swap underlying the forward starting swap) are designated as hedged whether in total or in proportion to the principal amount of the borrowing being hedged. Page 20 10

11 ASU , Simplified Hedge Accounting Approach Additional considerations: Topic 815 allows election on a swap-by-swap basis, thus, an entity may apply to any qualifying swap (pre-existing or entered after date entity adopts ASU ) Applying to pre-existing swaps if FV approximated zero at swap inception, may disregard criterion that swap FV approximates zero at time of application of ASU Entity must still apply other requirements of Topic 815 Entity must still include Topic 815 & 820 disclosures on FV measurements Exempt from Topic 825 FV disclosures ONLY if certain criteria are met Page 21 ASU , Simplified Hedge Accounting Approach Example: Assume a private company with a calendar fiscal year end elects the simplified hedge accounting approach and applies it to a qualifying interest rate swap entered into on January 1, No requirement to test ineffectiveness The hedge could be formally documented at any point prior to the annual financial statements being issued in 2014 (e.g., in connection with the 2013 audit conducted in April or May 2014). Page 22 11

12 ASU , Simplified Hedge Accounting Approach Frequently Asked Questions: Early adoption Entity wide vs. instrument-by-instrument election Existing and future swaps Hedge documentation matters Fair value vs. settlement value Impact on the auditor s report FRL: Page 23 PCC Current Agenda Projects Issue No A, Accounting for Identifiable Intangible Assets in a Business Combination Issue No , Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements Issue No B, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Combined Instruments Approach Page 24 12

13 Issue No A, Accounting for Identifiable Intangible Assets in a Business Combination Current research: would provide option to recognize only those identifiable intangible assets that are capable of being sold or licensed independently from other assets of the business. Result: private companies would recognize fewer intangible assets (separately from goodwill) as a result of a business combination than under existing U.S. GAAP No timing indicated to complete project. Page 25 Issue No , Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements Would provide option not to apply variable interest entity (VIE) guidance for assessing whether to consolidate a lessor when: - The lessor and the private company are under common control, - The private company has a leasing arrangement with the lessor, and - Substantially all of the activity between the two companies is related to the leasing activity of the lessor to the private company lessee. - At inception, the leased asset provides sufficient collateral for the debt of the lessor entity If adopted, certain disclosures about lessor would be required PCC s January 2014 decision forwarded to FASB for endorsement. Early adoption still anticipated to be available for 2013 year-end if the statements are not yet available for issuance. Page 26 13

14 Issue No B, Accounting for Certain Receive-Variable, Pay- Fixed Interest Rate Swaps Combined Instruments Approach Additional approach related to simplifying the accounting for certain interest rate swaps. Would have resulted in off-balance sheet accounting for the swap. PCC decided to discontinue this project at its January 2014 meeting, citing concerns related to Dodd-Frank rules and relief already provided in ASU Page 27 PCC Potential Agenda Projects Stock-based compensation potential simplification to fair value measurement Other comprehensive income potential option to record certain items in net income, rather than OCI. Conforming existing definitions of public/private entities to ASU Debt/equity issues explore certain simplifications to specific areas of existing US GAAP. Accounting for uncertain tax positions (as referenced in ASC Topic 740, formerly FIN 48) continuing outreach. Page 28 14

15 Practical Considerations and Adoption of Standards Private companies Public companies Private equity firms Page 29 Private Companies PCC alternatives intended to provide relief from complex accounting standards. Prior to adopting, consider: User needs, such as owners and lenders - PCC alternatives could impact loan covenants, such as recent changes to goodwill (and indirectly, deferred taxes) and hedge accounting Whether public company statements will be required in the future - No specific transition guidance from FASB/SEC, thus an entity would have to retrospectively apply public entity requirements Page 30 15

16 Public Companies Acquisition of private entities Equity method investments in private entities FASB to consider extending alternatives to public entities Reminder: Emerging Growth Companies are considered PBEs, and thus are not eligible to apply PCC alternatives Page 31 Private Equity Firms IPO as an exit strategy. Reorganizations and roll-up transactions of multiple portfolio companies that may have different PCC elections in place. Portfolio-level accounting policy considerations? E.g., potentially significant costs savings related to impairment testing for goodwill recorded as a result of pushdown accounting. Page 32 16

17 Additional Webinars and Resources Recent BDO Ac sense Webinars/Archives: Ac sense 2013 Managing Risk in Cyberspace - January 2014 Ac sense Board Matters Q4 Update January 2014 Ac sense Q4 Technical Update January Additional resources are accessible via the BDO Board Reflections Audit Committee page: NOTE: Link to a self-study course of today s program will be available shortly at: Page 33 Page 33 CPE Certificates Certificates will be processed and will be accessible by participants for printing as follows: 1. Individuals 1. Under the Participation tab below before exiting the webcast, OR 2. By logging onto the after the session is completed and clicking on My Learning - Completed Items. Under the Certificate column, click the Print button beside the completed webcast. 2. Group participants - After receipt and processing of submitted group sign-in sheets to cpe@bdo.com, group participants will be proctored into LearnLive and will be notified via when they can retrieve their certificates, following the steps above. 3. Sign-in sheets may be downloaded from the following: CPE%20Attendance%20Sheet.doc Page 34 Page 34 17

18 Evaluation We continually try and improve upon our programming and appreciate constructive feedback Following the program, we will be sending out a thank you e- mail that contains a link to a brief evaluation Thank you in advance for your consideration! Page 35 Page 35 That concludes today s program. Thank you for attending! Page 36 18

19 ASU , Accounting for Goodwill Comparison to Existing U.S. GAAP Existing U.S. GAAP Alternative under ASU Goodwill not amortized Goodwill is amortized, straight-line basis over 10 years, or <10 years if entity demonstrates that another useful life is more appropriate 2-step impairment test Required annually (or if triggered) Step 1 identifies potential impairment and Step 2 measures the amount of impairment (if any) Optional Step 0 - qualitative assessment Must test goodwill for impairment at the reporting unit level 1-step impairment test Test goodwill for impairment only when a triggering event occurs Optional Step 0 - qualitative assessment Must elect to test goodwill for impairment at either the entity level or the reporting unit level Page 37 ASU , Simplified Hedge Accounting Approach Comparison to Existing U.S. GAAP Existing U.S. GAAP Alternative under ASU Criteria to qualify for hedge accounting: Derivatives and hedged items must meet extensive criteria under Topic 815 Practical expedient to apply a simplified cash flow hedge accounting approach to account for certain swaps that are entered into for the purpose of economically converting variable-rate interest payments into fixed-rate payments Documentation: Hedge documentation must be completed contemporaneously at hedge inception Hedge documentation may be prepared any time prior to issuing the financial statements Page 38 19

20 ASU , Simplified Hedge Accounting Approach Comparison to Existing U.S. GAAP Existing U.S. GAAP Alternative under ASU Effectiveness testing: Derivative s ability to generate offsetting changes in fair value or cash flows of hedged item Effectiveness must be assessed prospectively and retrospectively using an acceptable method Measurement: Recognize all derivative instruments, including swaps, in B/S as assets or liabilities and measure them at fair value Option to assume no ineffectiveness for qualifying swaps designated in a hedging relationship Option to measure designated swap at its settlement value (i.e., primarily excluding nonperformance risk ), instead of fair value Page 39 ASU , Simplified Hedge Accounting Approach Comparison to Existing U.S. GAAP Existing U.S. GAAP Alternative under ASU Disclosure: Apply requirements in Topics 815 and 820. Disclosure requirements in Topics 815 and 820 continue to apply, however, in providing those disclosures, amounts recorded at settlement value may be used in place of fair value wherever applicable. Disclose settlement value amounts separately from FV amounts. For purposes of topic 825 FV disclosures, a swap recorded under the simplified hedge accounting approach is not considered a derivative instrument under Topic 815. Page 40 20