Quarterly Accounting Roundup: An Update of

Transcription

1 The Dbriefs Financial Reporting series presents: Quarterly Accounting Roundup: An Update of Important Developments Bob Uhl, Deloitte & Touche LLP Alfred Popken, Deloitte & Touche LLP Elsye Putri, Deloitte & Touche LLP Jason Nye, Deloitte & Touche LLP June 22, 2011

2 Agenda SEC Work Plan Update Joint FASB/IASB Developments FASB Developments IASB Developments Other SEC Developments

3 Keep in mind This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance Check with a qualified advisor before taking any action See later slides for information on obtaining written summaries of issues discussed today

4 Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the FASB, SEC, and IASB

5 Poll question #1 Are you a financial statement preparer, user, auditor or other interested party? Preparer User Auditor Other

6 SEC Work Plan Update

7 The road to IFRS incorporation SEC Staff Work Plan February 2010: SEC statement commitment to: Development of single set of high-quality, globally accepted accounting standards Execution by SEC staff of work plan that will guide SEC in deciding on whether, when and how to incorporate IFRSs into US financial reporting system Periodic progress reports on work plan October 2010: first progress report 1.1

8 Possible IFRS incorporation approach May 2011 staff paper Incorporate newly issued IFRSs through endorsement: SEC and FASB would retain ability to modify or supplement IFRSs when in public interest and necessary for protection of investors Apply convergence approach during transition phase (e.g. 5-7 years) IFRSs subject to Memorandum of Understanding (MoU) projects IFRSs on IASB s agenda Other existing IFRSs and areas not addressed by IFRSs SEC staff continues to consider early-adoption adoption option for US issuers to use IFRS SEC announces Roundtable on IFRSs 1.2 SEC staff: Staff paper approach is one approach, not necessarily the only or the preferred approach

9 Poll question #2 Which of the following best describes the work effort performed to-date by your organization relative to IFRS and convergence issues? Have not performed any significant assessment yet Have performed an initial assessment but have not yet translated this to detailed operational plans Have prepared detailed operational plans for IFRS and key convergence standards Don t know / not applicable

10 Joint FASB/IASB Developments

11 Joint projects SEC decision on IFRS? Expected date Projects Financial instruments: Classification and measurement Impairment Offsetting Effective Hedge accounting date? Revenue recognition Transition? Leases Fair value measurement Insurance Consolidation Q2 ASU issued May 2011 Presentation of financial statements: Financial statement presentation Discontinued operations Other comprehensive income ASU Issued June H F E F E E E 2.1 E Exposure Draft F Final Standard

12 Revenue recognition Timeline and latest developments June 2011 Q Month/Year Complete redeliberations Milestone Issue revised exposure draft with 120 day comment period Q3 - Q Perform outreach activities Q Q Q TBD Evaluate feedback and begin redeliberations Finalize revenue standard? Revenue standard effective date Transition - retrospective application required May provide elective transition relief Consider need for 3 years of information 2.2

13 Revenue recognition Re-exposure: exposure: potential focus areas Performance obligations An entity satisfies a performance obligation continuously if Its performance creates or enhances a customer controlled asset; or Its performance does not create an asset with an alternative use and at least one of the following 1. the customer receives a benefit as the entity performs each task 2. another entity would not need to reperform the task(s) performed to date if it were to fulfill the remaining i obligation i to the customer, 3. the entity has a right to payment for performance to date even if the customer could cancel the contract for convenience 2.3

14 Revenue recognition Re-exposure: exposure: potential focus areas (cont.) Performance obligations Entities shall recognize revenue from satisfying performance obligations only if the transaction price is reasonably assured The amount is not reasonably assured when any of the following apply: 1. Additional consideration can be avoided without breaching the contract (e.g., certain royalties) 2. Entity has no experience with similar types of contracts (or other persuasive evidence), or 3. Entity has experience, but experience is not predictive (susceptible to external factors, judgment of third parties, and risk of obsolescence) 2.4

15 Revenue recognition Other significant decisions Onerous obligations Onerous test t is limited it to contracts t with performance obligations that t an entity satisfies over an extended period of time (e.g., long-term service contracts) Collectability Adjustments for impact of initial and subsequent assessments of collectability presented separately from revenue (one line item immediately following revenue) Disclosures Board confirmed many of the proposals in the ED Some relief provided for nonpublic companies Industry-specific specific issues Telecommunications Aerospace and defense Rate-regulated industries 2.5

16 Leases Basic measurement principle i Lessee Right-of-use asset Present value of lease payments plus initial direct costs incurred by the lessee Obligation to pay rent liability Present value of lease payments Discount rate = Rate lessor charges the lessee if readily determinable or the Incremental borrowing rate Initial direct costs = Costs directly attributable to negotiating and arranging a lease 2.6

17 Leases Lease payments ED Principle Lease Payments Contingent payments measured using expected outcome approach, including contingent payments Very unpopular decision, viewed as extremely onerous to apply New Tentative Decision Lease Payments Contingent payments recognized for those: Based on index (spot rate) Variability lacks commercial substance (e.g., disguised minimum lease payments) Contingent lease payments that are probable or reasonably certain Renewal options: Renewal options: Longest possible term that is Must be reasonably assured more likely than not to occur 2.7

18 Leases Subsequent measurement ED Principle Lease transaction is a financing Right-of-use asset Amortized cost, typically straight-line expense recognition Obligation to pay rent Interest method Led to front-end loading of expense: Expense Cash Outflow Straight line rent expense (old standard) Interest and Deprec. Expense (new standard) 80 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year

19 Leases Remaining items to be finalized Scope Lessor accounting model Presentation ti & disclosures Transition method Timing & project next steps 2.9

20 Poll question #3 Have the Boards redeliberations thus far on the revenue recognition and leases projects adequately addressed your concerns (if any) from the exposure drafts? Yes for both projects Yes, but for revenue recognition only Yes, but for leases only No for both projects Don t know / not applicable

21 Accounting for financial instruments Project update Topic FASB IASB Classification & measurement Redeliberations of the exposure draft are underway. FASB anticipates completing its deliberations in 2011 IASB issued IFRS 9, Financial Instruments, in November 2009 (revised in October 2010). deliberations in IFRS 9 is effective January 1, 2013 (with early application permitted). Hedge Redeliberations have not yet Redeliberations are underway accounting begun. and the IASB has been quite active. The IASB plans to complete redeliberations over the next few months. Impairment A working party with representatives from both Boards proposed a new model. Both Boards voted to further explore the model jointly. Offsetting Supports approach based on Supports approach proposed in conditional rights of offset. ED. 2.10

22 Classification and measurement The FASB moves forward Recent and significant decisions made by the FASB: Initial measurement principle will be based on subsequent measurement Limited fair value option provided for financial liabilities with embedded derivatives that would be bifurcated Measurement attribute for nonmarketable securities held by nonpublic entities using a practicability exception will be cost less impairment with adjustments for fair value Equity method accounting is available for unconsolidated investments when the investor maintains significant influence; no fair value option Financial liabilities meeting cash flow characteristics criterion will be classified based on specific business strategy criterion 2.11

23 Hedge accounting The IASB forges ahead Recent and significant decisions made by the IASB: Clarified the terms other than accidental offsetting, g, unbiased, and minimize expected hedge ineffectiveness in the hedge effectiveness assessment. Confirmed the accounting outcomes for the accounting for time value of options as proposed in the ED. Permitted written and purchase options to be jointly designated as the hedging instrument t provided d the combination is not a net written option. Proactive rebalancing is eliminated and a hedging relationship would be rebalanced when quantities of the instrument or item are adjusted in response to changes in circumstances that affect the relationship. Prohibition against voluntary discontinuation is retained. 2.12

24 Impairment New, 3-Bucket approach being explored Bucket Description Allowance 1 Indirect impairment factors (macro) 12 months of initial expected credit losses plus full lifetime effect of changes in expected credit losses 2 Events directly indicating future default though losses not individually identifiable Based on portfolio-level calculation of the full lifetime expected losses 3 Events directly indicating future Full lifetime expected losses default losses individually identifiable Other tentative decisions Estimating expected losses using the expected value approach (other methods will be permitted) Purchased debt: good book vs. bad book 2.13

25 Offsetting Convergence through disclosures Joint Exposure Draft issued in January 2011 with comments received in April Various roundtables and other outreach efforts were conducted to ensure a comprehensive picture of relevant feedback might inform future deliberations June 14 th, the FASB and IASB voted differently on how to move forward with the project The IASB voted unanimously to retain the approach proposed in the joint ED and address certain issues raised by constituents The FASB, however, voted by a slim margin to adopt an approach based on conditional rights of offset for all or some financial i instruments, t which h is similar il to the current requirements under US GAAP During these same deliberations, the IASB Chairman noted convergence might be achieved through disclosure 2.14

26 Fair value measurement Overview of ASU issued May 2011 Results in substantially converged fair value measurement framework (IASB issued IFRS 13) ASU is not expected to result in significant changes from existing practice. However: Disclosures are expanded, particularly those relating to Level 3 measurements Highest and best use explicitly limited to nonfinancial assets FVM adjustments for assets and liabilities with offsetting risks permitted Blockage factors explicitly itl prohibited ASU effective for public companies interim or annual periods beginning after 12/15/11 (i.e., Q1 ending 3/31/2012 for public), while effective for nonpublic entities beginning annual periods ending after 12/15/12 with early adoption permitted. 2.15

27 Other comprehensive income (OCI) Comprehensive income to be reported in either: A continuous statement of comprehensive income Two separate, but consecutive statements There would be no change to the items that must be reported in other comprehensive income Effective dates: U.S. GAAP Public Entities: effective for fiscal years, and interim periods within those years, beginning on or after December 15, Nonpublic Entities: effective for annual periods ending after December 15, 2012 IFRSs effective for fiscal years beginning on or after July 1, Full retrospective application is required 2.16

28 Poll question #4 Which of the following convergence projects presents the greatest level of concern for your organization, in terms of the effort required for compliance or the potential impact on your financial statements? Financial instruments Revenue recognition Leases Consolidations Other Don t know / not applicable

29 FASB Developments

30 Testing goodwill for impairment Overview of Proposed ASU Proposal would amend the goodwill impairment analysis under ASC Option to perform a qualitative screen before calculating the fair value of the reporting unit in Step 1 Does not change requirement to test goodwill for impairment annually and between annual tests if facts and circumstances warrant Does not amend Step 1 or Step 2 of the goodwill impairment test There exists a possibility that current proposals may not achieve the cost savings hoped for. 3.1

31 Troubled debt restructurings (TDRs) Final ASU issued April 5, 2011 Clarifies that a creditor shall classify a loan modification or restructuring as a TDR when both of the following has exist: When a borrower is experiencing financial difficulties When a creditor has made a concession Determining that a loan modification or restructuring represents a TDR results in: The application of specific impairment model (i.e., under ASC 310) Additional disclosures The provisions of the ASU are effective: For public entities for the first interim or annual period beginning on or after June 15, 2011 For nonpublic entities for annual periods ending on or after December 15, 2012, including interim periods therein 3.2

32 Repurchase agreements (repos) Final ASU issued April 29, 2011 (effective December 15, 2011), modifying the criteria used to determine whether a transfer of assets under a repo can be accounted for as a sale. Effective Control 3.3 An entity that t maintains i effective control must account for the transfer as a secured borrowing. The ASU eliminates the requirement to assess the transferor s ability to repurchase the assets through h retention ti of specified amounts of collateral. Now, when these conditions are met, effective control is maintained: The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price. The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

33 Poll question #5 Under the FASB s proposed ASU on goodwill impairment, entities would be required to perform a qualitative assessment before calculating the fair value of a reporting unit under Step 1. True or false? True False Don't know

34 IASB Developments

35 IASB consolidation standards Overview Objective is to provide a single model for consolidation that can be applied to all entities, including structured entities Final standards issued in May 2011 IAS 27, Separate Financial Statements (amended) IAS 28, Investments in Associates and Joint Ventures (amended) IFRS 10, Consolidated Financial Statements (new) IFRS 11, Joint Arrangements (new) IFRS 12, Disclosure of Interests in Other Entities (new) Effective date: effective for annual periods beginning on or after January 1,

36 IASB consolidation standards Consolidated financial statements Investor has control if it has all of the following: Power over the investee Exposure, or rights, to variable returns from its involvement with the investee Ability to use its power over the investee to affect the amount of the investor s returns Model applies to all entities 4.2

37 IASB consolidation standards Consolidated financial statements Considerations for power through h voting rights Investor with more than half of the voting rights when relevant activities directed by majority vote (considering whether rights are substantive and rights held by others) Investor can have power with less than majority vote, for example, through: Contractual arrangement with other vote holders Rights arising from other contractual arrangements Investor s voting rights Potential voting rights Combination of factors 4.3

38 IASB consolidation standards Consolidated financial statements Investor with decision-making i rights should assess whether it is acting as a principal or an agent Consider overall relationship, including: Scope of decision-making authority over the investee Rights held by other parties Remuneration to which it is entitled in accordance with the remuneration agreement Decision maker s exposure to variability of returns from other interests that it holds in the investee Different weightings shall be applied to each of factors based on specific facts and circumstances 4.4

39 IASB consolidation standards IFRS 11 joint arrangements Joint Arrangements Joint Arrangements (Joint control) Joint Operators (each party records its share of assets/liabilities/results from operations) Joint Ventures (use equity method of accounting) Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control 4.5

40 IASB consolidation standards Disclosure of interests in other entities Objective of IFRS 12 is to require an entity to disclose information that enables users to evaluate Nature of, and risks associated with, its interests in other entities Effects of those interests on its financial position, financial performance, and cash flows Includes disclosures around: 4.6 Significant judgments and assumptions made in determining the nature of interest in another entity Information about its interests in subsidiaries, joint arrangements and associates, and structured entities not controlled by the entity (unconsolidated structured entities)

41 Poll question #6 Under IFRS 10, when determining whether a decision- maker is a principal or an agent, an entity should consider which of the following factors? The scope of decision-making authority The rights held by other parties The remuneration of the decision-maker The decision-maker s exposure to variability of returns from other interests that it holds in the investee All of the above Don t know / not applicable

42 Other SEC Developments

43 Whistleblower rule Background The SEC will have enhanced authority to give financial awards to whistleblowers under the Dodd Frank Act Extended to any securities laws violations Size of awards is potentially ti increased The SEC received numerous comment letters on the proposed rule issued in November The SEC approved its final rules on May 25, 2011 The rules provide for financial a awards a for original information reported to the SEC leading to enforcement actions that recover more than $1 million 5.1

44 Whistleblower rule Several aspects of the final rule Several factors are considered in determining the award amount generally 10% 30% of monetary sanctions Continues requirements from proposed rule including: Information has to be original information and provided directly to SEC ( or to other regulatory institutions) The original information must lead to successful enforcement action of greater than $1 million New or changed requirements include: 5.2 Grace period to provide original information to the SEC increased from 90 days to120 days Certain groups are not eligible to receive awards except in certain situations Anti-retaliatory protections Culpable Whistleblowers

45 Poll question #7 In the Final Rules, the SEC created incentives to encourage whistleblowers to use their internal compliance processes. True or false? True False Don t know

46 Question and danswer

47 Join us June 28, 2011 at 2 PM EDT as our Financial Reporting series presents: EITF Roundup: Highlights of the June Meeting

48 Contact information Bob Uhl Alfred Popken Elsye Putri Jason Nye

49 Other resources Heads Up: SEC Staff Paper Explores Method of Incorporating International Standards Into U.S. Reporting System (June 1, 2011) Heads Up: Update on FASB s Project on Accounting for Financial Instruments (May 10, 2011) Heads Up: FASB and IASB Issue Substantially Converged Requirements for Fair Value Measurement and Disclosure (May 13, 2011) t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/479ea1b965c40310VgnVCM a56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/3b5f551451bdf210VgnVCM a56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/ec0f200eaf9ef210VgnVCM b56f00arcrd.htm Heads Up: FASB Finalizes Guidance on Presentation of Comprehensive Income (June 17, 2011) t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/041c88176ae90310VgnVCM b56f00aRCRD.htm

50 Other resources (cont.) Heads Up: Amendments Proposed to Guidance on Impairment Testing (April 25, 2011) Heads Up: FASB Addresses TDRs (April 6, 2011) Heads Up: FASB Amends Guidance on Effective Control in Repurchase Agreements (May 2, 2011) Heads Up: New IFRSs Issued on Consolidation (May 27, 2011) t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/0dc85eaf3bd8f210VgnVCM f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/374d6572fcb2f210VgnVCM c56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/daedbe13811bf210VgnVCM b56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/8ac406b1aa230310VgnVCM c56f00aRCRD.htm

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