VI. FASB ACCOUNTING UPDATE

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1 VI. FASB ACCOUNTING UPDATE Presenters: Muneera Carr, EVP Controller and Chief Accounting Officer, Comerica Bank Adam Brown, Partner, BDO USA LLP RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 1

2 FASB Accounting Update FASB Updates Consolidation Leases Financial Instruments Share based payments Accounting for IT Projects 2

3 FASB Updates

4 Consolidation ASU Overview Targeted amendments to current consolidation guidance Applicable to all industries Requires re-evaluation of consolidation conclusions Significant project for companies with a large number of Variable Interest Entities (VIEs) Effective date beginning after 12/15/2015 for Public Business Entities Early adoption is permitted Significant amendments Determination of VIE Fees to service provider Related parties Change in how an entity assess whether equity holders at risk lack decision making rights New analysis specific to partnerships Fewer criteria in determining whether a fee arrangement is a variable interest Market-based and commensurate fees do not represent a variable interest assuming there is no principal risk Fewer fee arrangements may be variable interests Considered earlier in analysis for parties with power, indirect interests must be considered Reduced instances where the related party tiebreaker is performed 4

5 Leases Overview of expected major impacts under new standard Recognizes majority of lease contracts on balance sheet Lessees now required to recognize right of use asset and lease liability for both type A (financing) and Type B (operating) leases Lease classification drives financial statement recognition Type A Lessee Accounting: - Amortizing expense - Interest expense Lessor Accounting: - Potential Day 1 profit/(loss) - Interest income Yes Does lease transfer substantially all risks and rewards? (No bright line threshold) No Type B Lessee Accounting: - Lease expense Lessor Accounting: - Lease income Transition to update using modified retrospective approach 5

6 Leases Working through the final details Topic Lease Definition Accounting model Lessee/ Lessor Recent Board Decisions Affirmed definition of a lease as a contract that conveys the right to use an identified asset (the underlying asset) for a period of time in exchange for consideration Collectability Lessor Transfer of control and collectability of lease payments are key considerations in classification and recognition Impairment Lessor Assess impairment of unguaranteed residual asset using ASC 310 Receivables rather than ASC 360 Property, Plant and Equipment Purchase of Leased asset Lessee Difference between purchase price and lease liability carrying amount should be recorded as an adjustment to asset carrying value Final standard expected in 4Q

7 Financial Instruments Classification and measurement Implementation Considerations What is changing What is not changing If FV option elected for financial liabilities, changes due to own credit would be recognized in OCI Equity instruments measured at fair value through net income (no remeasurement through OCI) Practicability exception for equity investments lacking readily determinable fair values Excludes equity method investments One-step impairment test for equity securities lacking readily determinable fair values Classification and measurement models for loans and debt securities Bifurcation of embedded derivative features Unconditional fair value option Modified retrospective transition - Cumulative effect adjustment to balance sheet at beginning of 1st reporting period Final standard expected in 4Q

8 Financial Instruments Current Expected Credit Loss (CECL) model Key Considerations Entities would record estimate of full lifetime expected credit losses at each reporting period Estimate of expected credit losses Applies to financial assets measured at amortized cost Time value of money Consider available information including past events, current conditions (internal and external) and reasonable and supportable forecasts Consider risk of loss even if risk is remote Period to period allowance roll-forward for financial assets at amortized cost and FV through OCI Disaggregate credit quality indicators by vintage year up to 5 years Disclosure Transition OTTI debt securities transition prospectively CECL scoped assets recognize a cumulative effect adjustment Required transition disclosures 8

9 Share-based Payments Accounting Simplifies share based payments accounting of income tax effects, minimum tax withholding requirements and forfeitures Exposure draft comment period ended in August 2015 Majority of respondents support changes to accounting of forfeitures, minimum tax withholding & treatment within cash flow statement Concerns expressed over the conceptual merit and impact of recognition of income tax effects within the income statement. Effective date for standard update is not yet known 9

10 Other ASUs issued in 2015 Accounting Standard Update ASU Income Statement Extraordinary and unusual items ASU Interest Imputation of Interest ASU Compensation - Retirement Benefits ASU Earnings Per Share ASU Fair Value Measurement Description Eliminates the separate presentation of extraordinary items but maintains separate disclosure of material items that are unusual or infrequent Records debt issuance costs as a deduction of the related debt rather than as a deferred asset Permits entities with a period end that is not a month-end to measure plan assets/obligation using the closest monthend value Requires all earnings/losses of a transferred business related to periods prior to the date of the dropdown transaction be allocated entirely to the general partner. Eliminates requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. 10

11 Other ASUs issued in 2015 Accounting Standard Update ASU Business Combinations ASU Financial Services Insurance ASU Inventory ASU Plan Accounting: Defined Benefit Pension Plans ASU Derivatives and Hedging Description Pushdown accounting made optional for all companies effective immediately. Additional disclosure requirements to understand future cash flows related to insurance liabilities Simplifies measurement of inventory to lower of cost or net realizable value as opposed to market value except inventory measured at LIFO and retail inventory method. (a) requires pension plans to use contract value as only measure for fully benefit-responsive investment contracts, (b) amends investment disclosure requirements for employee benefit plans, (c) practical expedient for benefit plans with a measurement-date that do not coincide with a month end. Specifies rules of net settlement for electricity based forward contracts. 11

12 Accounting for IT Contracts

13 Cost of Internally Used Software Capitalization versus Expense Depends on Stage of Development and Activity Upgrades and Enhancements Capitalize if provides additional functionality Services are expensed as incurred Considerations when entering into IT Contracts Pricing Allocation Coordination 13

14 Cloud Computing and Hosting Arrangements ASU 2015 Old GAAP did not include guidance regarding cloud computing arrangements which have become more prevalent Resulted in diversity in practice: service, capitalized asset, both New guidance establishes two criteria for capitalization of a portion of cost 1. Contractual right to take possession of the asset without significant penalty 2. Operate software on its own or through another third party If both criteria are met, allocate cost between capitalized asset and expense Effective date public companies Annual periods beginning after December 15, 2015 Early adoption is permitted 14

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