FASB Update: A View from the Top - The Latest Developments in Financial Accounting Standards

Transcription

1 FASB Update: A View from the Top - The Latest Developments in Financial Accounting Standards Jenifer Wyss Project Manager, FASB MACPA 2014 CPA Innovation Summit June 16, 2014 The views expressed in this presentation are those of the presenters. Official positions of the FASB and IASB are reached only after extensive due process & deliberations. 1

2 Today s Agenda FASB Agenda FASB Projects Private Company Council Joint FASB/IASB Projects 2

3 Three Broad Categories of Agenda Setting Foundational Projects Projects that will have an overarching, longstanding impact on how those who use U.S. GAAP practice accounting Example: Conceptual Framework Promoting Transparency Recognition and measurement and presentation Blocking and tackling projects Example: Pensions Reducing Complexity 2 Issues Complicated, dense standard obscures its meaning Accounting treatment is clear, but applying it is lengthy, convoluted & expensive 3

4 FASB Agenda Prioritization Meetings: January 2014 FASB voted to reorganize its agenda - Decisions will allow resources to be directed at financial reporting issues FASB stakeholders find most important - Several research projects were discussed as part of its prioritization initiative - Board considered changes to its own agenda and that of the Emerging Issues Task Force (EITF) April Additional potential projects considered by the Board 4

5 Prioritization: Technical Agenda Added: - Project to develop guidance for disclosure requirements related to government assistance - Clarifying certain existing principles on statement of cash flows - Fees paid by a customer in a cloud computing arrangement Removed: - Emissions Trading - Earnings per Share - Income Taxes (short-term convergence project) - Not-for-Profit Financial Reporting: Other Financial Communications - Investment Property Entities - Investment Companies: Real Estate Property Investments 5

6 Prioritization: EITF Agenda Removed: - Application of the AICPA Audit and Accounting Guide, Investment Companies, by Real Estate Investment Companies (EITF 09-D) - Commodity Inventories of Brokers and Dealers (EITF 06-12) - Interpretation of Constraining Conditions of a Transferee in a CBO Structure (EITF 03-15) - Multiple Foreign Exchange Rates (EITF 10-B) - Potential EITF Issues on Application of EITF When a Special-Purpose Entity Holds Equity Securities 6

7 Prioritization: Research Agenda Added: - Accounting Issues in Employee Benefit Plan Financial Statements - Accounting for Financial Instruments- Hedging - Accounting for Financial Instruments- Liquidity and Interest Rate Disclosures - Conceptual Framework - Financial Statement Presentation - Liabilities & Equity: Short-term Improvements - Pensions- Cash Balance Plans - Simplification Initiative 7

8 FASB Projects Disclosure Framework Not-for-Profit Financial Statement Presentation Going Concern Discontinued Operations 8

9 Disclosure Framework 9

10 Disclosure Framework Objective: Improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements. Board s Decision Process Entity s Decision Process Promotes consistent decisions about disclosure requirements by the Board Conceptual Framework for Financial Reporting, Chapter 8 Exposure draft issued March 2014, comment period ends July 14, 2014 Exercise of discretion by reporting entities Conducted a field study to test public, private, and NFP entities abilities to exercise discretion over which disclosures they provide Materiality and entity specific relevance 23 entities submitted results Insights on application of discretion criteria 10

11 Disclosure Framework Next Steps Analyze comment letters regarding the Board s Decision Process Based upon field study results and other feedback to develop changes to the Codification to promote the use of discretion - Expose changes to several Topics disclosure sections Address disclosures for interim periods Accounting policies 11

12 Financial Statements of Notfor-Profit Entities 12

13 Financial Statements of Not for Profit Entities Topics Net asset classification Financial Performance Reporting of Expenses Cash Flow Statement Liquidity NFP Note Disclosures 13

14 Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Proposed GAAP + Disclosures Without Donor Restrictions Amount and purpose of board designations With Donor Restrictions Nature and amount of donor restrictions 14

15 Financial Performance: Operating Measure Defined a required intermediate operating measure for (non-health care) NFPs based on two dimensions: Mission (Business & Charitable Activity): based on whether resources are from or directed at carrying out an NFP s purpose for existence (vs. investing and financing) Availability: based on whether resources are available for current period activities, and reflecting both external donor-imposed limitations and internal actions of an NFP s governing board 15

16 Financial Performance: Operating Measure Require available revenues separate from board designations (show gross instead of net) Remove requirement to display an operating measure, if reported, in same statements that reports the change in unrestricted net assets (ASC ) Additional Outreach: Health care Community and private foundations 16

17 Financial Performance: Statement Approach 1 Statement Ability to present total revenue and contributions Effect of transfers easier to identify Too much information in one statement Labeling of totals difficult 2 Statement Greater emphasis on the operating measure Retain Flexibility Facilitates multi-year comparison Some may ignore the second statement Incorrectly equate the operating measure to net income 17

18 One Statement Approach Statement of Activities 18

19 Two Statement Approach Statement of Operations 19

20 Two Statement Approach (cont d) Statement of Changes in Net Assets 20

21 Cash Flow Statement Board Decisions Require Direct Method for operating cash flows No longer require Indirect Method - Ask in ED if it should still be required for certain NFPs Re-categorize certain items to better align operating with activities statement - Interest paid on long-term debt: financing activity - Cash received for interest and dividends: investing activity - Purchase of property and equipment: operating activity 21

22 Reporting of Expenses N * A T U R E Expense by nature and function one place in the F/S (statement of activities, separate statement, or schedule in notes) Salaries & Benefits Grants to Others Equipment Rental & Maintenance Occupancy Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printing & Publication Interest Other Total FUNCTION Program Activities Supporting Activities Total Operating Program A Program B M&G Fundraising Expenses * Not-functionalized Non- Operating Total Expenses *Either (or both) on face of Statement of Activities 22

23 Remaining Topics Reporting of investment expenses (Board discussion begun) Liquidity and financial flexibility (Board discussion begun) NFP-specific notes (in-process) Expiration of capital restrictions and other display issues concerning capital transactions 23

24 Project Timeline Board Deliberations First half 2014 Comment Period Q Q Q Exposure Draft 2015 Final ASU 24

25 Going Concern 25

26 Going Concern: Background Going Concern (GC) presumption is critical to financial reporting; it informs measurements and classifications Today, auditors are responsible for assessing GC uncertainties and U.S. GAAP has no guidance on management s disclosures of GC uncertainties Objective - Provide guidance in U.S. GAAP, thereby reduce diversity, standardize disclosure timing & content (exposure draft issued in June 2013) In May 2014, the Board directed the staff to draft a final Accounting Standards Update for vote by written ballot. 26

27 Going Concern: Single Threshold Model Summary of Board s Decisions (March & May 2014) 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 beginning after December 15, 2015, and interim periods thereafter. 27

28 Discontinued Operations ASU Issued April 10,

29 Discontinued Operations Key Facts & Impacts Only those disposed components (or components held for sale) representing a strategic shift that have (or will have) a major effect on operations and financial results will be reported in discontinued operations. Significant continuing involvement will no longer preclude a disposal group from being presented as discontinued operations. Disposals of equity method investments will be eligible for discontinued operations presentation if the disposal meets the new definition. Expanded disclosures required. ASU generally not effective until 2015; early application permitted in certain circumstances. 29

30 Discontinued Operations Definition ASU defines discontinued operations as either: A component of an entity (or a group of components) that: Has been disposed of, meets the criteria to be classified as held for sale, or has been abandoned/spun-off; AND Represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results, OR Is a business or nonprofit activity that, on acquisition, meets the criteria to be classified as held for sale. Examples Strategic Shift Major geographical area Major line of business Major equity method investment 30

31 Presentation and Disclosure Presentation Income Statement Balance Sheet + Consistent with current presentation requirements + Discontinued operations assets and liabilities required to be separately presented for all years being presented 31

32 Presentation and Disclosure (cont d) Disclosures, information about: The discontinued operations major classes of assets and liabilities Major line items for its results of operations Major line items for its cash flows Option to disclose either (a) total operating and total investing cash flows of the discontinued operations, or (b) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items Continuing involvement Pretax profit or loss or loss of individually significant component that does NOT qualify for discontinued operations, but has been disposed of or is classified as held for sale 32

33 Transition and Effective Date For a public business entity, a not-for-profit entity that 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, and an employee benefit plan that files or furnishes financial statements with the SEC: Applied prospectively to all disposals (or classifications as held for sale) that occur within fiscal years beginning on or after December 15, 2014, and interim periods within those years, with earlier application permitted All other entities should apply the amendments prospectively to all disposals (or classifications as held for sale) that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015, with earlier application permitted 33

34 Private Company Council- Activities to Date 34

35 Private Company Key Events FASB creates Private Company Financial Reporting Committee (PCFRC) FAF works with AICPA & NASBA to create Blue Ribbon Panel FAF appoints several Trustees and senior FAF staff members to a Working Group FAF releases and seeks public comment on plan to create PCSIC Jan Oct May 2012 FAF creates Standard Setting Process Oversight Committee FAF undertakes nationwide listening tour Blue Ribbon Panel submits report to FAF Trustees FAF establishes the Private Company Council (PCC) 35

36 Private Company Council (PCC) Established by FAF on May 30, 2012; FAF oversight Identifies, deliberates & votes on proposed alternatives within existing U.S. GAAP for private companies - Based on agreed-on criteria w/fasb (Private Company Decision- Making Framework) - Subject to FASB endorsement & public due process Primary private company advisory body to FASB on active FASB projects Composed of private company practitioners (4), users (3), and preparers (3) 36

37 PCC Agenda Process Identification of potential GAAP alternatives Pre-agenda research on potential alternatives Staff analysis - Private Company Decision Making Framework PCC vote on agenda topics (Supermajority) 37

38 PCC Process PCC Agenda Decision FASB final endorsement FASB issues final Standards Deliberation of staff analysis and vote PCC re-deliberates FASB endorsement Exposure Draft 38

39 Private Company Decision- Making Framework (Guide) Final Guide Issued December 23,

40 Private Company Decision Making Framework Tool for PCC and FASB Identify & provide alternatives within U.S. GAAP based on differential factors Where guidance may differ between public & private companies (modules) -Number of primary users and access to management -Investment strategies of primary users -Ownership & capital structures -Accounting resources -Learning about new guidance -Recognition & Measurement -Display (Presentation) -Disclosures -Effective Date -Transition Method 40

41 Framework Fundamentals Assist in user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework Intended to facilitate decisions & drive consistency Fundamental approach retains or improves information relevant to typical users Applies to both look-back and current projects 41

42 Definition of a Public Business Entity ASU Issued December 23,

43 Public Business Entity Changes Definition: A Company That Meets Any One: Files or furnishes financial statements with the SEC (or is included in a filing) Follows Current GAAP Required by Securities Exchange Act of 1934 to file or furnish financial statements with a regulatory agency, other than the SEC Required to file financial statements with regulatory agency for the sale of securities Has unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market. New Its securities are unrestricted, and required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement. 43

44 Public Business Entity Orgs Affected Organizations Within Definition; Scope of Guide Definition excludes not-for-profits within scope of Topic 958 or employee benefit plans within scope of Topics 960 through 965 on plan accounting Public business entities, not-for-profits & employee benefit plans excluded from the scope of the Guide - Companies within the scope of the Guide are those for which the PCC & the FASB would consider potential accounting & reporting alternatives within U.S. GAAP FASB determine if apply to organizations outside of Guide s scope 44

45 PCC Current Projects 45

46 PCC Current Projects (Overview) PCC Issue No A, "Accounting for Identifiable Intangible Assets in a Business Combination" PCC Advising on FASB Projects Definition of a Nonpublic Entity project- phase 2 - PCC added to their agenda at the April 29, 2014 meeting 46

47 Identifiable Intangible Assets Why? In a Business Combination Requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful information Cost & complexity: - estimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships 47

48 Identifiable Intangible Assets Current U.S. GAAP Recognize intangibles separately from goodwill in a business combination if: - Contractual-legal OR - Separable Proposal (July 2013) Recognize intangibles separately from goodwill in a business combination if: - Contractual with noncancelable terms OR - Legal 48

49 Identifiable Intangible Assets The FASB staff identified the following alternative views (January 2014): - View A: No Intangibles View: An entity would not recognize any intangible assets separately from goodwill. - View B: No Intangibles except Those Capable of Being Sold or Licensed Independently from Other Assets of the Business: All intangibles would be subsumed into Goodwill and Other Intangible Assets except those that are capable of generating cash flows separate and distinct from a business. - View C: No change to U.S. GAAP: Continue to require recognizing and measuring identifiable intangible assets acquired in a business combination in accordance with Topic

50 Identifiable Intangible Assets January 28, 2014 PCC Meeting PCC directed FASB staff conduct further research and analysis on alternatives Recognize and measure only intangible assets capable of being sold or licensed independently Alternatives focusing solely on types of customer related intangibles that may not warrant recognition separately from goodwill 50

51 Identifiable Intangible Assets The FASB staff identified the following alternative views (April 2014): - View B1: Principle with Rebuttable Presumptions -Intangible assets would only be separately recognized if they are capable of being sold or licensed independently from other assets of a business. This alternative includes rebuttable presumption language on which assets would typically be expected to be recognized and which would not. - View B2: Change Limited to Non-competition Agreements (NCA) and Customer Related Intangibles (CRI) NCAs would not be recognized and CRIs would only be recognized if they are capable of being sold or licensed independently from other assets of a business. This alternative includes a rebuttable presumption that CRIs generally would not meet the criteria for recognition. 51

52 Identifiable Intangible Assets The FASB staff identified the following alternative views (April 2014), continued: - View B3: Principle and Rebuttable Presumption Limited to CRIs Similar to View B2, but limited to CRIs. - View B4: Narrower Definition of Contractual CRIs This alternative consists of narrowing the guidance on when a CRI meets the contractual/legal criterion for recognition provided in Paragraph

53 Identifiable Intangible Assets April 29, 2014 PCC Meeting View B1: NCAs and CRIs recognized if capable of being sold or licensed independently Elect to recognize all other intangibles other than NCAs and CRIs Alternatively, elect to perform analysis of other intangibles capable of being sold or licensed independently Expected Impact Primary Benefits Primary Concerns NCAs and many CRIs not recognized Option to assess other intangibles sold or licensed from the business Closely aligns with stakeholder views Potential to save costs beyond NCAs and CRIs Costly to implement Could lead to diversity in practice Principles-based, less likely to require future consideration May lead to differences in accounting for items 53

54 Identifiable Intangible Assets April 29, 2014 PCC Meeting View B2: Do not recognize the following intangible assets NCAs CRIs that are not capable of being sold or licensed independently from the other assets of a business Expected Impact Primary Benefits Primary Concerns NCAs not recognized CRIs not recognized in most business combinations Does not change recognition assessment for other intangibles Clear and specific change to U.S. GAAP In most business combinations, could achieve same result as B1 Preparers may continue to incur costs to estimate fair value of other intangibles Rules-based standard, future economic and business changes may require reconsideration 54

55 PCC Completed Projects 55

56 PCC Completed Projects Final ASUs PCC Issue No B, Accounting for Goodwill ASU issued January 16, 2014 PCC Issue No A, Accounting for Certain Receive- Variable, Pay-Fixed Interest Rate Swaps Simplified Hedge Accounting Approach - ASU issued January 16, 2014 PCC Issue No , "Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements ASU issued March 20,

57 Goodwill (ASU ) Why? Current requirements - provide limited benefits to users - disregard goodwill and goodwill impairment losses in analysis of financial condition and operating performance Cost & complexity of current goodwill impairment test 57

58 Goodwill Current US GAAP to Final Alternative Current US GAAP Final Alternative Do not amortize goodwill Test for impairment at least annually or more frequently Goodwill impairment test - At reporting unit level - Two-step test - Optional qualitative assessment Amortize goodwill Test for impairment upon occurrence of triggering event Goodwill impairment test - At entity level or reporting unit level - One-step test - Optional qualitative assessment 58

59 Goodwill Transition Amortize existing goodwill prospectively over 10 years or less if the entity can demonstrate that another useful life is more appropriate. Effective Date Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. 59

60 Interest Rate Swaps Simplified Hedge Accounting (ASU ) Why? Stakeholder Concerns Difficult to obtain fixed-rate borrowing Must enter into swaps to economically convert variable-rate to fixed-rate borrowing Lack expertise to comply with hedge accounting Question relevance/cost of determining & presenting fair value of swap for converting to fixed-rate borrowing 60

61 Interest Rate Swaps Current US GAAP vs. Alternatives Impact of interest rate swap Income statement Balance sheet No hedge accounting Volatility in interest expense as result of changes in FV Asset or liability at fair value Current GAAP Hedge accounting Interest expense approximates fixed rate debt Asset or liability at fair value Combined instruments (Not Finalized) Interest expense approximates fixed rate debt Only disclosure of settlement value PCC Alternative Simplified hedge accounting (Final) Interest expense approximates fixed rate debt Asset or liability at settlement value (or FV) Other comprehensive income No impact Includes changes in fair value of effective portion of hedge No impact Includes changes in settlement value (or FV) of the swap 61

62 Interest Rate Swaps Simplified Hedge Accounting Transition Private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption. Existing swaps as of the date of adoption may qualify for the simplified hedge accounting approach. Effective Date Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early application is permitted. 62

63 Interest Rate Swaps Combined Instruments Removed from agenda PCC Issue No B, Accounting for Certain Receive- Variable, Pay-Fixed Interest Rate Swaps Combined Instruments Approach - PCC took into consideration the simplified hedge accounting approach and concluded that Update meets the original proposal s objective of reducing the cost and complexity of applying hedge accounting for certain types of interest rate swaps while maintaining relevant information for private company financial statement users. 63

64 VIE Guidance to Common Control Leasing (ASU ) Why? Lenders do not find consolidating a lessor under common control with a lessee to be useful Guidance to apply VIE guidance costly & complex to implement - Difficult to follow & fragmented - Often times application of VIE guidance requires outside resources at a significant cost 64

65 VIE Guidance to Common Control Leasing 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 65

66 Lessee Elect Alternative Not to Apply When a) The private company lessee and the lessor are under common control b) The private company lessee has a leasing arrangement with the lessor, c) Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and d) 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. Important Note Not meeting the criteria above does not automatically result in consolidation. 66

67 VIE Guidance to Common Control Leasing Current US GAAP to Final Alternative Current US GAAP When performing a consolidation assessment, a private company lessee (the reporting entity) may need to apply VIE guidance to a lessor entity under common control. Final Alternative When certain conditions exist, a private company lessee can elect not to apply VIE guidance to a lessor entity. 67

68 VIE Guidance to Common Control Leasing Transition Full retrospective approach. Effective Date Effective for the first annual period beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, Early application is permitted. 68

69 PCC Pre Agenda Research Projects Stock-based compensation - At the April 2014 PCC meeting, the FASB staff presented preliminary research on private company valuation concerns in accounting for stock-based compensation. - PCC directed the staff to perform additional outreach and research on preliminary research presented 69

70 Joint FASB/IASB Projects Accounting for Financial Instruments Classification & Measurement Impairment (Credit Losses) Leases Revenue Recognition 70

71 Questions & Answers 71