LAW AND ACCOUNTING COMMITTEE SUMMARY OF CURRENT FASB DEVELOPMENTS 2017 Fall Meeting Washington DC

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1 LAW AND ACCOUNTING COMMITTEE SUMMARY OF CURRENT FASB DEVELOPMENTS 2017 Fall Meeting Washington DC Randall D. McClanahan Butler Snow LLP ACCOUNTING STANDARDS UPDATE NO CERTAIN SEC TRANSITION RELIEF In October 2017, the FASB issued Accounting Standards Update No , Revenue Recognition (Topic 615), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to Staff Announcement at the July 20, 2017 EITF meeting and Rescission of Prior SEC Staff Announcement and Observer Comments. This update provides that the SEC staff will not object if an entity elects to use the effective dates for private companies to adopt ASC 606 and ASC 842, if such entity is a public business entity only because their financial statements (or other financial information) must be included in the SEC filing of another entity. ACCOUNTING STANDARDS UPDATE No ACCOUNTING FOR FINANCIAL INSTRUMENTS HEDGE ACCOUNTING On August 28, 2017, the FASB issued Accounting Standards Update No Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. Some of the components of this update are as follows: New risk components can be hedged when applying hedge accounting. Expanded terms under which changes in the fair value of a hedged item can be measured and how the fair value of interest rate hedges can be measured. Modifies recognition and presentation of the effects of hedging instruments. Allows entity to elect for each hedge to assess effectiveness qualitatively, easing the burden of assessing hedge effectiveness. The effective date for public entities is for fiscal years beginning after December 15, 2018 and for interim periods within such years. For all other entities, the update is effective for fiscal years beginning after December 15, 2019 and interim periods after December 15,

2 ACCOUNTING STANDARDS UPDATE NO LIABILITIES & EQUITY TARGETED IMPROVEMENTS In July 2017, the FASB issued Accounting Standards Update No , Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Interests with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non-Public Entities and Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception. The requirement to include a down-round feature in determining whether an instrument is indexed to its own stock has been eliminated. Part II re-characterizes the indefinite deferral of FASB No. 150 to a scope exception. For public entities, the update will be effective for fiscal years, and for interim periods within such years, beginning after December 15, For all other entities, the update will be effective for fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, ACCOUNTING STANDARDS UPDATE NO SERVICE CONCESSION ARRANGEMENTS In May 2017, the FASB issued Accounting Standards Update No , Service Concession Arrangements (Topic 853), Determining the Customer of the Operation Services, a Consensus of the FASB Emerging Issues Tasks Force. The update eliminates the current diversity in the determination of the identity of the customer in service concession arrangements. The customer will be the grantor, rather than any third-party users of the services provided by the operating entity. The effective date is the same for Accounting Standards Update No , Revenue from Contracts with Customers (Topic 606). Entities should adopt No at the same time they adopt Update No ACCOUNTING STANDARDS UPDATE NO COMPENSATION STOCK COMPENSATION In May 2017, the FASB issued Accounting Standards Update No , Compensation Stock Compensation (Topic 718): Scope of Modification Accounting. The update addresses the accounting for changes in the terms of a share-based payment award. A modification will be defined as changes in terms or conditions of a share-based payment award. Currently the term modification is defined as a change in any of the terms or conditions of a share based payment award. The current language has been interpreted subjectively, and there are inconsistencies as to when modification accounting is applied. As amended, modification accounting would apply to a modification to the terms and conditions of the share-based payment award unless all of the following are the same before and after the modification: (i) fair value; (ii) vesting; and (iii) classification as equity or liability. 2

3 The effective date for all entities will be for annual periods, and for interim periods within such annual periods, beginning after December 15, Early adoption is permitted for reporting periods if financial statements have not yet been issued. ACCOUNTING STANDARDS UPDATE NO ACCOUNTING FOR INTEREST INCOME ASSOCIATED WITH THE PURCHASE OF CALLABLE DEBT SECURITIES In March 2017, the FASB issued Accounting Standards Update No , Receivables - Nonrefundable Fees and Other Costs (Subtopic ), Premium Amortization on Purchased Callable Debt Securities. The update provides that premiums on individual callable debt securities will be amortized to the earliest call date. If the call option is not exercised at that time, the yield is then reset to the coupon rate. Currently, the premium is amortized over the contractual life of the instrument. The effective date for public entities will be for fiscal years beginning after December 15, 2018 and interim periods within such years. For all other entities, the effective date will be for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, Early adoption is permitted. ACCOUNTING STANDARDS UPDATE NO DISCLOSURE FRAMEWORK RETIREMENT BENEFITS In March 2017, the FASB issued Accounting Standards Update, Compensation-Retirement Benefits (Subtopic ), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update modifies the presentation of net periodic pension costs and net periodic postretirement benefit costs. The effective date for public entities is for fiscal years beginning after December 15, For all other entities, the update is effective for annual periods beginning after December 15, ACCOUNTING STANDARDS UPDATE NO DISCLOSURE REQUIREMENTS CERTAIN PLANS In March 2017, the FASB issued Accounting Standards Update No , Plan Accounting: Defined Benefit Plan (Topic 960): Defined Contribution Pension Plan (Topic 962); Health and Welfare Benefit Plan (Topic 965) Employee Benefit Plan Master Trust Reports, a consensus of the FASB Emerging Issues Task Force. The update enhances disclosures of financial statement presentation requirements concerning a plan s interest in a master trust. The update is effective for fiscal years beginning after December 15, 2018 and will be applied prospectively. 3

4 ACCOUNTING STANDARDS UPDATE NO DE-RECOGNITION OF NON-FINANCIAL ASSETS In March 2017, the FASB issued Accounting Standards Update No , Other Income-Gains and Losses from the De-Recognition of Non-Financial Assets (Subtopic ): Clarifying the Scope of Asset De-Recognition Guidance and Accounting for Partial Sales of Non-Financial Assets. The update provides guidance on accounting for partial sales of non-financial assets" and adds a definition to the master glossary of in-substance non-financial assets." The update excludes transactions between entities under common control and does not address the sale of an undivided interest. The effective date is the same as for Accounting Standards Update No , as amended by Accounting Standards Update No , and will be adopted retrospectively. ACCOUNTING STANDARDS UPDATE NO ACCOUNTING FOR GOODWILL IMPAIRMENT In February 2017, the FASB issued Accounting Standards Update No , Intangibles Goodwill and Other (Topic 350), Simplifying the Accounting for Goodwill Impairment. The update simplifies the goodwill impairment test as follows: The impairment test is simplified by removing the requirement to perform a hypothetical purchase price allocation when carrying value exceeds fair value (i.e., step two of current GAAP impairment model). Entities should apply the same impairment model for reporting units with either a (i) positive carrying amount or (ii) zero or negative carrying amount. Accordingly, any goodwill impairment test would be performed by comparing fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any excess amount of carrying amount over fair value. The same impairment test will apply to all reporting units. No changes will be made for current GAAP presentation requirements. Additional disclosures will be required for those with zero or negative carrying amounts. The update is effective for all entities except for private companies that have already elected the private company alternative. The Board decided the effective date for non-sec filing public companies would be for years beginning after December 15, 2019 (December 15, 2020 for public entities that are not-sec filers.) For all other entities, the effective date will be for annual or interim goodwill impairment tests for fiscal years beginning after December 15, Early adoption is allowed beginning January 1,

5 ACCOUNTING STANDARDS UPDATE NO SEC MATERIAL In January 2017, the FASB issued Accounting Standards Update No , Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323); Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. Update No modifies the codification to consider two announcements made by the SEC observer in attendance at recent FASB Emerging Issues Task Force meetings concerning: (i) disclosures on financial statements when Update No. s , , and are adopted and (ii) accounting for investments in qualified affordable housing projects. ACCOUNTING STANDARDS UPDATE NO CONSOLIDATION - NOT-FOR-PROFIT ENTITIES In January 2017, the FASB issued Accounting Standards Update No , Not-for-Profit Entities Consolidation (Topic ): Clarifying When a Not-for-Profit Entity that is a General Partner should consolidate a For-Profit Limited Partnership or Similar Entity. The update provides that not-forprofit general partners should use the consolidation guidance in ASC Accordingly, a not-for-profit general partner is presumed to control a for-profit limited partnership, regardless of ownership interests. This presumption can be overcome if limited partners have substantive (i) kick-out rights or (ii) participating rights. The update is effective for fiscal years beginning after December 15, 2016 and for interim periods within such fiscal years. ACCOUNTING STANDARDS UPDATE CLARIFYING THE DEFINITION OF A BUSINESS In January 2017, the FASB issued Accounting Standards Update , Business Combinations (Topic 805), Clarifying the Definition of a Business. The update provides that the three elements of a business are inputs, processes and outputs. At a minimum, an input and a substantive process that contribute to the ability to create outputs will be necessary for a business to exist. For the latter to exist, an entity should possess an organized work force that can perform a process that is critical to develop or convert into outputs. If all but a de minimis amount of the fair value of the transferred set of activities and assets is represented by one asset, this indicates that the transferred set constitutes an asset instead of a business. The amendments will be applied prospectively and transition disclosures are not required. The effective date for public companies will be for annual periods beginning after December 15, 2017, including interim reporting periods within this period. For private entities, the effective date will be for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, ACCOUNTING STANDARDS UPDATE NO REVENUE RECOGNITION TECHNICAL UPDATE In December 2016, the FASB issued Accounting Standards Update , Technical Corrections and Improvements to Update No , Revenue from Contracts with Customers (Topic 5

6 606). This proposed update addresses technical corrections for: (i) loan guarantee fees; (ii) impairment testing for contract costs; (iii) interaction of impairment testing with other guidelines; (iv) provision for losses on construction-type and production-type contracts; (v) the scope of 606; (vi) the disclosure of remaining performance obligations; (vii) disclosure of priorperiod performance obligations; (viii) fixed-odd wagering casino contracts; and (ix) cost capitalization for funds. The effective date is the same as that for Accounting Standards Updates No and ACCOUNTING STANDARDS UPDATE NO TECHNICAL CORRECTIONS In December 2016, the FASB issued Accounting Standards Update No , Technical Corrections and Improvements. The update provides for minor changes to currently existing guidance. The update amends guidance for: (i) FASB ASC ; (ii) FASB ASC ; (iii) FASB ASC ; (iv) FASB ASC ; (v) FASB ASC ; and (vi) FASB ASC The amendments are effective immediately. ACCOUNTING STANDARDS UPDATE NO CASH FLOW STATEMENT RESTRICTED CASH In November 2016, the FASB issued Accounting Standards Update No , Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force. This update requires explanations regarding the changes in: (i) cash; (ii) cash equivalents and (iii) restricted cash or restricted cash equivalents. Current GAAP does not provide guidance regarding restricted cash or restricted cash equivalents. The update also clarifies that transfers among cash categories are not considered part of operating, investing and financing activities, and also require additional disclosures. The amendments will be applied on a modified retrospective basis through a cumulativeeffect adjustment to retained earnings. Deferred tax assets should be assessed to determine if realizable. Disclosures will be required for the following: (i) reason for and notice of change; (ii) effect of change on income from continuing operations; (iii) cumulative effect of change on retained earnings. Public entities will apply these changes in annual reporting periods beginning after December 15, 2017, and interim reporting periods within such periods. For non-public entities, the amendments will apply to annual reporting periods beginning after December 15, 2018 (and interim periods within annual periods beginning after December 15, 2019). Early adoption is permitted. LEASES On February 25, 2016, the FASB issued Accounting Standards Update No , Leases (Topic 842). The following is a summary of certain key provisions of the Update: 6

7 Definition of a Lease A contract that conveys the right to contract for the use of property, plant or equipment for a period of time, in exchange for consideration. Lessee has to both (i) obtain economic benefits from use of assets and (ii) direct the use of the asset. A contract does not contain a lease if an asset is incidental to the delivery of specified services. If the structure of the transaction does not constitute a lease, then its proper accounting is governed by another standard. Scope of the Update Except as provided below, all leases and subleases that transfer right to control the use of property. The following are not within the scope of the standard: Lessee Accounting Leases for the right to explore for minerals, oil and gas, etc. Leases of assets under construction Leases of biological assets Leases of intangible assets Leases of inventory Lessee will recognize a right of use asset for all leases except short-term leases. Lessees would apply one or two accounting approaches: (i) a financing approach or (ii) operating lease approach. For Finance Leases: Initially recognize a liability to make lease payments and a right of use asset, both measured at present value of lease payments. The liability will be subsequently measured using the effective interest method. 7

8 Right of use asset will be amortized on a systematic basis that reflects the pattern of consumption, resulting in greater total expense in earlier years. Recognize interest expense and amortization expense separately in the income statement. For Operating Leases: Lessor Accounting Initially recognize a liability to make lease payments and a right of use asset, both measured at present value of the lease payments. Measure the liability to make lease payments using the effective interest method. Recognize lease expense as one amount in the income statement. Lessor would account for lease under one of three approaches: (i) sales type lease; (ii) direct financing lease; or (iii) operating lease. Sales Type Transfers ownership of underlying asset at end of term. Lessor is reasonably certain to exercise a purchase option. Lease term is for 75% or more of economic life of the underlying asset; or Present value of minimum lease payments plus guaranteed residual value equals or exceeds 90% of the fair value of the leased asset. Direct Financing Lease does not meet any of the above criteria, but meets both of the following: Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value of the underlying asset; and 8

9 Subleases Operating lease It is probable that the lessor will collect lease payments plus any residual value guarantee. Lease that doesn't meet any of the above criteria. For sales-type or direct financing leases: The net investment in lease is recognized as an asset (lease receivable plus unguaranteed residual asset). De-recognize underlying assets. Selling profit is recognized at inception of lease and interest income recognized over lease term. For operating leases: Lessor continues to recognize underlying assets. Lease income recognized over straight-line basis. If the lessee acquires less than an insignificant portion of the leased asset, then the lessor should account for the underlying asset and recognize lease income over the lease term (i.e., similar to current operating lease format). Deferred profit is not recognized until the residual asset is sold or re-leased to another lessee. A lessor s lease of investment property would not be treated under the receivable and residual approach. In such cases, the lessor should continue to recognize the underlying asset and recognize lease income over the lease term. The head lease and the sublease should be accounted for as separate transactions. Sublessors utilize lease accounting on the head lease and lessor accounting on sublease. 9

10 Lease Term The lease term would be the non-cancellable base period plus any periods for which it is reasonably certain that options will be exercised to extend the lease term. Accounting for Purchase Options The exercise of a purchase option should be included in the computation of a lessee s liability for lease payments if the lessee is reasonably certain to exercise the purchase option. Short-Term Leases A short-term lease is a lease with a maximum possible term of 12 months or less. Lessees have the option to elect to account for all short-term leases of a portfolio asset class by recognizing lease payments in profit or loss on a straight-line basis, rather than by recognizing a lease asset or liability. Contract Modifications Real Estate Lessees will revise lease accounting if: There is change in assessment of the lease term. There is change in assessment of whether lessee will exercise the purchase option. There is change in amount probably owed by lessee to satisfy a residual value guarantee; or A contingency is resolved. The update removes the specific guidance for leases of real estate in current GAAP. 10

11 Sale and Leaseback Seller-lessees should follow guidance in ASC 606, Revenue from Contracts with Customers. If a sale has occurred, the transaction should be accounted for as a sale and then a separate leaseback. If sale has not occurred, then the contract should be accounted for as a financing. Transition Guidance Modified Retrospective Transition Lessees must recognize a right of use asset and a lease liability for all operating leases based on present value of remaining minimum lease payments. Potential Effects of this Update: The lessee s balance sheet will grow due to the recognition of an asset and liability for all previously accounted for operating leases. Because of the required recognition of a liability, the lessee s leverage ratios will decrease. Lessee s interest coverage ratios computed on an earnings basis will decrease. Any lessee measures involving EBIT or EBITDA will improve since portions of the lease payments will now be characterized as interest expense and depreciation expense. Operating cash flow for a lessee will improve since payments for leased assets will be classified as financing activities rather than operating activities. For leases previously accounted for as operating leases, the lessor s balance sheet will grow under the proposals. Consequently, the lessor s ratios will also be affected. For leases accounted for as direct financing leases, the effect on lessors will depend on the specific characteristics of the lease. Loan covenants, financing agreements, and regulatory requirements could be affected. 11

12 The effective date for public companies will be for years beginning after December 15, 2018, and for interim periods within such years. The standard will be effective a year later for private companies, and for interim periods within fiscal years beginning after December 15, REVENUE RECOGNITION On May 28, 2014, the FASB issued Accounting Standards Update, No , Revenue Recognition (Topic 605), Revenue from Contracts with Customers. The core objectives of this update are for: (i) eliminating inconsistencies in current rules; (ii) creating a single framework; (iii) standardizing revenue recognition practice; (iv) improving usefulness of disclosures; and (v) making financial statements easier to prepare. The update only applies to contracts with customers. A customer is a contract party for purposes of acquiring goods and services. The overriding principles are as follows: Revenue should be recognized in a manner that reflects the transfer of goods or services. The consideration expected to be received should be equal to the revenue recognized. The following five steps would be applied in analyzing revenue recognition: Step 1 - Identify the contract with a customer. Contracts are considered on an individual basis but would be combined if (i) they were negotiated as a package, (ii) the amount of consideration depends on the price or performance of the other, or (iii) all goods and services are considered part of a single obligation. A contract modification would be approved when it created enforceable rights and obligations. For example, before a change order would affect revenue recognition, the change order must create an enforceable right. A contract modification is a separate contract if the modification increases the scope because of the addition of distinct promised goods or services and the price of contract increases by an amount that reflects the standalone price of the additional goods or services. Step 2 - Identify the separate performance obligations in the contract. 12

13 Each promised good or service is accounted for separately if it is distinct. A good or service is distinct if the entity regularly sells it separately, or the customer can benefit from the good or service on its own or with other resources available. If the good or service is not distinct, an entity would combine the good or service until the bundle of goods or services is distinct (obviously, this may mean that all contracted goods and services for a particular contract are treated as a single performance obligation). A good or service should be accounted for as a distinct good or service if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer. Factors in determining whether a good or service is distinct include: Whether the entity provides a significant service of integrating the good or service into the bundle of goods or services that the customer has contracted. Whether the customer is able to purchase the good or service without affecting the other goods or services in the contract. Whether the good or service significantly modifies or customizes another good or service in the contract. Whether the good or service is part of a series of consecutively delivered goods or services promised in the contract, the performance obligations are satisfied over time and the entity uses the same method for measuring progress of the transfer of the goods or services. Step 3 - Determine the transaction price (the amount to which an entity expects to be entitled). The transaction price (and correspondingly, revenue) is not adjusted for customer credit risk. This is a reversal from the 2010 Exposure Draft. Effect of credit risk (such as a price concession) must be considered in determining if there is an impairment loss. The transaction price is reassessed at each reporting date. The transaction price should include the minimum amount of variable consideration that is expected to be received and that would not result in a subsequent revenue reversal. 13

14 If the contract has a financing component, then the consideration should be adjusted to reflect the time value of money. Non-cash consideration should be measured at fair value. If an entity expects to pay consideration to a customer, the entity would account for the consideration as a reduction of the transaction price (unless payment is in exchange for a distinct good or service). If a sale involves a loan, the entity would consider a customer s credit risk. Step 4 - Allocate the transaction price to separate performance obligations in the contract. If there are multiple performance obligations, allocate the transaction price to each separate performance obligation based on relative stand-alone selling prices. If there are no separate observable selling prices, the entity should estimate them. Methods used to estimate would include: (i) adjusted market measurement approach; (ii) expected cost plus a margin approach; or (iii) a residual approach. If an entity gives discounts to a customer, and selling prices indicate evidence of a separate performance obligation to which discounts should be allocated, then the discount should be allocated to these performance obligations, as opposed to all performance obligations. The residual approach for allocating price of a good or service should be used if the stand-alone price is variable or uncertain and also for contracts when there are two or more goods or services that have highly variable prices, but at least one of the other goods or services has a stand-alone price that is not highly variable. Step 5 - Recognize revenue when (or as) the entity satisfies a performance obligation. Defined by when the customer obtains control of that good or service. Indications of transfer of control include the following: (i) the entity has the present right to payment for the asset; (ii) the customer has legal title to the asset; (iii) the entity has transferred physical possession of the asset; (iv) the customer has significant risks and rewards of ownership of the asset; (v) the customer has accepted the asset. If a performance obligation is satisfied over time, then a method of measuring progress, such as outputs or inputs, would be determined. 14

15 For variable consideration, recognize revenue when the entity is reasonably assured of being entitled to the consideration in exchange for a performance obligation. Both of these criteria must be met for an entity to be reasonably assured of variable consideration: (i) the entity has experience with similar types of performance obligations and (ii) the entity s experience is predictive of the amount of consideration to which the entity is entitled. A performance obligation will be deemed satisfied over time (in such case, control is transferred over time) if at least one of the following tests is met: The asset created does not have an alternative use and the entity has a contractual right to payment for performance to date. The assessment of alternative use will be made at the inception of the contract. The customer consumes the benefits of the service performance throughout the process, and another entity would not have to substantially re-perform such work; or The customer controls the asset as it is being produced or enhanced. If performance obligation is satisfied over time, the entity would be required to recognize revenue over time. This could result in an entity recognizing revenue before the product is delivered. The standard was supposed to apply to public entities for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. The effective date for nonpublic entities was supposed to be for annual reporting periods beginning after December 31, 2017 and interim periods after that date. Early application was prohibited, and the standard would be applied retrospectively. In subsequent rediliberations, the FASB decided to clarify guidance for: Sales tax reporting Contract modifications Transition disclosures Non-cash consideration Collectability Identifying performance obligations Licenses Accounting Standards Update No delayed the effective date for one year. 15

16 NONEMPLOYEE SHARE-BASED ACCOUNTING In March 2017, FASB issued Proposed Accounting Standards Update No , Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The overall objective of this proposed update is to modify Topic 718, Compensation - Stock Compensation, to include payments for goods and services to nonemployees. Currently, ASC 718 only applies to share-based payments to employees. Proposed changes include the following: Overall measurement objective measured at fair value of the equity instrument that an entity is obligated to issue when goods have been delivered or services have been rendered. Measurement date measured at grant date. Performance conditions have to consider the possibility of satisfying performance obligations. Reassessment of equity class awards - classification of equity classified nonemployee share-based payment awards would continue to be subject to ASC 718, even after the non-employee ceased to provide goods or services to the entity. An effective date has not been proposed. Comments were due by June 5, The Board will consider feedback at a future meeting. DISCLOSURE FRAMEWORK INCOME TAXES On July 26, 2016, the FASB issued a proposed Accounting Standards Update, Income Taxes (Topic 740): Disclosure Framework Changes to Disclosure Requirements for Income Taxes. The proposed update would require the following disclosures for all entities: Description of changes in tax law that would probably affect the entity in a future period. Separation of income before income taxes between domestic and foreign operations. Separation of income tax expense between domestic and foreign operations. Income taxes paid would be separated between domestic and foreign operations. Changes in the indefinite reinvestment of undistributed foreign earnings. 16

17 Aggregate cash, cash equivalents and marketable securities held by foreign subsidiaries. For public entities, the following disclosures would also be required: Separate disclosures of unrecognized tax benefits. Settlements using existing deferred tax assets. Recognition of and/or releases of valuation allowances. Amount of unrecognized tax benefits. The effective date will be determined after feedback is considered. The comment deadline ended September 30, On January 25, 2017, the Board discussed the comments received but no further decisions were made. DISCLOSURE FRAMEWORK FAIR VALUE On December 3, 2015, the FASB issued Proposed Accounting Standards Update, Fair Value Measurement (Topic 820), Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurements. The proposed update would align the requirements to those contained in Exposure Draft No , Proposed Statement of Financial Accounting Concepts Conceptual Frameworks for Financial Reporting Chapter 8: Notes to Financial Statements. The update would: Eliminate disclosures for (i) the reasons for transfers between level one and level two of the fair value hierarchy; (ii) the reasons for the timing of transfers between levels; and (iii) level three measurement valuation policies and procedures. For private companies, eliminate reconciliation of opening balances to closing balances for recurring level three measurements. Add certain disclosure requirements for public companies. The comment deadline ended February 29, At its June 1, 2016 meeting, the Board asked the staff to conduct further outreach. On June 6, 2017, the staff was asked to present a plan for rediliberations. DISCLOSURE FRAMEWORK INVENTORY In January 2017, the FASB issued Proposed Accounting Standards Update No , Inventory (Topic 330), Disclosure Framework Changes to the Disclosure Requirements for Inventory. The 17

18 purpose of the proposed update is to improve the efficiencies and disclosures in the notes to financial statements regarding inventory. The following disclosures would be required: Inventory disaggregated by component Inventory disaggregated by measurement basis Changes to the balance in inventory Replacement cost for LIFO inventory Effect of LIFO liquidation on income Description of costs capitalized into inventory Quantitative and qualitative information about critical assumptions used in the calculation of inventory. The following disclosures would not be required: Inventory measured at fair value, net realizable value or market value An entity s LIFO method and computation techniques Inventory pledged as collateral Terms of firm purchase commitments Changes in market factors. The changes would be applied prospectively. An effective date has not been proposed. Comments were due March 13, The Board met on June 21, 2017 and discussed comments received on the proposed update. DISCLOSURE FRAMEWORK DEFINED BENEFIT PENSION AND POST RETIREMENT PLANS On January 26, 2016, the FASB issued Proposed Accounting Standards Update, Compensation Retirement Benefits Defined Benefit Plans General (Subtopic ), Changes to the Disclosure Requirements for Defined Benefit Plans. The proposed update will remove certain disclosure requirements that are deemed inconsistent with FASB s proposed concepts statements. Certain other disclosures would be added. The comment period ended April 25, Deliberations will continue at a future date. 18

19 NOTES TO FINANCIAL STATEMENTS On September 24, 2015, the FASB issued Proposed Accounting Standards Update No , Notes to Financial Statements (Topic 235), Assessing Whether Notes are Material. The main provisions are as follows: Omitting disclosures of immaterial information would not constitute an accounting error. Materiality is defined in legal terms. Materiality is applied quantitatively and qualitatively, both individually and in the aggregate. These amendments would be effective upon issuance. Comments were due on December 8, On November 8, 2017, the Board began rediliberations on this issue. The Board decided the following: (i) to amend the current definition of materiality in Concept Statements No. 8 with language similar to that in Concept Statements No. 2, and (ii) to remove references to materiality as a legal concept in Statement 8 and Topic 235. CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING On September 24, 2015, the FASB issued Proposed Accounting Standards Update No , Proposed Amendments to the Statement of Financial Accounting Conceptual Framework and Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information. The proposed amendments would eliminate any inconsistency between the framework and the legal definition of materiality by making it clear that the meaning of materiality is a legal concept. The U.S. Supreme Court s definition of materiality would be incorporated by reference to the codification. Comments were due on December 8, CONCEPTUAL FRAMEWORK MEASUREMENT A goal of this agenda item is to develop concepts related to measurement, including: (i) agreeing on the meaning of key terms; (ii) identifying appropriate types of measurement; and (iii) determining circumstances under which to use specific measurements. At its meeting on December 15, 2015, the Board discussed alternatives for what should be included in initial carrying amounts of assets, liabilities and equity. At its November 30, 2016 meeting, the Board decided to develop a project to address initial measurement and carrying amount of assets. The Board also decided that there are three categories of initial measurement: (i) entry price; (ii) past price; and (iii) estimated future cash flows. 19

20 DISCLOSURES BY BUSINESS ENTITIES ABOUT GOVERNMENT ASSISTANCE On November 12, 2015, the FASB issued Proposed Accounting Standards Update No , Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance. The update provides that disclosures should be required regarding contracts in which an entity receives value or benefit from the government. The term government will include domestic and foreign local, regional and national governments, along with related entities. Disclosures will be required about: (i) the type of arrangements; (ii) accounting for the assistance; and (iii) effect on financial statements of receiving party. Receiving entities will be required to disclose: (i) information about nature of assistance; (ii) line items affected by assistance; (iii) terms and conditions of commitments; (iv) amount of government assistance received but not directly recognized. The FASB decided to exclude contracts from this proposal if: (i) the government is legally required to provide the assistance to an entity simply because it met eligibility requirements or (ii) the government is a customer. The update would apply to public and private entities. The comment period ended February 10, The Board began redeliberations on June 8, During the redeliberations, the FASB confirmed that: (i) the standard will be limited to disclosures; (ii) the scope will apply to legally enforceable agreements; and (iii) not-for-profit entities will be excluded from this guidance. Redeliberations are continuing. SIMPLIFYING THE BALANCE SHEET CLASSIFICATION OF DEBT On January 10, 2017, the FASB issued Proposed Accounting Standards Update No , Debt (Topic 470) Simplifying the Classification of Debt in a Classified Balance Sheet (Current verses Noncurrent). A debt would be noncurrent if one of the following criteria is present as of the balance sheet date: (i) the contractual settlement date is at least 12 months after the balance sheet date or (ii) the entity can contractually defer the settlement of the liability for a period of 12 months or longer after the balance sheet date. Convertible debt instruments and liabilityclassified mandatorily redeemable financial instruments are included in the scope of the proposed guidance. A subsequent refinancing would not be taken into account in determining classification of debt as of balance sheet debt. Comments were due on May 5, On June 21, 2017, the Board discussed the comments received. On September 13, 2017, the Board decided to modify the scope to include lease liabilities and also affirmed most of the Proposed Accounting Standards Update. The Board has completed rediliberations and asked the staff to draft a final update. 20

21 CONCEPTUAL FRAMEWORK PRESENTATION On August 11, 2016, the Board issued an exposure draft, Conceptual Framework for Financial Reporting: Chapter 7: Presentation. The purpose of this draft is to address concepts and factors regarding information presented in the financial statements. Furthermore, the factors will be assigned priority in deciding how to display such items. The FASB will use the conclusions as a basis for creating presentation requirements in future standards. Comments were due by November 9, On May 3, 2017, the Board discussed feedback from comment letters. CONCEPTUAL FRAMEWORK ELEMENTS This project was added to the Board s technical agenda on May 3, At its October 11, 2017 meeting, the Board discussed working definitions of revenues and expenses, and their relationship with the definitions of gains and losses. NOT-FOR-PROFIT STATEMENTS TECHNICAL UPDATE On October 27, 2016, the FASB issued Proposed Accounting Standards Update No , Technical Corrections to Update No , Not-For-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities Endowment Reports. The proposed update would remove the phrase that contain no purpose restrictions from Accounting Standards Update No The comment period ended November 11, LONG DURATION INSURANCE CONTRACTS On September 29, 2016, the FASB issued Proposed Accounting Standards Update No , Financial Services Insurance (Topic 944): Targeted Improvements to the Accounting for Long Duration Contracts. The following are among the proposed modifications: Update assumptions used to measure future cash flows at least annually and the discount rate at each reporting date Discount expected future cash flows at the yield of high quality fixed income instruments Measure all market risk benefits at fair value Amortize deferred acquisition costs in proportion to the amount of insurance in force No effective date has been proposed. The standard would be applied via a cumulative catch-up adjustment. 21

22 The comment period ended December 15, Rediliberations are continuing. During rediliberations, the following are some of the conclusions of the Board: (i) measurement assumptions should be updated, (ii) cash flow assumptions should be reviewed at least annually, (iii) discount rate assumptions should be reviewed each reporting date, (iv) contracts from different issue years should not be aggregated; (v) the existing guidance for the liability for future policy benefits for participating insurance contracts should be retained; (vi) amortization of deferred acquisition costs should be modified and simplified; and (vii) market risk benefits should be measured at fair value. INTEREST INCOME ON PURCHASE DEBT SECURITIES AND LOANS. On March 18, 2015, the Board voted to add this item to its agenda. Deliberations have not yet started. FINANCIAL STATEMENTS OF NONPROFIT ENTITIES This is Phase 2 of the not for profit financial statements project. The purpose is to reexamine standards for financial statement presentations by not-for-profit entities. Deliberations have not yet begun. FINANCIAL PERFORMANCE REPORTING The Board added this project to the agenda in January The objective is to review ways to improve relevance of information presented in the performance statement. At its July 24, 2015 meeting, the Board directed the staff to research other methods for distinguishing between earnings components. At its January 20, 2016 Board meeting, the Board directed the staff to clarify the objectives of the project. On September 20, 2017, the Board decided to focus the project on the disaggregation of performance information. IMPROVING THE ACCOUNTING FOR ASSET ACQUISITIONS AND BUSINESS COMBINATIONS This is phase 3 of the Definition of a Business Project. On August 2, 2017, the Board decided the project should address differences in accounting for acquisition of assets and businesses (as opposed to sales of a business). The Board directed the staff to conduct further outreach. COLLABORATION ARRANGEMENTS TARGETED IMPROVEMENTS On November 16, 2016, the FASB added this project to its agenda. Deliberations began on October 11, In this initial meeting, the Board decided: (i) certain transactions between collaboration participants could result in revenue under Topic 606; (ii) Topic 606 should be applied if the collaborative participant is a customer; and (iii) if identified units of accounting are deemed within the scope of Topic 606, an entity should use the entire accounting model in Topic

23 On October 4, 2017, the Board directed the staff to obtain feedback on the potential impact of the model. CONSOLIDATION RELATED PARTY GUIDANCE In June 2017, the FASB issued proposed Accounting Standards Update No , Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The proposed update provides as follows: Private company reporting entities do not have to apply VIE guidance to entities under common control if neither the parent nor the entity being considered as a VIE is a public entity. In analyzing whether fees paid to decision makers and service providers represent variable interests, indirect ownership interests are considered on a proportional basis. If no reporting entity individually has a controlling financial interest, mandatory consolidation is not required when commonly controlled parties as a group have a controlling financial interest. The comment period ended September 5, NOT-FOR-PROFIT ENTITIES REVENUE RECOGNITION In August 2017, the FASB issued proposed Accounting Standards Update No , Not-For-Profit Entities (Topic 958); Clarifying the Scope of The Accounting Guidance for Contributions Received and Contributions Made. The proposed update provides guidance as to how an entity should determine whether a transaction is an exchange transaction or a contribution. The effective date will be for annual reporting periods beginning after December 15, 2017 for public entities. For all other entities, the effective date will be for annual reporting periods beginning after December 15, 2018 and for interim reporting periods beginning after December 15, The Board will consider feedback at a future meeting. TECHNICAL CORRECTIONS BAD DEBT RESERVES AT SAVINGS & LOANS INSTITUTIONS In June 2017, the FASB issued proposed Accounting Standards Update No , Technical Corrections and Improvements to Topic 942, Financial Services Depository and Lending: Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans. The proposed update purports to remove outdated deferred tax guidance on bad debt reserves of savings and loans institutions arising after December 31, The comment period ended August 28, The Board will consider feedback of a future meeting. 23

24 DISTINGUSHING LIABILITIES FROM EQUITY On September 20, 2017, the Board added a project to its agenda to focus on the indexation and settlement of convertible debt, disclosures and earnings per share. The Board directed its staff to research and draft a technical plan. SEGMENT REPORTS The Board decided on September 20, 2017 to add a project to its agenda on improvements to segment aggregation criteria and disclosure requirements. TECHNICAL CORRECTIONS MEASUREMENT OF FINANCIAL ASSETS On October 3, 2017, the FASB issue Proposed Accounting Standards Update No , Technical Corrections and Improvements to Recently Issued Standards I Accounting Standards Update , Financial Instruments Overall (Subtopic ); Recognition and Measurement of Financial Assets and Financial Liabilities. The proposed update provides certain guidance for investments in equity securities, derivatives and hedging, and foreign currency transactions. For those entities that have early adopted guidance on presentation changes related to the application of the fair value option to liabilities, this would be effective upon the issuance of a Financial Accounting Standards Update by applying the same transition requirements as those in Accounting Standards Update No For the remaining guidance, the effective date of transition would be the same as for Accounting Standards Update TECHNICAL CORRECTION - LEASES On October 3, 2017, the FASB issued Proposed Accounting Standards Update No , Technical Corrections and Improvements to Recently Issued Standards II Accounting Standards Update No , Leases (Topic 842). This proposed update would make certain technical corrections to certain provisions of the lease guidance. For entities that have adopted ASC 842, the guidance would be effective upon issuance of a final accounting standards update by applying the same transition requirements as in ASC 842. For entities that have not adopted ASC 842, the effective date will be the same as an ASC 842. TECHNICAL CORRECTIONS CODIFICATION IMPROVEMENTS In October 2017, the FASB issued Proposed Accounting Standards Update No , Codification Improvements. The proposed update would make certain technical corrections, clarifications and other improvements the FASB accounting standards codification regarding the following: (i) comprehensive income; (ii) debt modifications and extinguishments; (iii) distinguishing liabilities from equity; (iv) stock compensation; (v) business combinations; (vi) derivatives and hedging; and (vii) fair value measurement. The effective date would be immediately upon issuance of the final accounting standards update. 24