EITF Roundup: Highlights from the June Meeting

Transcription

1 The Dbriefs Financial Reporting series presents: EITF Roundup: Highlights from the June Meeting Bob Uhl, Partner, Deloitte & Touche LLP Adrian Mills, Partner, Deloitte & Touche LLP Jason Nye, Senior Manager, Deloitte & Touche LLP Sean Prince, Manager, Deloitte & Touche LLP June 17, 2013

2 Agenda 13-A Benchmark Interest Rates 13-C Unrecognized tax benefit liability 12-H Service Concession Arrangements 12-G Measuring Assets and Liabilities of a CFE 13-E Reclassifying Loans to Other Real Estate Owned 13-D Post-service Performance Targets Administrative matters Question and answer

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. See FASB s Web site for official minutes and ratified consensuses.

4 Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the Emerging Issues Task Force.

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

6 EITF Developments

7 Issue 13-A: Benchmark interest rates Background ASC 815 provides guidance on the benchmark interest rate risks that are permitted to be hedged widely recognized and quoted rate in an active financial market that is broadly indicative of the overall level of interest rates attributable to highcredit-quality obligors in that market... In theory, the benchmark interest rate should be a risk-free rate (that is, has no risk of default). ASC 815 permits entities to hedge only the benchmark components Demand for products based on the Fed Funds Effective Swap Rate, which represents the Overnight Index Swap Rate (OIS) in the U.S. Spread between LIBOR and OIS has grown 1 Borrowing Rate Liquidity Duration Credit Benchmark (risk-free)

8 Issue 13-A: Benchmark interest rates Final consensus Current U.S. benchmark interest rates remain: 1. U.S. Treasuries 2. LIBOR Federal Funds Effective Swap Rate (represents OIS) is an acceptable benchmark interest rate in the United States Existing restrictions on the use of different rates for similar hedges is removed Interest rate swap Company X Fixed Big Bank OIS Periodic settlements based on an agreed upon notional and fixed interest rate versus Fed Funds Effective rate 2

9 Issue 13-A: Benchmark interest rates Final consensus Transition and effective date Prospective for qualifying new or redesignated hedging relationships Effective upon the issuance of a final ASU 3

10 Poll question # 2 True or False: Under a finalized ASU related to this issue, rates based on U.S. Treasuries and the LIBOR swap rate will still be acceptable benchmark rates in the U.S. True False

11 Issue 13-C: Unrecognized tax benefit liability Background Balance Sheet Gross Net Deferred Tax Assets 1, Other Assets 20,000 20,000 Total Assets 21,000 20,500 UTB Liability Other Liabilities 14,000 14,000 Diversity in Practice Currently entities present an unrecognized tax benefit (UTB) liability net of a tax carryforward either when: The UTB would, or is available to, reduce the net operating loss (NOL) or tax credit carryforward under the provisions of the tax law; or Total Liabilities 14,500 14,000 Total Equity 6,500 6,500 Total Liabilities and Equity 21,000 20,500 The UTB is directly associated with a tax position taken in a tax year that resulted in the recognition of a NOL carryforward for that year 4

12 Issue 13-C: Unrecognized tax benefit liability Final consensus Presentation A UTB shall be presented as a reduction of a deferred tax asset for a NOL, a similar tax loss, or a tax credit carryforward (that is, net rather than as a liability) except as follows When a NOL, a similar tax loss, or tax credit carryforward is not available or would not be used to settle additional income taxes that would result from the disallowance of a tax position, the UTB shall be presented as a liability 5

13 Issue 13-C: Unrecognized tax benefit liability Final consensus Transition and effective date Prospectively to any UTBs that exist as of the effective date with an option to apply the final ASU retrospectively Early adoption will be permitted Effective for Public entities, for annual periods beginning after December 15, 2013, and interim periods within those annual periods Nonpublic entities, for annual periods beginning after December 15, 2014, and interim periods within those annual periods 6

14 Issue 12-H: Service concession arrangements Background A private-sector entity ( operating entity ) enters into a contract with a city-government ( grantor ) for the right to operate the city s toll roads for 20-years and the obligation to maintain the infrastructure and operate it efficiently The operating entity keeps all tolls collected The operating entity makes certain payments to the city, or compensates them by constructing/upgrading infrastructure The grantor sets the toll fees, and maintains ownership of the toll road during the entire contract period What accounting guidance should be applied to this transaction (i.e., is this a lease)? 7

15 Issue 12-H: Service concession arrangements Background Accounting guidance U.S. GAAP does not specifically address the accounting for service concession contracts (IFRS does) Some operating entities account for these contracts as leases (ASC 840) Some operating entities account for these contracts as intangible assets, financial assets, or both (in a manner similar to IFRS guidance) 8

16 Issue 12-H: Service concession arrangements Consensus-for-exposure Scope Contracts between a public-sector grantor and a private-sector operating entity to construct, upgrade, or operate its infrastructure that is used to provide public services Grantor must: Control (ability to modify or approve) what services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price Control any residual interest in the infrastructure at the end of the term of the contract The EITF s consensus-for-exposure is that service concession contracts meeting this issue s scope are not leases 9

17 Issue 12-H: Service concession arrangements Consensus-for-exposure Transition and effective date Entities would apply this issue using a limited retrospective approach to All contracts existing at the beginning of the period of adoption All contracts entered into after the beginning of that period Effective date will be discussed at a future meeting 10

18 Poll question # 3 True or False: Service concession contracts that fall within the scope of Issue 12-H can be accounted for as a lease. True False

19 Issue 12-G: Measuring assets/liabilities of a CFE Background Collateralized financing entity (CFE): Holds: Financial assets such as bonds or loans Pass through to BI holders Issues: Non-recourse financial liabilities [issued as beneficial interests (BIs)]. Has little or no equity. An entity that is the primary beneficiary of a CFE will consolidate the variable interest entity, resulting in: Initially measuring newly consolidated financial assets and financial liabilities of the CFE at fair value (FV) An option to elect the fair value option for the financial assets CFEs pass through cash flows, but fair value of the assets may not equal the fair value of the liabilities 11

20 Issue 12-G: Measuring assets/liabilities of a CFE Background Issue How should an entity measure the financial assets and financial liabilities of a CFE in order to eliminate differences that do not relate to beneficial interests held by the entity? Currently, entities record the excess as either: A gain and allocate such amount to the noncontrolling beneficial interest holders in arriving at net income available to common shareholders, or A direct adjustment to appropriated retained earnings Subsequent accounting for changes in fair value: allocate to noncontrolling interest in arriving at net income available to common shareholders 12

21 Issue 12-G: Measuring assets/liabilities of a CFE Consensus-for-exposure Scope Initial and subsequent measurement guidance applies to all entities that are required or elect to measure all of the CFE s financial assets at fair value and do not account for the financial liabilities at amortized cost CFE defined A variable interest entity that holds financial assets and issues beneficial interests in those financial assets. The equity issued by the variable interest entity, if any, is nominal. All of the beneficial interests only have recourse to the related financial assets of the CFE and are classified as financial liabilities. 13 A CFE may temporarily hold nonfinancial assets (e.g., real estate) as a result of default or efforts to restructure a debt instrument

22 Issue 12-G: Measuring assets/liabilities of a CFE Consensus-for-exposure Initial and subsequent measurement Measure financial assets at fair value Measure financial liabilities at an amount equal to: Fair value of financial assets + Carrying value of nonfinancial assets Fair value of financial assets and carrying value of nonfinancial assets related to beneficial interests held by the entity Carrying value of beneficial interests that represent compensation for services 14 No change to the accounting for beneficial interests that represent compensation for services (i.e., still cannot be at fair value)

23 Issue 12-G: Measuring assets/liabilities of a CFE Example 100% of beneficial interests are held by third-parties Balance sheet Before consensus After consensus CFE financial assets (FV) Carrying value of nonfinancial assets CFE financial liabilities (held by third parties) Appropriated retained earnings (97) (100) (3) - 15

24 Issue 12-G: Measuring assets/liabilities of a CFE Example 90% of beneficial interests are held by thirdparties Balance sheet Before consensus After consensus CFE financial assets (FV) Carrying value of nonfinancial asset Beneficial interests held by the entity CFE financial liabilities (held by third parties) [(97) * 10%] = (9.7) [(97) * 90%] = (87.3) Appropriated RE (2.7)

25 Issue 12-G: Measuring assets/liabilities of a CFE Consensus-for-exposure Disclosure Financial assets, which are measured at fair value, subject to ASC 820 disclosure requirements Financial liabilities are not subject to ASC 820, but entities would state that the measure is derived from the financial asset Transition and effective date Entities required to apply issue prospectively; however, entities that previously elected to measure a CFEs financial assets at fair value may apply the issue retrospectively Entities that had not previously elected to measure a CFEs financial assets at fair value may elect to do so at adoption Effective date will be discussed during a future meeting 17

26 Poll question # 4 Do you believe real estate held by a CFE should be measured at fair value even if it is not held for sale? Yes No Don t know

27 Issue 13-E: Reclassifying loans to OREO Background Under ASC 310, a creditor reclassifies mortgage loans to other real estate owned (OREO) when there is in substance a repossession or foreclosure by the creditor However, U.S. GAAP does not define nor provide interpretive guidance for in substance a repossession or foreclosure This issue addresses when a creditor should reclassify a loan to OREO 18

28 Issue 13-E: Reclassifying loans to OREO Consensus-for-exposure Scope: Consumer loans that are collateralized by real estate property Consensus-for-exposure require entities to: Reclassify loans when either of the following occurs The creditor obtains legal title to the real estate collateral The borrower voluntarily conveys all interest in the real estate property to the entity to satisfy the loan Disclose: The carrying amount of loans secured by one to four family properties in the process of foreclosure Other information about the OREO balance 19

29 Issue 13-E: Reclassifying loans to OREO Consensus-for-exposure Transition and effective date Reclassify loans (or OREO) as of the beginning of the year of adoption Record a cumulative-effect adjustment to beginning retained earnings, if any Early adoption would be permitted Effective date will be discussed at a future meeting 20

30 Poll question # 5 Do you think the scope of Issue 13-E should be expanded to include commercial mortgage loans and loans collateralized by nonfinancial assets (e.g., auto loans)? Yes No Don t know

31 Issue 13-D: Post-service performance targets Background Objective of ASC 718 is to measure grant-date fair value and recognize over period employee service is received Stock-based compensation awards often contain performance conditions, which include both: A requisite period of service provided by the employee A performance target defined by reference to the employer s operations or activities Some stock-based compensation awards include performance targets that can be met after the requisite service period U.S. GAAP does not provide explicit guidance on the accounting for such performance targets 21

32 Issue 13-D: Post-service performance targets Background In 2005 the FASB Statement 123(R) Resource Group discussed this issue but did not conclude. Three possible solutions were observed: A - Performance condition View A the performance target is considered a performance condition that affects vesting, not the grant date FV. Thus: An entity does not record compensation expense for the award until the performance target is probable of being met even if the employee is currently providing service as a condition of the award. Diversity in practice exists in how View A is applied to retirement-eligible employees. 22 B Adjust grant-date FV View B The performance target is a condition that affects the grant-date fair value (i.e., similar to a market condition, and may be characterized as a postvesting restriction). Thus: Grant-date fair value is generally reduced to reflect an estimate of the probability of the performance target being met. Compensation expense related to the award is recognized over the requisite service period or immediately for retirement-eligible employees. C Other condition View C The performance target is akin to an other condition (i.e., other than a service, performance, or market condition). Thus: The award is classified as a shared-based liability. The liability is marked-tomarket each reporting period. This approach is not generally seen in practice.

33 Issue 13-D: Post-service performance targets Background - Example Employee must work 2 years (not retirement eligible) Award only transfers if IPO within 4 years Grant-date FV = $100 Discount at grant date for probability of IPO = $20 January 20X3 December 20X5 September 20X7 Grant Date Service Ends IPO Completed View A Target is a performance condition that effects vesting $0 Compensation (comp) expense $0 comp expense $0 comp expense $100 Grant date FV View B Target is a condition that affects the grant-date FV $40 comp expense $40 comp expense $0 comp expense $0 comp expense and no adjustment 23

34 Issue 13-D: Post-service performance targets No decision reached The Task Force directed the staff to: Identify differences between U.S. GAAP and IFRSs, including potential amendments resulting from the IFRIC s projects related to IFRS 2, for the accounting for awards with performance conditions Develop examples illustrating the two views with different fact patterns Perform additional outreach to better understand users preferences The Task Force did tentatively decide that this Issue should be applied prospectively This Issue will be discussed during a future meeting of the EITF 24

35 Poll question # 6 Which alternative would you think is most appropriate for addressing performance targets that can be met after the employee completes the required service? View A Treat it as a performance condition that affects vesting (i.e., don t adjust grant-date FV, and delay recognition until probable) View B Treat it as post-vesting restriction (i.e., adjust the grant-date fair value but recognize during the employee s service period) View C Treat the award as liability and mark-tomarket Don t know / don t have a preference

36 EITF administrative matters Ratification of EITF issues will be considered during the June 26, 2013 FASB meeting Next EITF meeting is September 13, Potential agenda includes: Issue 12-F, Pushdown Accounting Issue 13-B, Investment in Tax Credits Issue 13-D, Post-service Performance Targets Issue 13-X, FHA-Guaranteed Loans Issues added as a result of the July 9, 2013 EITF Agenda Committee meeting 25

37 Poll question # 7 Would you like to subscribe to EITF Snapshot, a publication summarizing the emerging financial issues discussed at each EITF meeting? Yes No I am already subscribed

38 Question and answer

39 Join us June 27 at 2 PM ET as our Financial Reporting series presents: Quarterly Accounting Roundup: An Update of Important Developments

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41 Contact info Bob Uhl Adrian Mills Jason Nye Sean Prince

42 Acronyms frequently used in presentation ASC: FASB Accounting Standards Codification ASU: Accounting Standards Update BI: Beneficial Interest CFE: Collateralized Financing Entity EITF: Emerging Issues Task Force FASB: Financial Accounting Standards Board GAAP: Generally Accepted Accounting Principles LIBOR: London Interbank Offered Rate NCI: Noncontrolling Interest RE: Retained Earnings SEC: Securities and Exchange Commission

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