Quarterly Accounting Update: FASB Update

Transcription

1 Quarterly Accounting Update: FASB Update The following selected Accounting Standards Updates (ASUs) were issued by the Financial Accounting Standards Board (FASB) during the third quarter. A complete list of all ASUs issued or effective in 2015 is included in Appendix A. Measurement-Period Adjustments in Business Combinations Simplified Affects: All Entities that have Reported Provisional Amounts for Items in a Business Combination for which the Accounting is Incomplete On September 25, 2015, the FASB issued ASU , Simplifying the Accounting for Measurement- Period Adjustments, which attempts to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments require: An acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. An acquirer to record, in the same period s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects resulting from the change to the provisional amounts. This effect is required to be calculated as if the accounting had been completed at the acquisition date. An entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Effective Dates For public business entities, the amendments in ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. All other entities are required to apply the new requirements for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date, with earlier application permitted for financial statements that have not been issued. Implementation of the Revenue Recognition Standard Delayed Affects: All Entities On August 12, 2015, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of the revenue standard issued in 2014,

2 ASU , Revenue from Contracts with Customers. In response to stakeholders requests to defer the effective date of the guidance in ASU and in consideration of feedback received through extensive outreach with preparers, practitioners, and users of financial statements, the FASB proposed deferring the effective date of ASU Respondents to the proposal overwhelmingly supported a deferral. Respondents noted that providing sufficient time for implementation of the guidance in ASU is critical to its success. Effective Dates The amendments in ASU defer the effective date of ASU for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, All other entities may apply the guidance in ASU earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU Revisions to Employee Benefit Plan Guidance Affects: Defined Benefit Pension Plans, Defined Contribution Pension Plans, and Health and Welfare Benefit Plans On July 31, 2015, the FASB issued ASU , (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient, a three-part standard that provides guidance on certain aspects of the accounting by employee benefit plans. The ASU, which was released in response to consensuses reached at the Emerging Issues Task Force s (EITF) June 18, 2015, meeting, (1) requires a pension plan to use contract value as the only measure for fully benefit-responsive investment contracts, (2) simplifies and increases the effectiveness of the investment disclosure requirements for employee benefit plans, and (3) provides benefit plans with a measurement-date practical expedient similar to the practical expedient provided to employers in ASU Effective Dates The amendments in all three parts of ASU are effective for fiscal years beginning after

3 December 15, 2015; early adoption is permitted. An entity should apply the amendments in Parts I and II retrospectively to all financial statements presented, while the amendments in Part III should be applied prospectively. Inventory Measurement Simplified Affects: All Entities The FASB published ASU , Simplifying the Measurement of Inventory, on July 22, 2015, as part of its simplification initiative. ASU amends U.S. GAAP to require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory, there are no other substantive changes to the existing guidance on measurement of inventory. The amendments in ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The FASB received feedback from stakeholders that the proposed amendments would reduce costs and increase comparability for inventory measured using first-in, firstout (FIFO) or average cost but potentially could result in significant transition costs that would not be justified by the benefits for inventory measured using LIFO or the retail inventory method due to the complexity inherent in those methods. Therefore, the FASB decided to limit the scope of the simplification to exclude inventory measured using LIFO or the retail inventory method. Effective Dates For public business entities, the amendments in ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

4 Quarterly Accounting Update: Regulatory Update SEC Document will Solicit Public Views on IFRS The Securities and Exchange Commission (SEC) plans to release a document about the use of International Financial Reporting Standards (IFRS) in the U.S. by the end of While it is unclear what form the document will take, the paper is likely to contain questions about an idea first floated last year. At a U.S. Chamber of Commerce conference in December 2014, SEC Chief Accountant, James Schnurr, introduced the idea of a potential alternative of allowing domestic issuers to provide IFRS-based information as a supplement to U.S. GAAP financial statements without requiring reconciliation. SEC Solicited Comments on Audit Committee Disclosures In July, the SEC voted to publish a concept release seeking public comment on current audit committee disclosure requirements, focusing on the audit committee s oversight of independent auditors. The SEC believes that while current audit committee reporting requirements provide information about the role of the audit committee with respect to its oversight of the auditor, these disclosures do not describe how the audit committee executes its responsibilities. The SEC is interested in receiving information about the audit committee and auditor relationship and whether improvements can be made to enhance the information provided to investors about the audit committee s responsibilities and activities. In addition to seeking views about audit committee disclosures, the concept release invites comment on whether Commission disclosure requirements should be refined to provide more insight into the information the audit committee used and the factors it considered in overseeing the independent auditor. This includes considerations related to the process for appointing or retaining the auditor and the qualifications of the auditor and certain members of the engagement team, among others. The comment period has closed and it is uncertain what actions, if any, the SEC will take in response to the feedback provided. SEC Issues Final Rule on Pay Ratio Disclosure On August 5, 2015, the SEC issued a final rule that requires companies to disclose the relationship between the compensation of their principal executive officer (PEO) and the average compensation of all of their employees. The so-called pay ratio disclosure was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies covered by the rule would have to include the following disclosures, starting with its first full fiscal year beginning on or after January 1, 2017, in proxy or information statements in which executive compensation disclosures are required: (1) the median of the annual total compensation of all of its employees (excluding its PEO), (2) the PEO s annual total compensation, and (3) the ratio of (1) to (2). Emerging growth companies, smaller reporting companies,

5 foreign private issuers, registered investment companies, and filers under the U.S.-Canadian Multijurisdictional Disclosure System are exempt from the rule s requirements. Court Upholds Stay on SEC s Conflict Minerals Rule On August 18, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (Appellate Court) upheld its April 2014 ruling that parts of the SEC s conflict minerals rule and of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act violate the First Amendment to the extent that they require issuers to disclose that their products have not been found to be DRC conflict free. The Appellate Court had agreed to review its April 2014 ruling in light of a separate case involving country-of-origin labeling of meat products. On April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit held that parts of the SEC s rule on conflict minerals and of Section 1502 of the Dodd-Frank Act violate the First Amendment of the U.S. Constitution to the extent that they require regulated entities to report to the SEC and to state on their website that any of their products have not been found to be DRC conflict free. The court stated that the requirement that an issuer use the particular descriptor not been found to be DRC conflict free may arise as a result of the SEC s discretionary choices, and not as a result of the statute itself. The court held that the statute violates the First Amendment to the extent that it imposes that description requirement. The court remanded the case back to the U.S. District Court for the District of Columbia for further proceedings. However, on April 29, 2014, the staff in the SEC s Division of Corporation Finance issued a statement indicating that the SEC still expects companies to file any reports (Form SD or a Conflict Minerals Report) required by the rule on or before the June 2, 2014, due date and that those reports should comply with and address the provisions of the rule that the court upheld. In addition, on May 2, 2014, the SEC issued an order staying the effective date of certain conflict minerals-related portions of Form SD and Rule 13p-1 of the Securities Exchange Act of 1934, which were adopted in accordance with the mandate in Section 1502 of the Dodd-Frank Act. The SEC ordered this stay in response to the decision made by the U.S. Court of Appeals. The stay was effective immediately pending further judicial proceedings. The SEC is currently reviewing the Appellate Court s decision, and final resolution of the legal action remains uncertain. COSO Issues Paper Regarding Defining Duties Under 2013 Framework The Committee of Sponsoring Organizations (COSO) of the Treadway Commission released a paper, Leveraging COSO Against the Three Lines of Defense, at the Institute of Internal Auditor s International

6 Conference in July. The document expands upon COSO s Internal Control Integrated Framework, which was updated in 2013 and is intended to address how specific duties for risk management and internal controls should be assigned and coordinated. The 2013 update to the COSO framework has gained wide support, but the document does not assign responsibilities for the duties it outlines, and the Three Lines of Defense paper is meant to fill that gap. Specifically, the paper advocates a model that calls for clearly defining responsibilities for three aspects of risk management: risk ownership, monitoring, and assurance. Functions that own and manage risks are the first line of defense, various risk control and compliance functions that monitor risks are the second line of defense and internal audit, which provides independent assurance on the effectiveness of control and compliance functions, is the third line. The paper describes each of the three lines and assigns the corresponding framework principles.

7 Quarterly Accounting Update: On the Horizon The following selected FASB exposure drafts and projects are outstanding as of October 12, FASB Simplification Initiative The FASB s Simplification Initiative is a tightly-focused initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. The projects included in the initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing cost and complexity in financial reporting. In addition to the Simplification Initiative, the FASB recently completed several projects, and currently is working on several projects, that are intended to reduce cost and complexity in financial reporting. The FASB launched the initiative earlier this year to reduce the cost and complexity of financial reporting by making targeted changes to U.S. GAAP while maintaining or improving the usefulness of information for investors. Balance Sheet Classification of Debt This project is expected to reduce cost and complexity by replacing the existing fact-pattern specific guidance with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an organization s current compliance with debt covenants. Accounting for Income Taxes The FASB issued two proposed ASUs, which are expected to simplify accounting for income taxes by: Eliminating the requirement for organizations that present a classified statement of financial position to classify deferred tax assets and liabilities as current and noncurrent, and instead require that they classify all deferred tax assets and liabilities as noncurrent. Eliminating the prohibition in U.S. GAAP of the recognition of income taxes for transfers of assets from one jurisdiction to another. Employee Share-Based Payments A proposed ASU would allow an employer to repurchase more of an employee s shares than it can today for tax withholding purposes without triggering liability accounting and would require that any cash paid for these repurchases be classified as a financing activity on the statement of cash flows. The proposal also would provide a policy election to account for forfeitures as they occur. Further, it would require all income tax effects when awards vest or are settled to be recognized in income rather than through additional paid-in capital (APIC) in certain cases. That is, APIC pools would be eliminated. In addition, it would require awards with put features that are contingent on an event within an employee s control to be classified as equity until it is probable that the event will occur. It also would give private companies the option to use two practical expedients for estimating an award s expected term and measuring liability classified awards.

8 Equity Method Accounting A proposed ASU would simplify the equity method of accounting by eliminating the requirement that an investor identify, account for and make disclosures about the difference between the cost basis of an investment and its proportional interest in the equity of the investee (i.e., a basis difference). As a result, investors would no longer have to estimate the fair value of an investee s assets and liabilities to allocate basis differences and track adjustments related to basis differences. The FASB also proposed eliminating the requirement to account for an equity method investment retrospectively when an investor increases its ownership interest in a non-consolidated subsidiary to a level that qualifies for the equity method. Financial Instruments The FASB continues to work on its financial instruments project. This project took on heightened significance in the wake of the 2008 financial crisis and once was considered an essential international accounting convergence project. Negotiations with the IASB to write global accounting guidelines have since fallen apart, and the amendments the FASB plans to publish in 2015 are expected to change U.S. GAAP and not match the IASB s revisions to its standards. The project has three primary areas that are being individually addressed, (1) classification and measurement, (2), impairment and (3) hedging. Classification and Measurement The FASB tentatively decided to retain the separate models in current U.S. GAAP for classifying and measuring loans and debt securities rather than overhaul its guidance in this area, as it had proposed in In a change from today s accounting, however, equity securities would be measured at fair value with changes in fair value recognized in net income. The final standard is currently undergoing a fatalflaw review and is expected to be issued during the fourth quarter of Impairment The new guidance is expected to (1) eliminate the concept of time until recovery in today s otherthan-temporary impairment (OTTI) model for available-for-sale (AFS) debt securities, (2) require an impairment allowance for AFS debt securities instead of direct write-downs and (3) change how credit losses are estimated for all loans and receivables, including trade receivables. The FASB also recently revisited an earlier credit impairment decision by tentatively deciding to broaden the definition of a purchased credit-impaired (PCI) financial asset. This could result in more financial assets being accounted for as PCI than under both the FASB s original proposal and current U.S. GAAP. The FASB now plans to define a PCI asset as one that has experienced more than insignificant deterioration since origination, rather than one that has experienced significant deterioration since origination. Entities

9 that purchase debt securities they classify as AFS or held to maturity would have to consider whether these securities are credit impaired and if so, follow the PCI accounting model. The final standard is currently undergoing a fatal-flaw review and is expected to be issued during the fourth quarter of Hedging At its June 29, 2015, meeting, the FASB made a number of tentative decisions that would significantly modify certain aspects of the existing hedge accounting model. The FASB directed the staff to draft a proposed ASU, which will likely be issued in early The objective of this project is to make targeted improvements to the hedge accounting model based on feedback received from preparers, auditors, users, and other stakeholders. The FASB will consider opportunities to align with IFRS 9, Financial Instruments, which was issued in Leases In May 2013, the FASB issued a proposed ASU, Leases, which was a revision of the 2010 proposed ASU. The core principle of the proposed requirements is that an entity should recognize assets and liabilities arising from a lease. In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on whether the underlying asset is property or assets other than property. In their 2014 meetings, the FASB and the IASB began to back away from the lessee accounting model they proposed in May In redeliberations, the IASB supported a single on-balance sheet model, while the FASB supported a dual on-balance sheet model that would use the International Accounting Standard (IAS) 17, Leases, classification principles. These principles are similar to current U.S. GAAP but without bright lines. The Boards also indicated that they do not intend to significantly change lessor accounting. Instead, they supported retaining a dual classification model. The Boards also reached certain tentative decisions on lease term, a short-term lease exception and other ways to simplify their 2013 proposal. In December 2014, the Boards moved closer to finishing the controversial lease accounting standards by settling a central part of the project: the definition of a lease. The Boards have decided to define a lease as a contract that conveys the right to use an asset for a period of time in exchange for consideration. A

10 business determines if it has a lease, in part, by figuring out whether it has control over the use of the rented item, such as the freedom to drive a leased delivery truck on any route. The redeliberations will continue on a joint basis, with the intention of minimizing any differences between U.S. GAAP and IFRS. The Boards plan to issue a final standard in the fourth quarter of 2015, however according to a September 16, 2015 statement by FASB member Thomas Linsmeier, a lengthy review of a late-stage draft of the standard may push the release date into Disclosure Framework The objective and primary focus of this project is to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity s financial statements. Although reducing the volume of the notes to financial statements is not the primary focus, the FASB hopes that a sharper focus on important information will result in reduced volume in most cases. On March 4, 2014, the FASB issued an Exposure Draft, Conceptual Framework for Financial Reporting: Chapter 8 Notes to Financial Statements, intended to improve its process for evaluating existing and future disclosure requirements in notes to financial statements. Specifically, it addresses the FASB s process for identifying relevant information and the limits on information that should be included in notes to financial statements. If approved, it would become part of the FASB s Conceptual Framework, which provides the foundation for making standard-setting decisions. A final Concepts Statement is expected to be issued by the end of Qualitative Characteristics of Useful Financial Information and Assessing Whether Disclosures Are Material On September 24, 2015, the FASB released for public comment two related proposals it hopes will improve financial statement footnotes, Proposed Amendments to Statement of Financial Accounting Concepts (CON) No , Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information, and Proposed ASU No , Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material. These two proposals were issued to help entities decide what information should be included in their footnotes without bogging them down with extra details. Proposed CON No offers changes to the FASB s Conceptual Framework applied by the FASB when it is writing U.S. GAAP. Proposed ASU No offers a process entities can follow to ensure that they only include relevant information in their footnotes when they comply with an accounting standard. Specifically, the FASB proposals call for the concept of materiality to be the basis by which entities decide when to include information in their footnotes. Further, if the entity does not provide a disclosure because its management has concluded that the information is not material, the omission

11 would not be considered an accounting error. Comments are due by December 8. Financial Statements of Not-for-Profit Entities On April 22, 2015, the FASB issued a proposal that would significantly change the financial statements of not-for-profit (NFP) entities, including business-oriented health care entities. The proposal would require NFPs to present two rather than three net asset classes and standardized measures of operating performance. It also would change how NFPs report cash flows, classify expenses and provide information about liquidity. Business-oriented health care NFPs would no longer be allowed to present a performance indicator as a U.S. GAAP measure. The FASB has said that, before finalizing the guidance for NFPs, it will consider its decisions on related projects such as its research on financial performance reporting and improving classification guidance for the statement of cash flows. However, the proposal has attracted wide attention, and criticism, and some of the critics are from the group that helped develop the proposal, the FASB s Not-for-Profit Advisory Council. Prepaid Stored Value Cards On April 30, 2015, the FASB issued a proposal that would require entities (typically banks or other financial institutions) that issue certain prepaid stored-value cards that are redeemable only from thirdparty merchants for goods or services, cash or a combination of the two to recognize breakage, which is the value that is not redeemed by cardholders. Under that proposal, an issuer s liability for the cards would be considered a financial liability. Clarifying the Definition of a Business This project is intended to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets. Clarifying Certain Existing Principles on Statement of Cash Flows In November 1987, the FASB issued FASB Statement No. 95, Statement of Cash Flows. Statement 95 was later codified in Accounting Standards Codification (ASC) 230, Statement of Cash Flows. Recently, FASB staff research indicated that there was diversity in practice with respect to the classification of certain cash receipts and payments. The FASB staff s research also indicated that the primary reasons for the diversity in classification is the result of lack of specific accounting guidance and inconsistent application of the existing principles within ASC 230. This project will include clarifying existing principles in ASC 230 on how to classify cash receipts and cash payments. As part of the project, the FASB staff will research potential additional disclosures that could result in increased relevance for users.

12 Accounting for Interest Income Associated with the Purchase of Callable Debt Securities At its meeting on September 16, the FASB voted to add to its technical agenda a project to require disclosures about interest income on purchased debt securities and loans. The FASB discussed whether to amend the scope of the project to include the amortization period for purchased callable debt securities, for example, municipal bonds. The FASB decided to amortize all premiums to the first call date and all discounts to the maturity date. The Board further directed the FASB staff to research the disclosure requirements related to the accounting for interest income on callable debt securities and callable loans. The Board also directed the FASB staff to consider whether and how to limit the scope of the instruments subject to the change. EITF Agenda Items At its September 2015 meeting, the FASB's Emerging Issues Task Force (EITF) discussed the following two issues, but did not reach any final consensuses or consensuses-for-exposure: Issue 15-B: The EITF considered feedback on its consensus-for-exposure that certain prepaid stored-value cards would meet the definition of a financial liability, and that breakage for these cards would be recognized. Issue 15-F: The EITF discussed the classification of four types of transactions in the statement of cash flows. The Task Force previously discussed four other cash flow classification issues and will discuss another issue and transition for all nine of the cash flow issues at a future meeting. PCC Activities July PCC Meeting At its July, 2015 meeting, the Private Company Council (PCC) discussed the following projects: Preferability Assessment and Transition of PCC Alternatives: The PCC added the project to its agenda, and voted to develop a proposal that grants private companies an unconditional onetime option to elect a PCC alternative without having to conduct an initial assessment to determine whether an alternative is preferable. The PCC also decided to extend transition guidance indefinitely for the goodwill and interest rate swaps alternatives. The PCC recommended that the FASB consider whether the option should be extended to other alternatives developed by the FASB using the Private Company Decision-Making Framework. The PCC also recommended that the FASB consider providing additional guidance on assessing preferability.

13 Applying Variable Interest Entities (VIE) Guidance to Non-Leasing Common Control Arrangements: The PCC asked FASB staff to conduct research to determine ways to clarify the application of VIE guidance through the use of examples. The PCC also asked FASB staff to research potential modifications to existing business scope exceptions to address application issues. The PCC also discussed the following FASB projects: Leasing: Eight of the ten PCC members reaffirmed their views contained within the December 2013 comment letter. Six of the ten PCC members recommended that the FASB consider a linked (adjacent) balance sheet presentation of the operating lease assets and liabilities, which allows for netting of the two. Simplifying the Balance Sheet Classification of Debt: The PCC recommended that long-term debt with subjective acceleration clauses and/or material adverse change clauses should not be classified as current, unless the clauses are triggered. The PCC also recommended that debt covenant violations as of the reporting date that are waived before the issuance of financial statements, should not automatically trigger current classification of debt. However, the PCC was split on whether short term debt that is refinanced prior to financial statement issuance should continue to be classified as noncurrent. New PCC Chair On August 18, the Board of Trustees of the Financial Accounting Foundation appointed a new chair and three new members of the PCC to three-year terms that will begin on January 1, Six PCC members were reappointed. Named as incoming PCC chair was Candace E. Wright, who serves as a director with Postlethwaite & Netterville, a Louisiana-based accounting and business advisory firm. Ms. Wright will succeed Billy M. Atkinson, whose term will conclude on December 31, FASB Endorsement On August 31, 2015, the FASB endorsed several PCC decisions on the effective date and transition of the existing PCC accounting alternatives. The FASB endorsements include: An unconditional one-time option to elect an existing PCC accounting alternative subsequent to its effective date and forgo an initial preferability assessment; Extension of the transition guidance in the PCC accounting alternative related to goodwill; and Extension of the transition guidance in the PCC accounting alternative related to the simplified hedge accounting approach for interest rate swaps. As they are currently written, three of the four PCC accounting alternatives are effective for 2015 for calendar year-end private companies. Under current U.S. GAAP, companies electing to adopt a PCC accounting alternative after the effective date would be making a change in accounting principle, triggering an assessment of preferability as well as retrospective application.

14 PCC to Have a Higher Standard-Setting Profile In a presentation on September 15, 2015 to the FASB and 22 representatives from the Institute of Management Accountants, Teri Polley, president and CEO of the FAF indicated that the FASB s parent body is set to authorize a higher profile for the PCC. Polley indicated that the changes will be described in a paper the FAF will likely publish in October that will be based upon a review the foundation completed of the PCC. The shift will include a closer collaboration between the FASB and PCC about the issues that get the Board s attention.

15 Quarterly Accounting Update: Other Developments North Carolina Tax Reform Law Impacts Deferred Tax Assets and Liabilities On July 23, 2013, North Carolina Governor Pat McCrory signed a major tax reform bill into law that lowered the North Carolina corporate income tax rate among other things. Specifically, the corporate income tax rate was reduced from 6.9% to 6% in 2014 and to 5% in The rate will be further reduced to 4% during the 2016 tax year and to 3% for post-2016 tax years provided that specified revenue growth targets are reached. On July 28, 2015, McCrory announced the final revenue figures for the fiscal year ended on June 30, 2015 reveal that North Carolina had a $445 million revenue surplus. Thus, the state met the necessary revenue target for fiscal year to lower the corporate income tax rate from 5 percent to 4 percent effective for tax years beginning on or after January 1, The rate will be decreased for post-2016 tax years if the net general fund tax collections for fiscal year exceed $ billion. These collection targets that trigger additional rate decreases must be considered in determining the amount of deferred tax assets/liabilities. For accounting purposes, when it is considered to be more likely than not the tax rate changes will be implemented, the enacted changes in tax laws and rates that become effective for a particular future year(s) are to be considered in determining the tax rate to apply to temporary differences reversing in that year(s). The effect on deferred tax assets and liabilities from an enacted change in tax laws or rates is recognized in income from continuing operations in the period of enactment (date tax legislation signed into law) regardless of whether the tax legislation is retroactive or prospective. The excerpt of the rate reduction trigger criteria from the final enacted legislation can be accessed at: An Update on the New Revenue Recognition Standard The FASB and International Accounting Standards Board (IASB) published their landmark revenue recognition standards in May However, since its issuance, some companies and their auditors have expressed concern that the FASB introduced too much principles-based guidance for U.S. companies to effectively adopt. In addition, some critics have said they need more implementation guidance. Others have said there was too little time for them to confidently plan for the standard s effective date. In response to those implementation concerns, the FASB and the IASB decided at a meeting in February, 2015, to propose revisions to clarify the standard to reduce diversity in practice. Both Boards agreed that amendments to the guidance are needed to reduce the potential for diversity in practice. But, in general, the FASB decided to propose more changes than the IASB did. `

16 Effective Date Deferred On July 22, 2015, the IASB approved a one-year deferral of the effective date of its revenue standard, IFRS 15, to January 1, On August 12, 2015, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to delay the effective date of the revenue standard by one year. As a result, the standard will be effective for public entities for annual periods beginning after December 15, 2017 and interim periods therein. Nonpublic entities will be required to adopt the standard for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, All entities will be allowed to adopt the standard as early as the original public entity effective date (i.e., annual periods beginning after December 15, 2016). Licenses of Intellectual Property Although the Boards agreed on many substantive clarifications, the FASB decided to propose further clarifications in the guidance: Under the FASB proposal, when an entity grants a license to symbolic intellectual property, it is presumed that the entity s promise to the customer in granting a license includes undertaking activities that significantly affect the utility of the intellectual property to which the customer has rights. Intellectual property is considered symbolic when it does not have significant standalone functionality, such as brands, team or trade names, or logos. The FASB decided to clarify that, in some cases, an entity would need to determine the nature of a license that is not a separate performance obligation in order to appropriately apply the general guidance on whether a performance obligation is satisfied over time or at a point in time and/or to determine the appropriate measure of progress for a combined performance obligation that includes a license. The FASB decided to clarify that certain contractual restrictions are attributes of the license and therefore do not affect the identification of promised goods or services in the contract. Identifying Performance Obligations The Boards agreed to add some illustrative examples to clarify how to apply the guidance on identifying performance obligations. However, the FASB decided to propose further amendments to address implementation issues about: Identifying promised goods or services that would be subject to the separation guidance. Application of the guidance related to the concept of distinct in the context of the contract. Accounting for shipping and handling activities.

17 Principal-Versus-Agent Considerations The Boards agreed to identical proposals to address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The proposals would clarify that an entity should evaluate whether it is the principal or the agent for each specified good or service (i.e., each good or service or bundle of distinct goods or services that is distinct) promised in a contract with a customer. In addition, the proposals would add guidance to help entities determine the nature of promises in a contract. Specifically, the proposed guidance would require an entity to (1) identify the specified goods or services (or bundles of goods or services), including rights to goods or services from a third party, and (2) determine whether it controls each specified good or service before each good or service (or right to a third-party good or service) is transferred to the customer. In addition to clarifying the guidance on principal-versus-agent considerations, the proposals would amend certain illustrative examples in the standard (and add new ones) to clarify how an entity would assess whether it is the principal or the agent in a revenue transaction. New Tax Abatement Disclosure Requirements for State and Local Governments On August 14, 2015, the Governmental Accounting Standards Board (GASB) issued Statement 77, Tax Abatement Disclosures, which requires disclosure of tax abatement information about (1) a reporting government s own tax abatement agreements and (2) those that are entered into by other governments and that reduce the reporting government s tax revenues. Statement 77 requires governments that have tax abatement agreements to disclose the following information about the agreements: Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients The gross dollar amount of taxes abated during the period Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement Governments should organize those disclosures by major tax abatement program and may disclose information for individual tax abatement agreements within those programs. Tax abatement agreements of other governments should be organized by the government that entered into the tax abatement agreement and the specific tax being abated. Governments may disclose information for individual tax abatement agreements of other governments within the specific tax being abated. For those tax abatement agreements, a reporting government should disclose (among other things): The names of the governments that entered into the agreements The specific taxes being abated The gross dollar amount of taxes abated during the period

18 The requirements of Statement 77 are effective for financial statements for periods beginning after December 15, Earlier application is encouraged.