FASB Update. Russ Golden, FASB Chairman. University of Washington Financial Reporting Conference. May 11, 2018

Transcription

1 FASB Update Russ Golden, FASB Chairman University of Washington Financial Reporting Conference May 11, 2018 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations

2 Revenue Recognition: Implementation Progress

3 Rev Rec: Implementation Support Technical inquiries & TRG activities Advisory group discussions (status/efforts, look-backs) Engagement with external committees, regulators, and stakeholders Various educational activities: webcasts/podcasts targeting preparers, auditors, and investors 3

4 FASAC Post-Effective Date Assessment of Cost-Benefits MARCH 20 MEETING: Focused on initial/recurring costs of public co. transition FEEDBACK: Some preparers/practitioners, initial level of effort to apply: - Need to review all contracts or revenue streams - Some costs minimized because the information technology systems did not need to be modified. 4

5 Rev Rec Monitoring/Implementation: Private Companies Ongoing discussions with: PCC (informal meetings and 4 formal meetings a year) AICPA PCPS Technical Issues Committee we have a liaison meeting with them at least once a year and the staff is talks to them every time they convene for a meeting (~5 times a year). Private Company Town Halls (2-3 Town Halls per year). Webcasts 5

6 Future Plans Monitoring Diversity Post-Effective Date Assessment of Costs - One-Time Transition Costs - Ongoing Costs Post-Effective Date Assessment of Benefits 6

7 Leases 77

8 Leases: Transition Current Transition Recognize leases on balance sheet for all periods Provide new lease disclosures for all periods Some relief provided with run-off approach for existing leases Feedback Unanticipated costs and complexity related to comparative periods Examples: disclosures, tracking of FX rates New Transition Added Initially apply new leases guidance at effective date Still gets leases on balance sheet at effective date Changes when new leases guidance is initially applied, not how 24

9 Leases: Practical Expedients PURPOSE: Provide relief from application of leases guidance when appropriate (i.e., costs versus benefits) Example existing practical expedients New practical expedients coming Lessee practical expedient on not separating lease and nonlease components Short-term lease practical expedient Lessor practical expedient on not separating lease and nonlease components Land easements transition practical expedient 24

10 Leases: Other Issues Lessor issues practical expedients coming (consistent with Topic 606) Exclude from consideration taxes imposed on and concurrent with a specific revenue-producing transaction that are collected by the lessor from a lessee Exclude certain lessor costs (e.g., insurance) from variable consideration when lessor costs are paid by lessees and uncertainty in amount paid will not be resolved 10

11 Leases Timeline Standard issued Mandatory effective date 2/16 1/19 SAB 74 disclosures on possible impact of application FASB available for implementation questions 11

12 Credit Losses

13 Credit Losses: Education Presentations to preparers & practitioners at events FASB sponsored webcast July 2016 Educational presentations in association with regulator staff/ constituent training Participation in webcasts sponsored by other organizations (example: American Banker) Quarterly meetings with federal banking agencies and Conference of State Bank Supervisors, along with presentations at training sessions Participation in industry meetings or seminars with credit risk managers 13

14 Credit Losses: Transition Resource Group Convened in early 2016, before final standard issued Effort to improve confusing words and phrases before issued Should reduce need for technical corrections PURPOSE: Solicit, analyze, and discuss stakeholder issues arising from implementation of new guidance Inform the FASB about those implementation issues Help Board determine what, if any, action will be needed to address those issues Provide forum for stakeholders to learn about new guidance from others involved with implementation Next TRG meeting: Monday, June 11, 8:30 a.m. 4 p.m. EDT 14

15 Disclosure Framework

16 Disclosure Framework: Two Components Improving the effectiveness of notes requires both: Consistent considerations by the Board in each standard-setting activity Appropriate exercise of discretion by reporting entities when assessing disclosure requirements Phase I: Board s Decision Process Phase II: Entity s Decision Process 16

17 Next steps In the coming months, FASB will issue four final documents intended to improve the effectiveness of disclosures in notes to financial statements. They include: A new chapter in the FASB s conceptual framework on disclosures An update to an existing chapter of the conceptual framework that aligns the FASB s definition of materiality with other definitions in the financial reporting system An update to Fair Value Measurement disclosure requirements. An update to Defined Benefit Plan disclosure requirements. 17

18 Agenda Consultation

19 New Projects Added to Agenda Segment Reporting Financial Performance Reporting Liabilities/Equity 19

20 Segment Reporting: ITC Feedback 2016 Agenda Consultation Users rated segment reporting as a high priority in need of improvement. Preparers rated it a low priority but acknowledged that improvements are warranted. Many support making improvements, but do not consider this a major financial reporting issue: Segment disclosures are limited and reconciliations can be difficult to tie out. Aggregation criteria is subjective and questions continue to arise in practice. Other topics take priority, but continued focus on segments is warranted. Others do not support making improvements: Segments are not a major concern and changes are unnecessary. Management perspective is sound. Post-implementation review noted that the standard is effective. It is not possible to force better disclosures under the management approach. 20

21 Segment Reporting: Potential Improvements Potential alternatives (1) Segment disclosure requirements: Adding items to the list of required segment disclosures Requiring information to be reported in a table (2) Aggregation criteria Current criteria is very judgmental Remove some of the cost from the system Clarify when aggregation can occur August 2017 Staff undertaken outreach with preparers, users, regulators and audit firms to understand the impact of the different alternatives September The Board decided to add a project will focus these areas February 2018 Discussed issues related to the aggregation criteria 21

22 Segment Reporting Field Testing To better understand the impact and costs associated with different alternatives, we plan to undertake field testing. Seeking small & large preparers from a variety of industries Please contact lmottley@fasb.org if you would be interested in participating 22

23 Financial Performance Reporting: Background RESEARCH FASB directed staff to perform research on a financial statement presentation project in January 2014 RE-SCOPE Re-scoped from the previous financial statement presentation project, which went inactive in 2011 IDENTIFY & EVALUATE Objective of research is to identify & evaluate alternatives for improving financial performance reporting 23

24 Reasons for Undertaking FPR Project Ranked as top priority across stakeholders in 2015 FASAC agenda survey Stakeholders continue to raise concern McKinsey 24

25 Example: Consumer Goods Company Income Statement Net Revenue Cost of Sales Gross Profit Selling, General and Administrative Expenses Impairment charge Amortization of intangible assets Operating profit Interest Expense Interest Income Income before income tax Income tax expense Net Income XXX (XXX) XXX (XXX) (XXX) (XXX) XXX (XXX) XXX XXX (XXX) XXX 82% of respondents to a 2013 CFA survey think financial statement presentation, with improved disaggregation, to be very important Enhanced disaggregation of the income statement can reduce need for certain Non-GAAP measures 25

26 Income Statement: Perceived Issues Aggregation of earnings into only a few line items Entities are only required to present certain lines SG&A and COGS comprise lots of dissimilar items No requirement to prepare a structured income statement Use of Non-GAAP metrics suggests that some performance measures, in addition to net income, are important Limited transparency of items that are useful in making future earnings predictions Nonrecurring items aren t clearly communicated Users rely on Non-GAAP measures to provide greater transparency of performance Adjustments and nonrecurring items may not be consistent over time 26

27 FPR: Two Work Streams 1 Disaggregation of Performance Information 2 Structure of the Performance Statement 27

28 FPR Structure At its September 2017 meeting, the FASB: - Discussed improving structure of income statement by developing an operating performance measure - Decided to prioritize disaggregation of performance information - Would retain this issue on the research agenda Issue now appears as a separate research project in the technical agenda 28

29 FPR - Disaggregation Established a Project Resource Group Focused on COGS and SG&A lines Planning outreach to understand what capabilities are used to roll up information into COGS and SG&A lines 29

30 Liabilities/Equity: Background High volume of SEC comment letters Leading cause of financial statement restatements Complex Rules-based and path dependent Stakeholder Feedback on Guidance Difficult to Navigate Internally inconsistent 30

31 L/E: Project Objectives The Board added a project to its agenda on distinguishing liabilities from equity (including convertible debt) with the following objectives: 1. Reduce cost and complexity in financial reporting associated with: a) Convertible Instruments b) Scope exception to derivative accounting (Subtopic ) I. Indexation criterion (formerly EITF 07-5) II. Equity classification criterion (formerly EITF 00-19) 2. Maintain or improve the quality of information reported to financial statement users. 31

32 Convertible Debt Current GAAP: Five Models Initial Measurement Attribute Model Host Instrument Conversion Option 1) Embedded Derivative Residual Fair Value 2) Cash Conversion Fair Value w/o conversion option Residual 3) Beneficial Conversion Feature Residual Intrinsic Value 4) Substantial Premium Cost* Residual 5) Traditional Convertible Debt No separation entire instrument carried at amortized cost. Cost refers to the carrying amount of the liability after the premium is removed. Objective: Simplification 32

33 Derivatives Scope Exception Indexation Criterion Indexed to an entity s own stock 20 illustrative examples applied by analogy Equity Classification Criterion (Settlement) Additional criteria for equity classification Difficult interpretation of 8 strict rules Objective: Simplification 33

34 Other Projects

35 Other Projects of Note Cloud Computing Nonemployee Share-based Payments Consolidations Income Taxes 35

36 Customer s Accounting for a Cloud Computing Arrangement That Is Considered a Service Contract EITF Issue 17-A

37 EITF Consensus-for-exposure Implementation costs of CCAs that are service contracts would be accounted for in accordance with the guidance in Subtopic on internal-use software For example: configuration costs incurred during the application development stage of implementation would be capitalized, whereas costs incurred during the preliminary project and postimplementation stages would be expensed 37

38 EITF Consensus-for-exposure The amortization period of the capitalized implementation costs would include periods covered by renewal options of the CCA that are reasonably certain to be exercised The amortization of the capitalized implementation costs would be recorded in the same line item on the income statement as the fees for the CCA Proposed Accounting Standards Update released on 3/1/18; comments were due 4/30/18 38

39 Nonemployee Stock Compensation

40 New ASU: Non-Employee Stock Compensation (Expected 2Q 2018) Will expand scope of Topic 718, Compensation Stock Compensation to also include share-based awards granted to nonemployees in exchange for goods and services to be used in a grantor s own operations. Topic 718 currently only includes share-based awards granted to employees Will substantially align accounting for nonemployee and employee share-based awards. - Will supersede Subtopic , Equity Equity Based Payments to Non-Employees. 40

41 Non-Employee Stock Compensation: Why? Accounting for nonemployee share-based awards was identified as an area for simplification through: - Ideas submitted to the FASB as part of simplification initiative - The Private Company Council s (PCC) ongoing dialogue about making improvements to accounting for share-based awards - The Post-Implementation Review of FASB Statement No. 123(R), Share-Based Payment. 41

42 Non-Employee Stock Compensation: Effective Dates Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early adoption is permitted, but no earlier than an entity s adoption date of Topic 606 (Revenue Recognition). 42

43 Consolidations

44 Consolidations: Background DIFFICULT TO NAVIGATE Stakeholder feedback indicates that current consolidation guidance in Topic 810 is difficult to navigate and, thus, apply. DIFFICULTY APPLYING VIE Private company stakeholders continue to express difficulty applying variable interest entity (VIE) guidance to common control arrangements. VIE GUIDANCE Stakeholders requested that Board address certain areas of the VIE guidance for related parties under common control. 44

45 Project: Consolidation: Reorganization & Targeted Improvements Reorganize consolidation guidance in Topic 810 into a new Topic Topic 812 Separate Subtopics for VIEs and voting interest entities Controlled by contract guidance moved to Topic 958: Not-for- Profit Entities Not expecting change to current outcomes reached under

46 Project Consolidation: Targeted Improvements to Related Party Guidance for VIEs Private companies have alternative to not apply VIE guidance to common control arrangements Indirect interests through a related party under common control considered on proportionate basis for determining whether decision-making fee is a variable interest When evaluating whether a related party under common control must consolidate a VIE: Require consolidation when substantially all activities of a VIE are conducted on behalf of that related party. Provide criteria for a reporting entity to consider when determining whether it must consolidate the VIE Removes required consolidation in all cases at commonly controlled entity level 46

47 Tax Cuts and Jobs Act and Income Tax Reporting Staff Q&As and Update , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

48 Staff Q&As: Topic 740, Income Taxes On December 22, 2017, U.S. Congress enacted tax bill, H.R. 1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act). Upon enactment, stakeholders requested feedback on: Whether private companies and not-for-profit entities can apply U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act Whether to discount the tax liability on deemed repatriation Whether to discount alternative minimum tax credits that become refundable Accounting for the base erosion anti-abuse tax Accounting for global intangible low-taxed income. In response, FASB staff issued five Staff Q&A documents. 48

49 Financial Reporting Implications Timing of Enactment GAAP Requirements - Effect recognized at date of enactment. - Measurement of current and deferred taxes is based on provisions of the enacted tax law. - The tax effect of a retroactive change in enacted tax rates on current and deferred taxes is determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment. - The effect of adjusting deferred taxes for a change in tax rate is included in income from continuing operations for the period that includes the enactment date. This means that, as the tax laws or rates were enacted in 2017, the effects are reported in

50 Update Main Provisions Allows option to elect to reclassify from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. If election made to reclassify stranded tax effects, the amount of that reclassification should include: Effect of change in the U.S. federal corporate income tax rate Other income tax effects of the Tax Cuts and Jobs Act that entity elects to reclassify. 50

51 Update Transition Apply amendments either: At beginning of annual or interim period in which amendments are adopted Retrospectively to each period (or periods) in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income are recognized. Effective Date For all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption permitted 51

52 FASB Implementation Web Portal 52

53 Questions or Comments? 53