EITF Roundup: Highlights from the March Meeting

Transcription

1 The Dbriefs Financial Reporting series presents: EITF Roundup: Highlights from the March Meeting Bob Uhl, Partner, Deloitte & Touche LLP Adrian Mills, Partner, Deloitte & Touche LLP Sean St. Germain, Senior Manager, Deloitte & Touche LLP March 19, 2013

2 Agenda 12B Services Received from Affiliate 12G Collateralized Financing Entity 13B Investment in Tax Credits 12F Pushdown Accounting 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 EITF

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

6 EITF Developments

7 Legal Issue 12-B: Services received from an affiliate Background A not for profit (NFP) entity may receive various types of services from employees of an affiliate (entity under common control) Recipient NFP in Standalone F/S ASC 958 requires the recipient NFP to recognize the contributed services at fair value when the following criteria are met: Services are regularly performed and provided by a separately governed affiliate under direction of recipient NFP; and Create or enhance a nonfinancial asset, or Require specialized skills that the NFP would otherwise need to purchase

8 Issue 12-B: Services received from an affiliate Final consensus Scope All NFPs that receive services from personnel of an affiliate for which the affiliate does not charge for reimbursement of at least a substantial amount of its costs Recognition and measurement Recognize all contributed personnel services that directly benefit recipient NFP including "shared" services Measure personnel services at the actual direct costs incurred by the affiliate (e.g., employee's direct compensation and benefits) NFPs may elect to measure personnel services at fair value when the actual direct costs significantly differ from their fair value

9 Issue 12-B: Services received from an affiliate Final consensus Presentation within statement of changes in net assets Business-oriented health care entities that present a performance indicator in accordance with ASC 954, exclude services from the performance indicator (i.e., present as an equity transfer) NFPs not required to present a performance indicator, contra expense or contra-asset not allowed (other presentation guidance will not be prescribed)

10 Issue 12-B: Services received from an affiliate Implementation considerations Develop an inventory of contributed personnel services received and determine if those services are from an affiliate Implement a process to (1) track personnel services received from an affiliate and (2) obtain information regarding the employee s direct costs (and potentially identify which employee s cost may differ significantly from fair value) The Codification Master Glossary defines an affiliate as [a] party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity

11 Issue 12-B: Services received from an affiliate Final consensus Transition Prospective with option to apply using a modified retrospective approach (adjust all prior periods presented without an adjustment to opening retained earnings) Effective date Fiscal years beginning after June 15, 2014 and interim and annual periods thereafter Early adoption is permitted

12 Poll question #2 True or False. EITF Issue 12-B requires a recipient NFP to recognize all contributed personnel services that directly benefit the NFP, including "shared" services. True False

13 Issue 12-G: Consolidating 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 may conclude that it is a primary beneficiary of a CFE Measure newly consolidated financial assets and financial liabilities of CFE at fair value Elect fair value option on both the assets and liabilities Pass through, but fair value of the assets exceed the fair value of liabilities Differences might be caused by liquidity discounts, duration differences, principal market differences

14 Issue 12-G: Consolidating a CFE Background Issue How should an entity account for the excess in the fair value of financial assets over financial liabilities of a newly consolidated CFE? 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

15 Issue 12-G: Consolidating a CFE Final consensus Scope Initial and subsequent fair value measurement guidance applies to all entities that are required or elect to measure all of the CFE s financial assets and financial liabilities at fair value 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. A CFE temporarily holding nonfinancial assets received from a distressed loan or defaulted debt security would be in scope

16 Issue 12-G: Consolidating a CFE Final consensus Measurement Measure fair value of CFE s financial assets and financial liabilities in a manner consistent with the nonrecourse nature of the liabilities Eliminates noise from arbitrage between assets and liabilities for BIs Net risk exposure (own interests included if not compensation for services) Allocate the measurement of fair value to financial assets and financial liabilities using whichever price is more observable Any fair value representing compensation for services cannot be recognized in earnings

17 Issue 12-G: Consolidating a CFE Example 100% BI s held by third-parties Balance sheet Before ASU After ASU CFE financial assets CFE financial liabilities (held by third parties) Appropriated RE (Attributed as NCI equivalent in arriving at net income available to common) (187) (190) (3) -

18 Issue 12-G: Consolidating a CFE Example 90% BI s held by third-parties Balance sheet Before ASU After ASU CFE financial assets CFE financial liabilities (held by third parties) Appropriated RE (Attributed as NCI equivalent in arriving at net income available to common) [(187) * 90%] = (168.3) [(190) * 90%] = (171) (2.7) -

19 Issue 12-G: Consolidating a CFE Final consensus Disclosure No additional disclosures required Resulting measurements are fair value measurements Quantitative disclosures regarding inputs used in Level 3 fair value measurements of the CFEs financial assets and financial liabilities does not need to be duplicated

20 Issue 12-G: Consolidating a CFE Implementation considerations Entities may need to exercise judgment when determining whether the fair value of a CFE s financial assets or financial liabilities are more observable Measuring the fair value of financial assets and financial liabilities may be more complex when: a reporting entity holds BIs in the CFE and/or carried interests in the CFE representing compensation for services a CFE temporarily holds nonfinancial assets resulting from a distressed loan or defaulted debt security

21 Issue 12-G: Consolidating a CFE Final consensus Transition Measured CFE assets and liabilities at fair value in prior periods Prospective with cumulative-effect adjustment to opening balance sheet, or Retrospective to all prior periods presented Did not measure CFE assets and liabilities at fair value in prior periods Elect fair value option for CFE financial assets and financial liabilities, prospective transition with cumulative-effect adjustment to retained earnings Retrospective will not be permitted

22 Issue 12-G: Consolidating a CFE Final consensus Effective date Public entities: fiscal years beginning on or after December 15, 2013 (and interim reporting periods therein) Nonpublic entities: annual reporting periods beginning on or after December 15, 2014 (and interim and annual reporting period thereafter) Early adoption is permitted for all entities

23 Poll question #3 Do you think that the FASB should allow for early adoption of any final guidance resulting from its Consolidation: Policy and Procedures project (which might alleviate the need to apply EITF Issue 12-G)? Yes No Unsure

24 Issue 13-B: Investments in tax credits Consensus-for-exposure Background Low-Income Housing Tax Credit (LIHTC) provides tax credit benefits to owners of entity owning qualifying property Generally entities account for these investments as equity method or cost method investments under ASC Investment performance and tax benefits presented gross Some entities meet scope of ASC and may account for these investments using the effective yield method Investment performance and tax benefits presented net Tax credits are recognized when allocated and investment is amortized to provide a constant effective yield over the period that tax credits are allocated to the investor

25 Issue 13-B: Investments in tax credits Consensus-for-exposure Background To qualify for the effective yield method all of the following conditions must be met: Availability of the investor s allocable tax credits is guaranteed by a creditworthy entity Investor s projected yield based solely on cash flows from guaranteed tax credits is positive Investor is a limited partner and its liability is limited to its capital investment FASB Staff paper indicates that some believe these criteria are too restrictive resulting in only a small percentage of entities being able to use the effective yield method

26 Issue 13-B: Investments in tax credits Consensus-for-exposure Effective yield method modified qualifying criteria ASC Consensus-for-exposure Tax credit is guaranteed by creditworthy guarantor It is probable that the tax credits allocable to the investor will be available The investor retains no operational influence [other than certain protective rights] over the investment, and substantially all of the projected benefits are from tax credits and other tax benefits Investor s projected yield based solely on cash flows from guaranteed tax credits is positive Investor is a limited partner and its liability is limited to its capital investment The investor's projected yield based solely on the cash flows from the tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment) is positive The investor is a limited partner in the affordable housing project [or an investor in a limited liability company] for both legal and tax purposes, and the investor's liability is limited to its capital investment

27 Issue 13-B: Investments in tax credits Consensus-for-exposure Scope Limited to current scope of ASC (i.e., LIHTC investments) Disclosure Disclose impact of LIHTC investments on the entity s financial statements For example, information about the components of the net amount recognized in an entity s tax provision (such as pretax investment performance, tax credits, and other tax benefits)

28 Issue 13-B: Investments in tax credits Consensus-for-exposure Questions for respondents in the upcoming proposed ASU: Should the effective yield method be replaced with a method that (1) derecognizes the investment, (2) recognizes tax benefits, and (3) tax credits all on a straight-line basis over the investment s life presented within the tax provision? Are there other types of tax credits that would meet the proposed criteria? The Task Force needs feedback to inform its decision whether to allow or prohibit certain analogies to this guidance

29 Issue 13-B: Investments in tax credits Consensus-for-exposure Transition and effective date Retrospective to all prior periods presented Early adoption would be permitted Effective date to be determined at a future meeting

30 Poll question #4 Do you agree with the EITF s consensus-for-exposure to modify the qualifying criteria for when an entity is able to elect the effective yield method to account for LIHTC investments? Yes No Unsure

31 Issue 12-F: Pushdown accounting Background There is limited U.S. GAAP on pushdown accounting. SEC guidance applicable for SEC registrants is summarized below. Acquire less than 80% of an entity Pushdown accounting is prohibited Acquire 80% to 95% of an entity Pushdown accounting is permitted Acquire 95% or more of an entity Pushdown accounting is required

32 Issue 12-F: Pushdown accounting No consensus reached Accounting alternatives for when an acquiring entity should push down the new accounting basis to an acquired entity s standalone financial statements: When substantially all of the controlling financial interests are acquired When an acquiring entity obtains control and consolidates the acquired entity in accordance with ASC 810 A new basis should not be established in an acquired entity's standalone financial statements due to a change in its ownership The FASB Staff was requested to perform additional user outreach on (1) each of these three alternatives and (2) its applicability for nonpublic entities

33 Issue 12-F: Pushdown accounting No consensus reached Outreach summary Mixed user support for requiring pushdown Some favored information about the fair value of an entity s assets and liabilities (even if it was only a one-time remeasurement) Others did not believe pushdown accounting resulted in decisionuseful information (i.e., they favored comparability) PCC had split views for nonpublic entities Some thought pushdown accounting should be required, but it should only be applied when the change in ownership is high (e.g., substantially all) Others thought pushdown accounting should be optional for nonpublic entities Lenders and private equity investors of nonpublic entities also had mixed views

34 Issue 12-F: Pushdown accounting No consensus reached FASB Staff to perform outreach regarding the following options: Option 1: Requiring or permitting push-down accounting when an acquirer obtains control of a reporting entity Option 2: Only allowing push-down accounting at a higher level of change in ownership (e.g., substantially all) Option 3: Permitting push-down when an acquirer obtains control of a reporting entity, but requiring it at a higher level change in ownership (e.g., substantially all) Transition and effective date TBD

35 Poll question #5 Fill in the blank. When an acquirer obtains control of a reporting entity, push-down accounting should be to be reflected in the acquired entity s standalone financial statements. Permitted Required Unsure

36 EITF administrative matters Ratification of EITF Issues considered during March 29, 2013 FASB meeting Next EITF meeting is June 11, Potential agenda includes: Issue 12-F, Pushdown Accounting Issue 12-H, Service Concession Arrangements Issue 13-A, Benchmark Interest Rates Issue 13-C, Unrecognized Tax Benefit Liability Issues added during April 23, 2013 EITF Agenda Committee meeting

37 EITF administrative matters Issue 12-H, Service Concession Arrangements Operating entities should account for its rights as a financial asset, intangible asset, or both (tentative decision) Issue 13-A, Benchmark Interest Rates Fed Funds Effective Swap Rate should be included as a U.S. benchmark interest rate for hedge accounting purposes (in addition to LIBOR and U.S. Treasuries) Issue 13-C, Unrecognized Tax Benefit Liability Eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward or a tax credit carryforward exists Comment letters on Issues 13-A and 13-C due on April 22

38 Question and answer

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41 Contact info Bob Uhl Adrian Mills Sean St. Germain

42 Acronyms 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 LIHTC: Low-Income Housing Tax Credit NCI: Noncontrolling Interest NFP: Not For Profit PCC: Private Company Council RE: Retained Earnings SEC: Securities and Exchange Commission

43 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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