ACCOUNTING UPDATE. Presented by Paul J. Nockels

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2 ACCOUNTING UPDATE Presented by Paul J. Nockels

3 Broker-Dealer Accounting Broker-Dealers Private Company Council Exchanges 3

4 Definition of a Public Business Entity A public business entity is a business entity meeting the following criteria: It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing). Broker-dealers are public business entities as they meet the above definition Other entities meet the definition under separate criteria 4

5 Is a Futures Commission Merchant a PBE? Entities registered with the Commodity Futures Trading Commission (CFTC) do not file with the SEC, unless they are dually registered Not public business entities under criteria a Could be a PBE under other criteria If not a PBE, delayed required adoption of new accounting standards 5

6 Agenda Accounting Topics Accounting Standards Updates Other Topics 6

7 ACCOUNTING TOPICS

8 Accounting Topics Revenue Recognition Leases Digital Currencies Restricted Cash Income Taxes (TCJA) Current Expected Credit Loss (CECL) 8

9 REVENUE RECOGNITION

10 Revenue Recognition Standard May 2014 FASB and ISB issued substantially converged final standards Eliminates industry specific revenue recognition Comparability between industries Entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 10

11 Revenue Recognition Standard Entity should apply the following steps: 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligation in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation 11

12 Effective Date of ASU , Revenue from Contracts with Customers (Topic 606) Public entities Example: Calendar year end Nonpublic entities Effective Date As issued Annual reporting periods beginning after December 15, 2016, and the interim periods within that year Quarter and year beginning January 1, 2017 Annual reporting periods beginning after December 15, 2017, and the interim periods within annual periods beginning after December 15, 2018 As updated Annual reporting periods beginning after December 15, 2017, and the interim periods within that year Quarter and year beginning January 1, 2018 Annual reporting periods beginning after December 15, 2018, and the interim periods within annual periods beginning after December 15, 2019 Example: Calendar year end Year ending December 31, 2018 and interim periods in 2019 Year ending December 31, 2019 and interim periods in

13 Early Adoption of ASU , Revenue from Contracts with Customers (Topic 606) Early Adoption As issued As updated Public entities Prohibited Permitted in annual reporting periods beginning after December 15, 2016, and the interim periods within that year (which was the original effective date for public entities) Nonpublic entities Permitted in any of the following periods: (a) an annual reporting period beginning after December 15, 2016 or 2017, and the interim periods within that year or (b) an annual reporting period beginning after December 15, 2016, and the interim periods within annual periods beginning after December 15, 2017 Permitted in any of the following periods: (a) an annual reporting period beginning after December 15, 2016, and the interim periods within that year or (b) an annual reporting period beginning after December 15, 2016 and the interim periods beginning one year after that annual reporting period 13

14 Broker-Dealer Revenue Streams Revenue Stream Commission Income Commission Income Trade Date vs Settlement Date Selling and Distribution Fee Revenue Costs associated with underwriting Costs associated with investment banking advisory services Underwriting and related fee income Advisory fee income Soft dollar revenues Status of Paper Finalized and included in the AIPCA Guide Revenue Recognition Finalized and included in the AIPCA Guide Revenue Recognition Comment Period Closed Final Version Outstanding Finalized and included in the AICPA Guide Revenue Recognition Finalized and included in the AICPA Guide Revenue Recognition Finalized to be included in a future edition of the AICPA Guide Revenue Recognition Finalized to be included in a future edition of the AICPA Guide Revenue Recognition Finalized to be included in a future edition of the AICPA Guide Revenue Recognition 14

15 Transition Alternatives Upon Adoption Retrospective application to all periods presented with the option to elect one or more practical expedients Modified retrospective No restatement of prior periods Apply ASU to in-progress contracts as of the adoption date going forward and subsequent contracts Recognize a cumulative effect adjustment at adoption date for effects of applying ASU to in-progress contracts Disclose in the year of adoption the effect on each line item in the financial statements as a result of adoption 15

16 Required Disclosures Objective is to help financial statement users understand the nature, amount, timing and uncertainty of the related revenue and cash flows Annual and interim disclosures required of public entities Less on an interim basis, but mostly quantitative in nature More disclosures required of public business entities and certain nonprofit entities and employee benefit plans However, disclosures for all others are still significant 16

17 Required Disclosures Detailed quantitative and qualitative information about the following must be disclosed: Disaggregated revenue Contract assets, contract liabilities and receivable Performance obligations in general and the transaction price allocated to the remaining performance obligations at the end of the reporting period Significant judgments related to when performance obligations are satisfied and used to estimate and allocate the transaction price Capitalized customer contract costs Capitalized customer contract costs 17

18 ASC Topic 606 disclosure requirements Entities that adopted ASC Topic 606 on a modified retrospective basis must disclose what accounting treatment would have been under legacy revenue guidance

19 General tax revenue recognition rules (accrual method) Under an accrual method of accounting, income is includable when all the events to fix the right to receive the income and the amount can be determined with reasonable accuracy Revenue is fixed for tax when (1) the payment is earned through performance, (2) payment is due to the taxpayer, (3) payment is received by the taxpayer, or (4) the item of gross income, or any portion thereof, is taken into account as revenue in the AFS, whichever happens earliest

20 Tax considerations of ASC 606 Direct impacts Federal current tax State current tax Indirect impacts Sales tax Excise taxes Transfer pricing

21 ASC 606 assessment of tax impact Define scope Reflects company s industry, complexity and internal resources Financial reporting assessment Work collaboratively with financial reporting team to identify potential tax issues and opportunities Determine tax process Addresses level of analysis, specific action steps, and implementation needs Review data and calculate adjustments Involves determining proper tax methods and calculating adjustments Prepare deliverables Provides summary of analysis and implementation recommendations Implement Includes assistance with forms and ASC 740 taxrelated items

22 What about SIPC Revenue? Definition of SIPC Revenue unchanged by ASC 606 It is not clear how to address the cumulative effect adjustment at adoption date in the SIPC-6 Broker-dealers that are impacted could contact SIPC to clarify

23 LEASES

24 Leases Upon its effective date, FASB Update , Leases, will require a lessee to recognize on its balance sheet assets and liabilities for all leases other than those that meet the definition of shortterm leases.

25 Treatment of Operating Leases under SEC Rule 15c3-1 In a letter to SIFMA dated November 8, 2016, the staff of the Division of Trading and Markets stated it would not recommend enforcement action to the SEC under Exchange Act Rule 15c3-1 if a brokerdealer computing net capital adds back an operating lease asset to the extent of the associated operating lease liability.

26 Treatment of Operating Leases under SEC Rule 15c3-1 Further, the Division will not recommend enforcement action to the SEC if a broker-dealer determining its minimum net capital requirement using the AI standard does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset.

27 Treatment of Operating Leases pursuant to Rule 1.17 under the Commodity Exchange Act SIFMA issued a no-action letter request to the CFTC dated February 8, 2018 Includes appendix of examples

28 Leases Overview Scope Disclosures Effective date and transition

29 Leases overview

30 Related Party Leases No distinction between leases with related parties vs. third parties Application of Step 1 determine if contract contains a lease Included in expense sharing agreements? Determination of contract terms, including length, renewal options, etc.? Form over substance if there is no contract that is enforceable, is there no lease? NOW is a good time to revisit to clarify arrangements

31 Leases overview Changes for lessees Will record lease liability and right-of-use (ROU) asset for most leases Income statement expense presentation will depend on classification of lease Changes for lessors Limited changes to lessor accounting model Classification criteria modified Leveraged lease accounting prospectively eliminated Changes for both Sale-leaseback criteria New presentation and disclosure requirements

32 Scope Standard is applicable to all leases except: Leases of intangible assets Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources Leases of biological assets Leases of inventory Leases of assets under construction Short-term leases election

33 Lessee disclosures Extensive qualitative and quantitative disclosures Type Example disclosures Qualitative Nature of leases Leases that have not yet commenced Variable payment arrangements Termination/purchase/renewal options Quantitative Amortization and interest for finance leases Operating lease cost Variable lease cost Short-term lease cost Maturity analysis of lease liabilities Significant judgments and assumptions Determining if a lease exists Standalone prices

34 Lessor disclosures Extensive qualitative and quantitative disclosures Type Example disclosures Qualitative Nature of leases Variable payment arrangements Termination/purchase/renewal options Information about management of residual asset risk Quantitative Lease income (in tabular format) Maturity analysis of undiscounted cash flows (segregated by finance/operating lease)

35 Effective date Public business entities Annual and interim periods in fiscal years beginning after 12/15/2018 Early adoption permitted Modified retrospective transition Certain reliefs Nonpublic business entities Fiscal years beginning after 12/15/2019 Interim periods in fiscal years beginning after 12/15/2020 Early adoption permitted Modified retrospective transition Certain reliefs

36 Transition Modified retrospective transition Full retrospective adoption is prohibited All comparative periods presented are restated Packaged transition reliefs Expired/existing contracts contain leases Lease classification for expired/existing leases Whether previously capitalized initial direct costs could still be capitalized Other transition relief Hindsight can be used in determining lease term and assessing impairment of ROU assets

37 Proposed Leases: Targeted improvements to ASC 842 Transition Comparative Reporting at Adoption Entities will be given an additional option for transition, under which they will be allowed to elect to recognize a cumulative-effect adjustment to the opening balance of retained in the period of adoption, rather than in the earliest period presented. Reporting for comparative periods would remain under ASC 840 Separating Components of a Contract Lessors would be allowed to apply a practical expedient to not separate nonlease components from the related lease components Lessors applying this expedient would account for the combined components as a single lease component, if both: 1. The timing and pattern of revenue recognition for the nonlease component(s) and related lease component are the same 2. The combined single lease component would be classified as an operating lease Proposed ASU

38 Adoption Readiness Review of contracts Updates to clarify related party lease arrangements Updates to policies and internal controls System updates Controls related to adoption Interactions with auditors Assess quantitative impact prior to January 1, 2019 First reporting period January 19 FOCUS report 38

39 New Lease Accounting Resource Center Information about adoption and implementation of ASU , Leases (Topic 842), including: Leases: Bring on the balance sheet Leases: New accounting requirements for lessees Leases: Overview of the new guidance SAB 74 disclosures for new standard on lease accounting A contact form for those who need help implementing the new standard Additional resources on lease accounting visit - rsmus.com/asc842

40 DIGITAL CURRENCIES

41 Accounting and Financial Reporting of Digital Currencies Currently no authoritative literature under US GAAP that specifically addresses resulting in diversity in practice What is it? Cash? Financial Instrument? Intangible? Inventory? Security? Commodity? Something New? Why is it? ICOs? Trading? Liquid Asset? Economics consideration?

42 Accounting and Financial Reporting of Digital Currencies Recognition and measurement Trade/execution date? Time of day? Close of business? Offsetting considerations Carrying value (fair value vs. cost, subject to impairment?) Disclosure considerations If fair value, fair value hierarchy? Operating risks (keys stolen, lost, destroyed or otherwise compromised) Market risks Liquidity risks Counterparty and credit risks cryptocurrency platforms/exchanges

43 What about SIPC Revenue? It is not clear whether revenues earned by a broker-dealer related to digital asset activities is included in SIPC revenue Is the digital asset a security? Does it matter?

44 RESTRICTED CASH

45 Restricted Cash ASU , Statement of Cash Flows (Topic 230): Restricted Cash Effective for public business entities for fiscal years ending after December 15, 2017 Designed to reduce diversity in practice in cash flow presentations Entities must include restricted cash and cash equivalents in the reconciliation from beginning to end-of-period total cash amounts Entities must disclose the nature of restrictions on restricted cash 45

46 Broker-Dealer Considerations ASU does not include a definition covers amounts generally described as restricted cash or restricted cash equivalents Broker-dealers would consider proper presentation of disclosure of cash segregated under SEC 15c3-3/PAB requirements and CFTC regulations Several broker-dealers adopted for Q Q 46

47 INCOME TAXES (TCJA)

48 Financial statement impacts of Tax Cuts and Jobs Act On December 22, the Tax Cuts and Jobs Act (the Act ) was signed into legislation Most significant change in U.S. tax law since 1986 Significant financial statement impacts on a number of areas as a result of the Act including: Deferred tax assets and liabilities Accumulated Other Comprehensive Income (AOCI) Net operating losses (NOLs) Alternative minimum tax Foreign operations

49 The Act New law changes the discussion on tax impacts of revenue recognition New tax revenue recognition rules for entities with applicable financial statements (AFS) Significant changes Revenue is fixed for tax when (1) the payment is earned through performance, (2) payment is due to the taxpayer, (3) payment is received by the taxpayer, or (4) the item of gross income, or any portion thereof, is taken into account as revenue in the AFS, whichever happens earliest Tax will also follow the allocation of the transaction price Does not apply to special methods of accounting (e.g., percentage-of-completion, installment sales)

50 Deferred tax assets and liabilities under the Act ASC 740 requires that the effects of a change in tax law and rates be accounted for in the period of enactment Deferred tax assets and liabilities are required to be adjusted to reflect the effect of a change in tax rates in the period of enactment The Act reduces corporate tax rates from 35% to 21% for tax years beginning after 12/31/17 In financial statements for interim or annual periods after 12/22/17, deferred tax assets and liabilities should be determined based on the new corporate tax rate in effect when they will reverse Changes to deferred taxes would be recorded in continuing operations and would not be subject to the intraperiod allocations

51 Non-calendar year-end public business entities Non-calendar year-end public entities must reflect the changes under the Act in the quarter that includes 12/22/17 Estimated annual effective tax rate for the current year should be adjusted in the quarter of enactment Estimated change in the deferred tax items as of the beginning of the year should be treated as a discrete item in the quarter of enactment Scheduling of deferred tax items may be needed to determine the appropriate tax rate for reversal

52 ASU , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Changes in rates for items included in AOCI go through income taxes from continuing operations This results in a disproportionate tax effect being recorded in AOCI (referred to as stranded tax effects) Historically this disproportionate impact would have been reversed based upon an accounting policy election The ASU allows for reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act

53 ASU , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income If elected, the effective date for calendar year-ends Permitted Required 2019

54 NOLs under the Act NOLs arising in taxable years beginning after 12/31/17 may only offset 80% of current year taxable income NOLs arising in taxable years ending after 12/31/17 may not be carried back but can be carried forward indefinitely The Act does not change the pre-2018 NOL usage, carryover or carryback periods These changes will affect a company s assessment of the ability to utilize NOLs against deferred tax liabilities

55 Corporate alternative minimum tax under the Act Corporate alternative minimum tax is repealed for taxable years beginning after 12/31/17 Existing AMT credits will continue to be allowed to offset regular tax liability after other credits Any AMT credits not used to reduce regular tax will begin to be refunded starting in years beginning after 2017 These changes will result in a release of a valuation allowance against any AMT credits

56 Foreign operations under the Act U.S. companies will be required to include in U.S. taxable income the total amount of unremitted foreign earnings of its controlled foreign subsidiaries Effective for a foreign corporation s final year beginning prior to 2018, which would include years ending 12/31/17 As a result, the concept of permanent reinvestment in a foreign subsidiary would no longer be relevant as it relates to potential U.S. tax on foreign earnings Tax due on deemed repatriation may be paid over an eight-year period An entity that elects to pay the tax related to repatriation over eight years will need to record a portion of the payable as a current liability and a portion as a non-current liability Amount should not be recorded as a deferred tax item as it represents an actual tax liability

57 SEC guidance In late December, the SEC issued SAB 118 (codified in SAB Topic 5.EE) which addresses the application of ASC 740 in the reporting period that includes the date on which the Act was signed into law While ASC 740 provides accounting and disclosure guidance on accounting for income taxes, it does not address the treatment when the accounting for certain income tax effects of the Act is incomplete at the time financial statements are issued SAB 118 provides that in cases in which the accounting for certain income tax effects of the Act is incomplete but companies can make a reasonable estimate of the effects of the tax law change, that estimate should be recorded with appropriate disclosures The estimate would be reported as a provisional amount in the company s financial statements during the one-year measurement period Any adjustments during the measurement period should be included in income from continuing operations as a tax expense/benefit in the reporting period the adjustments are determined

58 SEC guidance (cont.) If a company does not have the necessary information available, prepared, or analyzed regarding certain income tax effects of the Act to determine a reasonable estimate to be included as provisional amounts: No related amounts should be included in an entity s financial statements for those specific income tax effects for which a reasonable estimate cannot be determined A company should continue to apply ASC Topic 740 (e.g., when recognizing and measuring current and deferred taxes) based on the provisions of the tax laws in effect immediately prior to the Act being enacted

59 January 10 th FASB meeting FASB issued a Q&A indicating that Private companies could follow the SAB 118 guidance Deemed repatriation payments and refundable AMT credits should not be discounted

60 Challenges? Since enacted date of Act is tax years beginning after 12/31/17, tax acceleration for ASC 605/various other GAAP guidance in 2017 (private companies) Then additional potential change in 2018/2019 as ASC 606 is fully implemented across all required entities IRS has not yet commented on how to effect any of these changes

61 BBA Audit Rules IRS amended partnership audit rules for tax years beginning in 2018 TEFRA partnership audit rules replaced by the BBA audit rules (Bipartisan Budget Act of 2015) IRS will generally collect tax at partnership level on adjustments at the highest corporate or individual rate Accounting for uncertain tax positions will become more complex 61

62 Tax reform resource center Additional information on how legislation can affect your business and tax planning visit - rsmus.com/taxreform

63 CURRENT EXPECTED CREDIT LOSS (CECL)

64 CECL: Not Just for Banks Consideration of accounting for various receivables Brokerage Margin loans Securities lending Reverse repurchase agreements Related party arrangements? Additional disclosure requirements

65 Overview of the credit losses standard ASU , Measurement of Credit Losses on Financial Instruments Creates ASC Topic 326 Subtopic applies to financial assets measured at amortized cost Supersedes impairment guidance in ASC 310 on receivables/loans and ASC 320 on debt securities (amongst other changes)

66 Effective dates of the credit losses standard SEC filers fiscal years beginning after 12/15/19 (including interim periods) 2020 for calendar year-end entities ( CYE ) Public Business Entities that are not SEC filers fiscal years beginning after 12/15/20 (including interim periods) 2021 for CYE All others fiscal periods beginning after 12/15/20 (interim periods beginning after 12/15/21) 2021 for CYE Early adoption is permitted for fiscal years beginning after 12/15/ for CYE Adopt through a cumulative effect adjustment to retained earnings Special rules for other-than-temporary impairment ( OTTI ), purchased financial assets with a more-than-insignificant amount of credit deterioration since origination ( PCD assets ) and beneficial interests

67 Applicability of ASC The following are in-scope: Financial assets measured at amortized cost (AC) including: Financing receivables (loans) Held to maturity debt securities Receivables from revenue transactions with customers and other income Reinsurance receivables Receivables related to repo and securities lending agreements Net investment in leases Off-balance-sheet credit exposures Loan commitments Standby letters of credit Financial guarantees/similar instruments

68 Applicability of ASC The following are out of scope: Financial assets measured at fair value (FV) Available-for-sale securities Other Loans made to participants by defined contribution employee benefit plans Policy loans receivable of an insurance entity Promises to give (pledges receivable) of a not-forprofit entity Loans and receivables between entities under common control

69 Major provisions of ASC Recognize expected (rather than incurred) credit losses Through allowance for recognized financial assets (including held-to-maturity ("HTM ) debt securities) Through liability for off balance sheet exposures Results in day 1 life of asset expected loss recognition Exception: Initial allowance recorded as increase to purchase price for PCD assets (Assets that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination Purchased with credit deterioration ) Changes in the allowance (plus and minus) are recorded immediately through credit loss expense

70 Major provisions of ASC Measure expected losses on a pool basis whenever similar risk characteristics exist No one method required. Some examples: Discounted cash flows Loss rate methods Roll-rate methods Probability of default methods Based on an aging analysis

71 Major provisions of ASC Consider relevant available information (internal and/or external) when estimating expected losses Don t rely solely on past events Adjust historical loss information for Differences in current asset specific risk characteristics Circumstances when historical info is not reflective of contractual term Current conditions Reasonable and supportable forecasts

72 Major provisions of ASC When estimating losses for periods beyond reasonable and supportable forecast, revert to historical loss information Input level or based on the entire estimate Immediately, straight line basis or another rational and systematic basis Include measure of expected risk of loss even if remote May reach conclusion expected credit loss is zero if justified based on historical loss info adjusted for current conditions and reasonable and supportable forecasts

73 Major provisions of ASC Collateral dependent practical expedient (PE) available when: Borrower is experiencing financial difficulty Repayment is expected substantially through the operation or sale of the collateral Base estimate of credit loss on amortized cost less fair value of collateral Adjust for selling costs if expect repayment through sale of collateral Must be used if foreclosure is probable

74 Major provisions of ASC Collateral maintenance provisions PE Borrower required to continually adjust the amount of collateral as a result of fair value changes in the collateral Limit allowance to excess of amortized cost of asset over fair value of collateral Through PEs only, could conclude expected loss is zero solely on the basis of the current collateral value. Absent PE, would need to consider potential future changes in collateral value and historical loss info for assets with similar collateral

75 ACCOUNTING STANDARDS UPDATES

76 Final standards recently issued ASU , Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ASU , Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

77 Final standards recently issued ASU , Codification Improvements to Topic 995, U.S. Steamship Entities: Elimination of Topic 995 ASU , Income Statement Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606) (SEC Update) ASU , Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update)

78 Final standards recently issued ASU , Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ASU , Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842

79 Final standards recently issued ASU , Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) ASU , Investments Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No (SEC Update) ASU , Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities

80 ASU , Targeted Improvements to Accounting for Hedging Activities ASU brings relief to the rigors of hedge accounting, including: Reduced upfront documentation requirements for certain private companies and ability to wait until financial statements are available to be issued to assess effectiveness Other entities can wait until the quarterly effectiveness testing to perform the initial assessment of effectiveness Can apply long-haul method if short cut method was not or no longer is appropriate

81 ASU , Targeted Improvements to Accounting for Hedging Activities Expanded risks eligible for hedging: Contractually specified component in cash flow hedge of commodities Contractually specified interest rate in cash flow hedge of interest rate risk Changes in fair value attributable to changes in SIFMA for fair value hedge of interest rate risk Additional flexibility for fair value hedges of interest rate risk

82 ASU , Targeted Improvements to Accounting for Hedging Activities Less quantitative analysis will be required If initial quantitative assessment indicates relationship is highly effective, can elect to perform subsequent assessments qualitatively absent a significant change in facts and circumstances Can assume dates match if forecasted transaction occurs, and derivative matures, within same 31 day period Ineffectiveness is no longer separately measured and recognized

83 ASU , Targeted Improvements to Accounting for Hedging Activities Certain transition elections permitted including: Switch from quantitative assessment to qualitative Indicate quantitative method to be used in the event short cut method fails Redesignate hedged risk as contractually specified component Reclassify debt security from HTM to AFS if eligible to be hedged under last-of-layer method PBEs and certain private companies must make elections in quarter of adoption, others before next financial statements are available to be issued

84 ASU , Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ) The amendments clarify certain aspects of the guidance issued in ASU Issue Equity Securities without a Readily Determinable Fair Value Discontinuation: Once an entity elects the measurement alternative in ASC , the entity must continue to apply the alternative until the investment has a readily determinable fair value or becomes eligible for the net asset value practical expedient. Are there additional situations that may allow for an entity to discontinue the measurement alternative? Summary of amendment An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer.

85 OTHER TOPICS

86 On the Horizon FASB is working on various projects including targeted improvements and clarifications: Related party guidance for VIEs Leases Disclosures of fair value measurements Digital currencies? 86

87 Segment Reporting Are broker-dealers subject to the segment reporting requirements under ASC 280? PBEs are encouraged but not required to provide disclosures in Topic 280, unless those entities also meet the definition of a public entity as defined in Section Public entity is a business entity that is required to file financial statements with the SEC When issued, SFAS 131 superseded FASB Technical Bulletin No. 79-8, which scoped out broker-dealers 87

88 Going Concern Statement on Auditing Standards No. 132 effective for audits of financial statements for periods ending on or after December 15, 2017 Includes consideration of management s evaluation (now required post ASU ) Assumption that the entity will continue its operations for a reasonable period of time Generally one year from when financial statements are issued or available to be issued, where applicable 88

89 Resources AICPA Expert Panel - Stockbrokerage and Investment Banking website (Minutes) FASB Website (fasb.org) FINRA - Annual Regulatory and Examination Priorities Letter SEC Examination Priorities SEC No-Action Letter dated November 8, 2016 RSM Financial Reporting Resource Center 89

90 RSM thought leadership visit - rsmus.com/frrc

91 FOR MORE INFORMATION PLEASE CONTACT: PAUL J. NOCKELS PARTNER, GREAT LAKES FINANCIAL SERVICES PRACTICE LEADER RSM US LLP ONE SOUTH WACKER DRIVE, SUITE 800 CHICAGO, ILLINOIS OFFICE:

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