KPMG s CFO Financial Forum Webcast

Transcription

1 KPMG s CFO Financial Forum Webcast Liquidation Basis of Accounting and Proposed Going Concern Standard July 19, 2013 Angie Storm, Partner Jeremy Peters, Senior Manager Agenda Background and Standard Setting Activities Liquidation Basis of Accounting Proposed Going Concern Standard d Questions and Answers Wrap up 2

2 Administrative CPE regulations require online participants take part in online questions You must respond to a minimum of four of the six questions in order to be eligible for CPE credit Questions will appear on your media player on top of the slides Do not view the presentation on full screen or the questions will not appear Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization Send Questions via Ask a Question Button Help Desk: or outside the U.S. at Reference materials are available 3 Glossary

3 Glossary ASC Accounting Standards Codification ASU Accounting Standard Update AU Auditing Standard AU-C Auditing Standard - Clarified IAS International Accounting Standard ED Exposure Draft FASB Financial Accounting Standards Board SEC Securities and Exchange Commission PCAOB Public Company Accounting Oversight Board U.S. GAAP United States Generally Accepted Accounting Principles 5 Background and Standard Setting Activities

4 Background Going Concern Project - Original Scope Incorporate in U.S. GAAP accounting and reporting guidance currently residing in the auditing standards AU-341/AU-C Section 570, The Auditor s Consideration of an Entity s Ability to Continue as a Going Concern Converge guidance with existing IFRS guidance IAS 1, Presentation of Financial Statements IAS 10, Events after the Balance Sheet Date Exposure Draft, Going Concern, initially issued October Timeline of Project Developments Going Concern ED 2 nd staff draft not exposed; determined inoperable Oct Nov Liquidation Basis ED issued Jul Going Concern ED issued Jun Jun Project Expanded to include Liquidation Basis Feb Apr Liquidation Basis Final Liquidation project Basis ASU separated issued from going (ASU concern 07) 8

5 PCAOB Developments Standard Setting Agenda released June 30, 2013 Going Concern project added Timing dependent on the FASB actions 9 Polling question #1 Do you believe the focus by standard setters on Going Concern and Liquidation Basis of Accounting is warranted? A. Yes There is a lack of specific U.S. guidance in accounting literature. B. No Existing auditing standards are sufficient to provide required information C. Not sure 10

6 Liquidation Basis of Accounting Overview of ASU , Liquidation Basis of Accounting ASU creates a new Subtopic , Liquidation Basis of Accounting, under Topic 205, Presentation of Financial Statements, in ASC Why is Liquidation Basis being addressed? Minimal guidance to address WHEN and HOW to apply the liquidation basis of accounting As a result Diversity in practice has been observed Liquidation Basis ASU intended to Clarify When and How to apply Provide principles for recognition and measurement of assets and liabilities ASU also amends glossary to define new term, liquidation Definition: Liquidation The process by which an entity converts its assets to cash or other assets and settles its obligations with creditors in anticipation of the entity ceasing all activities. Upon cessation of the entity s activities, any remaining cash or other assets are distributed to the entity s investors or other claimants (albeit sometimes indirectly). Liquidation may be compulsory or voluntary. Dissolution of an entity as a result of that entity being acquired by another entity or merged into another entity in its entirety and with the expectation of continuing its business does not qualify as liquidation.

7 Recognition and Scope When to apply Liquidation Basis of Accounting: An entity shall prepare financial statement on a liquidation basis when liquidation is imminent unless the liquidation follows a plan for liquidation specified in the entity s governing documents at inception Definition: Imminent A plan for liquidation has been approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that (a) the execution of the plan will be blocked by other parties (for example, those with protective rights), and (b) the entity will return from liquidation, or A plan for liquidation is imposed by other forces (for example, involuntary bankruptcy) and the likelihood is remote that the entity will return from liquidation. Scope: Applies to all entities EXCEPT investment companies regulated under the Investment Company Act of 1940 Polling question #2 Do you think imminent (as defined) liquidation is the appropriate trigger for non-limited-life entities to begin applying the Liquidation Basis of Accounting? A. Yes FASB definition is the most appropriate time to begin B. No, too late Liquidation Basis should be applied earlier than approval of the plan C. No, too early FASB definition would result in some entities applying Liquidation Basis at a point too far removed from when liquidation would actually occur D. Not sure 14

8 Recognition and Measurement Assets: Measured at estimated amount of consideration the entity expects to collect in settling or disposing of assets in liquidation; include previously unrecognized items that the entity expects to sell (e.g., unrecognized trademarks) Fair value may approximate the amount that an entity expects to collect; however, not presumed to be true for all assets Accrue estimated costs to dispose of recognized assets; present accruals in the aggregate, separately from the related assets Do not apply discounting in measuring accruals for disposal costs Liabilities Recognized and measured based on the existing requirements of otherwise applicable U.S. GAAP Adjust liabilities to reflect changes in assumptions resulting from decision to liquidate (for example, timing of payments). Entities should not anticipate legal release of liabilities 15 Recognition and Subsequent Measurement Other Costs and Income Accrue amounts expected to be incurred or earned (e.g., payroll expense/income from preexisting orders) through the end of liquidation if and when a reasonable basis for estimation exists Do not apply discounting provisions in measuring expected income and expense At each reporting date Remeasure assets, liabilities, and accruals for disposal or other costs or income to reflect the actual or estimated change in value since the previous reporting date 16

9 Polling question #3 Considering that an entity could apply Liquidation Basis for multiple reporting periods, do you agree with the FASB s provisions that discounting of financial statement amounts should not be used? A. Yes Given the entity is liquidating, time value of money is not relevant to users of financial statements B. No For entities where liquidation spans more than a year, users would be interested in the present value of what might be ultimately received in liquidation C. Not sure 17 Presentation and Disclosure Other Presentation Matters At a minimum the following basic financial statements will be prepared: Statement of net assets in liquidation Presents a liquidating entity s net assets available for distribution to investors and other claimants as of the end of the reporting period. Statement of changes in net assets in liquidation Presents the changes during the period in net assets available for distribution to investors and other claimants New Disclosure Requirements: A statement that the financial statements have been prepared using the liquidation basis of accounting, including the facts and circumstances surrounding its adoption A description of the entity s plan of liquidation that includes how it expects to dispose of its assets and liabilities and the anticipated duration of the plan The methods and significant assumptions (and any subsequent changes) used to measure assets and liabilities The type and amount of costs and income accrued 18

10 Effective Date and Transition Effective for both public and nonpublic entities (including employee benefit plans) that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods Early adoption is permitted At effective date, a cumulative-effect adjustment is required to account for differences between measurements under liquidation basis and going concern basis for entities required to apply liquidation basis as of the effective date Entities reporting on a liquidation basis of accounting at the effective date using existing U.S. GAAP about when and how to apply the liquidation basis (e.g., terminating employee benefit plans) are not required to newly adopt the ASU s provisions and may continue to apply existing guidance 19 Proposed Going Concern Standard

11 Overview of Proposed ASU, Disclosures of Uncertainties about an Entity s Going Concern Presumption Proposed ASU would create a new Subtopic , Going Concern under Topic 205, Presentation of Financial Statements, in ASC Why is Going Concern being addressed? As a result Going Concern ASU intended to No U.S. GAAP guidance about management s responsibilities in evaluating and disclosing going concern uncertainties Diversity in timing, nature and extent of footnote disclosure Provide guidance on management s responsibilities Clarify When/How going concern uncertainties should be disclosed Proposed amendments to Master Glossary: Definition: Going Concern Presumption Definition: Substantial Doubt The inherent presumption in preparing financial statements under U.S. GAAP that an entity will be able to continue as a going concern; that is, the entity will continue to operate such that it will be able to realize its assets and meet its obligations in the ordinary course of business. Substantial Doubt about an entity s ability to continue as a going concern exists when information about existing conditions and events, after considering the mitigating effect of all of management s plans (including those outside the ordinary course of business), indicates that it is known or probable that an entity will be unable to meet its obligations as they become due within 24 months after the financial statement date. Disclosure Thresholds All Entities Assess at each annual and interim reporting period an entity s potential inability to meet its obligations as they become due within 24 months after the financial statement date. Consider all information about conditions and events that exist at: The date the financial statement are issued (public entities) The date the financial statement are available to be issued (nonpublic entities) When information about conditions and events indicate either of the following: Without taking actions outside the ordinary course of business it is: More likely than not that the entity will be unable to meet its obligations within 12 months after the financial statement date, OR Known or probable that the entity will be unable to meet its obligations within 24 months after the financial statement date Disclose information that enables users of the financial statements to understand all of the following: Principal conditions and events giving rise to the entity s potential inability to meet its obligations Possible effects of such conditions and events on the entity Management s evaluation of the significance of those conditions and events Mitigating conditions and events Management s plans to address potential inability to meet obligations

12 Polling question #4 Do you believe the proposed amendments requiring an assessment of the potential inability to meet obligations as they become due for a period of 24 months is appropriate? A. Yes 24 months is an appropriate period of time to make an assessment B. No 24 months is too long of a time period to accurately forecast C. No companies should provide earlier warning of uncertainties beyond 24 months. D. Not sure 23 Conditions and Events Considered in Assessment The effect of the following conditions and events, among others, would be considered in assessing an entity s potential inability to meet its obligations: Sources of liquidity, idit including available liquid id funds and available access to credit Funds necessary to maintain operations in the ordinary course of business Conditional and unconditional obligations due or anticipated within 24 months after the financial statement date Conditions and events that could adversely affect the entity s ability to meet its obligations (e.g., anticipated loss of a major customer, impending maturity of significant debt, upcoming expiration of a key patent) Conditions and events that could mitigate the entity s potential inability to meet its obligations (e.g., renewal of a major customer contract, reduction in the costs of raw materials, increase in market demand of products) Effect of plans that are in the ordinary course of business if likely to be effectively implemented and likely to mitigate the adverse conditions and events Assessment is made in the aggregate, consider all information that exists at the date the financial statements are issued (or available to be issued for nonpublic)

13 Management s Plans That Are Outside the Ordinary Course of Business In assessing the potential inability to meet its obligations, an entity would not consider the mitigating effect of management s plans that are outside the ordinary course of business. Outside the ordinary course of business: Actions inconsistent (in nature, magnitude or frequency) with those customary in carrying out ongoing business activities Entity-specific determination. The same plan can be in the ordinary course for one entity but outside for another Plans primarily intended to alleviate specific conditions or events that likely would lead to an entity s inability to meet its obligations otherwise generally are outside the ordinary course (unless they are consistent with actions customary in carrying out the entity s ongoing business activities) Example: Outside the Ordinary Course of Business Entity A has limited access to sources of liquid funds and a significant portion of debt due 10 months after the financial statement date. The portion of debt due is significant relative to total assets, current assets and equity. Management has developed e various strategies es to maintain sufficient near-term liquidity qudtyas follows: o Management Plans Lower operating expenses through cost-cutting measures in areas such as entertainment, travel, and bonuses Engaged in discussions with current and other creditors to refinance debt In the event refinance is not possible, developed contingency plan to sell major line of business equal to 1/3 of operations Relevant Additional Factors Previously undertaken similar costcutting measures of varying types and scales Entity has not had to refinance debt in past 5 years and failure to refinance could lead to default Entity has not made any other plans or secured any other sources of financing to address liquidity

14 Example: Outside the Ordinary Course of Business Evaluation: To determine whether disclosure of going concern uncertainties is necessary, Entity A would consider the significance of the maturing debt in light of its available funds necessary to maintain current operations. Additionally, the entity would assess the effect of the repayment of the debt on its liquidity and, therefore, its potential inability to meet other conditional or unconditional obligations within 24 months. Plans are assessed as follows: Management Plans Cost cutting Measures Refinance of debt Selling line of business Assessment of Plan Include in consideration Plan is customary in carrying out ongoing business Depends Plan to refinance debt may or may not be considered outside the ordinary course. In this case, because the debt is significant to liquidity needs and because the entity does not customarily refinance, would likely be considered outside the ordinary course Exclude from consideration Considered outside the ordinary course of business on the basis of its infrequency, magnitude, and nature Polling question #5 In assessing whether an entity will be able to meet its obligations, do you believe the FASB s proposal to preclude consideration of management s plans that are outside the ordinary course of business will lead to inconsistent application? A. Yes The guidance provided is too prone to inconsistent application B. No The guidance provided is likely to result in consistent application, based on reasonable judgments by management C. Not sure 28

15 SEC Filer Requirements Evaluating Whether There Is Substantial Doubt SEC filers would be required to determine whether there is substantial doubt about the entity s going concern presumption: Substantial ti doubt exists if it is known or probable that the entity will be unable to meet its obligations as they become due within 24 months after the financial statement date. When evaluating, consider the effect of ALL plans that are likely to be effectively implemented and likely to mitigate adverse conditions and events, including those outside the ordinary course of business. SEC filers that determine there is substantial doubt would be required to: Explicitly itl state t in the financial i statements: there is substantial doubt about the entity s ability to continue as a going concern within 24 months after the financial statement date (or similar wording) Non-SEC-filers: Separate evaluation (and disclosure) of substantial doubt would not be required. Polling question #6 Do you agree with the Board s decision not to require an entity that is not an SEC filer to evaluate or disclose when there is substantial doubt about its going concern presumption? A. Yes The needs of users of non-sec filers financial statements do not require such an evaluation outside of the required uncertainty disclosures proposed B. No Management s evaluation as to substantial doubt is relevant information for users of all financial statements C. Not sure 30

16 Question and Answer Session Presenters contact details Angie Storm Partner, Department of Professional Practice Phone: Jeremy Peters Senior Manager, Department of Professional Practice Phone: Financial Reporting Network: KPMG Learning Executive Education: 32

17 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved NSS The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.