Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows

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1 KPMG s EITF Webcast Department of Professional Practice September 12, 2012 Mark Bielstein Sam Kerlin Greg Lawrie Dexter Metcalfe Michelle Rozich Jill Windrum Agenda Final Consensus: Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows Issue 12-C, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution Issue 12-E, Accounting for Fair Value Information That Arises After the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs Consensus-for-Exposure: Issue 11-A, Parent's Accounting for the Cumulative Translation Adjustment (CTA) upon a Sale within a Foreign Entity or a Sale of an Investment in a Foreign Entity Issue 12-G, Accounting for the Difference between the Fair Value of the Assets and Liabilities of a Consolidated Collateralized Financing Entity EITF Agenda Matters 1 1

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 2 Polling question #1 Please indicate your industry. A. Banking B. Not-for-Profit C. Entertainment D. Other 3 2

3 Final Consensus: Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows Background Not-for-profit entities (NFPs) typically accept donated securities to accommodate the donor s objectives, rather than to meet strategic investment decisions Diversity in practice exists among not-for-profit entities (NFPs) in the classification of the cash receipts from the sale of unrestricted ti t ddonated dsecurities in the statement t tof cash hflows The near immediate conversion into cash is economically similar to receiving a cash contribution Treating the cash flows as investing activities may be misleading and suggest a level of investing and investment risk that is not present Restricted donated securities are classified as financing cash flows 5 3

4 Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows (continued) Scope Expanded original scope to include all unrestricted donated financial assets For example, equity securities, debt securities, partnership interests Other non-financial assets are excluded from scope To be addressed in the FASB project, Not-for-Profit Financial Reporting: Financial Statements Criterion Cash receipts resulting from the sale of donated securities by NFPs that upon receipt are directed for sale and are converted into cash in the near immediate term shall be classified as operating cash flows Near immediate term to be addressed in basis for conclusion Concept of avoidance of significant risks and rewards included in original consensus-for-exposure 6 Issue 12-A, Not-for-Profit Entities- Classification of the Sale of Donated Securities in the Statement of Cash Flows (continued) Transition Applied prospectively to cash receipts on or after date of adoption from sale of donated financial assets Retrospective application would be allowed, but not required Early adoption would be permitted Effective Date Effective for annual and interim periods beginning after June 15,

5 Polling question #2 Which of the following is correct about the Final Consensus on Issue 12-A? A. Retrospective application is required. B. Classify unrestricted donated financial assets directed for sale upon receipt and converted into cash in the near immediate term as operating cash flows. C. Classify the sale of donated securities restricted for long-term purposes or permanently restricted that are sold immediately (or in the near term) as investing cash flows. D. The amendments will be effective immediately. 8 Polling question #2 Solution Answer: B Classify unrestricted donated financial assets directed for sale upon receipt and converted into cash in the near immediate term as operating cash flows. 9 5

6 Final Consensus: Issue 12-C, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution Issue 12-C, Subsequent Accounting for an Indemnification Asset Recognized as a Result of a Government-Assisted Acquisition of a Financial Institution Background: Issue relates to the subsequent accounting for loss-share agreements entered into as part of FDIC-assisted acquisitions Loss-share agreements are typically accounted for as indemnification assets under ASC Topic 805 Some diversity in practice When the indemnified assets are ASC loans that experience an increase in expected cash flows, how should an entity recognize the decrease in the indemnification asset? 11 6

7 Issue 12-C, Subsequent Accounting for an Indemnification Asset Recognized as a Result of a Government-Assisted Acquisition of a Financial Institution (continued) Consensus-for-Exposure reached by the Task Force at March 2012 meeting: Scope limited to indemnification assets recognized in a government-assisted acquisition of a financial institution Adjustments to the indemnification asset should be measured on the same basis as the change to the indemnified asset If amortization is appropriate, it should be based on the lesser of the term of the indemnification agreement or the indemnified asset Prospective application would be required for any new indemnification asset or changes in expected cash flows on existing indemnification assets Earlier application permitted 12 Issue 12-C, Subsequent Accounting for an Indemnification Asset Recognized as a Result of a Government-Assisted Acquisition of a Financial Institution (continued) Comment Letters received: Most support the Consensus-for-Exposure Two constituents disagreed with the proposed guidance, and suggested expanding disclosure requirements instead Others asked for an increase in scope or additional accounting matters related to indemnification assets be addressed Decisions reached at September meeting: The EITF affirmed its Consensus-for-Exposure Any unamortized balance at the effective date would be amortized over the shorter of the remaining term of the indemnification agreement or the remaining life of the indemnified assets The final consensus will be effective for fiscal years (and interim reporting periods within those years) beginning on or after December 15,

8 Polling question #3 Which of the following statements is correct about the decisions reached in September by the EITF on Issue 12-C? A. The EITF decided to overturn its previously proposed guidance B. The consensus would be applied retrospectively C. The consensus would only apply to public companies D. The EITF agreed to a final consensus based on its consensus-for-exposure, which would be effective for reporting periods beginning on or after December 15, Polling question #3 Solution Answer: D The EITF agreed to a final consensus based on its consensus for exposure. The final consensus will be effective for fiscal years (and interim reporting periods within those years) beginning on or after December 15,

9 Final Consensus: Issue 12-E, Accounting for Fair Value Information that Arises After the Measurement Date and its Inclusion in the Impairment Analysis of Unamortized Film Costs Issue 12-E, Accounting for Fair Value Information that Arises Subsequent to the Measurement Date and its Inclusion in the Impairment Analysis of Unamortized Film Costs ASC Topic 926, Entertainment Films, requires unamortized film costs to be tested for impairment when events or changes in circumstances indicate that the fair value of a film is less than the unamortized film costs. One of the example indicators is actual performance of a film subsequent to release failing to meet that which had been expected prior to release. The impairment i analysis for released films should consider information that t becomes available after the balance sheet date but prior to the issuance of the financial statements. Previously a rebuttable presumption existed that the conditions leading to impairment upon film release subsequent to the balance sheet date existed at the balance sheet date. The presumption could be overcome if the entity was able to demonstrate that the conditions did not exist at the balance sheet date. Thus, an entity would usually adjust its impairment analysis for the effect of any unfavorable information related to released films that becomes available after the balance sheet date but prior to the issuance of the financial statements. 17 9

10 Issue 12-E, Accounting for Fair Value Information that Arises Subsequent to the Measurement Date and its Inclusion in the Impairment Analysis of Unamortized Film Costs (continued) Fair Value Guidance ASC Topic 820, Fair Value Measurement, requires a fair value measurement to be as of the measurement date using assumptions that market participants would use when considering a transaction for the asset or liability. ASC Topic 855, Subsequent Events, indicates that changes in the fair value of assets or liabilities should not be recognized, but should ldbe disclosed d if material. The film industry guidance presumes that conditions leading to the write-down (i.e., actual box office performance) existed at the balance sheet date, while actual performance may be driven by a multitude of factors (e.g., competing films, weather, and sporting events). 18 Issue 12-E, Accounting for Fair Value Information that Arises Subsequent to the Measurement Date and its Inclusion in the Impairment Analysis of Unamortized Film Costs (continued) Task Force reached a Final Consensus: Delete the industry-specific rebuttable presumption in ASC Topic 926. Fair value measurements would only include information that is known or knowable at the measurement date. Does not imply that information obtained subsequent to the balance sheet date would be ignored in fair value measurement t( (would need dto evaluate what was known or knowable at tthe balance sheet tdate and market participant i t assumptions). Aligns accounting with ASC Topics 855 and 820. No expected changes to disclosure requirements (would continue to follow guidance in ASC Topics 855 and 820). Prospective application is required upon adoption, but early adoption will be permitted. Effective for periods ending after December 15, 2012 for public entities and December 15, 2013 for non-public entities

11 Polling question #4 Which of the following is correct about the Final Consensus on Issue 12-E? A. The impairment analysis should always include information that becomes available for films released subsequent to the measurement date, but prior to the issuance of the financial statements. B. The impairment analysis should be based on fair value, which includes information about market participants assumptions as of fthe measurement tdate. C. The impairment analysis will no longer be required for films that have been released before the balance sheet date. D. The impairment analysis will now be required for all films in production regardless of whether triggering events occur. 20 Polling question #4 Solution Answer: B The Final Consensus requires the impairment analysis to be based on fair value, which includes information about market participants assumptions as of the measurement date

12 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity How should CTA be accounted for? Parent Company Expanded scope of the issue Loss of controlling financial interest Partial sale of an equity method investment Step acquisitions Consolidated Foreign Entity Foreign Equity Method Investment Original scope of the issue Sale/transfer within a foreign entity Subsidiary Group of assets (business) 23 12

13 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity (continued) Topic 830, Foreign Currency Matters, provides for CTA to be reclassified into earnings only upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. Topic 810, Consolidation, provides for deconsolidation of the carrying amount of a former subsidiary s assets and liabilities when the parent ceases to have a controlling financial interest in that subsidiary (other than a sale of in-substance real estate or a conveyance of oil and gas mineral rights). ASC paragraph 810 requires the financial interest retained be measured at fair value upon the deconsolidation of the former subsidiary. Paragraph B53 (uncodified) states that upon a loss of control of a subsidiary, the amount of equity to be derecognized includes amounts previously recognized in Other Comprehensive Income (OCI). ASU expanded the scope of the deconsolidation and derecognition guidance in Topic 810 to include groups of assets that meet the definition of a business (excluding in-substance real estate and conveyances of oil and gas mineral rights) Did not specifically address derecognition of CTA. 24 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity (continued) Sale or transfer of a subsidiary or a group of assets that is a nonprofit activity or a business within a foreign entity. Alternative views: View A: Follow ASC 810 and reclassify a portion of the CTA associated with the disposed d subsidiary or group of assets into earnings (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) View B: Follow ASC 830 and only reclassify the CTA into earnings if the sale or transfer of the subsidiary or group of assets constitutes a complete or substantially complete liquidation of the foreign entity Consolidated Foreign Entity Parent Company Foreign Equity Method Investment Subsidiary Group of assets (business) Task Force Consensus-For-Exposure- View B 25 13

14 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity (continued) Loss of controlling financial interest in a consolidated foreign entity. ASC 810 should apply Loss of controlling financial interest is a sale, irrespective of any retained dinvestment t Loss of controlling financial interest, other than by sale (e.g., where the foreign entity is in legal reorganization or bankruptcy), is a sale All CTA related to the foreign entity should be reclassified into earnings upon deconsolidation as part of the gain or loss Consolidated Foreign Entity Parent Company Foreign Equity Method Investment Subsidiary Group of assets (business) 26 Polling Question #5 U.S. parent company owns 100% of ABC corp., a consolidated foreign entity. U.S. parent sells 80% of its financial interest in ABC corp. resulting in a loss of control. How much CTA related to ABC corp. should be reclassified into earnings based on the tentative conclusion reached by the Task Force? A. 100% B. 80% C. 20% D. 0% 27 14

15 Polling Question #5 - Solution Answer: A U.S. parent company owns 100% of ABC corp., a consolidated foreign entity. U.S. parent sells 80% of its financial interest in ABC corp. resulting in a loss of control. How much CTA related to ABC corp. should be reclassified into earnings based on the tentative conclusion reached by the Task Force? A. 100% B. 80% C. 20% D. 0% 28 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity (continued) Step Acquisition Represents two events under ASC 830 CTA should be reclassified into earnings upon disposal of previously held equity method investment Partial sale of a foreign equity method investment Continue to apply ASC 830 A pro rata allocation of CTA should be reclassified Consolidated Foreign Entity Parent Company Foreign Equity Method Investment Subsidiary Group of assets (business) 29 15

16 Issue 11-A, Parent s Accounting for the Cumulative Translation Adjustment Upon a Sale Within a Foreign Entity or a Sale of an Investment in a Foreign Entity (continued) Other tentative conclusions: Applied prospective from the beginning of the fiscal year of adoption Early adoption permitted No additional disclosure requirements Proposed update will be re-exposed 30 Consensus-for-Exposure: Issue 12-G, Accounting for the Difference Between the Fair Value of the Assets and the Liabilities i of a Consolidated Collateralized Financing Entity (CFE) 16

17 Issue 12-G, Accounting for the Difference Between the Fair Value of the Assets and the Liabilities of a Consolidated Collateralized Financing Entity (CFE) Background Collateralized debt obligations and other collateralized financing entities (CFEs) that hold financial assets and issue beneficial interests treated as liabilities are often variable interest entities (VIEs) e.g., because they have no equity. A reporting entity such as an asset manager may be the primary beneficiary of a CFE that is a VIE even without holding an equity or beneficial i interest t in the CFE. CFE primary beneficiaries often elect fair value option under ASC Topic 825 for CFE s eligible financial assets and financial liabilities. Fair value of CFE s assets can differ from fair value of its liabilities due to varying liquidity discounts, duration mismatches, etc. Question: How should the primary beneficiary, holding no direct interest in the CFE, account for the difference in fair value of a CFE s assets and liabilities upon initial consolidation and subsequently? 32 Issue 12-G, Accounting for the Difference Between the Fair Value of the Assets and the Liabilities of a Consolidated Collateralized Financing Entity (CFE) (continued) Example Entity A acquires asset management Entity Z (which manages a portfolio of CFEs) for $32 million non-contingent cash consideration Entity A holds no equity or beneficial interests in the CFE portfolio but must consolidate one CFE as a result of acquiring Entity Z Entity Z and the CFE to be consolidated by Entity A collectively qualify as a business Upon acquisition, fair value of Entity Z s assets and liabilities are $70 million and $40 million, respectively, excluding the CFE Entity A elects the fair value option under ASC Topic 825 for all CFE s eligible financial assets and financial liabilities Initial recognition: fair value of CFE s assets and liabilities are $190 million and $150 million, respectively, at acquisition Fair value of assets exceeds fair value of liabilities due to duration and liquidity differences Over time difference between fair value of assets and liabilities will decrease to zero Question: How should Entity A record the excess fair value of the assets over liabilities for the CFE upon initial consolidation and in subsequent periods, if any, as the fair value changes? 33 17

18 Issue 12-G, Accounting for the Difference Between the Fair Value of the Assets and the Liabilities of a Consolidated Collateralized Financing Entity (CFE) (continued) Initial Recognition View A View B View C View D View E Balance Sheet Assets Goodwill 2 2 CFE assets Liabilities CFE liabilities Appropriated retained earnings Retained earnings 38 Noncontrolling interest (NCI) 190 Income Statement Net income NCI allocation (38) Income available to common shareholders Issue 12-G, Accounting for the Difference Between the Fair Value of the Assets and the Liabilities of a Consolidated Collateralized Financing Entity (CFE) (continued) Consensus-for-Exposure was reached by the Task Force on View E Transition: Modified retrospective approach with option for full retrospective approach is recommended Modified retrospective- applies only to consolidated CFEs existing at the date of adoption Early adoption permitted Subject to ratification by the FASB and a public comment period 35 18

19 Polling question #6 Which of the following is correct about the Consensus-for-Exposure on Issue 12-G? A. Upon consolidation record any initial gain not owned by the reporting entity directly to non-controlling interest in equity. B. Upon consolidation record any initial gain not owned by the reporting entity directly to appropriated retained earnings. C. Upon consolidation record any initial gain not owned by the reporting entity within consolidatednet net income available to common shareholders (i.e., included in the reporting entity s earnings per share calculation). D. Upon consolidation the CFE s assets and liabilities are measured at an equal amount and no gain or loss is recorded as a result. 36 Polling question #6 Solution Answer: D The Consensus-for-Exposure requires the reporting entity, upon initial consolidation, to measure CFE s assets and liabilities at an equal amount, and no gain or loss is recorded as a result

20 EITF agenda matters Next EITF meeting tentatively scheduled for November 1, 2012 Open Issues: Issue 12-B, Not-for-Profit Entities: Contributed Services from an Affiliate Issue 12-D D, Accounting for Joint and Several Liability for Which the Total Amount of the Obligation is Fixed Issue 12-F, Recognition of New Accounting Basis (Pushdown) in Certain Circumstances Other- accounting for certain service concession arrangements (Issue number pending) 38 Question and Answer Session 20

21 Presenters contact details Mark Bielstein Partner, Department of Professional Practice Phone: Greg Lawrie Senior Manager, Department of Professional Practice Phone: Michelle Rozich Senior Manager, Department of Professional Practice Phone: Sam Kerlin Senior Manager, Department of Professional Practice Phone: Dexter Metcalfe Senior Manager, Department of Professional Practice Phone: Jill Windrum Director, Department of Professional Practice Phone: Financial Reporting Network: p g 40 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 endeavor 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. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 21