IASA Conference US GAAP Technical Update. Deloitte & Touche LLP September 14, 2016

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1 IASA Conference 2016 US GAAP Technical Update Deloitte & Touche LLP September 14, 2016

3 Insurance contracts Overview of the projects FASB and IASB exposure drafts fundamentally change the accounting for contracts with insurance risk This was a MAJOR proposal in the insurance industry significant feedback and course changes since then In deliberations, the FASB: Narrowed scope to insurance entities only Targeted changes for long duration contracts More disclosure for short duration contracts FASB issued ASU , Disclosures about Short Duration Contracts in May 2015: Effective for PBEs for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016 FASB proposed ASU for Long Duration contacts expected in Q3 IASB is expected to issue an IFRS insurance standard in late 2016/early 2017; also addressing interaction with IFRS 9 adoption Copyright 2016 Deloitte Development LLC. All rights reserved. 3

5 Insurance FASB targeted improvements Long-duration contract accounting Tentative Decisions: Long-duration contracts For traditional long-duration, limited payment and participating contracts to determine the liability for future policy benefits: Update cash flow assumptions annually at the same time (chosen by management) every year or more frequently if actual experience or other evidence indicates a need to revise previous assumptions Expected cash flows for participating life insurance contracts would consider investment yields, expected mortality, termination (lapse), expense, and dividend payments. Update discount rate assumptions quarterly Contracts currently discounted using an expected investment yield and participating contracts would be discounted using a high-quality fixed income instrument yield Would eliminate provision for adverse deviation and premium deficiency test Copyright 2016 Deloitte Development LLC. All rights reserved. 5

6 Insurance FASB targeted improvements Long-duration contract accounting Tentative Decisions: Long-duration contracts (cont d) Updating the assumptions Use a retrospective approach to calculate the effect of cash flow assumption updates: Calculate a revised net premium ratio as of contract inception using actual historical experience and updated cash flow assumptions, then (1) apply revised ratio to calculate a cumulative catch-up adjustment that is recorded in current earnings and (2) use the revised ratio to accrue the liability for future policy benefits for subsequent periods Net premium ratio is capped at 100% to avoid deferral of losses to future periods Use an immediate approach to update discount rate assumptions: Does not affect net premium ratio Record effect of discount rate changes immediately in other comprehensive income AOCI balance = difference between carrying amount of the liability for future policy benefits discounted using updated rates versus the locked-in rates at contract inception Copyright 2016 Deloitte Development LLC. All rights reserved. 6

Insurance FASB targeted improvements Long-duration contract accounting Tentative Decisions: Long-duration contracts (cont d) Deferred Acquisition costs: Generally, amortize over expected life of a

7 Insurance FASB targeted improvements Long-duration contract accounting Tentative Decisions: Long-duration contracts (cont d) Deferred Acquisition costs: Generally, amortize over expected life of a book of contracts in proportion to the amount of insurance in-force If the above is not possible, use straight line method in proportion to the number of contracts outstanding Retain amortization using effective interest method for certain investment contracts Copyright 2016 Deloitte Development LLC. All rights reserved. 7

8 Insurance FASB targeted improvements Long-duration contract accounting Market risk benefits Guidance applies to contracts and benefits with the following characteristics: Contract holder (1) can direct funds to one or more separate account investment alternatives, and (2) receives (is passed) investment performance, net of fees and assessments Insurer provides benefit protecting the contract holder from adverse capital market performance, exposing it to other than nominal capital market risk Other than nominal net amount at risk would vary significantly as a result of capital market volatility Capital market risk includes foreign exchange, interest rate and equity risk Both criteria must be met Example - GMxB type contracts Market risk benefits are measured at fair value: Recognize change in FV quarterly in current earnings Portion of the change related to changes in the insurer s own credit risk is recognized in OCI Copyright 2016 Deloitte Development LLC. All rights reserved. 8

9 Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Market risk benefits presentation Insurers should separately present: Carrying amount of the liability for market risk benefits in the statement of financial position Changes in the fair value of that liability (excluding changes in an entity s own credit risk) in the statement of operations Tentative decisions: Annual and interim disclosures Liability for Future Policy Benefits: Disaggregated tabular rollforward of the opening to closing balance Reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability Qualitative and quantitative information about adverse development Qualitative and quantitative information about the significant estimates, inputs, assumptions, and judgments used to determine that no losses are expected for contracts for which no liability is recognized because no future losses are expected Copyright 2016 Deloitte Development LLC. All rights reserved. 9

Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Annual and interim disclosures (cont d) Liability for Policyholders Account Balances: Disaggregated tabular

10 Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Annual and interim disclosures (cont d) Liability for Policyholders Account Balances: Disaggregated tabular rollforward of the opening to closing balance For each rollforward indicate (1) Weighted average earned and crediting rates (2) net amount at risk and (3) cash surrender value Reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability Tabular presentation of policyholders account balances by range of guaranteed minimum crediting rates and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums Qualitative and quantitative information about objectives, policies, and processes for managing risks. Copyright 2016 Deloitte Development LLC. All rights reserved. 10

11 Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Annual and interim disclosures (cont d) Market Risk Benefits: Disaggregated tabular rollforward of the opening to closing balance Related net amount at risk and fees collected for each rollforward presented Reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability, disaggregated between in-the-money and out-of the-money positions Qualitative and quantitative information about objectives, policies, and processes for managing risks Separate Account Liabilities: Disaggregated tabular rollforward of opening to closing balance Cash surrender value for each rollforward presented Reconciliation of the disaggregated rollforwards to the aggregate ending carrying amount of the liability Deferred Acquisition Costs: Disaggregated tabular rollforwards of the opening to the closing balance, together with inputs and assumptions used to determine amortization Copyright 2016 Deloitte Development LLC. All rights reserved. 11

12 Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Transition Liability for Future Policy Benefits: Retrospective application using actual historical information at the level at which reserves are calculated Recognize in AOCI the cumulative effect of discount rate changes between the transition date an contract inception Use estimates for periods in which actual historical information is not available at the level at which reserves are calculated If impracticable, apply guidance to in-force contracts on the basis of their existing carrying amounts at the transition date and updated future assumptions Adjust the opening retained earnings balance to the extent that the net premium ratio exceeds 100 percent. Treat the transition date as the contract inception date for subsequent adjustments Copyright 2016 Deloitte Development LLC. All rights reserved. 12

13 Insurance FASB targeted improvements Long-duration contract accounting Tentative decisions: Transition (cont d) Market Risk Benefits (measured at fair value): Cumulative effect of changes in an entity s own credit risk between the contract inception date and the transition date should be recognized in AOCI Difference between fair value and carrying value at the transition date, excluding the amount above, should be adjusted to opening retained earnings. Deferred Acquisition Costs: Apply guidance at transition date on the basis of the existing carrying amounts, adjusted for the removal of any related amounts in AOCI Copyright 2016 Deloitte Development LLC. All rights reserved. 13

15 Insurance FASB targeted improvements Short-duration contract accounting Required annual disclosures Scope Insurers that issue SD contracts as defined in ASC 944 Tables of incurred and paid loss development by accident year (amounts should be undiscounted and shown net of reinsurance), including reconciliation to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses (CAE) and a separate disclosure of reinsurance recoverable on unpaid claims. For most recent reporting period show total net O/S claims for years not separately presented Cumulative information on the frequency of claims, unless impracticable Total amount of IBNR liabilities plus expected development on reported claims to enable computation of claim severity Qualitative information on computation methodologies used, and any significant changes thereto, for (1) IBNR, (2) claim frequency and (3) liability for unpaid claims and CAE Historical average annual percentage payout of incurred claims by age, net of reinsurance, as of the most recent reporting period (except health claims) Effects of discounting on liability for unpaid claims and CAE doesn t affect what is discounted Copyright 2016 Deloitte Development LLC. All rights reserved. 15

20 Insurance FASB targeted improvements Short-duration contract accounting Implementation considerations Foreign exchange rates: ASU does not address how foreign currency translation adjustments should be incorporated into the disclosures Concerns about potential distortion of data due to FX impact Acquisition and dispositions: How should the effects of certain events be presented in the claims development tables: o Acquisition of an entity or assumption of an existing block of business o Disposition of an entity or an existing block of business through a novation or reinsurance o Indemnity reinsurance of an existing block of business (retroactive reinsurance Claim counts and frequency disclosures: Diversity in practice among insurance entities Appropriate level of disaggregation Copyright 2016 Deloitte Development LLC. All rights reserved. 20

21 Insurance FASB targeted improvements Short-duration contract accounting Other considerations: Location of disclosures Level of disaggregation Impact of segment change Copyright 2016 Deloitte Development LLC. All rights reserved. 21

24 Classification and measurement Accounting Standards Update No Overview of the standard ASU was issued January 6, 2016 Makes significant changes to: Classification and measurement of investments in equity securities Presentation of certain fair value changes for financial liabilities measured at fair value under the fair value option Disclosure of fair value of financial instruments Copyright 2016 Deloitte Development LLC. All rights reserved. 24

25 Classification and measurement Accounting Standards Update No Overview of the standard (cont d) Equity investments Most equity securities will be carried at fair value through net income: o Practicability exception permitted for equity securities that do not (1) have readily determinable fair values and (2) qualify for the net asset value (NAV) practical expedient o Equity method investments and investments that are consolidated are excluded from the scope of the new guidance Accounting for equity securities for which the practicability exception has been elected: o Adjustments are made for (1) observable price changes and (2) impairment o Other-than-temporary impairment no longer exists for equity securities Copyright 2016 Deloitte Development LLC. All rights reserved. 25

26 Classification and measurement Accounting Standards Update No Overview of the standard (cont d) Instrument-specific credit risk for fair value option liabilities Separately recognize in OCI changes in fair value attributable to instrument-specific credit risk: o Entire change in fair value of derivative liabilities is still presented in net income Instrument-specific credit may be calculated by either: o o Determining the excess of total change in fair value over the change in fair value that results from a change in a base market risk (e.g., riskfree interest rate, benchmark interest rate) or Using another method that the entity believes is a more faithful representation Copyright 2016 Deloitte Development LLC. All rights reserved. 26

where entities may either: o Evaluate the need for a valuation allowance on a DTA related to AFS debt securities separately, or o Evaluate the need for a valuation

27 Classification and measurement Accounting Standards Update No Overview of the standard (cont d) Valuation allowance on a deferred tax asset (DTA) related to an AFS debt security Eliminates existing diversity in practice, where entities may either: o Evaluate the need for a valuation allowance on a DTA related to AFS debt securities separately, or o Evaluate the need for a valuation allowance on a DTA related to AFS debt securities in combination with the entity s other DTAs Valuation allowance on a DTA related to an AFS debt securities now may only be assessed in combination with the entity s other DTAs Copyright 2016 Deloitte Development LLC. All rights reserved. 27

28 Classification and measurement Accounting Standards Update No Overview of the standard (cont d) Disclosure changes: Non-public entities no longer required to disclose FV of items carried at amortized cost (e.g., debt) Public entities no longer required to disclose methods and significant assumptions used to estimate FV of items carried at amortized cost Public entities must use exit price notion to estimate FV of items carried at amortized cost Financial assets and financial liabilities must be presented separately, grouped by (1) measurement category and (2) class of financial asset Copyright 2016 Deloitte Development LLC. All rights reserved. 28

29 Classification and measurement Accounting Standards Update No Overview of the standard (cont d) Effective date: PBEs: fiscal years beginning after December 15, 2017 (including interim periods) Non PBEs: fiscal years beginning after December 15, 2018 (not including interim periods) Early adoption of certain provisions is permitted 1 Non-PBEs may adopt consistent with PBE effective date 1 Only the following provisions may be early-adopted: Instrument-specific credit risk presented separately in OCI Elimination of certain fair value disclosure requirements for financial instruments not recognized at fair value (only applies to non-pbes). Copyright 2016 Deloitte Development LLC. All rights reserved. 29

31 Hedge accounting project Project at a glance What hasn t changed Highly Effective effectiveness threshold retained Benchmark interest rate concept for fair value hedges (hedges of fixed-rate financial instruments) Voluntary hedge de-designations Required timing for preparation of all hedge documentation except, that relating to the initial quantitative prospective assessment What has changed? Concept of recognizing periodic hedge ineffectiveness Benchmark interest rate concept for variable-rate instruments in cash flow hedges eliminated - able to designate the contractually specified index rate as the hedged risk SIFMA added as a benchmark interest rate Ability to hedge contractually-specified components of nonfinancial items Added new disclosure requirements and amended existing requirements Areas where relief has been proposed Designation of fallback long haul method for shortcut method Certain fair value hedges of interest rate risk Timing of initial quantitative effectiveness assessment Need for subsequent quantitative effectiveness assessments Copyright 2016 Deloitte Development LLC. All rights reserved. 31

32 Hedge accounting project Project at a glance Fair Value Hedges Cash Flow Hedges Net Investment Hedges Record the entire change in the fair value of the hedging instrument in the same income statement line item as the earnings effect of the hedged item Record the entire change in fair value of the hedged item attributable to the hedged risk in income and adjust the carrying amount of the hedged item Record the entire change in the fair value of the hedging instrument used to assess hedge effectiveness in OCI Reclassify amounts in AOCI to the same income statement line item where the earnings effect of the hedged item is presented when the hedged item affects earnings Recognize immediately in the same income statement line item as the earnings effect of the hedged item the portion (if any) of the hedging instrument s change in FV that is excluded from the hedge effectiveness assessment Record the entire change in the fair value of the hedging instrument used to assess hedge effectiveness in the cumulative translation adjustment in OCI Reclassify amounts from CTA to the same income statement line item where the earnings effect of the hedged item is presented when the hedged item affects earnings Recognize immediately in net income the portion (if any) of the hedging instrument s change in FV that is excluded from the hedge effectiveness assessment Copyright 2016 Deloitte Development LLC. All rights reserved. 32

33 Hedge accounting project Other relief proposed Tentatively approved model Requires an initial quantitative assessment of hedge effectiveness in most circumstances: An entity generally would not have to complete its initial quantitative prospective assessment of hedge effectiveness until the end of the reporting period during which it designated the hedge (i.e., up to three months). Quantitative assessment would use data as of hedge inception regardless of when it is performed. Timing requirement for the preparation of all other hedge documentation will not change (must be in place at hedge inception) Initial quantitative assessment is not required if the hedge qualifies for the shortcut or critical terms match methods (or other methods that assume perfect effectiveness) Copyright 2016 Deloitte Development LLC. All rights reserved. 33

34 Hedge accounting project Other relief proposed Tentatively approved model (cont d) Permits use of the critical terms match method for a CF hedge of a group of forecasted transactions if the transactions occur and the hedging derivative matures within the same 31-day period (assuming all other CTM criteria are met) Retains the shortcut method; but would permit application of the long-haul method if the entity subsequently determines that the use of the shortcut method was or is no longer appropriate and The hedge was highly effective The entity documented at hedge inception which long-haul methodology it would use to measure hedge ineffectiveness if the shortcut method could not be applied Shortcut criteria would be amended to allow partial-term fair value hedges of interest risk to qualify for the shortcut method Copyright 2016 Deloitte Development LLC. All rights reserved. 34

35 Hedge accounting project Other relief proposed Fair value hedges of interest rate risk Option to use either the cash flows associated with the benchmark interest rate or the total contractual coupon cash flows to calculate the change in the fair value of the hedged item Use of the contractual coupon cash flows is required when the effective interest rate of the financial instrument is less than the benchmark interest rate on the date of hedge designation Fair value hedges of callable debt May consider only how changes in interest rates affect the obligor s decision to call the debt when assessing hedge effectiveness and measuring changes in fair value attributable to changes in the benchmark interest rates Ability to designate a portion of the term of a financial instrument as the hedged risk Change in the fair value of the hedged item attributable to interest rate risk would be calculated under the assumption that its maturity occurs on the date in which the last hedged cash flow is due and payable Copyright 2016 Deloitte Development LLC. All rights reserved. 35

36 Hedge accounting project Other relief proposed Adoption Alternatives Modified retrospective Early adoption permitted at the beginning of any fiscal period before the effective date All amendments must be adopted at one date Effective date TBD Need to provide certain transition disclosures Other Transition Provisions Changes in accounting for FV hedges of interest rate risk Dedesignate then redesignate Hedged item s basis adjustment adjust cumulative amount to reflect what it would have been had the new accounting treatment been applied throughout the life of the hedge Offset Opening balance of R/E No guidance for partial term FV hedges existing at adoption Use SIFMA benchmark rate as designated risk instead of changes in total price Dedesignate, then redesignate Basis adjustment from dedesignated hedge amortize over remaining life of hedged item on a level yield basis One-Time Transition Elections To be made by end of the first fiscal year after the adoption date Amend existing hedge documentation to address whether subsequent effectiveness assessments will be qualitative Amend documentation for shortcut method hedges to specify fallback long-haul method for quantitatively assessing hedge effectiveness To be made on or before the first quarterly effectiveness assessment date after the adoption date For hedges of contractually specified components of nonfinancial items - allow reset of hypothetical derivative terms to be at market as of the hedge inception date Copyright 2016 Deloitte Development LLC. All rights reserved. 36

38 Introduction to revenue recognition On May 28, 2014, the staff of the Financial Accounting Standards Board ( FASB ) and International Accounting Standards Board issues their final standard Revenue from Contracts with Customers The new guidance has an effective date of periods beginning after December 15, 2017, with retrospective and cumulative catch-up options The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers, and supersedes current revenue recognition guidance, including industryspecific revenue guidance. The objective of the guidance in this Topic is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Copyright 2016 Deloitte Development LLC. All rights reserved. 38

39 Why the update? Revenue is a crucial number to users of financial statements in assessing an entity s financial performance and position. However, previous revenue recognition requirements in U.S. GAAP differ from those in IFRS, and both sets of requirements were in need of improvement. To remove inconsistencies and weaknesses in existing revenue recognition standards by providing clear principles for revenue recognition in a robust framework; To provide a single revenue recognition model which will improve comparability over a range of industries, companies and geographical boundaries; To simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer to; Provide a more robust framework for addressing issues as they arise; Provide enhanced disclosures; and Clarify accounting for contract costs. Copyright 2016 Deloitte Development LLC. All rights reserved. 39

40 The five-step model Core Principle 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 When? The entity satisfies a performance obligation by transferring a good or service to a customer How much? The amount that represents the consideration to which the entity expects to be entitled Step 1 Step 2 Step 3 Step 4 Step 5 Identify the contract with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to performance obligations Recognize revenue when (or as) the entity satisfies a performance obligation Copyright 2016 Deloitte Development LLC. All rights reserved. 40

41 Step 1: Identify the contract Step 1 Identify the contract with the customer Step 2 Identify the performance obligations Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue A contract is an agreement between two or more parties that creates enforceable rights and obligations. An entity should apply the requirements to each contract that meets the following criteria: Approval and commitment of the parties Identification of the rights of the parties Identification of the payment terms The contract has commercial substance It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer Copyright 2016 Deloitte Development LLC. All rights reserved. 41

42 Step 2: Identify the performance obligation Step 1 Identify the contract with the customer Step 2 Identify the performance obligations Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue A performance obligation is a promise to transfer a good or service to the customer. If an entity promises in a contract to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is (1) distinct or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer. A good or service is distinct if both of the following criteria are met: 1.Capable of being distinct The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. 2.Distinct within the context of the contract The promise to transfer the good or service is separately identifiable from other promises in the contract. A good or service that is not distinct should be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct. Copyright 2016 Deloitte Development LLC. All rights reserved. 42

43 Step 3: Identify the transaction price Step 1 Identify the contract with the customer Step 2 Identify the performance obligations Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. To determine the transaction price, an entity should consider the effects of: Variable consideration Constraining estimates of variable consideration Existence of significant financing component Noncash consideration Consideration payable to the customer Copyright 2016 Deloitte Development LLC. All rights reserved. 43

44 Step 4: Allocate the transaction price Step 1 Identify the contract with the customer Step 2 Identify the performance obligations Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue To allocate an appropriate amount of consideration (step 3) to each performance obligation (step 2), an entity must determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation and would typically allocate the transaction price on a relative standalone selling price basis. The following approaches are used to allocate the transaction price to the performance obligation: Allocating the transaction price to the performance obligations on the basis of the stand-alone selling price Allocating a discount on a bundle of goods or services to performance obligations in the contract Allocating variable consideration to the performance obligations in the contract Allocating changes in the transaction price to the performance obligations in the contract Copyright 2016 Deloitte Development LLC. All rights reserved. 44

45 Step 5: Recognize revenue Step 1 Identify the contract with the customer Step 2 Identify the performance obligations Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. Point in Time Revenue is recognized upon transfer of control to the customer. This is more likely when the customer has the following: Obligation to pay the seller Legal title to the asset Possession of the asset Assumed the risks and rewards of ownership Accepted the asset Over Time Revenue is recognized over a period of time if: Customer benefits as work is performed; or Customer controls the asset as it is created; or Seller is creating an asset that has no alternative use and seller has right to receive payment for work completed Copyright 2016 Deloitte Development LLC. All rights reserved. 45

46 Disclosure requirements The table below provides a summary of recurring disclosures required by the New Revenue Standard. Disclosures will likely require additional system and process considerations to enable collection and extraction of data. Disclosures 1. Disaggregation of revenue into the primary categories 2. Beginning and ending contract balances disclosure with explanation of changes 3. Nature of performance obligations 4. Describe when performance obligations are satisfied, the significant payment terms, nature of goods and services 5. Disclose the amount/timing of transaction price allocated to the remaining performance obligation 6. Disclose a reconciliation of assets recognized from the costs to obtain a contract Qualitative Quantitative Potential source within company Detail reports or account groups within IT system or customized system reports Customized reports within IT system Technical accounting/ Financial reporting team Technical accounting/ Financial reporting team Customized reports within IT system Customized reports within IT system Example decisions Determination of preferred disaggregation categories Descriptions of obligations needed Preferred breakdown of remaining obligation Comments Reporting can be included as requirement within IT system planning Specifications may be established within revision to IT system accounting logic Need not disclose if original contract is a year or less Specifications may be established within IT system Copyright 2016 Deloitte Development LLC. All rights reserved. 46

47 Transition options Transition options Full Retrospective restate prior comparative periods Modified Retrospective apply to contracts not completed as of effective date cumulative catch-up January 1, 2018 Initial Application Year 2018 Current Year 2017 Prior Year Prior Year 2 New contracts (Same approach for both methods) New ASU - Existing contracts Full - Existing contracts - Modified - New ASU - New ASU + cumulative catch up - Restate under New ASU - Legacy GAAP - Restate under New ASU - Legacy GAAP - Completed contracts Full - Completed contracts Modified - Restate under New ASU 1 - Legacy GAAP - Restate under New ASU 1 - Legacy GAAP 1 Practical expedient available for completed contracts - an entity is not required to restate contracts that begin and end within same annual reporting period Copyright 2016 Deloitte Development LLC. All rights reserved. 47

48 Transition methods potential implications The following summarizes the transition method potential implications under the New Revenue Standard: Factor Investor relations Retrospective approach Comparative numbers for all years presented minimizes any disruption in trends SEC has stated it will not require companies to restate years in the fiveyear table (beyond the base financial statements) IT timeline IT timeline, if needed, will likely require completion by early 2017, to permit transition/ testing Amount of effort to restate Requires companies to restate accounting records for 2016 and 2017 Population of contracts to be adjusted is greater under the full retrospective approach than the cumulative adjustment approach (includes those completed in 2016 and 2017) Potential implications Cumulative adjustment approach May distort trends since the new standard is applied to contracts only as of February 4, 2018 Supplemental disclosures in the year of adoption could mitigate this risk The IT timeline could be longer by perhaps one to two quarters, as restatement efforts will not be required until February 2018 Dual accounting records will need to be maintained in 2018 to disclose the impact to financial statement line items Provide an explanation of the significant changes between applying the new guidance and prior/legacy guidance Copyright 2016 Deloitte Development LLC. All rights reserved. 48

49 Revenue recognition considerations The following highlights certain potential challenges related to the implementation of the new revenue recognition guidance: Population of contracts Customized pricing arrangements Shipping terms Principal agent considerations Material rights Allocation of the transaction price Bundled contract services Disclosures Copyright 2016 Deloitte Development LLC. All rights reserved. 49

50 Cross-functional effort for implementation Accounting Identification of revenue streams and assessment of potential impacts within each revenue stream Updating accounting policies and revenue processing procedures Training for team members on the future state of revenue accounting and data retention from now through Q Updated accounting procedures should be implemented for the key areas with changes in the new standard Information Technology Systems Operations Team members will need to support the accounting team in their understanding of the operational aspects of various revenue streams Participate in initial assessment and follow-up working sessions to share insight on business practices that may or may not be captured within written contracts Maintain open communication with accounting to identify any unique arrangements in sales contracts that may impact revenue recognition Potential impacts to legacy revenue recognition systems and sub-ledgers Work with accounting to identify updates to systems requirements Systems will likely have to be updated to capture information about contracts with customers in a systematic way in order to comply with extensive disclosure requirements Program Management Work with teams to develop integrated plan, identify inter-dependencies and track progress against the plan Coordination of activities and efforts across work streams Identify and elevate issues requiring executive input and coordinate the process for issue resolution Copyright 2016 Deloitte Development LLC. All rights reserved. 50

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

52 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. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2016 Deloitte Development LLC. All rights reserved. 36 USC

FASB Proposes Targeted Improvements to Hedge Accounting Relief Is Coming. Heads Up September 14, 2016 Volume 23, Issue 25. In This Issue.

FASB Proposes Targeted Improvements to Hedge Accounting Relief Is Coming. Heads Up September 14, 2016 Volume 23, Issue 25. In This Issue. Heads Up September 14, 2016 Volume 23, Issue 25 In This Issue Introduction Key Proposed Changes to the Hedge Accounting Model Transition and Adoption Comparison With IFRSs Appendix A Questions for Respondents