2017 Deloitte Renewable Energy Seminar Innovating for tomorrow November 13-15, 2017

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1 2017 Deloitte Renewable Energy Seminar Innovating for tomorrow November 13-15, 2017

2 Accounting hot topics Jason Gambone, Managing Director, Deloitte & Touche LLP Chris Terhark, Managing Director, Deloitte & Touche LLP

3 Agenda Build to suit transactions 4 Development fee revenue 13 Hedging ASU 22 Restricted cash ASU 48 Definition of a business ASU 63 Going concern 73 Copyright 2017 Deloitte Development LLC. All rights reserved. 3

5 Build to suit transactions By their nature, many alternative energy projects are build to suit transactions. The customer and project developer agree that the project developer will build an asset specific to the customer s power needs The customer agrees to pay for the use of the asset The customer uses some, if not all, of the output of the project Copyright 2017 Deloitte Development LLC. All rights reserved. 5

6 Build to suit transactions Project Developer Considerations Accounting during construction Project Construction Revenue Recognition Accounting at the title transfer date Project Asset De-recognition Revenue Recognition Accounting post-construction PPA Revenue Recognition Copyright 2017 Deloitte Development LLC. All rights reserved. 6

7 Build to suit transactions Accounting during construction Prior to ASC 606 adoption, the first consideration is ASC , Real Estate Sales Is the project Real Estate? Is the Project Integral Equipment? Integral Equipment is any physical structure or equipment attached to the real estate that cannot be removed and used separately without incurring significant cost. What is Significant Cost? No bright line test 10% test Copyright 2017 Deloitte Development LLC. All rights reserved. 7

8 Build to suit transactions Accounting during construction Balance Sheet approach Asset is capitalized at cost during the construction period Evaluate for impairment under an ASC 360 model Accounting during construction Income Statement approach Completed Contract Method Inability to reliably estimate project cost Percentage of Completion Method Ability to estimate project cost and recognize revenue ratably as costs are incurred. Copyright 2017 Deloitte Development LLC. All rights reserved. 8

9 Build to suit transactions Accounting at title transfer date Model 100% sale Assuming no continuing involvement, sale and profit are recognized If continuing involvement, sale may not be recognized or profit is deferred based on exposure Partial sale Profit may be recognized when: The buyer is independent from the seller Collection is reasonably assured The seller will not be required to support the property to an extent greater than its proportionate interest A portion of profits can be recognized when some of these criteria are met. Apply Full Accrual Method recognition criteria first Copyright 2017 Deloitte Development LLC. All rights reserved. 9

10 Build to suit transactions Forms of Continuing Involvement Seller Obligation to Repurchase Seller is the GP in an acquiring LP Seller Guarantees Can lead to accounting as a financing, leasing or profit-sharing arrangement Seller Supports Operations Applies when Seller is operating at its own risk Can lead to accounting as a financing, leasing or profit-sharing arrangement Buyer option to purchase the property Copyright 2017 Deloitte Development LLC. All rights reserved. 10

11 Build to suit transactions Accounting at transfer date ASC 605 Completed Contract Method All Revenue recognized Percentage of Completion Method Remaining revenue recognized ASC 606 ASC is no longer applicable Continuing Involvement is not a specific concept in the new guidance Partial sale of real estate guidance was addressed in ASC Copyright 2017 Deloitte Development LLC. All rights reserved. 11

12 Build to suit transactions PPA Revenue Recognition Does the PPA meet the definition of a lease? Fixed price Obtain substantially all of the economic benefits ASC 815 considerations ASC 842 (required to be adopted in the fiscal year following ASC 606 adoption) removes the pricing component ASC 606 Fixed vs. variable pricing Blend and Extend Bundled transactions Copyright 2017 Deloitte Development LLC. All rights reserved. 12

14 Development fees Most Alternative Energy Projects include an Development Fee that is included in the selling price of the project. Accounting should follow the appropriate revenue recognition model ASC Real Estate Sales ASC 605 Revenue Recognition ASC 606 Revenue From Contracts with Customers Copyright 2017 Deloitte Development LLC. All rights reserved. 14

17 Targeted improvements to accounting for hedging activities Background ASU : Reasons for project Better align an entity s financial reporting with its risk management activities Improve relevance and depict a more faithful representation of hedging activities for investors Reduce complexity and costs Copyright 2017 Deloitte Development LLC. All rights reserved. 17

18 Targeted improvements to accounting for hedging activities What hasn t changed? Highly effective threshold for all hedges General documentation requirements Required prospective and retrospective hedge effectiveness assessments Ability to hedge components of financial items Concept of hedging the benchmark interest rate for fair value hedges of financial items Availability of shortcut and critical terms match methods Voluntary hedge dedesignations Simplified hedging approach Many disclosure requirements Copyright 2017 Deloitte Development LLC. All rights reserved. 18

20 Change in Fair Value of Hedging Instrument Overview Revised hedge accounting model P&L or OCI Effect Component included in hedge effectiveness assessment Fair Value Hedge Cash Flow Hedge Net Investment Hedge Current P&L OCI OCI (CTA) Component excluded from hedge effectiveness assessment (option time value, foreign exchange forward points, crosscurrency basis spreads) All Hedge Types Systematic and Rational Amortization Initial Value Any FV change that differs from S & R amortization Recognize change in current earnings Current P&L OCI Current P&L Copyright 2017 Deloitte Development LLC. All rights reserved. 20

Targeted improvements to accounting for hedging activities Cross-currency basis spreads Issuers may exclude the portion of the change in fair value of a currency swap attributable to a crosscurrency

21 Targeted improvements to accounting for hedging activities Cross-currency basis spreads Issuers may exclude the portion of the change in fair value of a currency swap attributable to a crosscurrency basis spread Has been a source of ineffectiveness and volatility since the Credit Crisis The spreads are present in the measurement of the hedging instrument, but not the hedged item Issuers that elect to exclude the cross-currency basis spread will: Amortize the excluded component present at recognition Subsequent changes in the fair value due to changes in the cross-currency basis spread should be deferred in OCI Copyright 2017 Deloitte Development LLC. All rights reserved. 21

Targeted improvements to accounting for hedging activities Hedge effectiveness assessment Initial Prospective Quantitative Hedge Effectiveness Assessment The ASU requires an initial prospective

23 Targeted improvements to accounting for hedging activities Hedge effectiveness assessment Initial Prospective Quantitative Hedge Effectiveness Assessment The ASU requires an initial prospective quantitative assessment of hedge effectiveness in most circumstances: Entities required to complete the initial quantitative prospective assessment of hedge effectiveness by the end of the hedge inception reporting period: Up to 3 months for public companies and all financial institutions Nonpublic, nonfinancial institutions may be up to a year Quantitative assessments would use data as of hedge inception An 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 2017 Deloitte Development LLC. All rights reserved. 23

Targeted improvements to accounting for hedging activities Hedge effectiveness assessment Subsequent Qualitative Hedge Effectiveness Assessments Entities may elect to perform subsequent retrospective

24 Targeted improvements to accounting for hedging activities Hedge effectiveness assessment Subsequent Qualitative Hedge Effectiveness Assessments Entities may elect to perform subsequent retrospective and prospective qualitative assessments of hedge effectiveness if: Initial prospective quantitative assessment demonstrates that the hedging relationship is highly effective The entity can, at hedge inception, reasonably support an expectation of high effectiveness on a qualitative basis in subsequent periods Documentation must specify: How qualitative assessments will be performed, and The alternative quantitative assessment that will be performed if the entity can no longer support a highly effective offset qualitatively Subsequent qualitative assessment election done on a hedge-by-hedge basis Copyright 2017 Deloitte Development LLC. All rights reserved. 24

25 Targeted improvements to accounting for hedging activities Hedge effectiveness assessment Timing of documentation of assessment Public companies and all financial institutions Hedge documentation timing requirement did not change (i.e., at inception) As previously noted though, completion of effectiveness assessment can be deferred up to 3 months Private companies that are not financial institutions as well as not-for-profit entities Must prepare only a statement of intent to hedge at hedge inception Not required to perform and document all initial and subsequent hedge effectiveness assessments (whether quantitative or qualitative) until their next set of interim (if applicable) or annual financial statements is available to be issued Note Relief relates only to timing of performance and documentation of effectiveness assessments, not to the documentation s content or frequency of effectiveness assessments Copyright 2017 Deloitte Development LLC. All rights reserved. 25

Targeted improvements to accounting for hedging activities Loosening the reins on critical terms and shortcut Critical terms match for a CF hedge of a group of forecasted transactions if the

26 Targeted improvements to accounting for hedging activities Loosening the reins on critical terms and shortcut Critical terms match 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 or fiscal month Back-up long-haul method for certain hedges designated as shortcut if: The hedge was highly effective The entity documented at hedge inception which longhaul methodology it would use to measure hedge ineffectiveness as a back-up Shortcut criteria would be amended to allow partial-term fair value hedges of interest risk to qualify for the shortcut method Codifies certain practices related to the change in variable cash flows method and hypothetical derivative methods for cash flow hedges Copyright 2017 Deloitte Development LLC. All rights reserved. 26

Targeted improvements to accounting for hedging activities Component hedging not just for financial transactions anymore Nonfinancial purchases and sales Purchases/sales of nonfinancial assets

28 Targeted improvements to accounting for hedging activities Component hedging not just for financial transactions anymore Nonfinancial purchases and sales Purchases/sales of nonfinancial assets containing a contractually specified component, may be eligible for component hedging if: The exposure related to variability in cash flows attributable to the component exists throughout the life of the hedge Hedges for longer than the contractual term or for a not-yet-existing contract are permissible if certain criteria are met Copyright 2017 Deloitte Development LLC. All rights reserved. 28

29 Targeted improvements to accounting for hedging activities What does specified really mean? Nonfinancial purchases and sales Sometimes a contractually specified component is not explicitly referenced in the executed contract, but other agreements exist to support the price at which the nonfinancial asset will be purchased or sold such as: Purchases in the spot market that have demonstrable agreements noting that the spot price is based formula that incorporates a specific index and a basis Certain pre-execution agreements Copyright 2017 Deloitte Development LLC. All rights reserved. 29

30 Targeted improvements to accounting for hedging activities Non-financial component example Entity A purchases aluminum delivered at their factory under a 3 year agreement with the following price formula: Price = $1000/ton + Platt's US Midwest Basis Adjustment + a fuel adjustment based on the DOE Onhighway Weekly Diesel Average Entity A enters into Diesel swaps that settle against the DOE On-highway Weekly Diesel average to fix the transportation component of its raw aluminum purchases. Current hedge accounting standard New hedge accounting standard Entity A s only designation option is to hedge the total price risk associated with the forecasted aluminum deliveries. As the total price will fluctuate based on a regional aluminum basis and diesel prices, the Diesel hedge alone may not be effective. Under the new standard, Entity A will be able to designate the Diesel swap as a hedge of the Diesel component of the aluminum forecasted purchase. Copyright 2017 Deloitte Development LLC. All rights reserved. 30

Targeted improvements to accounting for hedging activities Changes to hedges of financial assets/liabilities Acceptable designated risks for fair value hedges of interest rate risk have increased.

32 Targeted improvements to accounting for hedging activities Changes to hedges of financial assets/liabilities Acceptable designated risks for fair value hedges of interest rate risk have increased. New FV hedging strategies include: Benchmark interest rate component of coupons New benchmark component for FV hedges: SIFMA Partial-term hedging Prepayable debt may consider only how changes in benchmark interest rate impact decision to prepay Last of layer approach hedging closed portfolio of prepayable assets (or beneficial interest in portfolio of prepayable assets) Cash flow hedging: Benchmark interest rate replaced with contractually specified rate Copyright 2017 Deloitte Development LLC. All rights reserved. 32

33 Targeted improvements to accounting for hedging activities Benchmark component of coupons Example: Company ABC issues 10-year fixed-rate debt Principal: $100 million Interest: 7% per annum, payable semi-annually 10-year $100 million notional swap Pay variable: 6-mo LIBOR Benchmark component of coupons Receive fixed: 4.5% per annum Net settles every 6 months Hedged item for purposes of measuring change in FV: 10-year fixed-rate debt Principal: $100 million Interest: 4.5% per annum, payable semi-annually Copyright 2017 Deloitte Development LLC. All rights reserved. 33

34 Targeted improvements to accounting for hedging activities Partial-term hedging Example: Company ABC issues 10-year fixed-rate debt Principal: $100 million Interest: 7% per annum, payable semi-annually 5-year $100 million notional swap Pay variable: 6-mo LIBOR Receive fixed: 3.5% per annum Net settles every 6 months Hedged item for purposes of measuring change in FV: 5-year fixed-rate debt Principal: $100 million Interest: 3.5% per annum, payable semi-annually Benchmark component of coupons Combination of benchmark component and partial term Qualifies for shortcut method! Copyright 2017 Deloitte Development LLC. All rights reserved. 34

35 Targeted improvements to accounting for hedging activities Prepayments due to benchmark Example: Company ABC issues 10-year fixed-rate debt Principal: $100 million Interest: 8% per annum, payable semi-annually Callable at par by issuer after 5 year anniversary 10-year $100 million notional swap, settles semi-annually Pay variable: 6-mo LIBOR Receive fixed: 5.5% per annum Counterparty may terminate after year 5 Benchmark component of coupons Hedged item for purposes of measuring change in FV: 10-year fixed-rate debt, callable after year 5 Principal: $100 million Interest: 5.5% per annum, payable semi-annually Issuer s decision to call debt is based on LIBOR swap rate + 2.5% Copyright 2017 Deloitte Development LLC. All rights reserved. 35

36 Targeted improvements to accounting for hedging activities Strategies available for callable debt Example: Company ABC issues 10-year fixed-rate debt Principal: $100 million Interest: 8% per annum, payable semi-annually Callable at par by issuer after 5 yr anniversary Derivative/Hedging Options: Today: 10-year swap, terminable after year 5 Same derivative ineffectiveness of credit spread can be ignored: Component of coupon Benchmark impact on prepayments Partial-term hedge: Swap up to 5 years can ignore prepayment risk Swap beyond 5 years needs to consider termination option in swap Copyright 2017 Deloitte Development LLC. All rights reserved. 36

37 Targeted improvements to accounting for hedging activities Additional benefits of new identifiable risks Portfolio hedging Example: Insurance Co XYZ holds $200 million of fixed-rate corporate bonds Interest rates vary benchmark component of coupons makes them all similar Maturities vary partial-term hedge makes them similar Callable bonds combination of strategies may make them similar Mix callable and non-callables? What about convertible debt? Example: Company EGC issues 10-year convertible notes: Principal: $100 million Interest rate: 2% Convertible at option of holder at $10/share Callable by issuer after year 5 Copyright 2017 Deloitte Development LLC. All rights reserved. 37

Targeted improvements to accounting for hedging activities Last of layer approach Example: Bank MSG holds $200 million of fixed-rate residential mortgages Interest rates: range from 3-8% per annum

38 Targeted improvements to accounting for hedging activities Last of layer approach Example: Bank MSG holds $200 million of fixed-rate residential mortgages Interest rates: range from 3-8% per annum Remaining maturity dates: ranging from years Bank MSG is confident that $150 million of mortgages will remain in 3 years Swap: Notional: $150 million Term: 3 years Pay fixed: 4% per annum Receive variable: 3-month LIBOR Net settles every 3 months Copyright 2017 Deloitte Development LLC. All rights reserved. 38

39 Targeted improvements to accounting for hedging activities Last of layer approach Criteria: Closed portfolio of similar items Prepayable financial assets or beneficial interest(s) in portfolio of prepayable financial assets Probable that bottom layer will remain throughout hedge ($150 million in example) Requires partial-term hedging election Effect: Prepayments and defaults are applied to top layer first ($50 million in example) Partial dedesignation required if portion no longer expected to be outstanding If last of layer is impacted before dedesignation, hedge accounting ceases Dedesignations result in allocation of basis adjustments to individual assets - Basis adjustments are proportional to amount de-designated Copyright 2017 Deloitte Development LLC. All rights reserved. 39

Targeted improvements to accounting for hedging activities Cash flow hedges of interest rate risk Definition of interest rate risk changed Preadoption GAAP The risk of changes in a hedged item s fair

40 Targeted improvements to accounting for hedging activities Cash flow hedges of interest rate risk Definition of interest rate risk changed Preadoption GAAP The risk of changes in a hedged item s fair value or cash flows attributable to changes in the designated benchmark interest rate ASU For recognized variable-rate financial instruments and forecasted issuances or purchases of variablerate financial instruments, interest rate risk is the risk of changes in the hedged item s cash flows attributable to changes in the contractually specified interest rate in the agreement Eliminates the benchmark interest rate concept for variable-rate financial instruments, now allowing an entity to hedge a contractually specified rate Copyright 2017 Deloitte Development LLC. All rights reserved. 40

Targeted improvements to accounting for hedging activities Disclosure requirements No longer required to disclose amounts of hedge ineffectiveness New Requirements: Tabular disclosure of FV or CF

42 Targeted improvements to accounting for hedging activities Disclosure requirements No longer required to disclose amounts of hedge ineffectiveness New Requirements: Tabular disclosure of FV or CF hedging activity effects on individual income statement line items, as well as the total amounts reported for those line items affected by hedging activity For FV hedges carrying amounts and cumulative basis adjustments of items designated and qualifying as hedged items Frequency Every annual and interim reporting period for which a balance sheet and income statement are presented Copyright 2017 Deloitte Development LLC. All rights reserved. 42

44 Targeted improvements to accounting for hedging activities Effective date and transition Effective Dates: PBEs: Fiscal years beginning after 12/15/18 and interim periods therein All others: Fiscal years beginning after 12/15/19, interims within fiscal years after 12/15/20 Early adoption is allowed during any interim or annual period: If adopted during an interim period transition adjustments as of beginning of fiscal year Also must complete all transition elections by end of quarter of adoption Transition: Modified retrospective approach to existing hedging relationships Cash flow and net investment hedges: adjust OCI for prior ineffectiveness Effects of any modified hedge relationships also in cumulative-effect adjustment Copyright 2017 Deloitte Development LLC. All rights reserved. 44

45 Targeted improvements to accounting for hedging activities Transition elections One-time elections: Reclassify debt securities eligible for last of layer approach from HTM to AFS Existing hedges: Modify hedge documentation: Shortcut add fallback methodologies for longhaul Change hedge assessment to qualitative Fair value hedges modify relationships: Apply benchmark component (may also de-designate a portion) Apply benchmark impact on prepayment options Exclude cross-currency basis spread from hedge assessment and amortize into earnings Change method for excluded components to amortization approach Copyright 2017 Deloitte Development LLC. All rights reserved. 45

46 Targeted improvements to accounting for hedging activities Transition elections (cont.) One-time elections: Existing hedges: Cash flow hedges: Modify risk to contractually specified component or interest rate Change method for excluded components to amortization approach Net investment hedges Change method for excluded components to amortization approach Copyright 2017 Deloitte Development LLC. All rights reserved. 46

47 Targeted improvements to accounting for hedging activities Early adoption considerations Early adoption allowed during interim periods Existing hedges: Modification of any existing hedges must be done by end of quarter of adoption Cumulative effect of adoption is as of beginning of fiscal year Similar hedges similar assessments (exception for pre- and post-adoption) Transfers from HTM ICFR over hedge accounting: Process for qualitative assessments Change in designated risks may require different data for quantitative assessments Copyright 2017 Deloitte Development LLC. All rights reserved. 47

49 ASU The FASB issued ASU , Restricted Cash a consensus of the FASB Emerging Issues Task Force, in November 2016 to address how entities classify and present changes in restricted cash or restricted cash equivalents that occur when there are: Transfers between cash, cash equivalents, and restricted cash or restricted cash equivalents Direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents Copyright 2017 Deloitte Development LLC. All rights reserved. 49

50 Key requirements Include amounts that are deemed to be restricted cash and restricted cash equivalents within cash and cash equivalents ASU does not define the terms restricted cash and restricted cash equivalents Intent is not to change the practice for what an entity reports as restricted cash or restricted cash equivalents Continue to provide appropriate disclosures regarding accounting policies pertaining to restricted cash in accordance with other GAAP Any change in accounting policy will need to be assessed under ASC 250 Copyright 2017 Deloitte Development LLC. All rights reserved. 50

51 Key requirements (cont.) A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents Changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions Copyright 2017 Deloitte Development LLC. All rights reserved. 51

52 Classification of restricted cash Current Practice Cash account is restricted, therefore the ability of the account s owner to withdraw funds at any time is contractually restricted Balance on deposit is equivalent to an investment in which the satisfaction of conditions, rather than a mere withdrawal demand, is required for a return of principal Accordingly, in restricted cash accounts, deposits and withdrawals of principal balances constitute the creation or return of an investment, which an entity should generally present as investing activities in the statement of cash flows Copyright 2017 Deloitte Development LLC. All rights reserved. 52

53 Classification of restricted cash (cont.) ASU As mentioned earlier, changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows Copyright 2017 Deloitte Development LLC. All rights reserved. 53

54 Classification of interest earned on restricted funds Current Practice Depends on the nature of the restriction (i.e., whether the restriction covers interest earned on the restricted cash) If there is no restriction: Include the nonrestricted portion of the cash balance in cash and cash equivalents and present the restricted portion as restricted cash Classify the interest earned on the restricted cash balance as an operating cash inflow in the period in which it is earned If there is a restriction: Interest represents a noncash transaction in the period in which it is earned and should be included as a reconciling item when net income is reconciled to cash flows from operating activities Subsequent withdrawal should be classified as an operating cash inflow to the extent of cumulative interest earned but not previously withdrawn. Any withdrawals in excess of cumulative interest earned should be classified in a manner consistent with the restricted cash classification as either operating or investing cash inflows. Copyright 2017 Deloitte Development LLC. All rights reserved. 54

55 Classification of interest earned on restricted funds (cont.) Example A Year 1 On January 1, 20X5, Company Z places $1,000,000 into a restricted cash account as collateral for an operating lease. The lease agreement restricts all interest earned on the restricted cash as well as the initial deposit in the account. The restricted cash account earns 5 percent interest annually. On December 31, 20X5, the restricted cash balance is $1,050,000 ($1,000,000 restricted cash deposits plus $50,000 interest income earned). Company Z would reflect the above transactions in its statement of cash flows for the year ended December 31, 20X5, as follows: $1,000,000 original investment in restricted cash as an investing cash outflow $50,000 of interest earned as a noncash transaction (companies would include an adjustment to net income in reconciling net income to cash provided by operating activities) Copyright 2017 Deloitte Development LLC. All rights reserved. 55

56 Classification of interest earned on restricted funds (cont.) Example A Year 2 On January 1, 20X6, as a result of a lease payment, the amount of restricted cash required by the lease agreement is reduced to $990,000. As a result, Z withdraws $60,000 from the restricted cash account. This transaction would have the following impact on Z s statement of cash flows for the year ended December 31, 20X6: $50,000 operating cash inflow (representing a return on investment to the extent of cumulative interest earned on the restricted cash balance that has not been previously withdrawn) $10,000 investing cash inflow (representing a return of investment, since cumulative withdrawals are in excess of the cumulative interest earned on the restricted cash balance) Copyright 2017 Deloitte Development LLC. All rights reserved. 56

57 Classification of interest earned on restricted funds (cont.) Example B Year 1 On January 1, 20X5, Company Z places $1,000,000 into a restricted cash account as collateral for an operating lease. The lease agreement does not restrict any of the interest earned on the restricted cash; only the initial deposit in the account is restricted. The restricted cash account earns 5 percent interest annually. On December 31, 20X5, the restricted cash balance is $1,050,000 ($1,000,000 restricted cash deposits plus $50,000 interest income earned). In its balance sheet, Z would present $1,000,000 as restricted cash and would include $50,000 in cash and cash equivalents In its statement of cash flows, Z would present the $1,000,000 original investment in restricted cash as an investing cash outflow and $50,000 of interest earned as an operating cash inflow (included within net income as interest income) Copyright 2017 Deloitte Development LLC. All rights reserved. 57

58 Classification of interest earned on restricted funds (cont.) Example B Year 2 On January 1, 20X6, as a result of a lease payment, the amount of restricted cash required by the lease agreement is reduced to $990,000. As a result, Z withdraws $60,000 from the restricted cash account. This transaction would have the following impact on Z s statement of cash flows for the year ended December 31, 20X6: $10,000 excess is an investing cash inflow (representing a return of investment to the extent of cumulative withdrawals in excess of cumulative interest earned on the restricted cash balance) $50,000 withdrawal would be classified in the statement of cash flows according to the nature of the expenditure, if any (e.g., operating, investing, or financing) Copyright 2017 Deloitte Development LLC. All rights reserved. 58

59 Classification of interest earned on restricted funds (cont.) ASU Classify interest earned on restricted funds in the statement of cash flows in a manner consistent with cash and cash equivalents that are not restricted and include such amounts in disclosures about restricted cash Copyright 2017 Deloitte Development LLC. All rights reserved. 59

61 Presentation and disclosures (cont.) Amounts included in restricted cash represent those required to be set aside by a contractual agreement with an insurer for the payment of specific workers compensation claims. Restricted cash included in other long-term assets on the statement of financial position represents amounts pledged as collateral for long-term financing arrangements as contractually required by a lender. The restriction will lapse when the related long-term debt is paid off. Copyright 2017 Deloitte Development LLC. All rights reserved. 61

62 Effective date and transition For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods thereafter Early adoption will be permitted for all entities, which must apply the guidance retrospectively to all periods presented Copyright 2017 Deloitte Development LLC. All rights reserved. 62

64 ASU The FASB issued ASU , Clarifying the Definition of a Business, in January 2017 in order to clarify the definition of a business in ASC 805 in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. An entity uses the definition of a business in ASC 805 in determining whether to account for a transaction as an asset acquisition or a business combination. This distinction is important because the accounting for an asset acquisition significantly differs in certain respects from the accounting for a business combination. Note that this definition also affects other aspects of accounting (e.g., disposal transactions, determining reporting units when goodwill is tested for recoverability, and the business scope exception in ASC 810). Copyright 2017 Deloitte Development LLC. All rights reserved. 64

65 Key requirements Provides a screen for determining when a set is not a business. When substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set would not be considered a business. Specifies that if the screen s threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output Narrows the definition of the term output to be consistent with the description of outputs in ASC 606 Copyright 2017 Deloitte Development LLC. All rights reserved. 65

66 Screen for determining when a set is not a business Requires an entity to compare the fair value of a single identifiable asset or group of similar identifiable assets with the gross assets acquired, as opposed to the total consideration paid or net assets, to ensure that debt or other liabilities do not affect the analysis Gross assets acquired exclude cash and cash equivalents, deferred tax assets, and goodwill resulting from the effects of deferred tax liabilities Gross assets include the consideration transferred in excess of the fair value of the net assets acquired Assessment may be either qualitative or quantitative Copyright 2017 Deloitte Development LLC. All rights reserved. 66

67 Single identifiable asset A single identifiable asset includes any individual asset or group of assets that could be recognized and measured as a single identifiable asset in a business combination The ASU also provides that the following should be considered a single identifiable asset for purposes of the screen: A tangible asset that is attached to and cannot be physically removed and used separately from another tangible asset (or an intangible asset representing the right to use a tangible asset) without incurring significant cost or significant diminution in utility or fair value to either asset (for example, land and building) In-place lease intangibles, including favorable and unfavorable intangible assets or liabilities, and the related leased assets Copyright 2017 Deloitte Development LLC. All rights reserved. 67

68 Group of similar identifiable assets Acquiring multiple versions of the same asset could still qualify for the screen (e.g. if a 100 turbine wind farm was acquired, could those be viewed as a "single asset") The following should not be considered similar assets for purposes of the screen: A tangible asset and an intangible asset Identifiable intangible assets in different major intangible asset classes (for example, customer-related intangibles, trademarks, and in-process research and development) A financial asset and a nonfinancial asset Different major classes of financial assets (for example, accounts receivable and marketable securities) Different major classes of tangible assets (for example, inventory, manufacturing equipment, and automobiles) Identifiable assets within the same major asset class that have significantly different risk characteristics. Copyright 2017 Deloitte Development LLC. All rights reserved. 68

69 A set with no outputs When a set does not have outputs (e.g., an early-stage company that has not generated revenues), an entity would need to apply more stringent criteria when determining whether a set has a substantive process To qualify as a business, the set would have both an input and a substantive process that together significantly contribute to the ability to create outputs only if it includes employees that form an organized workforce and an input that the workforce could develop or convert into output The mere existence of any employee does not mean that a set without outputs should be considered a business Organized workforce must have the necessary skills, knowledge, or experience to perform an acquired process (or group of processes), which is critical to producing outputs Copyright 2017 Deloitte Development LLC. All rights reserved. 69

70 A set with outputs It is more likely that the set generating outputs includes both an input and a substantive process when compared with a set that is not generating outputs Criteria for determining whether a set with outputs has a substantive process are less stringent The ASU clarifies that a continuation of revenues alone does not mean that both an input and a substantive process have been acquired Copyright 2017 Deloitte Development LLC. All rights reserved. 70

71 Definition of an output This ASU changes the definition of an output to the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues Narrows the definition to be consistent with ASC 606, which describes goods or services that are an output of the entity s ordinary activities. As not every entity has revenues within the scope of ASC 606, the Board decided to incorporate into the definition of output other types of revenues. For example, the reference to investment income in the definition of an output was included to ensure that the purchase of an investment company could still qualify as a business combination. Copyright 2017 Deloitte Development LLC. All rights reserved. 71

72 Effective date and transition For public business entities, the guidance is effective in annual periods beginning after December 15, 2017, including interim periods therein For all other entities, it is effective in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance Copyright 2017 Deloitte Development LLC. All rights reserved. 72

74 ASU The FASB issued ASU , Disclosure of Uncertainties About an Entity s Ability to Continue as a Going Concern, in August This ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements to address a lack of previous U.S. GAAP guidance. Key requirements are as follows: Management is required to perform interim and annual assessments of an entity s ability to continue as a going concern within one year of the date the financial statements are issued An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity s ability to continue as a going concern Based on the new requirements above, management needs to consider, implement and document their processes and controls. Copyright 2017 Deloitte Development LLC. All rights reserved. 74

75 Disclosure thresholds Required to disclose information about potential inability to continue as a going concern when substantial doubt about ability to continue as a going concern exists, which the ASU defines as follows: Substantial doubt about an entity s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.... The term probable is used consistently with its use in Topic 450 on contingencies. Required to evaluate relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. Reasonably knowable conditions or events are those that can be identified without undue cost and effort. Copyright 2017 Deloitte Development LLC. All rights reserved. 75

76 Disclosure thresholds (cont.) Examples of events that suggest that an entity may be unable to meet its obligations: Negative financial trends recurring operating losses working capital deficiencies negative cash flows from operating activities other adverse key financial ratios Other indications of possible financial difficulties default on loans or similar agreements arrearages in dividends denial of usual trade credit from suppliers a need to restructure debt to avoid default noncompliance with statutory capital requirements a need to seek new sources or methods of financing or to dispose of substantial assets Copyright 2017 Deloitte Development LLC. All rights reserved. 76

77 Disclosure thresholds (cont.) Examples of events that suggest that an entity may be unable to meet its obligations: Internal matters work stoppages or other labor difficulties substantial dependence on the success of a particular project uneconomic long-term commitments a need to significantly revise operations External matters legal proceedings, legislation, or similar matters that might jeopardize the entity s ability to operate loss of a key franchise, license, or patent loss of a principal customer or supplier an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood Copyright 2017 Deloitte Development LLC. All rights reserved. 77

78 Time horizon The Assessment Date Assess conditions known and reasonably knowable as of the financial statement issuance date... The Assessment... to determine whether it is probable that an entity will not meet its obligations within... The Look Forward Period... one year from the financial statement issuance date. 12/31/X1 3/1/X2 12/31/X2 3/1/X3 Balance sheet date Financial statement issuance date Current auditingstandard requirement: one year from balance sheet date ASU s requirement: one year from financial statement issuance date Copyright 2017 Deloitte Development LLC. All rights reserved. 78

79 Disclosure content requirements Substantial doubt is raised but alleviated by management s plans Principal conditions or events Management s evaluation Management s plans Substantial doubt is raised and is not alleviated Principal conditions or events Management s evaluation Management s plans Statement that there is substantial doubt about the entity s ability to continue as a going concern Copyright 2017 Deloitte Development LLC. All rights reserved. 79

80 Disclosure content requirements (cont.) Disclosure of how the substantial doubt was resolved is required in the period that substantial doubt no longer exists (before or after consideration of management s plans) The mitigating effects of management s plans to alleviate substantial doubt should be evaluated only if (1) the plans are approved before the financial statement issuance date and (2) both of the following conditions are met: It is probable that management s plans will be effectively implemented within one year after the date that the financial statements are issued It is probable that management s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity s ability to continue as a going concern within one year after the date that the financial statements are issued Copyright 2017 Deloitte Development LLC. All rights reserved. 80

81 Effective date and transition The guidance is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016 Early application is permitted Copyright 2017 Deloitte Development LLC. All rights reserved. 81

82 This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication 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, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. 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 2017 Deloitte Development LLC. All rights reserved.

FASB s targeted improvements to hedge accounting: Smoother sailing ahead? The Dbriefs Financial Reporting series

FASB s targeted improvements to hedge accounting: Smoother sailing ahead? Robert Uhl, Partner, Deloitte & Touche LLP Mark Bolton, Managing Director, Deloitte & Touche LLP Jonathan Howard, Partner, Deloitte