Accounting and Financial Reporting Developments for Private Companies

Transcription

1 Accounting and Financial Reporting Developments for Private Companies THIRD QUARTER UPDATE 2017 The Quarterly Newsletter is a quarterly publication from EKS&H s Technical Accounting and Auditing Group. In the newsletter, we highlight some of the more important 2017 third quarter accounting and financial reporting activities. The content is not meant to be all inclusive. You can access prior Quarterly Newsletters at s Accounting Guidance Issued in Third Quarter 2017 Adoption Relief for Certain Companies for New Revenue and Lease Standards ASU , Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842), amends the SEC paragraphs to the new revenue and leases sections of the FASB Accounting Standards Codification for the announcement the SEC Observer made at the July 2017 Emerging Issues Task Force (EITF) meeting. In 2013, the FASB issued guidance defining a public business entity (PBE). The definition of a PBE includes business entities that file or furnish financial statements with the SEC and this includes entities whose financial statements or financial information are included in a filing with the SEC. Under this definition, some entities that are not SEC registrants, such as a registrant s equity method investees that are significant under Regulation S-X Rule 3-09 or 4-08(g) or entities acquired that are significant under S-X Rule 3-05, are considered PBEs because their financial statements or financial information are included in the registrant s SEC filing. In those cases, the entity is only a PBE for purposes of the financial statements or financial information included in the SEC filing. For example, a registrant may have a significant equity method investment in a private company that it accounts for under the equity method of accounting. The equity method investee s financial statements may be required to be included in the registrant s filings under Rule 3-09 because the investee is significant to the registrant. Alternatively, certain financial information about the investee may be required to be included in the registrant s filings under Rule 4-08(g) depending on significance. For another example, a registrant may acquire a private company that is significant and include the acquiree s audited financial statements in its filing under Rule In the three examples, the investee meets the definition of a PBE. Whether an entity is a PBE can have a significant impact on financial reporting, particularly since certain FASB guidance, including the new revenue and lease standards, have different effective dates for PBEs. In a May 2016 speech, the SEC stressed that registrants must ensure that all investee entities or acquired entities that meet the definition of a PBE adopt the new guidance using the effective dates for PBEs for purposes of the financial statements or financial information included in a filing with the SEC. However, in response to concerns, the SEC staff provided significant relief at the July 20, 2017 EITF meeting. Specifically, businesses that do not meet the definition of a PBE aside from the fact that they have to include their financial statements or financial information with the financial statements of other public companies can have more time to adopt the revenue recognition and lease accounting standards. The SEC will not object to these companies adopting these new standards at the same time as non-pbes (private companies). Note that adoption relief was not given for any other new standards. Relief was not required for the new credit loss and financial instruments standards because the effective dates are specified as different for SEC Filers (not PBEs) THIRD QUARTER UPDATE (PRIVATE COMPANY)

2 and other companies. For other new standards, private companies meeting the definition of a PBE because of a public investor, are not required to adopt new accounting guidance in their standalone financial statements based on the PBE effective dates; however, the investor would be required to adjust these financial statements to reflect the new guidance (other than revenue and lease standards). In addition, if audited investee financial statements are required to be included in the filing, the standalone audited financial statements would have to reflect the new guidance. As a result, a private company with a public investor should discuss financial reporting expectations and agree on whether the investee should adopt new guidance using the PBE effective dates in the standalone financial statements. Targeted Improvements to Accounting for Hedging Activities ASU , Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities improves and simplifies the accounting rules around hedge accounting. This concept and reporting of hedge ineffectiveness are often difficult for financial statement users to understand, so entities will no longer be required to separately measure and report hedge ineffectiveness. For fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness will be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow and net investment hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness will be recorded in other comprehensive income (for cash flow hedges) or in the currency translation adjustment section of other comprehensive income (for net investment hedges). Those amounts will be reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. The ASU also includes targeted improvements to simplify assessments of hedge effectiveness by allowing an entity: The amendments in this Update more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity s hedging strategies. The ASU changes the designation and measurement guidance for qualifying hedging relationships and the method of presenting hedge results. The amendments also align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity s intended hedging strategies. Entities must present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. In addition, the ASU simplifies the financial statement reporting for qualifying hedging relationships. Current GAAP provides special hedge accounting only for the portion of the hedge deemed to be highly effective and requires an entity to separately reflect the amount by which the hedging instrument does not offset the hedged item, which is referred to as the ineffective amount. To perform subsequent assessments of hedge effectiveness qualitatively if certain conditions are met. More time to perform the initial quantitative hedge effectiveness assessment. Current GAAP requires assessment at hedge inception whereas the amendments require any time after hedge designation, but no later than the first quarterly effectiveness test date (using data as of inception date). In addition, certain private companies may select the method of assessing hedge effectiveness, and perform the initial quantitative effectiveness assessment and all quarterly hedge effectiveness assessments before the date on which the next interim (if applicable) or annual financial statements are available to be issued. This incremental relief does not affect the simplified hedge accounting approach for private companies. To apply the long-haul method for assessing hedge effectiveness when use of the shortcut method was not or no longer is appropriate, if certain conditions are met. To apply the critical terms match method for a group of forecasted transactions if the transactions occur and the derivative matures within the same 31-day period or fiscal month, and the other requirements for applying the critical terms match method are satisfied. The amendments modify disclosures required in current GAAP including a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges THIRD QUARTER UPDATE (PRIVATE COMPANY)

3 and eliminating the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. The amendments also require new tabular disclosures related to cumulative basis adjustments for fair value hedges. The new standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private companies. Early adoption is permitted in any interim period or fiscal year before the effective date of the standard. Accounting for Certain Financial Instruments with Down Round Features ASU , Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, simplifies the accounting for certain financial instruments with down round features (a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings). Down round features are found in many warrants, convertible preferred shares and convertible debt instruments. Under current accounting guidance, financial instruments with down round features are generally required, on an ongoing basis, to be measured at the fair value of the entire instrument (i.e.: warrant) or conversion option. The fair value is driven by changes in the value of a company s own share price, and does not reflect the economics of the down round feature, which exists to protect certain investors from declines in the issuer s share price under certain circumstances. The new ASU requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature and will also recognize the effect of the trigger within equity. The effect will be treated as a dividend and reduce earnings available to common stockholders. The ASU also addresses navigational concerns within the FASB Accounting Standards Codification related to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests. The deferral created significant pending content in the Codification. To address this concern, the Board decided to reclassify the indefinite deferral as a scope exception, which does not have an accounting effect. The amendments of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after For all other organizations, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early adoption is permitted for all organizations, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied in either of the following ways: 1. Modified respective - retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the Update is adopted. 2. Full retrospective - retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented. This ASU may be early adopted for interim financial statements in 2017, with the impact of the adoption reflected as of January 1, 2017 (modified retrospective method) or January 1, 2016 (full retrospective if 2 year financial statements are included). THIRD QUARTER UPDATE (PRIVATE COMPANY)

4 s FASB Launches Webpage for New Standards Implementation The FASB recently launched a new webpage, Implementing New Standards, that helps position organizations for a successful and smooth transition to new financial accounting and reporting standards. The webpage focuses on how the FASB: Conducts outreach with stakeholders; Establishes and operates transition resource groups, and Offers a technical inquiry service for implementation questions. The webpage also acts as a one-stop-shop for educational materials and implementation guidance for FASB s major standards. This is a useful tool for management to use for implementation of the new standards. THIRD QUARTER UPDATE (PRIVATE COMPANY)

5 s Standards Issued in 2017 Update Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) Update Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities Update Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception Update Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services Update Compensation Stock Compensation (Topic 718): Scope of Modification Accounting Update Receivables Nonrefundable Fees and Other Costs (Subtopic ), Premium Amortization on Purchased Callable Debt Securities Update Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost Update Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting Update Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic ): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets December 15, 2019, and interim periods beginning after December 15, beginning after December 15, 2018, and December 15, 2019, and interim periods beginning after December 15, beginning after December 15, 2018, and Fiscal years beginning after December 15, December 15, 2019, and interim periods beginning after December 15, beginning after December 15, 2018, and beginning after December 15, 2017, and Fiscal years beginning after THIRD QUARTER UPDATE (PRIVATE COMPANY)

6 s Standards Issued in 2017 (continued) Update Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment Update Accounting Changes and Error Corrections (Topic 250) and Investments Equity Method and Joint Ventures (Topic 323) Update Not-for-Profit Entities Consolidation (Subtopic ): Clarifying When a Not-for-Profit Entity That is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity Update Business Combinations (Topic 805): Clarifying the Definition of a Business N/A December 15, Public business entities that are SEC filers: fiscal years beginning after All other public business entities: fiscal years beginning after December 15, Upon issuance. Fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, If ASU has not been adopted, must adopt both at same time. December 15, beginning after December 15, 2017, and THIRD QUARTER UPDATE (PRIVATE COMPANY)

7 s Standards Issued in Prior Years Effective 2017 or After Update No Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers Update No Technical Corrections and Improvements Update No Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) Update No Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control Update No Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory Most amendments effective immediately. Six of the amendments provide specific transition guidance and allow for early adoption. beginning after December 15, 2017, and December 15, Must adopt ASU at same time.* beginning after December 15, 2016, and ** beginning after December 15, 2017, including Update No Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) Update No Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities beginning after December 15, 2017, and Nonpublic companies only: annual financial statements issued for fiscal years beginning after December 15, 2017, and interim periods * Effective 2017 for nonpublic companies ** Effective 2017 for public business entities THIRD QUARTER UPDATE (PRIVATE COMPANY)

8 s Standards Issued in Prior Years Effective 2017 or After (continued) Update No Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Update No Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients Update No Rescission of SEC Guidance Because of Accounting Standards Updates and Pursuant to Staff Announcements at March 3, 2016 EITF meeting Update No Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Update No Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Update No Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Update No Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting Update No Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years See ASUs and Nonpublic (including not-for-profit entities and employee benefit plans): fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, Public business entities that are SEC filers: fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other public business entities: fiscal years beginning after December 15, 2020, fiscal years. See ASUs and December 15, 2017, and interim periods beginning after December 15, 2016, fiscal years. ** Annual periods and interim periods within those periods, beginning after December 15, * ** December 15, 2017, and interim periods beginning after December 15, 2016, fiscal years. ** * Effective 2017 for nonpublic companies ** Effective 2017 for public business entities THIRD QUARTER UPDATE (PRIVATE COMPANY)

9 s Standards Issued in Prior Years Effective 2017 or After (continued) Update No Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Update No Liabilities Extinguishments of Liabilities (Subtopic ): Recognition of Breakage for Certain Prepaid Stored-Value Products Update No Leases (Topic 842) Update No Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities Update No Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes Update No Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, for certain amendments December 15, 2017, and interim periods beginning after December 15, 2016, fiscal years. ** Public business entities, certain not-for-profit entities and certain employee benefit plans: fiscal years beginning after December 15, 2017, fiscal years. December 15, 2019, and interim periods December 15, beginning after December 15, 2018, fiscal years. beginning after December 15, 2017, fiscal years. December 15, 2017, and interim periods beginning after December 15, 2016, including interim periods within those fiscal years. ** Can be applied prospectively or retrospectively. December 15, * beginning after December 15, 2015, including interim periods within those fiscal years. * Effective 2017 for nonpublic companies ** Effective 2017 for public business entities THIRD QUARTER UPDATE (PRIVATE COMPANY)

10 s Standards Issued in Prior Years Effective 2017 or After (continued) Update No Revenue from Contracts with Customers (Topic 606): Deferral of the Update No Inventory (Topic 330): Simplifying the Measurement of Inventory Update No Financial Services- Insurance (Topic 944): Disclosures about Short- Duration Contracts Update No Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Update No Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets Update No Consolidation (Topic 810): Amendments to the Consolidation Analysis, under certain circumstances Nonpublic: apply the guidance in ASU to fiscal years beginning after after Public business entities, certain not-for-profit entities, and certain employee benefit plans: apply the guidance in ASU to fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. December 15, * beginning after December 15, 2016, and ** December 15, * beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, Nonpublic: fiscal years, and interim periods within those fiscal years, beginning after December 15, *, and interim periods within those fiscal years, beginning after December 15, December 15, *, and interim periods within those fiscal years, beginning after December 15, December 15, *, and interim periods within those fiscal years, beginning after December 15, * Effective 2017 for nonpublic companies ** Effective 2017 for public business entities THIRD QUARTER UPDATE (PRIVATE COMPANY)

11 s Standards Issued in Prior Years Effective 2017 or After (continued) Update No Consolidation (Topic 810) - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity Update No Revenue from Contracts with Customers (Topic 606) Nonpublic: fiscal years, and interim periods within those years, beginning after December 15, *, and interim periods within those years, beginning after December 15, * Effective 2017 for nonpublic companies ** Effective 2017 for public business entities THIRD QUARTER UPDATE (PRIVATE COMPANY)