Defining Issues February 2013, No. 13-9

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1 Issues & Trends Defining Issues February 2013, No FASB Expands Disclosures for Items Reclassified Out of Accumulated Other Comprehensive Income The FASB recently issued an Accounting Standards Update (ASU) that requires entities to disclose: 1 For items reclassified out of accumulated other comprehensive income (AOCI) and into net income in their entirety, the effect of the reclassification on each affected net income line item; and For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. Contents Effective Date and Transition 1 Background 2 New Disclosures for Items Reclassified Out of AOCI 2 Disclosure Examples 4 The ASU carries forward the existing requirement that reclassifications out of AOCI be separately presented for each component of other comprehensive income. 2 This information may be presented either on the face of the financial statement that reports comprehensive income or as a separate disclosure in the notes. There is no change in the requirement to present the components of net income and other comprehensive income in either a single continuous statement or two separate 3 but consecutive statements. The ASU also does not change what items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income. Effective Date and Transition The ASU applies to both public and nonpublic entities and will be applied prospectively. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2012 and interim periods within those years. Because the new disclosure requirements apply to public entities for interim as well as annual periods, calendar-year public entities will be required to provide the disclosures beginning with their first quarter of For nonpublic entities, the new requirements are effective for annual reporting periods beginning after December 15, 2013 and interim and annual periods thereafter. Early adoption is permitted. 1 FASB Accounting Standards Update No , Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, February 2013, available at 2 FASB ASC paragraph A, available at 3 FASB Accounting Standards Update No , Presentation of Comprehensive Income, June 2011, available at

2 Although the requirement in ASU to present the components of net income and other comprehensive income in either a single statement or two consecutive statements was applied retrospectively upon adoption, the new disclosure requirements in ASU are to be applied prospectively (i.e., the comparative disclosure information is not required in the first year of application). Background The FASB issued ASU , which changed the presentation requirements for comprehensive income, with the goal of increasing the prominence of comprehensive income. However, it did not change what items are reported in AOCI and when and how they are reclassified. Under existing U.S. GAAP, items of AOCI include (1) unrealized gains or losses on available-for-sale securities; (2) deferred gains or losses on cash flow hedges; (3) cumulative translation adjustments on foreign operations; and (4) deferred items (i.e., actuarial gains or losses, prior service cost, and transition adjustments from initial adoption of the standards) from pension and non-pension defined benefit postretirement plans. In the original provisions of ASU , the FASB also required companies to disclose, on the face of the statement that reports net income, the line items in which items being reclassified out of AOCI were reported (e.g., cost of goods sold, research and development expense). Because of concerns about the cost and effort to gather the information to comply with retrospective application of that requirement, the difficulty in tracking items that may have been initially reclassified to a balance sheet account, and the potential for confusion from the additional information to be presented on the face of the statement that reports net income, the FASB deferred the effective date of that requirement to allow it more time to develop a cost-effective manner of presenting this information. 4 Constituents had raised particular concerns about the cost of obtaining the required information because retrospective application would be especially difficult for items that may have been initially capitalized when reclassified out of AOCI and not affect net income until one or more subsequent periods (e.g., actuarial gains or losses capitalized in the cost of self-constructed property, plant, and equipment that affects net income as the asset is depreciated). New Disclosures for Items Reclassified Out of AOCI The FASB addressed those concerns in ASU by requiring disclosure of the effects of reclassifications out of AOCI on net income line items only for those items that are reported in their entirety in net income in the period of reclassification. For these items (e.g., realized gains or losses on available-for-sale securities reclassified from AOCI to net income at the date the securities are sold), entities are required to disclose the effect of the reclassification on each line item of net income that is affected by the reclassification adjustment. For items that are not reclassified in their entirety into net income (e.g., actuarial gains or losses on a defined benefit pension plan that may be capitalized into inventory, self-constructed property, plant and equipment, internal-use software, etc.), entities are required to add a cross reference to the note that includes additional information about the effect of the reclassification (e.g., the postretirement benefit note). 4 FASB Accounting Standards Update No , Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No , December 2011, available at Defining Issues / February 2013 / No

3 For entities that only have AOCI reclassifications into net income in their entirety, this information may be presented either in the notes or parenthetically on the face of the statement that reports net income as long as all of the required information is presented in a single location. However, an entity that has one or more reclassification items that are not presented in their entirety in net income in the period of reclassification must present this information in the notes to the financial statements rather than parenthetically on the face of the statement that reports net income. If the information required by the ASU is provided in the notes, before-tax and net-oftax presentations are permitted under the existing requirements for presenting other comprehensive income. 5 If the information required by the ASU is provided parenthetically on the statement that reports net income, the information should be provided using the existing requirements for presenting the net income line item (e.g., on a before-tax basis for reclassifications reported in continuing operations). For public entities, these disclosures are required for annual and interim reporting periods. For nonpublic entities, disclosures about the effects of reclassifications on net income are only required for annual reporting periods. Nonpublic entities are permitted, but not required, to provide the disclosures if they issue interim financial statements. The ASU also carries forward the requirement for entities to present separately for each component of other comprehensive income, current period other comprehensive income and reclassifications out of AOCI during the current reporting period. The requirement to present the amount of tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, on the face of the financial statements or in the notes also was retained. 6 The disclosure requirements about current period other comprehensive income and reclassifications out of AOCI during the period for each component of other comprehensive income apply to both annual and interim periods for both public and nonpublic entities. 5 FASB ASC paragraph , available at 6 FASB ASC paragraph , available at Defining Issues / February 2013 / No

4 Disclosure Examples The required disclosures are illustrated in the following examples. Example 1: Items Not Reclassified in Their Entirety to Net Income Entity ABC Notes to Consolidated Financial Statements Reclassifications Out of AOCI/(Loss) Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Statement Where Net Income Is Presented (Losses) on cash flow hedges Commodity derivative contracts $ (2,500) Cost of goods sold Foreign exchange derivative contracts (1,000) Net revenues Interest rate derivative contracts 2,100 Interest expense (1,400) Total before tax 400 Income tax expense (1,000) Net of tax Available-for-sale securities Realized gain on sale of securities 2,600 Other income/(expense) Impairment expense (1,200) Other income/(expense) 1,400 Total before tax (400) Income tax expense 1,000 Net of tax Defined benefit pension plan items Amortization of prior service costs (2,300) See Note 1 below Amortization of actuarial gains/(losses) 1,200 See Note 1 below Pension curtailment (1,700) See Note 1 below (2,800) Total before tax 800 Income tax expense (2,000) Net of tax Foreign currency translation adjustments Sale of foreign entity (600) Discontinued operations Total reclassifications $ (2,600) Net of tax Note 1: These items are included in the computation of net periodic pension cost. See Note X, Pensions and Other Postretirement Benefit Plans, for additional information. Defining Issues / February 2013 / No

5 Entity ABC Notes to Consolidated Financial Statements Changes in AOCI/(Loss) by Component (Net of Tax) (Losses) on Cash Flow Hedges Unrealized (Losses) on Availablefor-Sale Securities Defined Benefit Pension Plan Items Foreign Currency Translation Adjustments Total Beginning balance $ $ (6,000) $ (2,000) $ 2,400 $ (5,600) Other comprehensive income/(loss) before reclassifications 4,000 5,000 (3,600) (1,200) 4,200 Amounts reclassified from AOCI 1,000 (1,000) 2, ,600 Net current period other comprehensive income/(loss) 5,000 4,000 (1,600) (600) 6,800 Ending balance $ 5,000 $ (2,000) $ (3,600) $ 1,800 $ 1,200 Defining Issues / February 2013 / No

6 Example 2: All Items Reclassified in Their Entirety to Net Income Entity DEF Consolidated Statement of Income Net revenues (includes net loss of $5,000 in AOCI reclassifications for cash flow hedges) $ 560,000 Cost of goods sold (includes net gain of $3,000 in AOCI reclassifications for cash flow hedges) 230,000 Gross margin 330,000 SG&A 100,000 Operating income 230,000 Other income (includes net gain of $1,000 in AOCI reclassifications for previously unrealized net gains on available-for-sale securities) 10,000 Income from continuing operations before tax 240,000 Income tax expense (includes $300 income tax benefit from AOCI reclassifications) 50,000 Income from continuing operations 190,000 Loss from discontinued operations (includes gain of $2,500 (net of tax) in AOCI reclassifications for previously unrealized gain on foreign currency translation adjustments) 10,000 Net income $ 180,000 Defining Issues / February 2013 / No

7 Entity DEF Notes to Consolidated Financial Statements Changes in AOCI/(Loss) by Component (Net of Tax) (Losses) on Cash Flow Hedges Unrealized (Losses) on Availablefor-Sale Securities Foreign Currency Translation Adjustments Total Beginning balance $ 3,000 $ (10,000) $ 4,200 $ (2,800) Other comprehensive income/(loss) before reclassifications (4,000) 6,000 (2,100) (100) Amounts reclassified from AOCI 1,400 (1) (700) (2) (2,500) (1,800) Net current period other comprehensive income/(loss) (2,600) 5,300 (4,600) (1,900) Ending balance $ 400 $ (4,700) $ (400) $ (4,700) For illustration purposes: (1) Net loss in AOCI reclassifications for cash flow hedges included in net revenues $ (5,000) Net gain in AOCI reclassifications for cash flow hedges included in cost of goods sold 3,000 Income tax benefit of $600 included in income tax expense 600 (3) Total $ (1,400) (2) Net gain in AOCI reclassifications for previously unrealized net gains on available-for-sale securities included in other income $ 1,000 Income tax expense of $300 included in income tax expense (300) (3) Total $ 700 (3) Total of $300 income tax benefit from AOCI reclassifications included in income tax expense Contact us: This is a publication of KPMG s Department of Professional Practice Contributing authors: Paul H. Munter Joseph R. Epstein Earlier editions are available at: The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the standard or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors. Defining Issues is a registered trademark of KPMG LLP KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.