Accounting and financial reporting activities for private companies

Accounting and financial reporting activities for private companies SECOND-QUARTER 2018 In this update, we highlight some of the more important 2018 second-quarter accounting and financial reporting activities for private companies. The content is not meant to be all-inclusive. Accounting Guidance Issued in Second Quarter 2018 Simplifying Accounting for Nonemployee Share-Based Payments ASU 2018-07, Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, simplifies accounting for share-based payments issued to nonemployees for goods and services that are currently accounted for under Topic 505-50, Equity-Based Payments to Nonemployees. The existing guidance on nonemployee share-based payments is significantly different from current guidance for employee share-based payments and can be very difficult to apply. The ASU expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services to be used or consumed in the issuer s own operations, substantially aligning the accounting for both, and supersedes Topic 505. The amendments do not apply to share-based payments used to effectively provide financing to the issuer, or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

A company should apply the requirements of Topic 718 to nonemployee awards except for guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). Below is a comparison of the current and amended guidance for these awards: Current GAAP Summary of Amendments Overall Measurement Objective: Nonemployee share-based payment awards are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured. Consistent with the accounting for equity-classified awards issued to employees, equity-classified nonemployee awards within the scope of Topic 718 will be measured at grant-date fair value. Measurement Date: The measurement date for equity-classified nonemployee share-based payment awards is the earlier of the date at which: A commitment for performance by the counterparty is reached, and The date at which the counterparty s performance is complete. Equity-classified nonemployee share-based payment awards are measured at the grant date. The definition of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. Awards with Performance Conditions: Nonemployee share-based payment awards with performance conditions are measured at the lowest aggregate fair value. Consistent with the accounting for employee share-based payment awards, a company considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. Classification Reassessment of Certain Equity-Classified Awards: Generally, the classification of equity-classified nonemployee share-based payment awards is subject to other GAAP (ex. Topic 815, Derivatives and Hedging) once the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This often results in the need to reassess the classification of such awards. Generally, the classification of equity-classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless modified after: The good has been delivered and/or service has been rendered Any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and The nonemployee is no longer providing goods or services. This eliminates the current requirement to reassess classification of such awards upon vesting. 2018 second-quarter update 2

The amendments are effective for public companies for fiscal years beginning after Dec. 15, 2018, including interim periods within that fiscal year. For all other companies, the amendments are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Early adoption is permitted, but no earlier than a company s adoption date of Topic 606, Revenue from Contracts with Customers. Upon adoption, a company should only remeasure liabilityclassified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. These awards should be measured at fair value as of the adoption date. Note that assets that are completed are not remeasured. For example, finished goods inventory or equipment that has begun amortization should not be remeasured upon transition. Not-For-Profit Grant and Contribution Accounting ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, clarifies and improves the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises. The ASU clarifies whether certain transactions should be characterized as contributions or exchanges and reduces diversity in practice. The new ASU does not apply to transfers of assets from governments to businesses. The ASU clarifies and improves current guidance about whether a transfer of assets or the reduction, settlement, or cancellation of liabilities is a contribution or an exchange transaction. It provides criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards. It also provides a more robust framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. This is important because such classification affects the timing of contribution revenue and expense recognition. The amendments are effective for a public company or a not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market for transactions in which the entity serves as a resource recipient to annual reporting periods beginning after June 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after The amendments are effective for a public company or a not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the new standard for transactions in which the entity serves as a resource provider to annual reporting periods beginning after Dec. 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after Dec. 15, 2019, and interim periods within annual periods beginning after Dec. 15, 2020. Early adoption of the amendments in this ASU is permitted. ASUs Expected to be Issued Third Quarter 2018 The FASB has many active standard-setting projects in process. You can find an inventory as well as the current status of each project on FASB.org. There are several projects that are expected to result in the issuance of final ASUs in the third quarter. We will discuss these in depth in our Third Quarter Update Newsletter. The topics include the following: Targeted improvements to related-party guidance for variable interest entities (VIEs) Accounting by a customer for implementation costs incurred in a cloud computing arrangement that is considered a service contract Targeted amendments to ASC 842, Leases. See later discussion under New Lease Standard Effective Calendar Year 2020 Recognition for an assumed liability in a revenue contract under ASC 805, Business Combinations Modify disclosures for employers that sponsor defined benefit pension or other postretirement plans Modify disclosures for fair value measurements Simplify the balance sheet classification of debt 3 Plante Moran

New Revenue Recognition Rules Effective Calendar Year 2019 As a reminder, the new standard is effective yearend 2019 for calendar-year private companies (interim period in 2020) and companies can adopt using full retrospective adoption or cumulative effect adoption method (modified retrospective option). The FASB has issued several ASUs that provide clarification for identifying performance obligations, licensing implementation guidance, principal versus agent assessment, clarification guidance in certain narrow areas as well as practical expedients. As discussed in previous Newsletters, the TRG was formed to review implementation issues and bring issues to the FASB s attention if further amendments to the guidance were deemed necessary. The TRG has issued numerous whitepapers addressing implementation issues. Additionally, the AICPA formed sixteen industry task forces to help develop a new Accounting Guide on Revenue Recognition that will provide helpful hints and illustrative examples for how to apply the new revenue standard. The industry task forces continue to discuss industry-specific implementation issues, and FinRec released various working drafts of industry guidance, some of which are still available for public comment on the AICPA website. Companies should consider the TRG and FinRec whitepapers in implementing ASC 606. Calendar year-end public companies were required to adopt the standard Jan. 1, 2018. Private companies should consider reviewing disclosures made by public companies in their industry sector. The FASB has a webpage, Implementing New Standards, that helps position companies 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, including the revenue standard. New Lease Standard Effective Calendar Year 2020 The new lease standard is effective year-end 2020 for private companies. See our First-Quarter Update 2016 for discussion of the new guidance. Under the new guidance, including amendments, lessees will be required to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a capital or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the guidance in the ASU will require both types of leases to be recognized on the balance sheet. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (with potential relief permitting a cumulative effect in the period of adoption pending FASB approval - see later discussion). The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented, and provides for certain other practical expedients. Lessees and lessors may not apply a full retrospective transition approach. The FASB is expected to issue two more amendments in the third quarter to simplify certain aspects of the guidance as follows: Allow for the option to adopt using a cumulative-effect adjustment to retained earnings as of Jan. 1, 2020 (calendar year-end companies) Provide a practical expedient to allow lessors to treat certain leases with multiple components as a single lease In April 2018, the Center for Audit Quality (CAQ) issued, Preparing for the Leases Accounting Standard: A Tool for Audit Committees [https://www.thecaq.org/preparingleases-accounting-standard-tool-audit-committees] to help audit committees exercise their oversight responsibilities as companies implement the new leases accounting standard. 2018 second-quarter update 4

The tool includes an overview of the new standard and offers important questions for audit committee members to consider for successful implementation. Implementation of the leases standard is a significant effort and will affect multiple functional areas of an organization, including (but not limited to) accounting, tax, financial reporting, financial planning and analysis, investor relations, treasury (e.g., debt covenants), operations, procurement, legal, information technology, and real estate. It also involves judgments and estimates, thoughtful reassessment of accounting policies, and new required disclosures. This tool provides important questions to consider, such as the following: How will accounting for leases change? Is the company on track for successful implementation? How is the company preparing investors and creditors to understand the impact to the company and its financial reporting? Are new processes and controls being developed to address the accuracy of the adoption of and ongoing accounting required by the standard? Are the appropriate disclosures being developed? The tool is also very useful to management teams as they implement the standard and coordinate the process with their governance body and auditors. Measurement of Credit Losses on Financial Instruments As a reminder, ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, changes the impairment model to a current expected credit loss ( CECL ) model and will require an entity to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. As a result, entities will need to incorporate forward-looking information to better form their credit loss estimates and credit losses will generally be recognized earlier when a current expected credit loss exists. The new guidance also permits the restoration of prior credit losses on available-for-sale-debt securities in circumstances where the estimate of credit losses has declined. Entities will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU was discussed in our 2016 Second-Quarter Update. The ASU is effective for SEC filers fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2019 (i.e., Jan. 1, 2020, for calendar year entities). For public companies that are not SEC filers, the ASU is effective for fiscal years beginning after Dec. 15, 2020, and interim periods within those For all other organizations, the ASU will take effect for fiscal years beginning after Dec. 15, 2020, and for interim periods within fiscal years beginning after Dec. 15, 2021. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. The FASB established a transition resource group (TRG) to solicit, analyze and discuss implementation issues related to the new credit impairment standard. The group has discussed various topics of interest and the meeting materials can be accessed on the FASB website. Cybersecurity Cybersecurity presents a risk to all companies public and private. In April 2018, the CAQ issued a toolkit for board members, Cybersecurity Risk Management Oversight. The tool provides questions that board members charged with cybersecurity risk oversight can use as they discuss these risks and disclosures with management and auditors. The tool is also useful to management teams and private company governance committees as they address cybersecurity risks. The questions are grouped under four key areas: 1. Understanding how the financial statement auditor considers cybersecurity risk 2. Understanding the role of management and responsibilities of the financial statement auditor related to cybersecurity disclosures 3. Understanding management s approach to cybersecurity risk management 4. Understanding how CPA firms can assist boards of directors in their oversight of cybersecurity risk management 5 Plante Moran

Standards Issued in 2018 Update 2018-08 Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made Nonpublic entities that serve as a resource recipient: annual periods beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Nonpublic entities that serve as a resource provider; annual periods beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Public business entities that serve as a resource recipient: annual periods beginning after June 15, 2018, and interim periods within those * Public business entities that serve as a resource provider: annual periods beginning after Dec. 15, 2018, and interim periods within those Update 2018-07 Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, if ASU 2014-09 adopted Nonpublic: fiscal years beginning after Dec. 15, 2019 and interim periods beginning after Dec. 15, 2020. Dec. 15, 2018 and interim periods within those Update 2018-06 Codification Improvements to Topic 942, Financial Services Depository and Lending N/A Upon addition to FASB codification*, ** Update 2018-05 Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) N/A Upon addition to FASB codification** Update 2018-04 Investments Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update) N/A Upon addition to FASB codification*, ** Update 2018-03 Technical Corrections and Improvements to Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, if ASU 2016-02 adopted 2016-01 ** 2018 second-quarter update 6

Update 2018-02 Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Fiscal years beginning after Dec. 15, 2018, and interim periods within those Update 2018-01 Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842 2016-02 Standards Issued in Prior Years Effective 2018 or After Update 2017-15 Codification Improvements to Topic 995, U.S. Steamship Entities: Elimination of Topic 995 Fiscal years and first interim periods beginning after Dec. 15, 2018. Update 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) ** Update 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities Nonpublic: fiscal years beginning after Dec. 15, 2019, and interim periods beginning after Dec. 15, 2020. Dec. 15, 2018, and interim periods within those Update 2017-11 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 Part I: Nonpublic: fiscal years beginning after Dec. 15, 2019, and interim periods beginning after Dec. 15, 2020. Dec. 15, 2018, and interim periods within those Part II: No transition guidance is required as no accounting impact exists. 7 Plante Moran

Update 2017-10 Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services ** Update 2017-09 Compensation Stock Compensation (Topic 718): Scope of Modification Accounting Fiscal years beginning after Dec. 15, 2017. *,** Update 2017-08 Receivables Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities Nonpublic: fiscal years beginning after Dec. 15, 2019, and interim periods beginning after Dec. 15, 2020. Dec. 15, 2018, and interim periods within those Update 2017-07 Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost interim periods within fiscal years beginning after Dec. 15, 2017, and interim periods within those ** Update 2017-06 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 Fiscal years beginning after Dec. 15, 2018. Update 2017-05 Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ** Update 2017-04 Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment Update 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business Nonpublic: fiscal years beginning after Dec. 15, 2021. Public business entities that are SEC filers: fiscal years beginning after All other public business entities: fiscal years beginning after Dec. 15, 2020. interim periods within fiscal years beginning after Dec. 15, 2017, and interim periods within those ** 2018 second-quarter update 8

Update No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers ** Update No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) interim periods within fiscal years beginning after Dec. 15, 2017, and interim periods within those ** Update No. 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory Dec. 15, 2017, including interim periods within those ** Update No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) Nonpublic: fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2017, and interim periods within those ** Update No. 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities Nonpublic only: annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and interim periods within fiscal years beginning after Dec. 15, 2018.* Update No. 2016-13 Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years Nonpublic (including not-for-profit entities and employee benefit plans): fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021. Public business entities that are SEC filers: fiscal years beginning after Dec. 15, 2019, including interim periods within those All other public business entities: fiscal years beginning after Dec. 15, 2020, including interim periods within those Update No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ** 9 Plante Moran

Update No. 2016-11 Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at March 3, 2016 EITF meeting s 2014-09 and 2014-06 s 2014-09 and 2014-06 ** Update No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ** Update No. 2016-09 Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Nonpublic: fiscal years beginning after Dec. 15, 2017, and Dec. 15, 2018.* Dec. 15, 2016, including interim periods within those Update No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ** Update No. 2016-06 Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments Nonpublic: fiscal years beginning after Dec. 15, 2017, and Dec. 15, 2018.* Dec. 15, 2016, including interim periods within those Update No. 2016-05 Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Nonpublic: fiscal years beginning after Dec. 15, 2017, and Dec. 15, 2018.* Dec. 15, 2016, including interim periods within those Update No. 2016-04 Liabilities Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products Public business entities, certain not-for-profit entities and certain employee benefit plans: fiscal years beginning after Dec. 15, 2017, including interim periods within those ** 2018 second-quarter update 10

Update No. 2016-02 Leases (Topic 842) Nonpublic: fiscal years beginning after Dec. 15, 2019, and Dec. 15, 2020. Dec. 15, 2018, including interim periods within those Update No. 2016-01 Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, for certain amendments Dec. 15, 2017, including interim periods within those ** Update No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes Nonpublic: fiscal years beginning after Dec. 15, 2017, and interim periods within fiscal years beginning after Dec. 15, 2018.* Dec. 15, 2016, including interim periods within those Update No. Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, under certain circumstances Nonpublic: apply the guidance in ASU 2014-09 to fiscal years beginning after Dec. 15, 2018, and interim periods after Public business entities, certain not-for-profit entities, and certain employee benefit plans: apply the guidance in ASU 2014-09 to fiscal years beginning after Dec. 15, 2017, including interim reporting periods within those ** Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) ** 11 Plante Moran