EITF Roundup: Highlights from the January Meeting

The Dbriefs Financial Reporting series presents: EITF Roundup: Highlights from the January Meeting Stuart Moss, Partner, Deloitte & Touche LLP Adrian Mills, Partner, Deloitte & Touche LLP Bryan Benjamin, Manager, Deloitte & Touche LLP Sean St. Germain, Senior Manager, Deloitte & Touche LLP January 28, 2013

Agenda 11A CTA Upon Sale in a Foreign Entity 12D Joint and Several Liability 13A Benchmark Interest Rates 13C Unrecognized Tax Benefit Liability 12B Services Received from Affiliate 12H Service Concession Arrangements 12F Pushdown Accounting Administrative matters Question and answer

Keep in mind This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance Check with a qualified advisor before taking any action See later slides for information on obtaining written summaries of issues discussed today See FASB s Web site for official minutes and ratified consensuses 1

Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the EITF 2

Poll question #1 Are you a financial statement preparer, user, auditor, or other interested party? Preparer User Auditor Other

EITF Developments

Issue 11-A: CTA upon sale in a foreign entity Background Global Solar Panel, Inc. has sold its manufacturing business: Global Solar Panel, Inc. (USD reporting currency) Foreign Entity in South America (Brazilian Real functional currency with a CTA of 10) Does the currency translation adjustment (CTA) attach here? Follow ASC 830, Foreign Currency Matters No CTA release on disposal of the manufacturing business (not a complete or substantially complete liquidation of the investment in the foreign entity) Manufacturing business (CTA of 8) 3 Retail business (CTA of 2) Or, does the CTA attach here? Follow ASC 810, Consolidations CTA of 8 is recognized in the gain or loss on the disposal of the manufacturing business

Issue 11-A: CTA upon sale in a foreign entity Final consensus Follow guidance in ASC 830-30 for sale of a subsidiary or group of net assets within a consolidated foreign entity Release entire balance of CTA upon losing a controlling financial interest in an investment in a consolidated foreign entity Release entire balance of CTA from an equity method investment in a foreign entity for a step acquisition Issue would not change requirement to release a pro-rata portion of CTA for a partial sale of an investment in an equity method investment 4 CTA attaches at the foreign entity level. Recycling of CTA depends on the derecognition of an investment in a foreign entity and impacts the income statement

Issue 11-A: CTA upon sale in a foreign entity Examples Transactions Within a Foreign Entity Sold a subsidiary or a group of net assets that is a nonprofit activity or a business Transactions For an Investment in a Foreign Entity Sold a noncontrolling financial interest and retained a controlling financial interest (e.g., 100% to 80%) Sold a controlling financial interest and retained a noncontrolling financial interest (e.g., 100% to 30%) CTA Release Release CTA only if sale represents complete or substantial liquidation of investment in a foreign entity CTA Release None; reallocate CTA between controlling and noncontrolling interest Release entire CTA into earnings Sold part of an equity method investment (e.g., 30% to 25%) Sold part of an equity method investment and retained a cost method investment (e.g., 25% to 5%) Obtained a controlling financial interest through a step acquisition (e.g., 30% to 60%) 1 5 Pro-rata release of CTA into earnings Pro-rata release of CTA into earnings; reclassify remaining balance against investment s carrying value Release entire CTA into earnings

Issue 11-A: CTA upon sale in a foreign entity Final consensus Transition Prospective from beginning of the fiscal year of adoption Early adoption is permitted Effective date Public entities: fiscal years beginning on or after December 15, 2013 (and interim reporting periods therein) Nonpublic entities: fiscal years beginning on or after December 15, 2014 (and interim reporting periods therein) 6

Poll question #2 Will EITF Issue 11-A cause your organization to account for the release of CTA for transactions within a foreign entity and investments in a foreign entity differently than the organization s past practice? Yes No Unsure

Issue 12-D: Joint and several liability Background Subsidiary A Parent $100 $100 Subsidiary B Subsidiary A and B each: Receive $100 in proceeds Are joint and severally liable for the full $200 obligation Arrangement to each repay $100 7 For standalone reporting of A and B: Record the full $200 obligation? Treat $200 obligation as a guarantee arrangement and apply ASC 460? Treat $200 obligation as a contingent liability and record amount that is probable and can be reasonably estimated?

Issue 12-D: Joint and several liability Final consensus Scope All entities with a joint and several liability Recognition and measurement Measure joint and several liability as amount agreed to among co-obligors plus the amount an entity expects to pay on behalf of co-obligors Task Force removed guidance from consensus-forexposure to apply ASC 460, Guarantees, when an entity s primary role is that of a guarantor 8

Issue 12-D: Joint and several liability Final consensus Subsidiary A Parent $100 $100 Subsidiary B Subsidiary A and B each: Receive $100 in proceeds Are joint and severally liable for the full $200 obligation Arrangement to each repay $100 At inception, A and B each: Recognize amount agreed to pay of $100 Three months into the agreement, A expects to be required to cover $50 of B s obligation: A recognized liability is $150 B does not adjust $100 liability 9

Issue 12-D: Joint and several liability Final consensus Disclosures (each liability or group of similar liabilities) Information about the obligation s nature (i.e., how it originated, term, expected timing of settlement) Total amount of the outstanding obligation for all entities participating in the arrangement (excluding any possible recoveries from other entities) Carrying amounts of the obligation and any related receivable Information about the entity s recourse provisions The offsetting entry when the obligation is initially recognized and measured or the measurement significantly changes 10

Issue 12-D: Joint and several liability Final consensus Transition Modified retrospective approach (apply issue retrospectively to obligations that exist at the beginning of the fiscal year of adoption) Early adoption is permitted Effective date Public entities: fiscal years beginning on or after December 15, 2013 (and interim reporting periods therein) Nonpublic entities: fiscal years ending on or after December 15, 2014 (and interim and annual reporting period thereafter) 11

Poll question #3 True or False. According the EITF s final consensus, each entity that is a co-obligor in an arrangement with joint and several liability should always record the entire amount of the joint obligation in its standalone financial statements. True False

Issue 13-A: Benchmark interest rates Background ASC 815 provides guidance on the benchmark interest rate risks that are permitted to be hedged widely recognized and quoted rate in an active financial market that is broadly indicative of the overall level of interest rates attributable to highcredit-quality obligors in that market.... In theory, the benchmark interest rate should be a risk-free rate (that is, has no risk of default). Entities may hedge only the benchmark component (e.g., LIBOR) Demand for fed funds-based products has grown due to increased volatility and the widening of the spread between LIBOR and OIS 12 Borrowing Rate Liquidity Duration Credit LIBOR

Issue 13-A: Benchmark interest rates Consensus-for-exposure Treasury departments are concerned with managing the risk in the overnight rate Current U.S. benchmark interest rates remain: 1. U.S. Treasuries 2. LIBOR Federal Funds Effective Swap Rate would also be an acceptable benchmark interest rate in the United States Interest rate swap Company X Fixed Big Bank FF Periodic settlements based on an agreed upon notional and fixed interest versus Fed Funds Effective rate 13

Issue 13-A: Benchmark interest rates Consensus-for-exposure Transition and effective date Prospective for new or designated hedges entered into on or after adoption date Early adoption would be permitted Effective date to be determined at a future meeting 14

Issue 13-C: Unrecognized tax benefit liability Background Balance Sheet Gross Net Deferred Tax Assets 1,000 500 Other Assets 20,000 20,000 Total Assets 21,000 20,500 UTB Liability 500 - Other Liabilities 14,000 14,000 Total Liabilities 14,500 14,000 Total Equity 6,500 6,500 Total Liabilities and Equity 15 21,000 20,500 Diversity in Practice Currently entities present an unrecognized tax benefit (UTB) liability net of a net operating loss (NOL) or tax credit carryforward either when: The uncertain tax position would, or is available to, reduce the NOL or tax credit carryforward under the provisions of the tax law; or The UTB is directly associated with a tax position taken in a tax year that resulted in the recognition of a NOL carryforward for that year

Issue 13-C: Unrecognized tax benefit liability Consensus-for-exposure Presentation A UTB should be presented as a reduction of a deferred tax asset for a NOL or tax credit carryforward (rather than as a liability) when the uncertain tax position would, or is available to, reduce the NOL or tax credit carryforward under the provisions of the tax law 16 At the balance sheet date, if the taxing authority were to disallow an uncertain tax position (for which a UTB was recognized), does tax law allow an entity to offset the taxable amount against an NOL, tax credit carryforward, or amount refundable in the tax return or is cash settlement required?

Issue 13-C: Unrecognized tax benefit liability Consensus-for-exposure Transition and effective date Retrospective to all prior periods presented Early adoption would be permitted Effective date to be determined at a future meeting 17

Poll question #4 Do you agree with the proposed transition method for EITF Issue 13-C to be applied retrospectively to all prior periods? Yes No Unsure

Issue 12-B: Services received from an affiliate Background A not for profit (NFP) entity may receive various types of services from employees of an affiliated entity under common control Legal Recipient NFP in Standalone F/S ASC 958 requires the recipient NFP to recognize the contributed services at fair value when the following criteria are met: Services are regularly performed and provided by a separately governed affiliate under direction of recipient NFP; and Create or enhance a nonfinancial asset, or 18 Require specialized skills that the NFP would otherwise need to purchase

Issue 12-B: Services received from an affiliate No final consensus reached (tentative decision made) Issue How should a NFP recognize and measure the receipt of services from an affiliate under common control (for which the affiliate does charge for reimbursement of its costs) in its standalone financial statements? Recognition and measurement Recognize all personnel services that directly benefit recipient NFP including certain "shared" personnel service Measure personnel services at the actual direct costs incurred by the affiliate (e.g., employee's direct compensation and benefits) 19

Issue 12-B: Services received from an affiliate No final consensus reached (tentative decision made) Presentation within statement of changes in net assets If a performance indicator is presented, exclude from the performance indicator (i.e., present as an equity transfer) If a performance indicator is not presented, presentation guidance would not be prescribed (contra expense not allowed) Transition and effective date Prospective with option to apply using a modified retrospective approach Early adoption would be permitted Effective date to be determined at a future meeting 20

Issue 12-B: Services received from an affiliate No final consensus reached (tentative decision made) FASB Staff performing additional research on the following questions: Should personnel services contributed by certain affiliated for-profit entities or individual donors be excluded from the Issue s scope? Should the Issue s recognition guidance be limited to the type of contributed services currently evaluated for recognition under ASC 958-605? 21

Issue 12-H: Service concession arrangements Background A private-sector entity ( operating entity ) pays a citygovernment ( grantor ) $100 million for the right to operate the city s toll roads for the next 20-years The operating entity keeps all tolls collected (estimated $200 million) The grantor maintains the right to regulate the toll fees, provides certain other performance conditions, and maintains ownership of the toll roll during the entire contract period What accounting guidance should be applied to this transaction? 22

Issue 12-H: Service concession arrangements Background Accounting guidance U.S. GAAP does not specifically address the accounting for service concession contracts (IFRS does) Some operating entities account for these contracts as leases (ASC 840) Some operating entities account for these contracts as intangible assets, financial assets, or both (in a manner similar to IFRS guidance) Service concession contracts Public-sector entities enter into contracts with private-sector entities to operate (may also construct or maintain) its infrastructure that is used to provide public services 23

Issue 12-H: Service concession arrangements No consensus reached (tentative decision made) Scope Contracts between a public-sector grantor and a privatesector operating entity Grantor must: Control (ability to modify or approve) what services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price Control any residual interest in the infrastructure at the end of the term of the contract Contract must be for the primary functionality of a grantor s infrastructure 24 The EITF s tentative decision is that service concession contracts meeting this Issue s scope are not leases

Issue 12-H: Service concession arrangements No consensus reached (tentative decision made) Recognition and measurement Operating entity should account for its rights as: a financial asset for any unconditional contractual right to receive a specified or determinable amount of cash (or another financial asset) from the public-sector entity an intangible asset for any conditional rights to future cash flows based on usage by a third party a combination of a financial asset and an intangible asset Transition and effective date To be discussed at a future meeting 25

Issue 12-H: Service concession arrangements Example A operating entity pays a city-government $100 million for the right to operate the city s toll roads for the next 20-years The operating entity keeps all tolls collected (estimated $200 million) and $60 million in tolls revenue is guaranteed by the grantor at $3 million each year (i.e., the grantor covers any toll short-falls) Tentative combination model for $100 million payment (ignoring time value of money) $60 million financial asset $40 million intangible asset Subsequently measure each asset based on current U.S. GAAP 26

Poll question #5 Do you think that the EITF should limit the personnel services received from an affiliate to only those services that meet the current contributed services guidance (instead of all personnel services that directly benefit recipient NFP)? Yes No Unsure

Issue 12-F: Pushdown accounting Background There is limited U.S. GAAP on pushdown accounting. SEC guidance applicable for SEC registrants is summarized below. Acquire less than 80% of an entity Pushdown accounting is prohibited Acquire 80% to 95% of an entity Pushdown accounting is permitted Acquire 95% or more of an entity Pushdown accounting is required 27

Issue 12-F: Pushdown accounting No consensus reached Task Force deliberated three alternatives for when an acquiring entity should push down the new accounting basis to an acquired entity s standalone financial statements: When substantially all of the controlling financial interests are acquired When an acquiring entity obtains control and consolidates the acquired entity in accordance with ASC 810 A new basis should not be established in an acquired entity's standalone financial statements due to a change in its ownership 28 FASB Staff to perform additional outreach on each of these three alternatives and applicability for nonpublic entities

Poll question #6 Which alternative that the EITF is considering in Issue 12-F do you primarily support? That is, do you believe an acquiring entity should push down the new accounting basis to an acquired entity s standalone financial statements when Substantially all of the controlling financial interests are acquired An acquiring entity obtains control and consolidates the acquired entity in accordance with ASC 810 A new basis should not be established in an acquired entity's standalone financial statements due to a change in its ownership Unsure

EITF administrative matters Ratification of EITF Issues considered during January 31, 2013 FASB meeting Next EITF meeting is March 14, 2013. Potential agenda includes: Issue 12-B, Services received from an affiliate Issue 12-F, Pushdown accounting Issue 12-G, Consolidating a CFE Issue 12-H, Service concession arrangements New agenda topic Issue 13-B, Investments in Tax Credits (added December 2012) 29

Issue 13-B: Investments in tax credits New issue overview Background Low-Income Housing Tax Credit (LIHTC) provides tax credit benefits to owners of entity owning qualifying property Generally entities account for these investments as equity method investments Investment performance and tax benefits presented gross Some entities meet scope of ASC 323-740 and account for these investments under the effective yield method Investment performance and tax benefits presented net Scope FASB Chairman limited Issue s scope to the current scope in ASC 323-740 for LIHTC investments 30

Poll question #7 Does your organization invest in tax credit programs, such as the LIHTC or other similar tax credit programs? Yes No Unsure

Question and answer

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Contact info Bryan Benjamin Adrian Mills Stuart Moss Sean St. Germain bbenjamin@deloitte.com amills@deloitte.com smoss@deloitte.com sstgermain@deloitte.com

Acronyms used in presentation CFE: Collateralized Financing Entity CTA: Currency Translation Adjustment FF: Federal Funds Effective Swap Rate IFRS: International Financial Reporting Standards LIBOR: London Interbank Offered Rate LIHTC: Low-Income Housing Tax Credit NFP: Not For Profit NOL: Net Operating Loss OIS: Overnight Index Swap UTB: Unrecognized Tax Benefit

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