The Dbriefs Financial Reporting series presents: EITF Roundup: Highlights from the November Meeting Bob Uhl, Partner, Deloitte & Touche LLP Adrian Mills, Partner, Deloitte & Touche LLP Jason Nye, Senior Manager, Deloitte & Touche LLP November 19, 2013
Agenda 13-B Investments in LIHTC 12-H Concession Arrangements 12-G Assets and Liabilities of a CFE 13-E Reclassifying Loans to OREO 13-F Guaranteed Mortgage Loans 12-F 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.
Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the Emerging Issues Task Force.
Poll question # 1 Are you a financial statement preparer, user, auditor, or other interested party? Preparer User Auditor Other
EITF Developments
Issue 13-B: Investments in LIHTC Background The Low-Income Housing Tax Credit (LIHTC) program provides tax credit benefits to owners of limited liability entities that own and operate qualifying properties Affordable housing projects Investor Limited liability entity General partner Raises capital Constructs affordable housing Operates property Collects rent from tenants Passes LIHTC to investors IRS 6
Issue 13-B: Investments in LIHTC Background (continued) Generally entities account for these investments as equity method or cost method investments under ASC 970-323 However, if certain conditions are met, an entity may apply the effective yield method under ASC 323-740 (optional) This table compares the different methods of accounting: 7 LIHTC Equity method Cost method Effective yield Qualification More than minor* Minor* Specific criteria in ASC 323-740 Investment amortization Income statement Tax depreciation + impairment Losses shown separately from tax credits and other benefits Straight-line Losses shown separately from tax credits and other benefits Constant effective yield Losses combined with tax credits and other benefits * ASC 323-30-S99-1 indicates that an ownership interest in a limited partnership of more than 3 to 5 percent is more than minor and should be accounted for using the equity method of accounting.
Issue 13-B: Investments in LIHTC Background (concluded) Currently, to qualify for the effective yield method all of the following conditions must be met: Availability of the investor s allocable tax credits is guaranteed by a creditworthy entity Investor s projected yield based solely on cash flows from guaranteed tax credits is positive Investor is a limited partner and its liability is limited to its capital investment Some believe these criteria are too restrictive resulting in only a small percentage of entities being able to use the effective yield method. 8
Issue 13-B: Investments in LIHTC Final consensus The EITF s final consensus loosens the qualifying criteria for the accounting option in ASC 323-740: Current requirements Tax credit is guaranteed by creditworthy guarantor A similar requirement is not currently included in ASC 323-740 Investor s projected yield based solely on cash flows from guaranteed tax credits is positive Investor is a limited partner and its liability is limited to its capital investment New requirements It is probable that the tax credits allocable to the investor will be available The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity, and substantially all of the projected benefits are from tax credits and other tax benefits The investor's projected yield based solely on the cash flows from the tax credits and other tax benefits is positive The investor is a liability investor in the limited liability entity for both legal and tax purposes, and the investor s liability is limited to its capital investment [same as current req.] 9
Issue 13-B: Investments in LIHTC Final consensus In addition, the limited liability investor is permitted to enter into another transaction with the investee if: The reporting entity is in the business of entering into such other transactions The transaction is consistent with an arm s-length transaction with market terms The reporting entity does not acquire a significant ability to influence the operating and financial policies of the limited liability entity The EITF s final consensus related to LIHTC investments will: Eliminate the effective yield method, replacing it with a proportional amortization method. Original cost of the investment is amortized in proportion to the tax credits and other tax benefits received, or In proportion to just the tax credits if the investor expects the results would not be significantly different 10
Issue 13-B: Investments in LIHTC Final consensus Other matters: Entities will not be required to present the investment as a DTA Tested for impairment when it is more likely than not the tax credits and other benefits will not be realized, and marked to fair value Entities must disclose the impact of LIHTC investments on the entity s financial statements Effective annual periods beginning after Dec. 15, 2014 (retrospective transition)* * Public entities must apply to interim periods within the first year of adoption; nonpublic entities only the annual. All may early adopt. Entities that applied the effective yield method my continue but only for existing investments. 11
Poll question #2 Do you believe that the FASB should permit entities to apply the guidance in 13-B (i.e., proportional amortization of the tax credit investment presented net in the provision for income taxes) to other tax credit investments that meet the qualifying criteria in 13-B? Yes No I have to think about it
Issue 12-H: Concession arrangements Background Service concession arrangements A private-sector entity ( operating entity ) enters into a contract with a city s government ( grantor ) for the right to operate the city s toll roads for 20-years and the obligation to maintain the infrastructure and operate it efficiently The operating entity keeps all tolls collected The operating entity makes certain payments to the city, or compensates them by constructing/upgrading infrastructure The grantor sets the toll fees, and maintains ownership of the toll road during the entire contract period What accounting guidance should be applied to this transaction (i.e., is this a lease)? 7
Issue 12-H: 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 in a manner similar to IFRS guidance, i.e., IFRIC 12: Intangible asset Both (i.e., part intangible and part financial) Financial asset 8
Issue 12-H: Concession arrangements Final consensus Scope Contracts between a public-sector grantor and a private-sector operating entity to operate the grantor s infrastructure for purposes of providing a public service 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 arrangement The EITF s final consensus precludes operating entities from treating these arrangements as leases or recognizing the infrastructure as its property, plant, or equipment. 9
Issue 12-H: Concession arrangements Final consensus Effective date Public: annual periods beginning after December 15, 2014, and interim periods therein Nonpublic: annual periods beginning after December 15, 2014, and annual and interim periods thereafter All may early adopt Transition Apply consensus to all contracts existing at the beginning of the period of adoption with a cumulative-effect adjustment to beginning retained earnings and to All contracts entered into after the beginning of that period 10
Poll question #3 Will the EITF s consensus on Issue 12-H permit an entity to account for service concession arrangements within the scope of that Issue as a lease? Yes No
Issue 12-G: Assets and liabilities of a CFE Background Collateralized financing entity (CFE): Holds: Financial assets such as bonds or loans Pass through to BI holders Issues: Non-recourse financial liabilities [issued as beneficial interests (BIs)]. Has little or no equity. An entity that is the primary beneficiary of a CFE will consolidate the variable interest entity, resulting in: Initially measuring newly consolidated financial assets and financial liabilities of the CFE at fair value (FV) An option to elect the fair value option CFEs pass through cash flows, but the fair value of the assets may not equal the fair value of the liabilities 18
Issue 12-G: Assets and liabilities of a CFE Background Issue How should an entity measure the financial assets and financial liabilities of a CFE in order to eliminate differences that do not relate to beneficial interests held by the entity? Currently, entities record the excess as either: A gain and allocate such amount to the noncontrolling beneficial interest holders in arriving at net income available to common shareholders, or A direct adjustment to appropriated retained earnings (RE) Subsequent accounting for changes in fair value: allocate to noncontrolling interest ( NCI ) in arriving at net income available to common shareholders 19
Issue 12-G: Assets and liabilities of a CFE Final consensus Scope CFE defined A variable interest entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity. The beneficial interests have recourse to the related financial assets of the [CFE] and are classified as financial liabilities. A [CFE] may hold nonfinancial assets temporarily as a result of default or in an effort to restructure the debt A CFE that holds a guarantee from the consolidating reporting entity would not be excluded from the scope of this Issue A failed sale is excluded 20
Issue 12-G: Assets and liabilities of a CFE Final consensus Most-observable measurement approach Measure the financial assets or financial liabilities at fair value, whichever is the most observable Use that fair value to determine the value of the less observable Required at initial consolidation, but there is an entity-wide policy choice to apply this or other GAAP in subsequent periods Financial Assets Are More Observable Fair value of financial assets Plus: Carrying value of nonfinancial assets Less: Fair value of the reporting entity s owned beneficial interests (other than those that represent compensation) Less: Carrying value of interests related to compensation Equals: The value of the financial liabilities of the CFE Financial Liabilities Are More Observable Fair value of the financial liabilities Plus: Fair value of the reporting entity s owned beneficial interests (other than those that represent compensation) Plus: Carrying value of interests related to compensation Less: Carrying value of nonfinancial assets Equals: The value of the financial assets of the CFE 21
Issue 12-G: Assets and liabilities of a CFE Final consensus Example liabilities are more observable Determine the value of the CFE s financial assets using the FV of liabilities* Jun 20, 20X2 (initial consol.) Dec. 31, 20X2 (subsequent) Fair value of 3 rd -party financial liabilities 90 95 Plus: Fair value of the owned BIs 10 12 Plus: Carrying value of interests related to 6 8 compensation Less: Carrying value of nonfinancial assets 5 5 Value of the financial assets of the CFE 101 110 * Adapted from November 1, 2013, Issue Summary No. 1, Supplement No. 3 related to EITF 12-G. 22
Issue 12-G: Assets and liabilities of a CFE Final consensus Other issues All entities are prohibited from applying the fair value option in ASC 825 to the financial assets or financial liabilities of a CFE within the scope of this Issue The final consensus requires certain disclosures; specifically, information related to: The most observable fair value measurement The fair value measurement of the beneficial interests held Effective date and transition Public: fiscal years beginning after December 15, 2014 and interim periods therein Nonpublic: fiscal years beginning after December 15, 2015, and annual and interim thereafter Early adoption is permitted Modified retrospective transition 23
Poll question #4 Should the FASB take on a project to clarify how it selects effective dates and transition methods? Yes, and the project should be open to the public Yes, and I am fine with the project being handled internally, as long as things are consistent going forward No I would need to think about this more
Issue 13-E: Reclassifying loans to OREO Background Under ASC 310, a creditor reclassifies mortgage loans to other real estate owned (OREO) when there is in substance a repossession or foreclosure by the creditor However, U.S. GAAP does not define nor provide interpretive guidance for in substance a repossession or foreclosure This issue addresses when a creditor should reclassify a loan to OREO 25
Issue 13-E: Reclassifying loans to OREO Final consensus Scope: Consumer loans that are collateralized by residential real estate property Final consensus: Reclassify loans when either of the following occurs The creditor obtains legal title to the real estate collateral A deed in lieu of foreclosure is completed, conveying all interest in the real estate to the creditor Disclose: The amount of residential real estate meeting the conditions above The recorded investment in consumer mortgage loans secured by residential real estate properties that are in the process of foreclosure 26
Issue 13-E: Reclassifying loans to OREO Final consensus Effective date Public: annual periods beginning after December 15, 2014, and interim periods therein Nonpublic: annual periods beginning after December 15, 2014, annual and interim periods thereafter Early adoption permitted Transition: Entities have the option to apply the guidance Prospectively to all foreclosures occurring after the effective date or Using a modified retrospective transition approach 27
Issue 13-F: Guaranteed mortgage loans Background The U.S. Government offers certain loan guarantee programs through, for example, the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD) Diversity in practice exists in the accounting for government-guaranteed loans when the creditor forecloses on the property Receivable? Real estate? Should the creditor reclassify the loan as real estate, a separate receivable from the government, or keep it as a loan? At what amount should the asset be measured? 28
Issue 13-F: Guaranteed mortgage loans Consensus-for-exposure Scope: residential mortgage loans issued by banks or other mortgage lenders that have both of the following two characteristics: The loan has a government guarantee inseparable from the loan that entitles the creditor to the full amount of unpaid principal At the time of foreclosure (see Issue 13-E), the creditor has the intent to make a claim on the guarantee and the ability to recover through the guarantee Such loans would be reclassified to a receivable separate from loans, and should be measured at the full amount of the guarantee Effective date will be discussed at a future meeting The transition method would align with the method applicable to 13-E 29
Poll question # 5 Under the consensus-for-exposure related to Issue 13- F, an entity would reclassify a government-guaranteed loan to real estate to be measured as the full amount of the guarantee. Select one of the alternative approaches listed below that you believe is preferable. I agree with the EITF that it is a receivable from the government upon foreclosure The loan should be reclassified into real estate and a separate guarantee receivable recognized Continue to classify as a loan but measure at the full amount of the guarantee Reclassify as real estate but measure at the full amount of the guarantee
Issue 12-F: Pushdown accounting Background There is limited U.S. GAAP guidance on pushdown accounting. SEC registrants must apply SEC guidance 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
Issue 12-F: Pushdown accounting Tentative decision (no consensus reached) The EITF considered these alternatives for public entities: Pushdown accounting should be optional for all acquired entities for which a change-in-control occurs Pushdown accounting should be optional for a change-incontrol event but required if that event causes the acquired entity to become substantially wholly owned by the acquirer Pushdown accounting should be required for all change-incontrol events Pushdown accounting should be required at the substantially wholly owned level, but otherwise prohibited The EITF requested that the staff identify other circumstances under which pushdown accounting should be required or not permitted. 32
Issue 12-F: Pushdown accounting Tentative decision (no consensus reached) Other tentative decisions: Nonpublic entities would get an unfettered option to apply pushdown accounting upon a change in control A change-in-control event that would permit or require an acquired entity to apply pushdown accounting could include one that occurs without a transfer of consideration An acquired entity is prohibited from recognizing acquisitionrelated debt incurred by the acquirer unless GAAP requires it (i.e., when it is the legal obligation of the entity) Goodwill would be pushed down, but bargain purchase gains would not The staff was also directed to consider: 33 The definition of substantially wholly owned, changes in control effected through club deals, and step acquisitions
Poll question #6 Which pushdown alternative do you think is preferable for public entities? Unfettered option for changes in control Required for changes in control Optional for changes in control but required if such change results in the acquired entity being substantially wholly owned (the EITF s tentative choice) Required if the acquired entity becomes substantially wholly owned but otherwise prohibited Prohibited in all cases
EITF administrative matters Ratification of EITF Issues will be considered during the December 11, 2013 FASB meeting Next EITF meeting is March 13, 2014. Potential agenda includes: Issue 13-D, post-service performance targets in sharebased compensation Issue 13-G, nature of a hybrid host Issue 13-F, government-guaranteed loans Issue 13-B, (round 2), investments in tax credits Issues added during December 19, 2013 EITF Agenda Committee meeting Comment letters on Issues 13-D and 13-G due on Dec. 23. 35
Poll question #7 Are you registered for our December 19 Dbrief, Quarterly Accounting Roundup? Yes No I will if you show me how
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