Current Accounting Issues

Current Accounting Issues

Panelists Christopher L. Bruner, Managing Partner- EY Philadelphia Peter Bible, Chief Risk Officer- EisnerAmper Desiree Burke, Senior Vice President & Chief Accounting Officer- Gaming & Leisure Properties, Inc. Sean Denham, Managing Partner- Grant Thornton Philadelphia Robert J. McNeill, Managing Partner- Deloitte Philadelphia Page 2

Accounting Hot Topics AS 18 and Related Party Transactions Business Combinations Spin Transactions Comment Letter Trends Inspection (PCAOB) Activity Page 3

AS 18 and Related Party Transactions Page 4

Auditing Standard 18, related parties Intended to strengthen auditor performance requirements in three critical areas: Relationships and transactions with related parties Significant unusual transactions Financial relationships and transactions with executive officers These areas have historically had a higher risk of material misstatement, often due to fraud. Many financial statement frauds have occurred using these types of transactions. Effective Date - for all audits of financial statements for fiscal years beginning on or after December 15, 2014 Many procedures are predicated on management providing listings of related party relationships and transactions Likely results in incremental internal controls over financial reporting to ensure completeness over these listings Page 5

AS 18 and the related party definition Related parties include (ASC 850): a. Affiliates of the entity b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity c. Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management d. Principal owners of the entity and members of their immediate families e. Management of the entity and members of their immediate families f. Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests Page 6

AS 18 and the related party definition Considerations for board members If a board member is an independent director on a large public company s board and does not have significant ownership in that company, the entities would not be related parties based solely on the shared board member However, analyze whether any of the other aspects of the definition of a related party apply. For example, does the director have significant influence over one of the parties to the extent that it may not act in its own economic interests? Conversely, if a board member is on the board of a small private company and has a controlling interest in the private company, the private company would be a related party This is based on the director s controlling interest (and therefore their ability to control the private company to the extent that the entity may act outside of its own interests) If the board member only had significant influence over the entity, additional analysis would be required Page 7

Definitions Significant unusual transactions and executive officers Significant unusual transactions Significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature Executive officers (for assessing financial relationships and transactions) For Issuers, PCAOB definition is consistent with the definition used by the SEC (Rule 3b-7) Rule 3b-7 drives disclosure requirements, so the Company should already have these officers determined This group of officers will often will be consistent with those determined to be Section 16 officers More expansive than the five named executive officers For brokers and dealers, the term "executive officer" is defined in Schedule A of Form BD Page 8

New required communications with the audit committee EY s inquiries of the audit committee will include: What the committee s understanding is of relationships and transactions with related parties that are significant to the company Whether the audit committee has concerns regarding relationships or transactions with related parties, and if so, the substance of those concerns Whether the company has entered into any significant unusual transactions EY s communications to the audit committee will include: Our evaluation of the company s identification of, accounting for, and disclosure of its relationships and transactions with related parties Other significant matters arising from the audit Page 9

Business Combinations Page 10 1 January 2014 Presentation title

Business Combinations (ASC 805) ASC 805 provides guidance on accounting and reporting for transactions under the acquisition method A business combination occurs when an entity obtains control of a business by acquiring its net assets, or some or all of its equity interests ASC 805 definition of a business: inputs and processes applied to those inputs that have the ability to create outputs where an output is defined as a result of an input that provides or has the ability to provide a return in the form of dividends, lower costs, or other economic benefits to investors or other owners, members or participants If the assets acquired are not a business, the reporting entity shall account for the transactions or other event as an asset acquisition Page 11

Defining a Business under ASC 805 Under current guidance a business is considered to have a set of inputs, processes, and outputs outputs are not required to be present at time of acquisition to be considered a business but must be produced subsequent to the acquisition There is not a minimum number of inputs and processes required to be defined as a business Market participants are capable of acquiring the set and integrating it with their own inputs and processes to continue producing outputs For example: the acquisition of a machine could be expected to lower costs (attribute of an output) when combined with the acquirers processes this input could be defined as a business acquisition under current guidance rather than an asset acquisition Page 12

FASB Proposal to Clarify Definition of a Business The FASB s proposed amendment would require that to be considered a business a set must contain at a minimum an input and a substantive process that together contribute to the ability to create outputs This proposed amendment would provide more consistency in application of guidance, reduce the costs and inefficiencies of analyzing transactions, and make the definition of a business more operable The amendment would be applied prospectively to any transaction that would occur on or subsequent to the effective date no additional disclosures would be required at transition Page 13

Acquisition Method Four requirements of the acquisition method: Whether a particular transaction or event is a business combination The identification of the acquirer and the acquisition date The period of time that an acquirer has to adjust provision amounts, referred to as the measurement period The determination of what is part of a business combination transaction Four steps of the acquisition method: Identifying the acquirer Determining the acquisition date Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree Recognizing and measuring goodwill or a gain from a bargain purchase Page 14

The Measurement Period The measurement period is defined as the period of time the acquirer has to adjust provisional amounts recognized at the acquisition date to their subsequently determined acquisition-date fair values of all considerations transferred as part of the acquisition Under current guidance, if the initial accounting for a business combination is incomplete by the end of the reporting period, the acquirer reports in its financial statements provision amounts for the considerations transferred that accounting is incomplete for Any new information discovered that existed as of the acquisition date and affected the measurement of amounts initially recognized, the acquirer must retrospectively adjust the provisional amount and revise comparative information for prior periods presented in financial statements Page 15

FASB Proposed Simplification The proposed amendment would require the acquirer recognize adjustments to provisional amounts during the reporting period in which the adjustment amount is determined The acquirer would record the effect on earnings of changes in depreciation, amortization or other income effects, as a result of the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date The amendment would be applied prospectively to adjustments to provision amounts that are identified after the effective date of the proposed amendment Entities would be required to disclose the nature of, and reason for, the change in accounting principle in the first annual period of adoption and in interim periods within the first annual period Page 16

Spin Transactions Page 17 1 January 2014 Presentation title

Spin Transactions A spinoff is defined as a transfer of assets that constitute a business by an entity (the spinnor) into a new legal spun-off entity (the spinnee) the transfer of assets is followed by a distribution of the shares of the spinnee to the spinnor s shareholders, without the surrender by the shareholders of any shares of the spinnor In certain circumstances the spinoff of a subsidiary is such that the legal form of the transaction does not match its substance The spinnee can be the continuing entity and the transaction is commonly referred to as a reverse spinoff This interpretation is an important factor in determining the accounting spinnor when the legal spinee is treated as the accounting spinnor a reverse spinoff has occurred Page 18

Traditional Spinoff vs. Reverse Spinoff Factors to consider: The size of the legal spinnor and the legal spinee In reverse spinoffs the accounting spinnor (legal spinnee) is larger than the legal spinnor when comparing assets, revenues and earnings The fair value of the legal spinnor and the legal spinnee In revers spinoffs the fair value of the accounting spinnor (legal spinnee) is greater than that of the accounting spinnee (legal spinnor) Senior management In traditional spinoffs the accounting spinnor (legal spinnor) retains the senior management of the combined entity (i.e., CEO, COO, CFO, etc.) Length of time to be held In a traditional spinoff the accounting spinnor (legal spinnor) is held for a longer period than the accounting spinnee (legal spinnee) If the indicators above are mixed, significant judgement will be needed in determining a traditional or reverse spinoff Page 19

Accounting for Spinoffs Determine if a spinoff is pro-rata A spinoff is pro-rata if each owner receives ownership interest in the spinnee in proportion to its existing ownership interest in the spinnor A spinoff is not pro-rata if the shareholders have the option to elect to participate in the spinoff we believe that even if all shareholders elect to join, the spinoff would not be pro-rata as at the inception the spinner could not be certain all shareholders would participate A spinoff would be considered pro-rata if the shareholder does not have the option to choose whether to receive shares in the spinnee, or to receive a cash equivalent fair value A spinoff would not be considered pro-rata if the shareholders receive shares of the spinnee while other shareholders receive other nonmonetary assets Page 20

Accounting for Spinoffs (cont.) A pro-rata spinoff of a consolidated subsidiary or equity method investee, is recognized at its carrying amount within equity no gain or loss is recognized We believe that a non pro-rata spinoff of a business should be measured at fair value if the spinoff is measured at fair value, ASC 845 requires the spinnor to recognize a gain or loss for the difference between the fair value and book value of the spinnee It is important to understand all elements of the transaction to determine if separate accounting principles are required Page 21

Change in Reporting Entity It is generally not appropriate for a spinnor to characterize a spinoff as a change in reporting entity and revise its financial statements The SEC staff has allowed under limited circumstances a change in reporting entity when involving the initial registration of an entity under the Exchange Act or Securities act The spinoff must occur prior to the effectiveness of the registration statement The spinnor and spinnee must: Be in dissimilar business Have been managed and financed historically as if they were autonomous Have no more than incidental common facilities and costs Will be operated and financed autonomously after the spinoff Will not have material financial commitments, guarantees or contingent liabilities to each other after the spinoff Page 22

SEC Reporting Considerations In reverse spinoffs, certain accounting spinnor disclosure requirements may not be fulfilled by the legal spinnors financial statements the SEC staff highly encourage registrants to consult with the staff to determine whether carve-out financial statements may be required for the legal spinee Pro forma financial information giving effect to a spinoff may be required under SEC registration statements and proxy statements filed by the spinnor this is not a disclosure requirement in the Form 10-K or in the annual shareholders report When preparing pro forma financial statements, spinnors should adjust for non-recurring items directly attributable to the spinoff this includes and agreements entered in connection with the spinoff Page 23

Comment Letter Trends Page 24

Frequent areas of SEC staff comment Ranking Comment letter topic 2016 2015 MD&A 1 1 Non-GAAP financial measures 2 4 Fair value measurements 3 2 Revenue recognition 4 3 Segment reporting 5 7 Income taxes 6 6 Intangible assets and goodwill 7 8 Acquisitions and business combinations 8 9 Signatures, exhibits and agreements 9 5 Commitments and contingencies 10 13 Source: Audit Analytics Comment letter taxonomy for SEC staff comment letters issued to registrants related to Forms 10-K from 1 July 2014 to 30 June 2016 Page 25

The SEC s filing review process Corporation Finance review responsibility Review required by Sarbanes-Oxley every three years Many registrants are reviewed more frequently IPOs, Form 8-Ks (Items 4.01 and 4.02), merger proxies Percentage of SEC issuers reviewed 60% 50% 40% 30% 20% 10% 0% 44% 48% 48% 52% 52% 51% FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Source: SEC 2014 Annual Performance Report Page 26

The SEC s filing review process Companies receiving comment letters by size Public float: Number of SEC comment letters by year 7,610 > $700 million, 56% < $75 million, 24% $75 to $700 million, 20% 5,916 5,352 4,683 3,688 2,782 2011 2012 2013 2014 2015 2016* Forms 10-K and 10-Q Source: Audit Analytics SEC UPLOAD comment letters issued related to Forms 10-K and 10-Q for the 12-month periods ended 30 June 2011 through 2016 * The SEC staff publicly releases comment letters no earlier than 20 business days after completion of its review. Therefore, some letters for the 12-month period ended 30 June 2016 may not yet be publicly available. Page 27

The SEC s filing review process Number of comment letters issued to complete review % of SEC staff reviews 80% 70% 60% 50% 40% 30% 20% 10% 0% 75% 19% 5% 1% 1 letter 2 letters 3 letters 4 letters or more Number of comment letter rounds Source: Audit Analytics Comment letters related to Forms 10-K posted to EDGAR during the 12-month period ended 30 June 2016 Page 28

PCAOB Inspection Activity Page 29

Key Areas of Inspection Focus- 2016 Areas where deficiencies have been identified in previous inspection cycles- review controls, responding to risks of material misstatements, accounting estimates Implementation of AS 18 Income tax accounting and disclosure Entity s ability to continue as a going concern Auditor s evaluation of segment identification and disclosures Audit areas affected by economic trends- effect of the strengthening US dollar, search for higher-yielding investment returns in a low interest rate environment Page 30 1 January 2014 Presentation title

2016 Inspections by the Numbers 210 firms planned to be reviewed by PCAOB inspectors This includes 10 U.S. firms with more than 100 issuer audit clients in 2015, and 60 non-u.s. firms in approximately 25 jurisdictions 6 Global Network Firms to be inspected annually 145 Global Network Firms to be inspected at least triennially Global Network Firms audited approximately 99% of the total market capitalization of issuers audited by firms registered with the PCAOB during the 2013-15 inspection cycles Page 31 1 January 2014 Presentation title