AGA FASB Update August 14, 2017 Nick Cappiello, Supervising Project Manager The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations
FASB Staff Disclaimer Expressions of individual views by members of the FASB and staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberations. 2
FASB Happenings Marsha Hunt - Public Company Preparer - Eligible for reappointment June 30, 2022 Harold Monk - Private Company Auditor - Eligible for reappointment June 30, 2022 3
Topic Summary Simplification Initiative - Simplifying the Balance Sheet Classification of Debt Nonemployee Share-Based Payments Invitation to comment - Distinguishing Liabilities from Equity - Financial Performance Reporting - Intangible Assets (including R&D) Conceptual Framework Disclosure Framework Cloud Computing Collaborative Arrangements Asset Acquisitions and Business Combinations IASB Rate-Regulated Activities 4
Simplification Initiative
Simplification Initiative Objective Reduce cost and complexity while maintaining or improving the usefulness of the information Initiative includes narrowly targeted improvements and simplifications to financial reporting Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent) 6
Simplifying the Balance Sheet Classification of Debt (Current vs. Noncurrent) Simplification Initiative Project
Simplifying the Balance Sheet Classification of Debt (Current vs. Noncurrent on a Classified Balance Sheet) Current Guidance Proposed Change What? Narrow scope rules on specific types of debt arrangements Overriding principle for the classification of debt that can apply to all arrangements* How? Mix of guidance using contractual maturity and management judgments Increase focus on contractual maturity and borrower s rights less focus on judgment or intent When? Some circumstances considered as of the financial statement issuance date, while others use the reporting date Criteria considered as of the reporting date 8
Simplifying the Balance Sheet Classification of Debt Proposed Classification principle Debt would be classified as a noncurrent liability if either of two criteria are met as of the balance sheet date Key Effects: - Waivers of Debt Covenant Violations - Refinancing - Subjective Acceleration Clauses 9
Classification of Debt Waivers of Debt Covenant Violations Under current guidance, debt is classified as noncurrent unless: A violation that gives the lender the ability to call the debt has occurred at the balance sheet date or would have occurred absent a loan modification It is probable that the borrower will not be able to cure the default at measurement dates within the next 12 months Under proposed guidance, debt will be classified as noncurrent if: The liability is contractually due to be settled or can be deferred for at least a year after the balance sheet date A waiver of the violation has been obtained before financial statement issuance The waiver does not result in an extinguishment or troubled debt restructuring It is not probable that any other covenants will be violated within 12 months of the balance sheet date 10
Classification of Debt Refinancing Current Guidance Short-term debt at the balance sheet date that is refinanced to long-term debt (or replaced by an equity issuance) after the balance sheet date but before the financial statements are issued should be classified as a noncurrent liability Proposed Guidance An entity cannot consider a subsequent refinancing when determining the classification of debt because those transactions are nonrecognized subsequent events (Type 2) 11
Classification of Debt Waivers of Subjective Acceleration Clauses (SACs) Current Guidance Classification depends on the likelihood of acceleration of the due date based on the triggering clauses Proposed Guidance These clauses would affect classification of debt only when the acceleration clause is triggered (no probability assessment) 12
Nonemployee Share-Based Payment Accounting
Nonemployee Share-Based Payments Why did the FASB make changes to the accounting for nonemployee share-based payments? Today s accounting example awards with performance conditions What would change as a result of the amendments in the proposed Update? What would not change as a result of the amendments in the proposed Update? 14
Nonemployee Share-Based Payments Why Did the FASB Make Changes? To improve the accounting for nonemployee share-based payments - Reduces cost and complexity when applying the guidance - Improves financial reporting The accounting for nonemployee share-based payments was identified as an area for simplification through: - Ongoing dialogue with the PCC about making improvements to accounting for share-based payments - Ideas submitted to the FASB as part of the Board s Simplification Initiative - The Post-Implementation Review Report on FASB Statement No. 123 (revised 2004), Share-Based Payment. 15
Nonemployee Share-Based Payments Today s Accounting Example: Awards with Performance Conditions Additional differences for performance conditions results in additional complexities: - Nonemployee If performance condition is not satisfied, value award at lowest aggregate fair value (probability not relevant) but there is diversity in practice - Employee If performance condition is not satisfied, so long as it is probable of being achieved recognize compensation cost 16
Nonemployee Share-Based Payments What Would Change? Proposed Amendments Nonemployee (Topic 718) Measurement objective FV (equity instruments issued) Measurement Date Grant date Measurement Input Contractual Term Award with Performance Conditions Entity considers probability of satisfying performance conditions Calculated Value Practical Expedient Nonpublic entities can substitute calculated values for expected volatilities Intrinsic Value Nonpublic entities can make policy election to measure liability awards at FV or intrinsic value 17
Nonemployee Share-Based Payments What Would Not Change? Proposal would NOT change practice for share-based payments to employees Proposal would NOT change attribution of compensation cost for share-based payments to nonemployees 18
Invitation to Comment (ITC) about Future Agenda
Invitation to Comment: Objective Help the FASB set its future agenda by identifying population of key projects to consider Determine priority of key projects Identify perceived financial reporting issue(s) for each topic Obtain feedback on potential alternatives or path forward 20
Invitation to Comment: Topics The following topics were included in the ITC: - Intangible assets (including research and development) - Pensions and other postretirement benefit plans - Distinguishing liabilities from equity - Reporting performance and cash flows (including income statement, segment reporting, other comprehensive income, and statement of cash flows) 21
Invitation to Comment 45 Comment Letters Respondent Type - 24 Practitioners - 13 Preparers - 5 Users - 3 Others User 11% Other 7% Preparer 29% Practitioner 53% 22
Invitation to Comment: Relative Rank of All Topics by Respondent Type Project Overall Preparer Practitioner User Other Liabilities and Equity Performance Reporting 1 1 1 3 2 2 3 2 1 4 Intangibles 3 2 3 2 3 Pensions and OPEB 4 4 4 4 1 23
Invitation to Comment: Constituent Views Distinguishing Liabilities and Equity Frequently Cited: - Guidance is overly complex and internally inconsistent - Guidance is path dependent and form based - Leads to frequent restatements and diversity in practice Performance Reporting Frequently Cited: - Rise of Non-GAAP information - Investors want/need more information and more comparability - Development of new technology changes the way information is consumed 24
Invitation to Comment: Constituent Views Intangible Assets Frequently Cited: - Inconsistent treatment of acquired vs. internally generated intangibles - Market capitalization of some companies is driven by items not reflected on the balance sheet 25
Conceptual Framework
Conceptual Framework Criticisms of the Accounting Principles Board (APB) that led to the formation of the FASB (1970 AAA Special Committee): APB s use of fire fighting, not a conceptual approach Many APB Opinions were compromises rather than coherent positions The lack of research of a satisfactory quality to support decisions 27
Conceptual Framework 28 General agreement on the need for accounting concepts APB Statement No. 4 (issued in 1970) - Posited that there are basic objectives and principles of accounting, including definitions of assets and liabilities AICPA s Accounting Objectives Study Group (1973) 28
Conceptual Framework 29 Source of the Early Debates Initial FASB Agenda - Research and Development Costs (SFAS-2) - Accounting for Future Losses (SFAS-5) Board had great difficulty because of a lack of a workable definition of an asset or a liability. (1) Also included: reporting by diversified companies, criteria for determining materiality, accounting for leases, broad qualitative standards for financial reporting, foreign currency translation 29
Conceptual Framework 30 Source of the Early Debates (continued) Need for proper matching to avoid distorting periodic earnings (net income) Argument used to justify not recognizing an item if recognition would distort earnings (profit and loss) Argument also used to justify recognition of an item to avoid distortion of earnings Assets, liabilities, or what-you-may-call-its 30
Conceptual Framework: First Concepts Statements CON1 (1978) CON2 (1980) CON3 (1980) CON4 (1980) CON5 (1984) Objectives of Financial Reporting by Business Enterprises Qualitative Characteristics of Accounting Information Elements of Financial Statements of Business Enterprises Objectives of Financial Reporting by Nonbusiness Organizations Recognition and Measurement in Financial Statements of Business Enterprises 31
Conceptual Framework Objective of Financial Reporting...to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit. (Con 8, Chapter 1 OB2) 32
Conceptual Framework: Purpose 33 Help solve financial accounting or reporting problems by: - Providing a set of common premises as a basis for discussion - Providing precise terminology - Helping to ask the right questions - Limiting the areas of judgment and discretion - Imposing intellectual discipline on what traditionally has been a subjective and ad hoc reasoning process 33
Conceptual Framework Project Original IASB FASB convergence project* started in 2004 was divided into 8 phases: - Objective and qualitative characteristics (completed in 2010 as CON 8, Chapters 1 and 3) - Elements, recognition, and derecognition - Measurement - Reporting entity (Exposure Draft 2010, never completed) - Presentation and Disclosure Framework purpose and status - Applicability to the not-for-profit sector (IASB) - Entire framework *This is no longer a joint project; the IASB released a Conceptual Framework Exposure Draft in May 2015 34
Conceptual Framework Project Never the intention to start with a clean sheet of paper and develop a new conceptual framework - Try to address deficiencies - Try to clarify and improve understanding - Make amendments that experience in application has suggested are necessary Began as a joint project that was intended to build on the existing IASB and FASB frameworks. However, joint project ended in 2010. 35
Conceptual Framework Project FASB research project identified the following areas to potentially address: - Elements of Financial Statements - Recognition - Derecognition - Measurement - Reporting Entity - Presentation - Disclosure 36
Conceptual Framework Project Current Issues - Elements Initial Deliberations - Measurement Initial Deliberations - Presentation Exposure Draft Redeliberations - Disclosure: Board s Decision Process Exposure Draft Redeliberations 37
Conceptual Framework: Elements 38 The staff will address elements of financial statements (currently defined in CON 6) concurrently with measurement and presentation concepts Definitions of certain elements in focus: - Assets and liabilities - Comprehensive income elements Revenues and expenses Gains and losses 38
Conceptual Framework: Measurement Intended to address measurement attributes and measurement issues - Measurement of assets is controversial. - Measurement of liabilities seems to pose even more issues, especially for nonfinancial liabilities. We seldom really measure anything; we make calculations. - Best estimate - Present value of expected cash flows 39 39
Conceptual Framework: Measurement The following general categories of methods should be discussed in the chapter: - Prices in transactions in which the entity participated - Current prices observed or estimated by the entity - Discounted estimates of future cash flows other than estimates of market prices - Other adjustments to carrying amount: accruals, systematic allocations, and allowances for impairment. 40
Conceptual Framework: Measurement 41 Three categories of initial measurement are: - Entry price - Exit price - Estimated future cash flows. Overall objective in identifying costs to be included in the initial carrying amount of an asset at entry price should be to capture the costs incurred to bring the asset to the location and condition necessary for it to be capable of operation. 41
Conceptual Framework: Measurement Next Steps - Subsequent measurement of assets - Subsequent measurement of liabilities - Adjustments to entry price 42
Conceptual Framework: Presentation Primary additions in Exposure Draft: - Seven considerations to determine how to aggregate individual, recognized items (assets, revenues, expenses, etc.) into line items on the financial statements - Other Comprehensive Income 43
Conceptual Framework: Presentation Line Items, Subtotals, and Totals - Simplifying, condensing, and aggregating - Homogeneous groupings - Focus on line items 44
Conceptual Framework: Presentation Comment Letter Highlights - Respondents were generally supportive of the considerations for grouping line items - Less support for the conclusion that there is no conceptual basis for Other Comprehensive Income - Other Notable Comments Interaction of ED with other parts of Conceptual Framework Relationships among financial statements 45
Disclosure Framework
Disclosure Framework Improving the effectiveness of notes requires both: Consistent considerations by the Board in each standard-setting activity Appropriate exercise of discretion by reporting entities when assessing disclosure requirements Phase I: Board s Decision Process Phase II: Entity s Decision Process 47
Disclosure Framework: Board s Decision Process Issues Addressed in ED Comment period ended July 14, 2014 Purpose of notes General limitations Relevance Costs Some information oriented toward the future Information that could be appropriate for inclusion in notes Considerations for interim reporting 48 Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Disclosure Framework: Entity s Decision Process Changes to the Conceptual Framework Legal Concept U.S. Supreme Court Definition 49
Disclosure Framework: Entity s Decision Process Provide to the extent material Changes to the Codification Eliminate language that limits discretion Add guidance on applying materiality 50
Disclosure Framework: Fair Value Measurement Remove Add Retain Clarify Forward-looking information Process and policies Gains and losses Level 3 rollforward Sensitivity information 51
Disclosure Framework: Defined Benefit Plans Disclosures added for all entities General characteristics Interest crediting rate of cash plans NAV disclosures Reasons for significant gains/losses Private cos.: Change in healthcare cost trend rates 52
Disclosure Framework: Income Taxes Disaggregation of: Income taxes paid Pretax income (loss) and income tax expense (benefit) Expanded carryforward disclosures Valuation Allowance Rate Reconciliation 53
Disclosure Framework: Income Taxes Undistributed Foreign Earnings Unrecognized Tax Benefits Change in Tax Law Government Assistance 54
Disclosure Framework: Inventory Disaggregation by component and measurement basis Effect of last-in, first-out (LIFO) liquidations on income Changes other than purchase, manufacture or sale Replacement cost for LIFO inventory Qualitative description of costs capitalized Retail Inventory Method (RIM) Segment reporting for public business entities 55
Disclosure Framework: Inventory Remove Add Retain Substantial and unusual threshold Redundant requirements Duplicative language Relationship between recognized measurement method and standard costs Impairment losses facts and circumstances Firm purchase commitment losses income statement presentation Significant estimates 56
Government Assistance Disclosures
Government Assistance Disclosures Scope A legally enforceable agreement in which a company receives from the government: Cash Nonmonetary assets or Benefits that reduce or eliminate an entity s expenditures 58
Government Assistance Disclosures Annual Disclosures - Nature of the Assistance - Related Accounting Policies - Effect on Financial Statement Amounts - Significant Terms and Conditions of the Agreement 59
Government Assistance Disclosures Effective Date Transition: Apply to all agreements: A B Existing at the effective date Entered into after the effective date Existing Agreements New agreements Retrospective Application Permitted 60
Implementation Costs Incurred in a Cloud Computing Arrangement that is Considered a Service Contract (EITF Issue)
Cloud Computing: Background ASU 2015-05, Intangibles Goodwill and Other Internal- Use Software (Subtopic 350-40): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement Recent staff outreach and research on implementation costs incurred in a Cloud Computing Arrangement (CCA) 62
Cloud Computing: Issue and Status Issue GAAP does not have guidance about accounting for implementation costs for a cloud computing arrangement that is accounted for as a service contract ASU 2015-05 provides guidance about which arrangements should be accounted for as a service contract (such as hosting or software-as-a-service) or as the purchase of a software license GAAP has longstanding guidance about accounting for implementation costs to develop or obtain software Status Recently added to EITF agenda and discussed at July meeting 63
Cloud Computing: Technical Considerations Should the term implementation costs be defined? Is it possible to keep the scope limited to cloud computing arrangements or will stakeholders suggest the scope be expanded to other service contracts? What is the most cost-effective solution? Should guidance be provided on amortizing the asset for those costs that are capitalized? 64
Collaborative Arrangements
Collaborative Arrangements Objective: Clarify when transactions between participants in a collaborative arrangement are within the scope of the revenue guidance 66
Asset Acquisitions and Business Combinations Phase 3 of the Definition of a Business Project
Phase 3 of the Definition of a Business Project Phases 1 and 2 completed in 2017 Objective of Phase 3: Improve the accounting for asset acquisitions and business combinations by aligning the accounting for the recognition and derecognition of assets and businesses 68
IASB Rate-Regulated Activities
IASB Rate-Regulated Activities The regulatory agreement 70 In defined rate regulation, the rate regulator intervenes to affect both the amount and the timing of the price P billed to customers. Regulatory agreement perspective Rate-regulated entity Customer contracts perspective Focus of the model P x Q Dealt with by IFRS 15 Rate regulator Entity s customers Influences the terms of the contracts between the entity and its customers 70
IASB Rate-Regulated Activities Developing an accounting model for consultation Focus on rate-adjustment mechanism Creates temporary differences when the regulated rate in one period includes amounts relating to required activities carried out by the entity in a different period Right to increase a future regulated rate Obligation to reduce a future regulated rate Analysing whether the right or obligation meets the revised Conceptual Framework definitions of an asset or liability Supplementary model would not amend existing IFRS Standards Board discussions throughout 2017 Output: Discussion Paper or Exposure Draft in 2018 71
IASB Rate-Regulated Activities IFRS 14 Regulatory Deferral Accounts DP Reporting the Financial Effects of Rate Regulation Conceptual Framework for Financial reporting Rateregulated Activities: 2 nd DP or ED January 2014* September 2014 Estimated late 2017 Estimated H1 2018 *Effective January 2016, only applicable for first-time adopters of IFRS Standards 72
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