Playing by the Rules: Accounting & Auditing Update 2016

Playing by the Rules: Accounting & Auditing Update 2016 Rachel Wallen, CPA, CFE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) ACCOUNTING STANDARD UPDATES (ASU)S 1

PREVIOUS RULES EFFECTIVE NOW Effective for All Entity Types ASU 2014 12, Compensation Stock Compensation (Topic 718): Accounting for Share Based Payments when the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period Performance Target should be treated as a Performance Condition and accounted for under pre existing guidance in FASB ASC Topic 718 ASU 2014 14, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310 40): Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure Examples: Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) Loans Mortgage Loan should be De Recognized and an Other Receivable (from the U.S. Government) should be recorded at the Amount of Principal and Interest Expected to Recover for the Real Property Conveyed to the U.S. Government ASU 2014 16, Derivatives and Hedging (Topic 815): Determining Whether a Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity 2

Effective for All Entity Types ASU 2015 01, Income Statement Extraordinary and Unusual Items (Subtopic 225 20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ASU 2015 03, Interest Imputation of Interest (Subtopic 835 30): Simplifying the Presentation of Debt Issuance Costs Required to be Presented on the Balance Sheet as a Direct Deduction in the Carrying Amount of the Related Debt ASU 2015 05, Intangibles Goodwill and Other Internal Use Software (Subtopic 350 40): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement If Includes a Software License, should be Accounted for as an Acquisition of a License If Does Not Include a Software License, should be Accounted for as a Service Contract ASU 2015 06, Earnings per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions Should all be Allocated to the General Partner Applicable to Private Companies ONLY ASU 2014 18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination All Identifiable Intangible Assets (Other than those that are Capable of being Sold or Licensed Independently) should be Included with Goodwill Must also Elect Accounting Alternative in ASU 2014 02, Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill and Amortize Goodwill 3

Effective NOW for Public Companies ONLY ASU 2014 13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity Provides for a Measurement Alternative that can be Elected based on which is more Observable ASU 2015 02, Consolidation (Topic 810): Amendments to the Consolidation Analysis Modifies the evaluation of whether Limited Partnerships are VIEs or Voting Interest Entities Modifies the evaluation of VIEs for Fee Arrangements and Related Party Relationships Eliminates the Presumption that a General Partner should Consolidate a Limited Partnership Effective NOW for Public Companies ONLY ASU 2015 04, Compensation Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets Allows Employers to Use the Month End Closest to their Fiscal Year End ( Alternative Measurement Date ) for Plan Measurement Required to be Applied Consistently from Year to Year Must Adjust the Measurement for Contributions and Significant Events between Alternative Measurement Date and Employer s Fiscal Year End ASU 2015 07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) Removes Requirement to Include in Fair Value Hierarchy WHEN Practical Expedient Chosen Removes Disclosure Requirements for all Applicable Investments and Requires it ONLY for Those in which the NAV Practical Expedient was Chosen 4

NEW RULES EFFECTIVE NOW ASU 2015 12 Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient PART I (Fully Benefit Responsive Investment Contracts) Current GAAP: Contracts measured at contract value on the face of the plan financial statements, though reconciled to fair value (also on the face of the financials) when the values differ Updated GAAP: Contracts to only be measured, presented, and disclosed at contract value 5

ASU 2015 12 (CONTINUED) PART II (Plan Investment Disclosure) Current GAAP: Must disclose (1) individual investments that represent 5% or more of net assets available for benefits, and (2) the net appreciation / depreciation for investments by general type Allows classes of assets to be disclosed by either (1) general type or (2) nature, characteristics, and risk, based on which section of the guidance is used ASU 2015 12 (CONTINUED) PART II (Plan Investment Disclosure) (Continued) Updated GAAP: Current requirements eliminated for both participant directed investments and non participant directed investments The net appreciation / depreciation for investments will be required to be disclosed in the aggregate, but disaggregation and disclosure by general type is no longer required Disclosure of classes of assets will be required to be by general type If an investment is measured at net asset value (NAV) per share, or its equivalent, and that investment is included in a fund that files, as a direct filing entity, a U.S. Department of Labor Form 5500, Annual Return / Report of Employee Benefit Plan, disclosure of that investment s strategy is no longer required 6

ASU 2015 12 (CONTINUED) PART III (Measurement Date Practical Expedient) Updated GAAP: Provides a practical expedient for Employee Benefit Plans to measure investments and investmentrelated accounts when the plan s fiscal year does not coincide with a month end. This expedient allows those investments to be measured on a month end date that is nearest to the plan s fiscal year end date, hereinafter referred to as the alternative measurement date Plans are required to apply it consistently each year Plans must adjust for plan transactions between the alternative measurement date and the plan s fiscal year end, and disclose the amounts of those transactions The use this practical expedient must be disclosed, as well as the alternative measurement date utilized ASU 2015 12 (CONTINUED) Effective Dates: ALL 3 PARTS: Years beginning after December 15, 2015 (2016 Calendar Year, 2017 Fiscal Year) Parts I and II should be applied retrospectively for all financial statements presented. Part III should be applied prospectively. Earlier application permitted 7

ASU 2015 13 Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets Current GAAP: Requires that a derivative contract be recognized at fair value unless it qualifies for the Normal Purchases and Normal Sales scope exception. There is not currently specific guidance as related to electricity sales Updated GAAP: Specifies that the use of locational marginal pricing by an independent system operator does not constitute net settlement of a contract for the purchase or sale of electricity on a forward basis that necessitates transmission through, or delivery to a location within, a nodal energy market, even in scenarios in which legal title to the associated electricity is conveyed to the independent system operator during transmission. Therefore, this does not, in and of itself, make the contract fail the physical delivery criteria, and as long as all other criteria for the normal purchases and normal sales scope exception are met, the contract can be considered to be applicable for this scope exception Effective Date: Effective upon Issuance and should be applied prospectively ASU 2015 14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date Delayed Effective Date of ASU 2014 09 by one year to be: Public Entities / Certain NFP / Certain EBPs: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2018 (2019 Calendar Year, 2020 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2019 Early application is permitted only as of annual reporting years beginning after December 15, 2016 8

ASU 2015 16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments Current GAAP: Adjustments made to provisional amounts recognized in a business combination are required to be reported retrospectively with a corresponding adjustment to goodwill Updated GAAP: Must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined Should record the effects on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date Required to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods, if the adjustment to the provisional amounts had been recognized as of the acquisition date ASU 2015 16 (CONTINUED) Effective Dates: Public Entities: Years beginning after December 15, 2015 (2016 Calendar Year, 2017 Fiscal Year), including interim periods within those years All Other Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), with interim periods within those years beginning after December 15, 2017 Earlier application permitted to be applied prospectively 9

ASU 2016 03 Intangibles Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance Current GAAP: If an entity elects to adopt an accounting alternative after its effective date, it must assess whether it is preferable Updated GAAP: Makes the guidance in the following EFFECTIVE IMMEDIATELY by removing their effective dates ASU 2014 02, Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill ASU 2014 03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive Variable, Pay Fixed Interest Rate Swaps Simplified Hedge Accounting Approach ASU 2014 07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements ASU 2014 18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination ASU 2016 03 (CONTINUED) Updated GAAP (Continued): Extends transition guidance on those above indefinitely Includes transition provisions that private companies are able to forgo a preferability assessment the 1 st time they elect the accounting alternatives Any subsequent change to an accounting alternative election requires justification that the change is preferable Effective Date: Immediately 10

FUTURE CONSIDERATIONS ASU 2015 11, Inventory (Topic 330): Simplifying the Measurement of Inventory Measure at the lower of cost or net realizable value Net Realizable Value = Selling Price Costs of Completion Cost to Dispose Cost to Transport Only applicable for First In, First Out (FIFO) or Average Cost Methods of Costing Inventory Effective Dates: Public Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year) All Other Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), with interim periods within those years beginning after December 15, 2017 Earlier application permitted at beginning of annual or interim period prospectively ASU 2015 17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes Deferred tax liabilities and assets must be classified as noncurrent in a classified financial statement Effective Dates: Public Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2018 11

ASU 2016 01, Financial Instruments Overall (Subtopic 825 10): Recognition and Measurement of Financial Assets and Financial Liabilities Requires equity investments (except those accounted for under the equity or consolidation methods) to be measured at fair value with changes in fair value through net income Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When assessment indicates impairment, the investment must be measured at fair value Eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the face of the financial statement Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure Requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value Effective Dates: Public Entities: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2018 (2019 Calendar Year, 2020 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2019 Early adoption permitted for NON Public entities for years beginning after December 15, 2017 ASU 2016 02, Leases (Topic 842) Lessee should recognize the assets (a right of use) and liabilities (to make lease payments) that arise from leases. All (BOTH Finance and Operating) leases create an asset and a liability Lessee and Lessor should include the following in measurement of asset and liability only if the lessee is reasonable certain that the option(s) will be exercised: Optional Lease Periods Purchase Options Effect on Cash Flows: Finance Lease New leases as a non cash item, with any principal payments thereon as a financing activity, and the interest an operating activity Operating Lease New leases as a non cash item, with all cash payments, principal or interest, within operating activities For terms of 12 months or less, lessee is permitted to make an accounting policy election by class of underlying asset NOT to recognize lease assets and liabilities In lieu of assets and liabilities, lease expense should be recognized generally on a straight line basis over the lease term Effective Dates: Public Entities / Certain NFPs / Certain EBPs: Years beginning after December 15, 2018 (2019 Calendar Year, 2020 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2019 (2020 Calendar Year, 2021 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2020 Early Application Permitted 12

ASU 2016 04, Liabilities Extinguishments of Liabilities (Subtopic 405 20): Recognition of Breakage for Certain Prepaid Stored Value Products Specifies that such a liability is a financial liability, not nonfinancial. Requires that breakage from such liabilities be accounted for under the provisions of FASB ASC Topic 606 (Revenue from Contracts with Customers) What does Topic 606 of FASC ASC say? Expected breakage should be recognized as revenue when the likelihood of the customer exercising its remaining rights becomes remote Effective Dates: Public Entities / Certain NFPs / Certain EBPs: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2018 (2019 Calendar Year, 2020 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2019 Earlier application permitted ASU 2016 05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Clarifies that a change in the counterparty in the situation above DOES NOT, in and of itself, require de designation of that hedging relationship provided that all other hedging criteria continue to be met Effective Dates: Public Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2018 Early Application Permitted ASU 2016 06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments Required to assess embedded call/put options solely in accordance with the 4 step decision sequence 1. The payoff is adjusted based on changes in an index, 2. The payoff is indexed to an underlying factor other than interest rates or credit risk, 3. The debt involves a substantial premium or discount, and 4. The call/put option is contingently exercisable Effective Dates: Public Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2018 Should be applied on a modified retrospective basis to existing debt instruments at the beginning of the year of adoption Early adoption permitted 13

ASU 2016 07, Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting Eliminates current retroactively application requirements. Requires that you add the cost of acquiring the additional interest to the pre existing investment balance and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method If an Available for Sale equity security that becomes qualified for the equity method, the entity must recognize through earnings the unrealized holding gain/loss previously accumulated in Accumulated Other Comprehensive Income at the date of qualification Effective Date: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), including interim periods within those years Earlier application permitted to be applied prospectively ASU 2016 08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Effective Date: Same as ASU 2014 09, which has been delayed one year with ASU 2015 14 (Below) ASU 2016 09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting Includes Guidance on: Accounting for Income Taxes Classification of Excess Tax Benefits on Statement of Cash Flows Forfeitures Minimum Statutory Tax Withholding Requirements Classification of Employee Taxes Paid on the Statement of Cash Flows when the Employer withholds Shares for Tax Withholding Purposes Practical Expedient Expected Term Intrinsic Value Effective Dates: Public Entities: Years beginning after December 15, 2016 (2017 Calendar Year, 2018 Fiscal Year), including interim periods within those annual periods All Other Entities: Years beginning after December 15, 2017 (2018 Calendar Year, 2019 Fiscal Year), with interim periods within those annual periods beginning after December 15, 2018 Earlier application permitted at beginning of annual or interim period An entity that elects early adoption must adopt all of the amendments in the same period 14

ASU 2016 10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Performance Obligations Not required to assess whether promised goods or services are performance obligations if immaterial to the contract with the customer Entity permitted, as an accounting policy election, to account for S&H activities that occur after the customer took control of the good, as an activity to fulfill the promise to transfer the good rather than an additional promised service Licensing A promise to grant a customer a license to intellectual property that has significant standalone functionality does not including supporting or maintaining that property during the license period. Rather, it includes the state of the intellectual property at that moment in time A promise to grant a customer a license to symbolic intellectual property includes supporting or maintaining that property during the license period Effective Date: Same as ASU 2014 09, which has been delayed one year with ASU 2015 14 (Below) OTHER FASB ACCOUNTING STANDARD UPDATES ASU 2015 08, Business Combinations (Topic 805): Pushdown Accounting Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update) ASU 2015 09, Financial Services Insurance (Topic 944): Disclosures about Short Duration Contracts Effective Now for Public Companies ONLY Applicable for Insurance entities, not policyholders ASU 2015 10, Technical Corrections and Improvements 15

OTHER FASB ACCOUNTING STANDARD UPDATES (CONTINUED) ASU 2015 15, Interest Imputation of Interest (Subtopic 835 30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update) ASU 2016 11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standard Updates 2014 09 and 2014 16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) ASU 2016 12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients FASB s PROJECTS IN PROCESS Currently in Final Standard stage Accounting for Financial Instruments: Impairment Estimated Completion: 2 nd Quarter 2016 Revenue Recognition Narrow Scope Improvements and Practical Expedient Estimated Completion: 2 nd Quarter 2016 Financial Statements of NFP Entities (Phase I) Estimated Completion: 3 rd Quarter 2016 Currently in Revised Exposure Draft stage Insurance: Targeted Improvements to the Accounting for Long Duration Contracts Clarifying when a Not for Profit Entity that is a General Partner should Consolidate a For Profit Limited Partnership (or Similar Entity) Consolidation: Interests Held Through Related Parties that are Under Common Control Technical Corrections and Improvements Technical Corrections and Improvements Update 2014 09, Revenue from Contracts with Customers 16

FASB s PROJECTS IN PROCESS (CONTINUED) Currently in Exposure Draft Re Deliberations Disclosure Framework: Board s Decision Process Accounting for Income Taxes: Intra Entity Asset Transfers Clarifying the Definition of a Business (Phase I) Disclosure Framework: Disclosure Review Fair Value Measurement Disclosure Framework: Entity s Decision Process Disclosures by Business Entities about Government Assistance Financial Statements of NFP Entities (Phase 2) Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments FASB s PROJECTS IN PROCESS (CONTINUED) Currently in Exposure Draft Comment Period Disclosure Framework: Disclosure Review Defined Benefit Plans Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Currently in Exposure Draft stage Accounting for Financial Instruments: Hedging Accounting for Goodwill Impairment Liabilities and Equity Targeted Improvements Restricted Cash Simplifying the Balance Sheet Classification of Debt 17

FASB s PROJECTS IN PROCESS (CONTINUED) Currently in Initial Deliberations Conceptual Framework: Measurement Carrying Values of Assets, Liabilities and Equity Conceptual Framework: Presentation of Assets, Liabilities, Equity, Income and Expense Accounting for Identifiable Intangible Assets in a Business Combination for Public Business Entities and Not for Profit Entities Accounting for Interest Income Associated with the Purchase of Callable Debt Securities Clarifying the Scope of Subtopic 610 20 and Accounting for Partial Sales of Nonfinancial Assets (Formally Clarifying the Definition of a Business (Phase2)) Improving the Equity Method of Accounting Nonemployee Share Based Payment Accounting Improvements PCC Issue No. 2015 02, Applying Variable Interest Entity Guidance to Entities Under Common Control Subsequent Accounting for Goodwill for Public Business Entities and Not for Profit Entities Disclosure Framework: Disclosure Review Income Taxes Disclosure Framework: Disclosure Review Inventory Disclosure Framework: Disclosures Interim Reporting AICPA S STATEMENTS ON AUDITING STANDARDS (SAS)S 18

SAS No. 130 An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements Objective: To transition the content of Attestation Standard Section 501, An Examination of an Entity s Internal Control over Financial Reporting that is Integrated with an Audit of its Financial Statements, from the attestation standards into generally accepted auditing standards (GAAS) Required to examine and report directly on the effectiveness of internal control over financial reporting. There is no longer an option to examine and report on management s assertion about the effectiveness of internal control over financial reporting Change in terminology to clarify that the risk factors the auditor is required to evaluate in the audit of financial statements is the same for this integrated audit Allows the auditor to use the work of internal auditors and others in obtaining evidence about the effectiveness of internal control over financial reporting Effective Date: Integrated audits for periods ending on or after June 15, 2016 (2016 or 2017 Fiscal Year, 2016 Calendar Year) SAS No. 131 Amendment to Statement on Auditing Standards No. 122, Section 700, Forming an Opinion and Reporting on Financial Statements Clarifies the format of the Auditors Report that should be issued when the audit conducts an audit in accordance with Public Company Accounting Oversight Board (PCAOB) standards, but the audit is NOT under PCAOB s jurisdiction When is an audit under the jurisdiction of the PCAOB? If, to perform the audit, the auditor is required to register, and be subject to inspection by, the PCAOB Why would an entity choose to be audited under PCAOB standards when not in their jurisdiction? Entity s preference Required by an agency, or regulator Required by a contractual agreement 19

SAS No. 131 (CONTINUED) Under these circumstances (entity chooses or is required externally, but not by PCAOB), the AICPA Code of Professional Conduct requires the auditor to ALSO conduct the audit in accordance with generally accepted auditing standards (GAAS) Requires the auditor to use the form of report required by the standards of the PCAOB, amended to state that the audit was also conducted in accordance with GAAS Effective Date: Audits of financial statements for periods ending on or after June 15, 2016 (2016 or 2017 Fiscal Year, 2016 Calendar Year) Early application permitted CONTACT INFORMATION Rachel C. Wallen, CPA,CFE Blackburn, Childers & Steagall, PLC Johnson City, Tennessee 423.282.4511 Rachel_C@BCScpa.com 20