Year-End Update From the SEC, PCAOB and FASB January 19, 2016
Agenda for Today Topics to Discuss: Update from AICPA Conference on Current SEC & PCAOB Developments ASU FASB Updates for 2015 and 2014 Leases Revenue Recognition Private Company Council Reporting Update
Conference Themes SEC very pleased with PCAOB Restatements down Desire for more credible reporting Segments MD&A Disclosures ICFR 2014 874 2015 541
SEC Initiatives Segments taking deep dive Discreet financial information (CODM) May be adequate with only gross profit Even if costs below shared/allocated (point is not to conclude not a segment if unable to produce full set of financial information)
SEC Segments (continued) Reassess periodically; consider: Organization structure changes Significant acquisitions/dispositions Change on CODM Reconcile w/ executive pay Congruent w/ budgeting Consider aggregation when all are true: Operating segments have similar economic characteristics Operating segments are similar with respect to qualitative criteria
SEC Segments (continued) ICFR Over Process
SEC ICFR Segments Income taxes Use of specialist; ownership by Company Governance Audit committees gate-keeper for investors and should not be management advocates Material Weakness should consider: Likelihood (what COULD occur) Magnitude Nature and severity of weakness
SEC Auditor Independence Watch scope creep Non-audit services (w/out pre-approval) Preparing financial statements Preparing tax provisions Computer system installations Work for RP s Affiliates Board Members
SEC Disclosures Common deficiencies Transparency surrounding tax planning strategies Transparency surrounding permanently reinvested funds Valuation assumptions & methodologies Tabularize narrative information w/ significant numerical data Restatements Debt versus equity treatment Statement cash flow classifications and presentations Income tax disclosures
SEC MD&A Make sure story is consistent Financial statements MD&A Internal story press releases, etc. Fresh look each year versus filling in blanks Use of metrics and KPIs Non-GAAP measures Very good reasons why important and useful to reader
SEC MD&A (continued) MD&A is forward looking (while F/S are back) OK to reference to F/S from MD&A, but never refer to MD&A from F/S Strong recommendation to use trends to tell story (don t simply use year-over-year) Tell WHY; not just what If estimates change, be transparent on why change occurred Litmus test: potential investors awakens and reads complete story understood?
SEC Enforcement 500+ actions in 2015 23% Financial reporting and auditing violations a focus Actively pursuing audit firms for: Violating independence Lack of adequate audit evidence Inadequate documentation of audit findings Inadequate support of judgmental and subjective issues Inadequate testing of valuation assumptions
SEC Enforcement (continued) ICFR lacking Renewed emphasis of earnings management cases Accounting issues, most frequently: Revenue recognition Complex financial instruments Valuation issues and assumptions Inadequate or misleading disclosures
SEC Miscellaneous Pursuing IFRS disclosure without reconciliation
PCAOB Developments PCAOB Focus Areas for 2016 ICFR Auditors often only considering errors found Need to assess control effectiveness on Potential errors Assessing and responding to Risks of Material Misstatement (RMM) Accounting estimates Segments ICFR over process CODM identification Income taxes ICFR over process Disclosure around indefinite reinvestment
PCAOB Developments PCAOB Focus Areas for 2016 Related party transactions Auditors need to improve identification RP s often part of frauds Auditing work of specialists Auditors must audit inputs Going concern M & A Cybersecurity
PCAOB Developments Miscellaneous Adoption of Form AP Auditor to file within 35 days of rendering auditor s report Names audit partner Identifies other firms that participated in the audit (5% audit hours) Effective 2017 Pursuing Critical Audit Matters Proposed as part of auditor s report
Learning Objectives ASU FASB Updates for 2015 and 2014 Leases Revenue Recognition Private Company Council Reporting Update
Debt Issuance Costs ASU 2015-03 Relates to debt issuance costs or costs incurred to obtain debt Not defined as an asset Classify as a reduction of the related debt liability Does change the income statement treatment Line of Credit arrangements (ASU 2015-15) allowed to continue to present as an asset.
Debt Issuance Costs ASU 2015-03 Public Business Entities: fiscal years beginning after 12/15/2015, and interim periods within those years Private Entities: fiscal years beginning after 12/15/2015, Early adoption is permitted Retrospective application required
Customer Accounting for Cloud Computing Fees ASU 2015-05 A hosting arrangement is defined as when an end user of the software does not take possession of the software. Instead, the software application resides on the vendor s or a third-party s hardware, and the customer accesses and uses the software on an asneeded basis over the Internet or via a dedicated line.
Customer Accounting for Cloud Computing Fees ASU 2015-05 Under the new standard, fees paid by a customer will be within the scope of the internal-use software guidance if both of the following criteria are met: The customer has the contractual right to take possession of the software at any time during the CCA period without significant penalty. It is feasible for the customer to run the software on its own hardware (or to contract with another party to host the software).
Customer Accounting for Cloud Computing Fees ASU 2015-05 If you meet both the criteria then you record as fixed asset Software and amortize to depreciation/ amortization expense. If you do not meet the criteria then record as a Prepaid Asset and amortize to operating expense.
Customer Accounting for Cloud Computing Fees ASU 2015-05 The new standard is effective for public companies for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For private companies, it is effective for annual periods beginning after December 15, 2015.
Balance Sheet Classification of Deferred Taxes ASU 2015-17 Current GAAP requires the deferred taxes to be presented as a net current asset or liability and net noncurrent asset or liability. New guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. Cannot offset DTA/DTLs for different tax paying components or jurisdictions
Balance Sheet Classification of Deferred Taxes ASU 2015-17 The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2016. For Private entities, the amendments are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted
Going Concern ASU 2014-15 What does going concern mean? In preparing financial statements under GAAP, there is a presumption that an entity will continue as a going concern There are instances in which there is substantial doubt about an entity ability to continue as a going concern Why: Currently, there is no guidance in GAAP regarding management s responsibility to evaluate whether there is substantial doubt.
Going Concern ASU 2014-15 Auditors are required to assess whether an entity can continue as a going concern for 12 months after the balance sheet date. New rules require: Management should evaluate whether its probable an entity can meet its future obligations for 12 months after the financial statements are issued. If conditions exist, disclosure is required concerning management s plans to alleviate the substantial doubt or conditions. Require an evaluation every reporting period including interim periods
Going Concern ASU 2014-15 Going concern disclosures: Conditions that raised substantial doubt issue Managements evaluation of the significance of the conditions and events Management s plans that alleviated substantial doubt
Going Concern ASU 2014-15 Public business entities: Fiscal years, and interim periods within those years, beginning after 12/15/2015 Private entities: Fiscal years beginning after 12/15/2016
Discontinued Operations ASU 2014-08 What is Discontinued Operations? A component of an entity that has been disposed of or is held for sale Why: Too many small disposals qualify as discontinued operations Disclosures can be onerous and time consuming
Discontinued Operations ASU 2014-08 Main Provisions: Under the new guidance, a discontinued operation is defined as a component or group that: Has been disposed of or is classified as held for sale and Represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results. Strategic shift could include: (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity.
Discontinued Operations ASU 2014-08 When: Prospectively for annual periods in fiscal years beginning after 12/15/14. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.
FASB ASU No. 2015-01 Extraordinary Items Companies could present an item net of tax on the income statement that was extraordinary which is both: Infrequent Unusual in nature Eliminates the concept and presentation guidance of extraordinary items Effective date Annual periods beginning after December 15, 2015 Early adoption permitted
FASB ASU No. 2014-17: Business Combinations (Topic 805): Pushdown Accounting Applies to the standalone separate financial statements of an acquired entity, both public and nonpublic, that is a business or nonprofit activity, upon the occurrence of an event in which an acquirer obtains control of the acquired entity. Objective is to provide guidance on when and how an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. This subject is not currently addressed in the codification
FASB ASU No. 2014-17: Business Combinations (Topic 805): Pushdown Accounting Allows an acquired entity the option to apply pushdown accounting Effective date November 18, 2014 Applicable to future acquisitions or most recent acquisitions
Lease Exposure Draft Why are they issuing this new standard? Existing lease accounting does not meet users needs accounting depends on classification contractual rights and obligations (assets and liabilities) are off balance sheet many users adjust financial statements Structuring opportunities current lease classification often based on bright lines significant difference in accounting on either side of operating/finance lease line
Lease Exposure Draft Who does this apply to? All leases. (with limited exceptions of leases of intangibles) Includes capital and operating leases
Lease Exposure Draft What are the major provisions? All leases (except certain short term leases) would be presented on the balance sheet DR. Right of Use Asset CR. Liability Short-term leases would be defined as a lease with a potential maximum period of 12 months or less
Lease Exposure Draft Two types of leases Type A (Capital or Finance Lease) - Accelerated leases Lessee consumes more than insignificant portion of leased asset Type B (Operating Lease) - Straight-Line lease Lessee does not consume more than insignificant portion of leased asset
Lease Exposure Draft Type A Capital/Finance Lease Accelerated leases Lessee consumes more than insignificant portion of leased asset Lease term is major part of economic life of asset PV of lease payments is substantially all of FV of asset Examples: Airplane with a 10 year lease; Vehicle lease, equipment loans, etc.
Lease Exposure Draft Type B Operating Lease Straight-Line lease Lessee does not consume more than insignificant portion of leased asset Lease term is insignificant relative to economic life of asset PV of lease payments is insignificant relative to FV of asset Example: Land or building
Lease Exposure Draft Accounting for each type of lease: Both leases will have a ROU Asset and Liability at inception Calculate the PV of all future cash payments Finance Lease- Accelerated method: Recognize amortization expense and interest expense (financing transaction) Operating - Straight-line method Recognize lease expense
Lease Exposure Draft Agreements with lease and non-lease components Separate the non-lease components and expense as incurred Elect an accounting policy to combine lease and non-lease components as a single lease component Taxes and Insurance Activities or costs that do not transfer a good or service to the lessee are not components in a lease contract
Lease Exposure Draft Present Value of Future lease payments = Fixed Payments (less lease incentives) Variable lease payments (CPI) Variable items, if applicable, and reasonable certain to exercise Termination penalties, Purchase options, Residual Value Guarantees @ Discount rate Use the rate implicit in the lease. If not determinable, can use the lessee incremental borrowing rate.
Lease Exposure Draft Lease Term = Noncancellable lease period Optional renewal periods if reasonable certain to exercise
Leases: Next Steps FASB is targeting January 2016 for final standard Estimated target of 2019 for Public Co s and 2020 for private
FASB ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) Issued May 28, 2014 Creates FASB ASC 606 Revenue from Contracts with Customers Eliminates FASB ASC 605 Revenue Recognition
Revenue From Contracts with Customers ASU 2014-09 Joint Project between FASB and IASB US GAAP Many standards (over 100) Significant Industry specific guidance IFRS Two key standards: IAS 18, Revenue and IAS 11, Construction Contracts Little industry guidance
Revenue From Contracts with Customers ASU 2014-09 Why? The new standards will be more principle based (i.e.: IFRS) Will be consistent across industries (i.e.: Construction Contractors, Software, Airlines, etc.) Will take time for interpretations and practices to evolve More judgment and estimates involved in the recognition process
Revenue From Contracts with Customers ASU 2014-09 Applies to: Contracts with customers Gain/loss recognition on sale of some nonfinancial assets (intangibles and PP&E) Certain nonmonetary exchanges Many industry specific transactions such as real estate sales
Revenue - ASU No. 2014-09 The following topics are scoped out: Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges
5-Step Recognition Process 1. Identify the contract(s) with the customer Some contracts would be combined and accounted for as one contract (change orders) 2. Identify the separate performance obligation(s) Good services and separate components 3. Determine transaction price Estimate variable consideration at expected value or most likely amount (unapproved amounts) 4. Allocate the transaction price Estimate selling prices if they are not observable Residual estimation techniques may be appropriate 5. Recognize revenue To recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, when the customer obtains control)
Revenue Recognition Observations Software, technology, media and multiple deliverable revenue generation will be impacted the most Construction contractors Completed contract method is no longer acceptable Non-refundable fees a focus Determination if a service and product are highly related (one deliverable) Manufacture an asset with an alternative use More estimation of variable consideration (i.e.: rebates, discounts, penalties, interest) Bill and Hold
PCC Responsibilities PCC Responsibilities? The Private Company Council (PCC) has two principal responsibilities: The PCC and FASB, working jointly, will review and propose rule alternatives within U.S. GAAP to address the needs of users of private company financial statements. The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB s technical agenda.
PCC Standards ASU No. 2013-012, Definition of a Public Business Entity: Required to file F/S w/ the SEC Required to file F/S w/ a foreign or domestic regulator in preparation for selling or issuing securities that are not subject to contractual restrictions on transfer Has securities that are traded, listed, or quoted on an exchange or over-the-counter market Has securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP F/S and make them publicly available on a period basis
PCC Standards Goodwill Goodwill ASU 2014-02 Cost and complexity of applying goodwill impairment testing Elect to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. Qualitative test Elect to amortize goodwill over 10 years
Accounting for Intangible Assets in a Business Combination ASU 2014-18 Why Reduces the cost and complexities in determining identifiable intangible assets in a business combination (i.e.: customer lists) Main Provisions Customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business and; Non-compete agreements
Accounting for Intangible Assets in a Business Combination ASU 2014-18 An entity that elects the accounting alternative in this Update must adopt the private company alternative to amortize goodwill as described in ASU No. 2014-02, Intangibles Goodwill and Other. However, an entity that elects the accounting alternative in ASU 2014-02 is not required to adopt the amendments in this Update.
Questions?