2014 aicpa cfo conference - accounting trends and update

© 2014 McGladrey LLP. All Rights Reserved.© 2014 McGladrey LLP. All Rights Reserved.

Accounting trends and update for CFOs

© 2014 McGladrey LLP. All Rights Reserved.

Rick Day [email protected]

Rick is the National Director of Accounting for McGladrey LLP. He has overall responsibility for the Firm’s accounting guidance, training on all accounting topics, and leadership of McGladrey’s Accounting Standards Group.

Rick joined McGladrey in 1981 and became a partner in 1990. He recently served as Director of McGladrey’s Western Regional Professional Practice Office. In this capacity, he had overall responsibility for all audit and accounting quality assurance elements and procedures for this region. As a designated SEC compliance reviewer, Rick has been responsible for assisting many of our publicly held clients with compliance matters and mergers and acquisitions.


Brian Marshall [email protected]

Brian is a partner in the National Accounting Standards Group of

McGladrey LLP. His responsibilities include consulting with clients and

engagement teams on complex accounting issues, facilitating training

events for McGladrey professionals and external participants and writing

interpretive guidance for McGladrey publications. He also is responsible

for monitoring standard setting by the Financial Accounting Standards

Board (FASB) and the FASB’s Emerging Issues Task Force (EITF) and

Private Company Council (PCC), writing firm comment letters on

proposed standards to the FASB and has been a member of several

EITF working groups. Brian’s primary areas of expertise include general

revenue recognition, software revenue recognition, asset impairments,

and business combinations accounting.

Prior to joining McGladrey, Brian worked as a senior program manager in

the accounting practices group of a Fortune 50 company and also was

employed by a Big Four accounting firm for over eight years in various

U.S. and European offices, with his last position being a senior manager

in the assurance services group.


Agenda

Private Company Council activities

FASB/IASB joint projects status

Other FASB developments


Private Company Council (PCC) activities


Private Company Council

Established in 2012 to improve the process for setting accounting standards for private companies

Two primary responsibilities- Utilizing the private company decision-making

framework, determine exceptions or modifications to existing GAAP

- Act as the primary advisory body to FASB on appropriate treatment for private companies for items under active consideration on FASB technical agenda


ASU 2013-12 – Definition of a Public Business Entity

Provides a single definition of a public business entity (PBE)- Applicable to new guidance only

PBEs may not elect private company alternatives

A PBE is a business entity meeting any of the following

conditions: - Required by the SEC to file or furnish financial statements, or

does file or furnish financial statements, with the SEC

(including other entities whose financial statements or financial

information are included in a filing)

- Required by the Securities Exchange Act of 1934 to file or

furnish financial statements with a regulatory agency other than

the SEC


ASU 2013-12 – Definition of a Public Business Entity

A PBE is a business entity meeting any of the following conditions (continued): - Required to file or furnish financial statements with a foreign or

domestic regulatory agency to sell or issue securities that are not subject to contractual restrictions on transfer

- Has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an 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 financial statements (including footnotes) and make them publicly available on a periodic basis

Refer to our summaries, “FASB defines public business entity” and “Q&A on the new public business entity definition”


ASU 2014-03 – Interest rate swaps alternative

Provides private companies with an accounting alternative for certain interest rate swaps

Scopes out benefit plans, not-for-profit entities and financial institutions (banks, savings and loan associations, savings banks, credit unions, finance companies, and insurance entities)

Can elect for existing and new qualifying swaps

Allows up until the date on which the first annual financial statements are available to be issued to meet documentation requirements



Allows simplified hedge accounting for certain swaps used to convert variable rate debt to fixed rate- Assumes 100% effectiveness- Permits recording swap at settlement value

Criteria to apply:- Swap and debt have same rate index and reset period- Swap is “plain-vanilla” with no floor or cap on the variable

interest rate unless borrowing has a comparable floor /cap- Repricing and settlement dates match or differ by no more

than a few days- Swap’s fair value at inception ~ zero- Notional amount of the swap <= debt principal- All debt interest payments during swap term are hedged



Extends the exemption from certain fair value disclosures to private companies for which such swaps are their only derivatives

Private companies can elect to apply the alternatives early to any financial statements that have not yet been made available for issuance

Refer to our white paper, “Simplified accounting for private companies: Certain interest rate swaps”

Effective date and transition

Effective retrospectively to certain types of swaps, using either a modified retrospective approach or a full retrospective approach, in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.


ASU 2014-07 – Variable interest entities alternative

Provides private companies with an accounting alternative for certain common control leasing arrangements:- A private company may elect not to apply the variable

interest entity (VIE) model in assessing whether to consolidate a lessor entity if:1. The lessor entity and the private company (reporting

entity) are under common control; 2. The private company has a leasing arrangement with

the lessor entity; 3. Substantially all of the activities between the two

entities relate to the leasing activity; and



- A private company may elect not to apply the variable interest entity (VIE) model in assessing whether to consolidate a lessor entity if (continued):4. If the private company explicitly guarantees or

provides collateral for any obligation of the lessor entity related to the leased asset, then the principal amount of the obligation at inception of the guarantee or collateral arrangement is not more than the value of the leased asset

Additional disclosures required



Other guidance, including ASC 460, Guarantees, ASC 840, Leases, and non-VIE guidance in ASC 810, may be applicable


Refer to our white paper, “Simplified accounting for private companies: Common control leases”


Effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.


ASU 2014-02 – Goodwill alternative

Provides private companies with a simplified approach to the subsequent accounting for goodwill

Amortize goodwill over a period not to exceed 10 years

Goodwill impairment testing- Test only when there is a triggering event rather than

annually- Test at either the entity level or reporting unit level- One-step test

• Compare the fair value of the entity (or reporting unit) to its carrying amount to measure impairment instead of performing current two-step goodwill impairment test




If alternative is elected, application is generally required to begin as of the first day of the fiscal year of adoption- As a result, a full year of goodwill amortization will be

required in the year of adoption


Effective prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.



Refer to our white paper, “Simplified accounting for private companies: Goodwill”

FASB is currently discussing the accounting for goodwill for public business entities and not-for-profit entities

FASB and PCC are also continuing to discuss a related issue, PCC Issue No 13-01A, on Accounting for identifiable intangible assets in a business combination


Considerations for electing private company alternatives

Companies should carefully consider the new public business entity definition in ASU 2013-12 - More companies may be considered PBEs

Private companies anticipating going public or eventually being acquired by a PBE should consider the difficulty involved in transitioning to public company accounting- Currently no specific transition guidance provided

- Retrospective application would be required


Considerations for electing private company alternatives

Private companies should discuss with their lenders, and other financial statement users, whether it is acceptable to utilize these alternatives

Refer to our summary, “FASB defines public business entity”


FASB/IASB joint projects status


FASB/IASB joint projects timeline

2014

Project Status 1H 2H

Revenue recognition Final ASU expected F

Leases ED issued in May 2013 RD RD

Financial instruments

• Classification and measurement

ED issued in Feb. 2013 RD RD, F

• Impairment ED issued in Dec. 2012 RD RD, F

• Hedging DP issued in Feb. 2011

Insurance ED issued in June 2013 RD RD

F = Final RD = Redeliberations


Revenue recognition

Why should you be interested?

• Revenue recognition policies of almost all entities will be affected

• Virtually all industry-specific guidance will be superseded

What’s the status? • Final ASU expected in Q2 2014

What’s happened recently?

• Drafting final standard

When would it be effective?

• 2017 for calendar year-end public companies- Disclosure of effect of adoption

required once final ASU is issued• 2018 for calendar year-end private

companies


Leases


• Accounting by lessees and lessors could change drastically

What’s the status?• Second ED issued in May 2013• Redeliberations commenced in

November 2013

What’s happened recently?

• Joint meetings in March and April• Boards did not agree on lessee model• Differences also on lessor model• Joint decisions on a number of items

including discount rate, modifications and in-substance fixed payments

What’s next? • Continued redeliberations


Financial instruments – Classification and measurement


• As proposed in 2013 ED, more financial assets would be measured at fair value

What’s the status? • Redeliberations are well underway

Have any significant decisions been reached in redeliberations?

• Existing separate guidance for loans and debt securities will be retained with modification as well as for hybrid financial assets and liabilities

What’s next?• Consider in addition to most equity

investments, what other financial assets should be measured at FV-NI


Financial instruments – Impairment


• Could significantly accelerate recognition of expected credit losses

What’s the status? • Redeliberations are in process

Have any significant decisions been reached in redeliberations?

• Reaffirmed upfront recognition of lifetime expected credit losses

• However for FV-OCI assets, expected credit losses would only be recognized if FV is less than amortized cost and would be limited to the difference between FV and amortized cost

What’s next?• Decide extent of impairment recognition

when asset is identified for sale or MLTN requirement to sell exists


Other FASB developments


ASU 2014-08 – Discontinued operations

Changes criteria for reporting discontinued operations, including removal of requirements to evaluate whether cash flows have been eliminated from ongoing operations and whether there will be any significant continuing involvement

Disposal of a component of an entity (or group of components) is a discontinued operation if considered a strategic shift resulting in a major effect on an entity’s operations and financial results when any of the following occurs to the component (or group of components):- Meets the criteria to be classified as held for sale

- Disposed of by sale

- Disposed of other than by sale


ASU 2014-08 – Discontinued operations

A business or nonprofit activity that meets the held-for-sale criteria on the date of acquisition is also considered a discontinued operation

Entities can adopt the guidance early for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements

Additional disclosures required

Effective date and transitionEffective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014.


Other final standards issued since last year’s CFO conference

ASU 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure RequirementsASU 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists


Other final standards issued since last year’s CFO conference

ASU 2014-01, Investments–Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects

ASU 2014-04, Receivables–Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

ASU 2014-05, Service Concession Arrangements (Topic 853)

ASU 2014-06, Technical Corrections and Improvements Related to Glossary Terms


Projects expected to be finalized in the first half of 2014

Development Stage Entities

Repurchase Agreements and Similar Transactions

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period


Questions and closing remarks


McGladrey thought leadership

Financial Reporting Resource Centerwww.McGladrey.com/FRRC

http://www.mcgladrey.com/FRRC



Recent McGladrey accounting white papers and summaries:- FASB defines public business entity- Q&A on the new public business entity definition- Simplified accounting for private companies: Certain

interest rate swaps- Simplified accounting for private companies: Common

control leases- Simplified accounting for private companies: Goodwill- FASB discusses the accounting for financial instruments- Recent developments in the FASB’s financial instruments

project



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Contact Information

Rick Day* [email protected]

( 563.888.4017

Brian Marshall* [email protected]

203.312.9329

mailto:[email protected]

mailto:[email protected]


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