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FASB/IASB convergence projects update
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Brian Marshall Biography [email protected]
Brian is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Brian’s responsibilities include consulting with clients and engagement teams on complex accounting issues associated with these subject matters, facilitating training events for McGladrey professionals and external participants and writing interpretive guidance for McGladrey publications. He is also responsible for monitoring standard setting by the FASB and the FASB’s EITF, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups. Prior to joining McGladrey in 2007, Brian worked as a Senior Program Manager in IBM’s Accounting Practices Group, serving as a resource on complex technical accounting matters for the Company’s global accounting community. Brian also was employed by Deloitte for over eight years in various offices in the U.S. and Europe, with his last position being a Senior Manager in the Assurance Services Group.
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Faye Miller Biography [email protected]
Faye is a director in the National Professional Standards Group of McGladrey LLP. She serves as a firm-wide technical resource for complex accounting issues involving financial instruments, such as derivatives, hedging, alternative investments, and complex equity and debt financing arrangements. As a firm-wide technical resource, Faye conducts training, follows recent developments, assists engagement teams and advises clients on these matters. Faye is also a frequent speaker and author on topics involving financial instruments including proposed or recently issued related accounting guidance. Faye has over 20 years of experience in banking and public accounting, is a past member of the AICPA Accounting Standards Executive Committee, received a Bachelor of Science degree from Pennsylvania State University and Master’s degree from Villanova University.
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McGladrey overview
5th largest accounting firm in the U.S. Provide assurance, tax and consulting services Nearly 6,500 professionals and associates in
more than 70 offices nationwide US member of RSM International (RSMI) – 6th
largest network of independent accounting, tax and consulting firms worldwide - More than 700 offices in 86 countries with over
32,000 people
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Agenda
Status of convergence projects Revenue Recognition Financial Instruments Leases
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Status of convergence projects
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Status of convergence projects
Joint standards on Fair Value Measurement & Comprehensive Income issued in 2011 Priority projects in progress
- Revenue Recognition - Financial Instruments - Leases Timing of completion of projects extended many
times Effective dates expected to allow sufficient time
for changes
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Timetable for active convergence projects
Joint Project 2Q 2012 2H 2012 2013 & Beyond Revenue Recognition R F Financial Instruments: Liquidity and Interest Rate Risk
Disclosures ED
Impairment ED Classification and Measurement ED Hedging ED, F
Leases ED F Insurance Contracts ED F Consolidation: Policy and Procedures F Investment Companies ED, F
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Revenue Recognition
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Revenue Recognition
Exposure draft issued in June 2010 Revised exposure draft issued in Nov. 2011 Final standard expected in early 2013
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Revenue Recognition
Scope Core principle Steps in applying the model
Identify the contract with a customer
(Step 1)
Identify the separate
performance obligations in the contract
(Step 2)
Determine the
transaction price
(Step 3)
Allocate the transaction price to the
separate performance obligations
(Step 4)
Recognize revenue when (or as) each performance obligation is
satisfied (Step 5)
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1. Identify the contract with a customer
Enforceable agreement between parties Can be written, oral or implied Combination
- Required for contracts entered into at or near the same time if certain criteria are met
Modifications - Treat separately if separate performance obligation
is added and the consideration is consistent with its standalone selling price
- Otherwise combine with remaining goods or services
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2. Identify separate performance obligations
Promise in a contract to transfer a good or service Account for separately if distinct because either of the
following criteria are met: - Good or service is regularly sold separately by the entity; or - Customer can benefit from good or service on its own or
together with other readily available resources
However, bundle of promised goods or services is accounted for as one performance obligation if both of the following criteria are met: - Highly interrelated and require significant integration service;
and - Significantly modified or customized to fulfill contract
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3. Determine the transaction price
Amount of consideration to which an entity expects to be entitled from a customer - Variable consideration (e.g.; contingencies, rebates,
royalties), estimate based on probability-weighted or most-likely amount
- Time value of money - Noncash consideration - Consideration payable to a customer Collectibility not considered in transaction price
- Record uncollectible amounts adjacent to revenue
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4. Allocate the transaction price
Generally based on relative standalone selling prices of separate performance obligations Standalone selling price
- Observable price when sold separately (best) - Otherwise, estimate based on:
• Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?
Subsequent changes in the transaction price are allocated on a relative standalone selling price basis unless certain criteria are met
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5. Recognize revenue
Recognize revenue as performance obligations are satisfied based on transfer of control Determine if satisfied (and revenue recognized)
over time, based on whether entity’s performance: - Creates or enhances an asset the customer controls; or - Does not create an asset with an alternative use and one
of following criteria is met: • Customer receives a benefit as entity performs • Another entity would not need to reperform work completed to
date • Vendor has right to payment for performance to date
Select method of progress toward completion (output or input)
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5. Recognize revenue
If prior criteria not met, then satisfied at a point in time Recognize revenue when customer obtains control
based on following indicators: - Entity has right to payment - Entity has transferred physical possession - Customer has legal title and risks and rewards of ownership - Customer has accepted goods or services
Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: - Experience with similar performance obligations - Whether that experience is predictive of outcome
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Financial Instruments
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Summary of key actions to date
IASB issued IFRS 9 in 2009 on financial assets. Requirements for financial liabilities were added in October 2010
IASB issued ED on impairment November 2009 FASB issued comprehensive ED May 2010 IASB issued ED on hedge accounting December 2010
- FASB issues discussion paper soliciting feedback on above February 2011
Boards jointly issued Supplementary Document on impairment proposing common solution January 2011
Significant redeliberations have been ongoing
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Current status of FASB project
Slides that follow are for the FASB project, based on tentative decisions made during redeliberations through April 18, 2012 Significant changes to:
- Classification/measurement from May 2010 ED - Impairment from ED and Supplementary Document No redeliberations on hedging thus ED
represents current status
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Classification and measurement, current status Classify at initial recognition based on characteristics of
instrument and business strategy - No subsequent reclassifications
Equity securities – measure at fair value through net income - Practicability exception for nonpublic entities for nonmarketable
equity securities • Measure at amortized cost less impairment • Adjust carrying value for observable price changes
- Won’t apply to equity method investments unless held for sale at initial qualification or certain redeemable securities
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Classification and measurement, current status
Debt securities - Measure at fair value through net income if any of
following are true: • Contractual terms are not limited to P&I payments • Held for sale at acquisition • Actively managed/monitored on fair value basis
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Classification and measurement, current status
Otherwise, measure debt securities - At fair value through OCI if business strategy is to
invest cash to maximize total returns or manage interest rate/liquidity risk, by collecting contractual cash flows or selling the instrument
- At amortized cost if: • Business model of holding to collect contractual cash
flows Intend to provide guidance on the nature of sales
activity that would prohibit amortized cost
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Classification and measurement, current status
Financial liabilities – measure at amortized cost if: - Contractual terms are limited to P&I payments, and - Business strategy is not to transact at fair value, and - Instrument is not a short sale Otherwise, measure at fair value through net
income
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Classification and measurement, current status
Hybrid financial instruments - Assets not solely P&I are ineligible for bifurcation.
(Carried at fair value through net income in entirety) - Retain existing bifurcation requirements for financial
liabilities Fair value option for hybrids to avoid bifurcation
of embedded derivative and for groups of financial assets/liabilities (including derivatives) if entity measures net exposure and provides info on that basis to management
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Impairment, current status
Nonmarketable equity securities subject to practicability exception - Assess qualitative factors (impairment indicators) - If more likely than not fair value is less than carrying
amount, recognize loss for difference between carrying amount and fair value
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Impairment of debt instruments, current status
3 bucket approach – recognize 12 months expected losses for bucket 1 vs. lifetime losses for buckets 2 and 3 Assets start in bucket 1 unless purchased with
explicit expectation of credit loss Move to bucket 2 (if evaluated collectively) and
bucket 3 (if evaluated individually) if more than insignificant deterioration in credit quality occurs such that its reasonably possible contractual cash flows may not be fully recovered
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Impairment of debt instruments, current status
Can move back to bucket 1 (other than purchased assets with credit deterioration) Trade receivables:
- If significant financing component – can elect simplified approach with initial and subsequent classification in buckets 2 or 3
- Otherwise, apply expected loss model with practical expedient of using provision matrix
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Hedge accounting, current status
FASB solicited feedback on IASB ED but has not begun redeliberations Significant changes proposed in May 2010
FASB ED (in part): - Effectiveness threshold - reasonably effective rather
than highly effective - Qualitative rather than quantitative analysis - No more critical terms match/short cut methods - Eliminate ability to elect to discontinue hedge
accounting
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New disclosures, current status
Qualitative discussion of risks and how managed Quantitative tabular liquidity disclosures
- Of cash obligations by nonfinancial entities - Expected maturities of classes of assets/liabilities by
financial institutions
Quantitative tabular disclosures of interest rate risk by financial institutions - Classes of assets/liabilities by repricing date - Issuance of time deposits last 4 quarters - Effect of hypothetical interest rate shifts
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Leases
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Leases
Exposure draft issued in August 2010 Nearly all leases to be recorded on balance sheet Lessees:
- Asset representing “right of use” - Liability for obligation to make payments Lessors:
- Performance obligation approach vs. derecognition approach
- Asset for receivable under either approach - Liability under performance obligation approach - Derecognize a portion of asset under derecognition
approach
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Leases
Responses to ED - Concerns about “front loading” of expenses for
lessees (compared to straight line) - Lease term - Variable lease payments - Lessor accounting
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Leases redeliberations
Retain position that leases within scope should be reflected on balance sheet Concerned about “front loading” of expense
recognition under ED approach Discussed 3 approaches in late February
- ED approach (accelerated recognition) - Interest-based amortization approach - Underlying asset approach Divergence in preferences Boards plan to redeliberate
- Currently performing outreach with constituents
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Leases, other lessee issues
Scope Short-term leases Lease term Agreements with lease and non-lease
components
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McGladrey thought leadership
FASB and IASB Issue Revised Exposure Draft on Revenue Recognition Revised Revenue Recognition Exposure Draft
– What Does It Mean For You? http://mcgladrey.com/Assurance/Accounting-
Resources
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QUESTIONS?