mcgladrey/aicpa presentation at september 2014 global manufacturing conference

#AICPAmanuf

Accounting and Financial Reporting Update for 2014An update on selected recent accounting and reporting developments over the past year

American Institute of CPAs #AICPAmanuf

Session Objectives

Gain an understanding of the recently issued revenue recognition standard and its potential impact on your organization

Understand and apply the new accounting alternatives available to private companies

Comprehend certain other recently issued or newly-proposed standards and their impacts


Agenda

Summary of the new ASU on revenue recognition

FASB’s recently issued accounting alternatives for private companies

AICPA’s financial reporting framework for small-and-medium entities

Overview of selected other, new or proposed ASUs


Brian Marshall, [email protected]

Brian is a partner in the National Accounting 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 and PCC, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups.

Brian is a certified public accountant in the states of Connecticut and New York, and is a member of the AICPA.


Michael Hoffman, [email protected]

Michael is a director with McGladrey. He is a member of McGladrey’s National Accounting Standards Group in the Firm’s Minneapolis MN office.

Michael provides McGladrey audit teams with technical accounting guidance on a variety of topics. He also provides accounting consultation advice to other CPA firms that are part of the independent McGladrey Alliance.

Michael’s formal education includes an MBA degree and a BA degree (accounting) from the University of St. Thomas (St. Paul, MN).


Fred Gill, [email protected]

Fred Gill, CPA, is a senior technical manager with the Accounting Standards Team at the American Institute of Certified Public Accountants (AICPA). During 30 years with the AICPA, he participated in the development of numerous accounting pronouncements.

Fred was a member of the United States delegation to the International Accounting Standards Committee (the predecessor of the International Accounting Standards Board) and developed the AICPA IFRS for SMEs – U.S. GAAP Comparison Wiki.


New revenue recognition standard



Background

Scope

Core principle and five-step revenue model

Other selected changes

Effective date and transition



Background


Background

Final standard issued by FASB in May 2014• ASU 2014-09, Revenue from Contracts with Customers (Topic

606)

Highlights• Substantial convergence achieved with IASB’s newly issued

IFRS 15• Single revenue recognition model for contracts with customers

that will affect almost all entities- Elimination of the vast majority of industry-specific U.S.

GAAP on revenue recognition



Scope


Scope

Applies to all contracts with customers, except the following:• Lease contracts• Guarantees other than warranties• Insurance contracts• Certain nonmonetary exchanges• Various contractual rights or obligations related to financial

instruments

Who is the customer?• The party that has contracted to obtain goods or services that

are an output of an entity’s ordinary activities• Most of the time, shouldn’t require much analysis


Scope

Sales of nonfinancial assets that are not an output of the entity’s ordinary activities• With limited exceptions, guidance in ASC 606 on recognition,

measurement and whether a contract exists applies to these sales

• Nonfinancial assets include tangible or intangible assets and in-substance nonfinancial assets

• Example:- Gain on manufacturer’s sale of equipment it used in the

manufacturing process



Core principle and five-step revenue model


Core principle

Recognize revenue to depict the transfer of promised goods or services to customers in an

amount that reflects the consideration to which the entity expects to be entitled in exchange for

those goods or services


Five-step revenue model


1. Identify the contract with a customer

Does a customer contract exist?• Defined as an agreement between two or more parties that

creates enforceable rights and obligations• Can be written, oral or implied based on the entity’s usual

business practices

Does the customer contract provide the unilateral, enforceable right to each party to terminate the contract with no compensation to the other party if the contract is wholly unperformed?• If so, no accounting consequences related to the contract


1. Identify the contract with a customer

Does the customer contract meet the following criteria to be accounted for in accordance with ASC 606’s revenue model?• Commercial substance exists• Approvals have been obtained and a

commitment to perform exists on the part of both parties

• Rights of both parties are identifiable• Payment terms are identifiable• Collection of the amount to which the

entity will be entitled is probable(i.e., likely to occur)

Reassessment of these criteria

once met is only required if there

is a significant change in

circumstances


2. Identify the performance obligations

Identifying the unit of accounting

Two key steps:• Identify all of the promises to provide/transfer goods or services

in the contract• Determine whether the promises to provide/transfer goods or

services are performance obligations- Performance obligations are accounted for separately



Identify all of the promises to provide/transfer goods or services in the contract• Consider both explicit and implicit promises• Some are obvious, others may not be so obvious• Every activity performed by the entity does not necessarily

represent the transfer of a good or service in and of itself



Determine whether the promises to provide/ transfer goods or services are performance obligations• Is the promised good or service distinct?

A promised good or service is distinct if it is both:• Capable of being distinct

- When a customer can benefit from the promised good or service on its own or by combining it with other readily available resources

• Distinct within the context of the contract- When the promised good or service is separately identifiable

from the contract’s other promised goods or services


3. Determine the transaction price

Transaction price is the amount of consideration to which an entity expects to be entitled• “Entitled” notion is what results in no consideration being given

to the customer’s credit risk• Estimate is reassessed each reporting period until all

performance obligations have been satisfied

Components of transaction price could include:• Fixed cash consideration• Variable consideration• Financing component• Consideration payable to the customer• Noncash consideration



Variable consideration• Examples: Bonuses, penalties and price concessions

- Could be explicit or implicit- Could affect whether consideration is paid at all or the

amount of consideration paid• Accounting model:

- Estimate the amount of consideration the entity expects to be entitled to

- Include the estimate in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur (the variable consideration constraint)



Variable consideration• Exception to accounting model: Sales and usage-based

royalties on licenses of intellectual property (IP) are not included in the transaction price until the later of:- Resolution of the related uncertainty (i.e., sales or usage

occurs)- Satisfaction of the related performance obligation in whole or

in part• Cannot apply this exception to other fact patterns by analogy


4. Allocate the transaction price

Overall approach is to allocate transaction price using a relative standalone selling price model

Steps in allocating the transaction price• Estimate the standalone selling prices of each performance

obligation• Determine whether any discounts or variable consideration

should be allocated to one or more, but less than all, performance obligations

• Allocate the transaction price


4. Allocate the transaction price

Standalone selling prices• The amount the entity charges (or would charge) when the

goods or services are sold on their own to a customer• Determined only at contract inception• Best evidence is the observable price charged by the entity

when they sell the goods or services separately in similar circumstances to similar customers

• If observable price does not exist, must estimate a standalone selling price- Maximize observable inputs- Consider all reasonably available and relevant information


5. Recognize revenue

Recognize transaction price allocated to a performance obligation when (or as) it is satisfied• Performance obligation is satisfied when (or as) control of the

underlying distinct good or service transfers to the customer- Control has transferred when the customer has the ability to

direct the use of the good or service and receive substantially all of the related remaining benefits



Indicators that control has transferred include:• The entity has a present right to payment for the distinct good or

service• One or more of the following have transferred/passed to the

customer- Legal title to the distinct good or service- Physical possession of the distinct good or service- Significant risks and rewards of ownership

• The customer has accepted the distinct good or service

Key question:• Is a performance obligation satisfied (and control of the

underlying good or service transferred) over time or at a point in time?



A performance obligation is considered satisfied over time if any one of these criteria are met:• The customer simultaneously receives and consumes

benefits as the entity performs• The entity’s performance creates or enhances an asset

that the customer controls as it is created or enhanced• The entity’s performance does not create an asset with an

alternative use to the entity and there is an enforceable right to payment for performance completed to date



Performance obligations satisfied over time• Identify a single method by which to measure progress toward

complete satisfaction of the performance obligation, which is:- A reasonable and reliable method

- If one cannot be identified, recognize revenue to extent of costs incurred only if costs are expected to be recovered and only until one can be identified

- Consistent with how control of the underlying goods or services are transferred to the customer

• Input method or output method may be appropriate depending on the facts and circumstances



Performance obligations satisfied at a point in time• Recognize revenue when the customer obtains control over the

underlying good or service



Other selected changes


Warranties

Customer has option to purchase separately or warranty provides an additional service• Treat as a performance obligation

Customer does not have an option to purchase separately and warranty does not provide an additional service• No revenue impact but must accrue expected costs

• Consider the following in determining whether warranty provides an additional service:

- Whether warranty is required by law

- Length of warranty period

- Nature of tasks to be performed under warranty


Balance sheet presentation

Entity recognizes a contract asset or contract liability by comparing its performance under the contract to the customer’s performance• Contract asset

- Entity’s performance > Customer’s performance• Contract liability

- Entity’s performance < Customer’s performance

Receivables are only recognized for the unconditional right to receive consideration• Recognized separate from other assets


Disclosures

Objective is help financial statement users understand the nature, amount, timing and uncertainty of the related revenue and cash flows

Annual and interim disclosures required of public entities• Less on an interim basis, but mostly quantitative in nature

More disclosures required of public business entities and certain nonprofit entities and employee benefit plans• However, disclosures for all others are still significant



Effective date and transition


Effective date

For public business entities and certain nonprofit entities and employee benefit plans:• Annual reporting periods beginning after December 15, 2016,

including related interim periods• Early application is prohibited

For all other entities:• Annual reporting periods beginning after December 15, 2017

and interim periods thereafter• Early application is allowed; however, cannot adopt earlier than

the effective date for public business entities would otherwise provide for


Transition

Choice between:• Full retrospective application of the new guidance to all periods

presented- May elect one or more of three practical expedients

• Recognition of a cumulative effect adjustment as of the date of initial application of the new guidance- Date of initial application is the first day in the period of

adoption- New guidance only applied to customer contracts not

completed at the date of initial application- Prior periods are not adjusted- Disclose the effects on each line item in the financial

statements of applying the new guidance in the period of adoption


FASB’s Recently Issued Accounting Alternatives for

Private Companies


Private company goodwill alternative

Goodwill accounting alternative for private companies provided by ASU 2014-02

What are the effects on a private company’s financial statements if it elects the alternative? • Amortize goodwill over a period not to exceed 10 years• Choose to test goodwill for impairment at either the entity

level or reporting unit (RU) level• Test goodwill for impairment only upon triggering event• Test and measure goodwill for impairment by comparing

the fair value of the entity (or RU) to its carrying amount


Private company goodwill alternative

When is ASU 2014-02 effective?• Annual periods beginning after December 15, 2014• Early adoption is permitted if financial statements have not yet

been made available for issuance• Amortization period for existing goodwill cannot exceed 10

years

What happens if a private company elects a private company alternative, but then goes public or its financial statements are included in an SEC filing?• Must retroactively undo alternative


Private company interest rate swap alternative

ASU 2014-03 provides a simplified hedge accounting approach for receive-variable, pay-fixed interest rate swaps used to convert variable rate borrowings to fixed-rate borrowings if certain conditions are met• Alternative not available to financial institutions

When is ASU 2014-03 effective?• Annual periods beginning after December 15, 2014• Early adoption is permitted if financial statements have not yet

been made available for issuance


Private company interest rate swap alternative

Benefits of electing alternative for qualified swaps and borrowings:• May elect on a swap-by-swap basis and assume no

ineffectiveness with the hedge relationship- Although, should be confident criteria will be met through the

entire term of the swap; otherwise, could be negative consequences

• May elect to measure the swap at settlement value instead of fair value

• Date for which all documentation for the election is required to be in place is the date the annual financial statements are available to be issued- Although, waiting could have negative consequences


Private company recognition of intangible assets in a business combination

Private company accounting alternative proposed by PCC in July 2013• Separate recognition of only those intangible assets that arise

from the following, regardless of whether they are transferable or separable:- Contractual rights with noncancelable contractual terms,

which would be measured at fair value except would only consider remaining noncancelable term

- Other legal rights, which would be measured at fair value • Comments on proposal were not favorable

PCC’s subsequent redeliberations have taken them in many different directions



PCC reached tentative decisions in July 2014 and will revisit issue in September 2014

Tentative decisions would create an alternative that would allow private companies to choose to:• Not separately recognize intangible assets for

noncompete agreements• Only recognize customer-related intangible assets if they

are capable of being sold or licensed independently from other assets of the business- Expectation is that not many would meet this hurdle- Examples that may meet this hurdle include mortgage

servicing rights and commodity supply contracts



PCC also tentatively decided to:• Add some qualitative disclosures about the types of intangible

assets that would not be separately recognized from goodwill under the alternative

• Provide prospective transition• Allow election of this alternative only if the goodwill alternative

has also been elected

Issues to be discussed in September 2014• When are noncompetes part of a business combination and

covered by the alternative• Scope of customer-related intangibles covered by the

alternative



Would proposed new guidance be available for companies to apply in calendar year end 2014 financial statements?• Depends on a lot of factors, including:

- Will the PCC reach final decisions in September 2014?- If they do, will they re-expose?- Will the FASB endorse any proposed or final decisions?


Private company common control lease alternative

ASU 2014-07 provides a private company accounting alternative applicable to common control leases• If elected, an entity does not have to apply the VIE

accounting model to a common control lease if certain criteria are met

When is ASU 2014-07 effective?• Annual periods beginning after December 15, 2014• Early adoption is permitted if financial statements have not

yet been made available for issuance



Caution – If a private company elects the common control accounting alternative, other applicable guidance in the Codification would still need to be applied

Capital lease analysis must still be performed• Could have similar results as if had consolidated the VIE

Guarantees – the guarantor of another company’s loan may need to record a liability for the fair value of its obligation• aka FIN 45 liability (now codified as ASC 460)• Related-party guarantors are not scoped out of FIN 45’s

measurement requirement unless under common control



Four criteria must be met for a private company lessee to elect the accounting alternative:A.Lessee and lessor are under common control

B.Lessee has a lease arrangement with the lessor

C.Substantially all activities between the two entities are related to the leasing activity between the two entities

D.If lessee explicitly guarantees (or provides collateral for) any obligation of the lessor 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


Definition of common control for purposes of private company accounting alternative

Definition of common control not provided

Use approach to evaluate whether common control exists in other contexts in U.S. GAAP• However, it was anticipated that what qualifies as common

control for purposes of the private company accounting alternative would be broader- Expanded beyond traditional definition of “a married couple

and their children”


Common control vs. common ownership

Caution - simply having some level of common ownership does not constitute common control• For example, assume the following ownership interests and that the

owners are not family members:

• Although Owner #1 has ownership in both the Reporting Entity (40%) and the VIE (100%), the two entities are not under common control- Owner #1 does not control Reporting Entity/Lessee- Reporting Entity (Lessee) would not qualify for the PCC accounting

alternative

Owner 1 Owner 2 Owner 3

Reporting Entity (Lessee) 40% 40% 20%

VIE (Lessor) 100% - -


Other PCC projects

Agenda project: Definition of a public business entity• Syncing up related definitions to the extent practicable

Pre-agenda research being conducted on:• Stock-based compensation• Accounting for certain partnership transactions


AICPA’s Financial Reporting Framework

for Small- and Medium-Sized

Entities


AICPA’s FRF for SMEs

AICPA issued their Financial Reporting Framework for Small- and Medium-Sized Entities in June 2013

Special-purpose framework• Other comprehensive basis of accounting (OCBOA)• Application is purely optional

Designed for use by small- and medium-sized entities that are not required to provide financial statements prepared in accordance with U.S. GAAP• However, small- and medium-sized is not defined• NASBA and AICPA have jointly developed a decision-making

tool and illustrative examples related to when the FRF for SMEs is a suitable framework to apply- Decision tool is available on the AICPA’s website



Principles-based framework

Measurement basis• Primarily uses historical cost • Some use of market value (which is not necessarily the same as

ASC 820 fair value)

Includes principles and guidance comparable to guidance in:• CICA Handbook published by The Canadian Institute of

Chartered Accountants • U.S. GAAP• IFRS for SMEs• Income tax basis of accounting• Cash basis of accounting



Examples of significant differences between FRF for SMEs and U.S. GAAP

FRF for SMEs U.S. GAAP

Intangible assets All have finite useful lives and are amortized

Some are indefinite-lived and not amortized

Internally-generated intangible assets

Choose between expensing or capitalizing costs incurred during development phase if certain criteria are met

Expense costs associated with internally-generated intangible assets

Intangible assets acquired in a business combination

Choose to either separately recognize intangible assets or subsume into goodwill

Identifiable intangible assets must be recognized separate from goodwill

Related PCC standard issued or proposal pending





Goodwill If amortized for tax, use tax life, otherwise amortize over 15 years

Not amortized

Impairment of long-lived assets

Long-lived assets are depreciated or amortized and are not tested for impairment

Comprehensive impairment models provided for various types of long-lived assets

Derivatives Cash basis and no hedge accounting

Provides comprehensive accounting model





Goodwill If amortized for tax, use tax life, otherwise amortize over 15 years

Not amortized

Impairment of long-lived assets

Long-lived assets are depreciated or amortized and are not tested for impairment

Comprehensive impairment models provided for various types of long-lived assets

Derivatives Cash basis and no hedge accounting

Provides comprehensive accounting model


Investments in joint ventures

Choose between the equity method and proportionate consolidation

Account for using equity method if significant influence exists

NCI in business combination

Measure at proportionate share of acquiree’s identifiable net assets as of the acquisition date

Measure at FV

Consolidation Choose to consolidate based on control or use equity method

Consolidation model based primarily on control

Variable interest entities

Does not incorporate concept Provides comprehensive consolidation guidance





Income taxes Choose between a taxes payable method and deferred income taxes method

Comprehensive deferred income tax accounting model is provided

Uncertain tax positions Does not incorporate concept Provides specific accounting model

Comprehensive income

Does not incorporate concept Incorporates concept





Stock-based compensation

Disclosure only Provides comprehensive accounting model

Defined benefit plans Choose between current contribution payable method or one of two accrued benefit obligation methods

Requires use of a projected benefit obligation method



Transition: Apply the FRF for SMEs to the opening balance sheet• Retrospective application• Exemptions related to the following are provided:

- Business combinations- Financial assets and liabilities- Asset retirement obligations

• Prohibited from retrospective application of certain principles related to the following:- Derecognition of financial assets and financial liabilities- Estimates- Noncontrolling interests



If considering FRF for SMEs• Understand the needs/requirements of the users of the financial

statements• If FRF for SMEs is a viable option

- Understand why considering an alternative basis of accounting

- Consider whether issues with current basis of accounting can be addressed in other ways

- Discuss costs of transition


Other Recent Accounting Developments


Other Recent Accounting Developments

Agenda

Recent FASB Developments:

• Selected Final Standards

• Selected Exposure Drafts

FASB/IASB Joint Projects

Other Standards and Projects


Selected Final Standards• Going Concern• Development Stage Entities• Discontinued Operations• Definition of a Public Business Entity


Going ConcernFinal Standard ASU 2014-15


Going concern

Prior to effective date of ASU 2014-15• Auditor is required to assess going concern uncertainties• GAAP does not require management to disclose any going

concern uncertainties

Acknowledgement that GAAP should address going concern uncertainties• FASB undertook a project to incorporate assessment and

disclosure of going concern uncertainties into GAAP• Lots of twists and turns along the way, including two exposure

drafts• The newly-issued ASU will require that management evaluate

whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern - And make certain disclosures


Going concern

Management’s assessment and disclosures• Disclosures required when there is substantial doubt about an

entity’s ability to continue as a going concern• When does substantial doubt exist?

- When it is probable that the entity will not be able to meet its obligations during the assessment period

- Evaluated in annual and interim reporting periods

What is the assessment period?• Public entity: One year from the date the financial statements

are issued • Nonpublic entity: One year from the date the financial

statements are available to be issued


Going concern

What disclosures would be required?• Must state that there is substantial doubt about an entity’s ability

to continue as a going concern• Principal conditions and events causing substantial doubt• Management’s evaluation of the significance of those conditions

and events• Any mitigating conditions and events, including management’s

plans

Effective date• Effective for the annual period ending after December 15, 2016

and for annual periods and interim periods thereafter• Early application is permitted


Development Stage EntitiesFinal Standard ASU 2014-10


Development stage entities

A development stage entity (DSE) is one that devotes substantially all of its efforts to establishing a new business and for which:

a) planned principal operations have not commenced, or

b) those operations have commenced but have produced no significant revenue

Existing GAAP requires a DSE to present:• Same basic financial statements as established companies, plus• Inception-to-date information about income statement line items,

cash flows, and equity transactions



ASU eliminates development stage entity guidance• Removes all incremental financial reporting for DSEs• Will reduce overall cost and complexity associated with financial

reporting for development stage entities (DSEs)• Without reducing availability of relevant information

Key points• Eliminates the formerly required “inception-to-date” information• Entities that have not started planned operations will now be

required to disclose:- The risks and uncertainties about their current development

activities- How those activities will lead to revenue-generating

operations



Key points (continued)• Removes an exception provided development stage entities for

determining whether an entity is a variable interest entity (VIE)

Effective date• Public business entities:

1. Presentation and disclosure requirements:- Annual periods beginning after December 15, 2014

2. VIE consolidation standards- Annual periods beginning after December 15, 2015

• Private companies – have an additional year from the above• Early adoption permitted


Discontinued Operations Final Standard ASU 2014-08


Discontinued operations

ASU is expected to result in fewer disposals being classified as discontinued operations (disc ops)

Comparison of key changes from existing GAAP on following slides ….



Current GAAP ASU 2014-08

Unit of accounting Component of an entityA component of an entity, a business or nonprofit activity

Component of an entity No significant changes

Criteria for disc ops treatment

Before a component is classified as disc ops, it must either:

• Have been disposed of, or• Be classified as held for sale

Held-for-sale criteria No significant changes


Discontinued operationsCurrent GAAP ASU 2014-08

Additional criteria for disc ops treatment

Both of the following will be true about the component after its disposal:• Its operations and cash

flows will be eliminated from the ongoing operations of the entity

• The entity will not have any significant continuing involvement in its operations

Disposal of the component represents a strategic shift that will have a major effect on an entity’s operations and financial results



Current U.S. GAAP ASU 2014-08

Business meets the held-for-sale criteria upon its acquisition

Similar provision does not exist Classified as disc ops

Equity method investments

Similar provision does not exist

Can qualify for disc ops treatment if applicable criteria are otherwise met



Current U.S. GAAP ASU 2014-08Income statement presentation No significant changes

Balance sheet presentation

Limited changes, but makes it clear that assets and liabilities of a disposal group classified as held for sale should be reclassified for all prior periods

Cash flow statement presentation

Similar provision does not exist

Disclose or present one of the following for the disc op:• Operating and investing

cash flows• Depreciation,

amortization, capital expenditures and significant operating and investing noncash items



ASU 2014-08

Disclosures

ASU includes a 3-page flowchart to help determine which disclosures apply in a particular set of facts and circumstances.

ASU expands disclosure requirements, including information about: • An individually significant component that has been

disposed of (or meets the held-for-sale criteria) but does not rise to the level of a disc op

• Equity method investments reflected as disc ops• Nature of the entity’s continuing involvement with a

disc op



Effective date• Public business entities (and certain nonprofit entities) -

annual periods beginning on or after December 15, 2014 and interim periods in those annual periods

• Private companies - annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015

• Early adoption permitted in certain circumstances


Definition of a Public Business Entity

Final Standard 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 SEC to file or furnish financial statements (or does

file or furnish financial statements) with the SEC, (including other

entities whose financial statements or 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


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


Is the company considered a PBE?

Facts Is it a PBE?

A private company that is a consolidated subsidiary of a public company

• Yes, for consolidated financial statements of public company.

• No, for its own standalone financial statements

A private company that controls a public subsidiary that meets the definition of a PBE

No

The Company’s financial information is included in a filing with the SEC pursuant to Regulation S-X, Rule 3-05, Financial Statements of Businesses Acquired or to Be Acquired

Yes


Definition of a public business entityFacts Is it a PBE?

A bank with over $500 million in assets required to file annual audited financial statements with the FDIC

Yes, if such a bank has one or more securities not subject to contractual restrictions on transfer

A bank covenant requires the Company to provide the bank with quarterly U.S. GAAP financial statements

No. Financial statements provided to a lender or limited number of lenders are not considered publicly available


Is the company considered a PBE?

Facts Is it a PBE?

An LLC places its financial statements on its website for its members and a login and password is required to access these financial statements

No. Financial statements that can be accessed on an entity’s website only by members would not be considered publicly available.

Furthermore, an entity must be required (by law, contract or regulation) to prepare and make those financial statements publicly available on a periodic basis, and must also have one or more securities not subject to contractual restrictions on transfer.


Selected Exposure Drafts:

• Pushdown Accounting• Measurement of Inventory• Extraordinary Items


Exposure DraftPushdown Accounting


Push-down accounting

Exposure Draft issued April 2014

What is push-down accounting?• Under pushdown accounting, the Acquirer’s accounting for the

business combination is pushed down to the Target’s separate standalone financial statements- A “new basis” is established for Target’s assets & liabilities- Push-down accounting is only relevant if Target prepares

and issues separate standalone financial statements• Under current U.S. GAAP, there is limited guidance for

determining when pushdown accounting should be applied

Existing guidance only applies to SEC registrants• However, non-SEC registrants often apply SEC guidance• Practice issues have arisen


Push-down accounting

Current guidance does not permit push-down accounting unless Acquirer obtains has obtained substantially all of the Target• Substantially all is defined as at least 80% ownership of the

Target

Under proposed guidance, pushdown would be optional upon acquisition by a new controlling parent• For example, pushdown would be allowed (but not required)

upon Acquirer obtaining 51% ownership of the Target

Next steps• FASB considering comment letters (were due July 31)


Exposure DraftSimplified Measurement

of Inventory


Simplified measurement of inventory

Exposure draft related to subsequent measurement of inventory issued in July 2014

Part of FASB’s simplification initiatives

Inventory would be measured at the lower of cost and net realizable value (NRV)• Would no longer need to consider replacement cost or

NRV less an approximately normal profit margin

Effective date• Change would be applied prospectively starting in annual

periods beginning after December 15, 2014 and interim periods within those annual periods

• Early adoption would be permitted


Exposure DraftExtraordinary Items


Extraordinary items

Exposure Draft issued July 2014

Exposure draft would eliminate the concept of extraordinary items • Part of FASB’s simplification initiative• Reduce costs and complexity in financial reporting while

improving or maintaining the usefulness of information

Extraordinary item:• An event or transaction that is both unusual in nature and

infrequent in occurrence• In practice, few items meet the criteria


Extraordinary items

Current guidance requires an entity to separately classify and present extraordinary items (net of income tax) after continuing operations • It’s often unclear when an item should be considered both

unusual and infrequent

The proposal would not result in loss of information• Because presentation and disclosure guidance for items that

are unusual in nature or infrequently occurring would be retained

Proposal would be applied prospectively in annual periods beginning after December 15, 2015• Early adoption permitted


FASB/IASB Joint Projects:

• Leases• Financial Instruments


FASB/IASB Joint Project Leases


Leases

Most recent exposure draft (ED) issued in May 2013• Many of the proposals in the ED have been reconsidered

during redeliberations and different decisions reached

Key decisions reached in redeliberations• Lease classification• Lessee accounting model• Lessor accounting model• Other


Leases

Lease classification• FASB decided leases would be classified (as either Type

A or Type B leases) by both lessees and lessors• Classification criteria (Type A or Type B) would be based

on those in IFRS, which are more principles based and do not include any bright lines

Lessee accounting model• Lessees would recognize assets and liabilities for leases

- Exception for short-term leases


Leases

Lessee accounting model - FASB• Dual-approach for lessee accounting

- Leases classified as in-substance purchases (similar to capital leases today) would be accounted for as the purchase of a right-of-use asset - Amortization would be recognized separately from

the interest on the lease liability

- All other leases (similar to operating leases today) would be accounted for by generally recognizing total lease expense on a straight-line basis

Lessee accounting model – IFRS• In contrast to FASB’s decision, IFRS has decided to only

have one class of lease for lessees (Type A lease)


Leases

Lessor accounting model• Limited changes to existing U.S. GAAP• For leases that are in-substance purchases, recognition of

selling profit and revenue at lease commencement would be tied to the transfer of control guidance in the new revenue recognition standard


Leases

Other topics redeliberated:

What’s next?• Continued redeliberations• Final ASU not anticipated until late 2015

Definition of a lease Definition of a short-term lease

Lease term Initial direct costs

Lease modifications and contract combinations

Separating lease and nonlease components

Variable lease payments Discount rates

Subleases Balance sheet presentation

Cash flow presentation


FASB / IASB Joint ProjectFinancial Instruments


Financial instruments

Two parts to financial instruments project:1. Classification and measurement

2. Impairment

Most recent exposure drafts (ED) proposed many significant changes• Classification and measurement ED issued in February 2013• Impairment ED issued in December 2012

Redeliberations are ongoing• Many of the proposals in both EDs have been reconsidered

during redeliberations and different decisions reached• No current indication on FASB’s website regarding when final

ASUs will be issued


Financial instruments – classification and measurement

Key decisions reached in redeliberations• Most equity securities would be required to be classified

as trading, with changes in fair value recognized in net income (FV-NI)

• Equity method of accounting would be retained• Practicability exception for equity securities without a readily

determinable FV that do not qualify for net asset value practical expedient in ASC 820-10-35-39- Measure at cost minus impairment plus or minus changes

resulting from observable price changes in orderly transactions for the identical investment or a similar investment of the same issuer

- Not available to investment companies or broker dealers



Key decisions reached in redeliberations (cont.)• Existing guidance on how to recognize and measure the

following will be retained:- Loans- Debt securities- Hybrid financial instruments and embedded derivatives- Loan commitments- Revolving lines of credit - Commercial letters of credit- Foreign currency gains and losses on debt securities

classified as available for sale (AFS)• Existing guidance on fair value option also retained



Key decisions reached in redeliberations (cont.)• Assessment of a valuation allowance for a deferred tax asset

(DTA) related to an AFS debt security would be made in combination with the entity’s other DTAs rather than discretely

• If an entity uses FV option to measure a financial liability at FV, the change in FV caused by instrument-specific credit risk would be reflected separately in other comprehensive income (FV-OCI)- Except for derivative liabilities, for which changes in FV

caused by entity’s credit risk would be FV-NI



Fair value disclosures for financial assets and liabilities measured at amortized cost• Only public business entities would be required to make

disclosure- Receivables and payables due in less than a year and

demand deposit liabilities would be excluded• Other entities would not be required to provide the disclosures

Many other existing disclosures retained and new disclosures added

What’s next?• Continued redeliberations on several topics, including

disclosures and effective date


Financial instruments – impairment

Key decisions reached in redeliberations (cont.)• Current expected credit loss (CECL) model

- Will be used to measure impairment losses for financial assets measured at amortized cost (AC), which will significantly accelerate recognition of expected credit losses (ECL)

- CECL model used for debt securities classified as AFS only if FV is less than AC and the ECL recognized would be limited to the difference between FV and AC

- For a debt security subsequently identified for sale, impairment allowance would be adjusted to equal difference between FV and AC basis


Financial instruments – impairment

Key decisions reached in redeliberations (cont.)• Clarifying guidance will be provided on how to estimate lifetime

ECL

What’s next?• FASB will continued redeliberations of the CECL model• Unit of account guidance related to expected losses on financial

assets measured at FV-OCI • Disclosures• Effective date and transition

No convergence of U.S. GAAP with IFRS• IASB has already issued their new standard on financial

instruments


Other Standards and ProjectsSummary List


Other standards and projects (non-PCC)

Standard or project Status

ASU 2014-14 Troubled Debt Restructurings by Creditors: Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

Issued August 2014

ASU 2014-13 Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity

Issued August 2014

ASU 2014-12 Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period)

Issued in June 2014

ASU 2014-11 Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures

Issued in June 2014




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

ASU 2014-05 Service Concession Arrangements Issued January 2014

ASU 2014-04 Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

Issued January 2014

ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects Issued January 2014

Accounting for the Effect of a Federal Housing Administration Guarantee Final ASU forthcoming

Insurance: Disclosures about Short-Duration Contracts

ED issued in June 2013, Redeliberations ongoing




Determining Whether the Host Contract in a Hybrid Financial Instrument Is More Akin to Debt or to Equity

ED issued in Oct 2013Redeliberations ongoing

Customer’s Accounting for Fees in a Cloud Computing Arrangement ED issued in August 2014

Disclosure Framework (Board’s Decision Process) ED issued in Mar 2014

Disclosure Framework: Disclosure Review –• Defined benefit plans• Fair value• Income taxes• Inventory• Interim reporting

Initial deliberations




Government Assistance Disclosures Initial deliberations

Clarifying the Definition of a Business Initial deliberations

Investment Companies: Disclosures about Investments in Another Investment Company

Initial deliberations

Financial Statements of Not-for-Profit Entities Initial deliberations

Clarifying Certain Existing Principles on Statement of Cash Flows Initial deliberations

Simplify presentation of debt issuance costs Newly added project

Simplify the measurement date for defined benefit plans Newly added project




Simplify the balance sheet classification of debt Newly added project

Accounting for income taxes Newly added project

Fair value hierarchy levels for certain investments measured at NAV

Newly added EITF project

Effects on historical earnings per unit of master limited partnership dropdown transactions

Newly added EITF project


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Financial Reporting Resource Centerwww.McGladrey.com/FRRC

http://www.mcgladrey.com/FRRC


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