MHM Executive Education Series: 2013 Fourth Quarter Accounting Update

Presented by: James Comito, Mike Loritz

and Mark Winiarski

December 17, 2013

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.

External participants will receive their CPE certificate via email immediately following the webinar.

CPE Credit

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The information in this Executive Education Series

course is a brief summary and may not include all the details relevant to your situation.

Please contact your MHM service provider to further

discuss the impact on your financial statements.

Disclaimer

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Today’s Presenters

James Comito, CPA Shareholder 858.795.2029 | jcomito@cbiz.com A member of MHM’s Professional Standards Group, James has expertise in all aspects of revenue recognition, business combinations, impairment of goodwill and other intangible assets, accounting for stock-based compensation, accounting for equity and debt instruments and other accounting issues. Additionally, he has significant experience with a variety of other regulatory and corporate governance issues pertaining to publicly traded companies, including all aspects of internal control. In addition, James frequently speaks on accounting and auditing matters at various events for MHM.

Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

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Today’s Presenters

Mark Winiarski, CPA 913.234.1656 | mwiniarski@cbiz.com Mark has 11 years of experience in an audit and advisory function and is located in our Kansas City office. In addition to serving his clients which are primarily in the manufacturing, retail and distribution industries, Mark supports our Professional Standards Group by consulting with clients and engagement teams across the country on accounting and auditing issues in areas including revenue recognition, consolidations and business combinations.

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Today’s Agenda

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FASB Update

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Considerations for Year End and 2014

PCAOB Update

FASB UPDATE

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The FASB voted to finalize the Private Company Decision-Making Framework.

The Framework is expected to be issued in early 2014.

The Framework is designed to assist the FASB and PCC in making determinations about potential alternatives in US GAAP for private companies.

The issuance of the Framework will not directly impact the preparation of financial statements.

Private Company Decision-Making Framework

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FASB redeliberated on October 31, 2013. Decisions included:

Make adjustments to the exposed definition

Clarify the applicability of the PCC accounting alternatives to entities that do not meet the proposed definition

Provide additional examples in the final ASU

Defer amending areas in US GAAP that already define nonpublic and public entities

Confirmed the effective date will be concurrent with the first ASU on the PCC accounting alternatives

Definition of a Public Business Entity

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Why is the board defining a Public Business Entity?

Definition of a Public Business Entity

1. To create a consistent definition within U.S. GAAP for a public and non-public business

2. Identify the types of entities that are excluded from the scope of the Private Company Decision-Making Framework

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What entities are public business entities? Scope exceptions

Not-for-profit entities under ASC Topic 958

Employee benefit plans under ASC Topic 960 through 965

All other entities that meet any one of these five criteria are public business entities 1. Those required by the SEC to file or furnish financial statements,

or does file or furnish financial statements (including voluntary filers), with the SEC.

This includes entities whose financial statements or financial information are required to be included in a filing.

Definition of a Public Business Entity

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Five criteria continued: 2. Those required by the Securities Exchange Act of 1934, as

amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency, other than the SEC.

3. Those required to file or furnish financial statements with a regulatory agency (foreign or domestic) in preparation for the sale of securities or for purposes of issuing securities.

4. Those that have (or is a conduit bond obligor for) securities that are traded, quoted, or listed on an exchange or an over-the-counter market.

5. Those with securities not subject to contractual restrictions on transfer, and it is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods) pursuant to a legal, contractual, or regulatory requirement.

Definition of a Public Business Entity

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On November 25, 2013, the FASB endorsed PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination.

The final Accounting Standard Update is expected to be issued in early 2014.

Effective date is for periods beginning after December 15, 2014.

Early adoption is permitted. If adopted, the change is accounted for prospectively.

Goodwill Subsequent to a Business Combination

This alternative can not be elected by an entity that is a public business entity or a not-for-profit entity.

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If adopted by a reporting entity: Goodwill will be amortized over an estimated useful life,

which cannot exceed ten years. Goodwill will not be subject to an annual impairment test,

rather, a “triggering event” model will be used. Impairment testing would be required when an event or

circumstances occur that indicate that it is more likely than not the fair value of the entity is below its carrying value.

The goodwill impairment test may be performed at the entity level. The requirement to perform a hypothetical “purchase price

allocation” is removed. The amount of impairment recognized is simply the difference between the fair value of the entity and its carrying value.

Goodwill Subsequent to a Business Combination

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Considerations before adopting: What is the cost savings of not having to prepare an annual

impairment analysis? How does amortizing goodwill impact contracts that refer to net

income? Earnings Before Income Taxes, Depreciation and Amortization

(EBITDA) will not be affected.

How does amortizing goodwill impact contracts that refer to ratios involving total assets? Tangible Net Worth will not be affected.

Deferred taxes may be affected.

What are the requirements of the users of the financial statements?

Goodwill Subsequent to a Business Combination

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On November 25, 2013, the FASB endorsed PCC Issue No. 13-03, Accounting for Certain Receivable-Variable, Pay-Fixed Interest Rate Swaps.

The final Accounting Standard Update is expected to be issued in early 2014.

Effective date is for periods beginning after December 15, 2014.

Early adoption is permitted. If adopted the change is accounted for prospectively.

Accounting for Certain Interest Rate Swaps

This alternative can not be elected by an entity that is a public business entity or a not-for-profit entity.

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The expected standard may be adopted for interest rate swaps that meet the following criteria:

1. Debt (hedged cash flows) and swap use the same index 2. “Plain-vanilla” swap 3. Re-pricing and settlement are the same time 4. Initial fair value of the swap is near zero 5. No forward starting swap 6. Swap notional is equal to or less then the related debt 7. Swap terms are equal to or less then the debt

Accounting for Certain Interest Rate Swaps

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If the accounting alterative is adopted, hedge accounting still applies, but: Documentation of the relationship can occur after the swap is

entered into instead of concurrently. The hedge is assumed to have no ineffectiveness. The swap may be recorded at settlement value instead of fair

value. Disclosures for the swap may be presented at settlement value

instead of fair value. Exempts companies for which all of their derivatives qualify for the

simplified short-cut method from fair value disclosures required by ASC 825.

Adoption can be performed on a modified retrospective or retrospective basis.

Simplified Short-Cut Method for Certain Interest Rate Swaps

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The PCC has approved Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements.

The intent is to simplify the accounting for certain commonly controlled leasing entities that may require consolidation under current U.S. GAAP by provide an exemption from consolidation.

The PCC is expected to discuss the proposal at the January 27, 2014 meeting.

Variable Interest Entity and Common Control Leasing Arrangements

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PCC added a fourth criteria

1. The lessor entity and the private company are under common control,

2. The private company has a leasing arrangement with the lessor entity, and

3. Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity.

4. The obligations of the lessor entity, if any, are only collateralized by the assets leased by the private company lessee and not by assets of the private company lessee

Variable Interest Entity and Common Control Leasing Arrangements

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EITF Issues

EITF consensus approved on December 11: Accounting for Investments in Qualified Affordable Housing

Projects Effective upon issuance

Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity Effective for public entities beginning after 12/15/14 and private

entities 12/15/15 Accounting for Service Concession Arrangements

Effective for public and private entities beginning after 12/15/14

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EITF Issues

EITF consensus approved on December 11 (con’t): Reclassification of Residential Real Estate Collateralized

Consumer Mortgage Loans Upon Foreclosure Effective for public and private entities beginning after 12/15/14

EITF exposure draft approved on December 11: Classification of Certain Government-Insured Residential

Mortgage Loans upon Foreclosure

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Development Stage Entities (Topic 915)

FASB Issued Exposure Draft 2013-320 on November 7, 2013

Eliminates the definition and reporting requirements for a Development Stage Entity

Eliminates the modification to variable interest entity accounting that permitted some Development Stage Entities to avoid consolidation if: They had sufficient equity, without subordinated support, to fund

their current stage of development, and

Their governing documents and contractual arrangements permitted them to raise additional equity investments.

Comments are due December 23, 2013.

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Convergence Projects Revenue Recognition - Licenses

Accounting for Licenses of Intellectual Property – Two Types

Static •“Right to Use” model

•Revenue is recognized upon transfer of control

Dynamic •Provides access to intellectual property

•Revenue is recognized over time

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Distinguishing the two IP license models Characteristics of dynamic licenses: Licensor will undertake activities that significantly affect the IP

to which the customer has rights. Activities do not transfer a good or service to the customer as

they occur. The rights granted by the license directly expose the customer

to any effects of those activities on the IP and the customer entered into the contract with the intent of being exposed to those effects.

Convergence Projects Revenue Recognition - Licenses

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Collectability threshold for revenue recognition A company will asses a customers intent and ability to

pay as amounts become due. For US GAAP revenue will be recognized when collection is

“probable.” (i.e. likely) For IFRS revenue will be recognized when collection is

“highly probable.” (i.e. more likely than not)

Convergence Projects Revenue Recognition - Collectability

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Revenue Recognition Status

A final revenue recognition standard is expected in the first quarter of 2014.

The effective date is to be for periods beginning on or after December 15, 2016, for public companies and December 15, 2017, for private companies.

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Other Major Projects

Financial Instruments – Final standards expected in the first half of 2014 for: Classification and measurement Impairment

Leases Redeliberation is expected first quarter 2014

Insurance contracts The Board is expected to redeliberate during 2014.

CONSIDERATIONS FOR YEAR END AND 2014

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Significant Standards for 2013 and 2014

Testing indefinite-lived intangible assets for impairment (ASU 2012-02) Creates a Step 0 for the impairment test consistent with

existing goodwill impairment tests

Effective for periods beginning after September 15, 2012

Disclosures of offsetting assets and liabilities (ASU 2011-11 and ASU 2013-03) Increases disclosure requirements for financial and

derivative instruments that are offset on the balance sheet

Effective for periods beginning on or after January 1, 2013

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Significant Standards for 2013 and 2014

Reporting of Reclassifications out of Accumulated Comprehensive Income (ASU 2013-02) Requires the presentation of significant reclassifications

either parenthetically on the face of the financial statements or in a single footnote

Effective for periods beginning after December 15, 2012, for public companies and December 15, 2013, for private companies

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Tangible Property Tax Regulations

Issued in September 2013 – new regulations include: Guidance on establishing capitalization thresholds for

tangible property For an entity with audited financial statements an election can be

made to expense tangible property up to $5,000. Requires that the capitalization policy be applied consistently

between the tax return and the audited financial statements.

Implementation issues exist for financial statements The tax guidance is inconsistent with US GAAP. When implementing, consider the impact on debt covenants and

the audit conclusions.

PCAOB UPDATE

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PCAOB Update

The Auditor’s Report Two audit standards proposed in August 2013 related to the auditor’s report Require the auditor's report to include a discussion of "critical

audit matters" specific to each audit Require communication of the auditor's responsibility for and

evaluation of "other information" beyond the audited financial statements included in a company's annual report filed with the SEC

Provide investors with information about auditor tenure, including the number of years the auditor has consecutively served as the company's auditor

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PCAOB Update

The Auditor’s Report Transparency Proposal – December 2013 (i) The name of the engagement partner responsible for

the audit and (ii) The names of other audit firms who participated in

the audit, including their locations and extent of participation.

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PCAOB Update

PCAOB – Adopted Proposals Two attestation standards related to the auditor's examination of

compliance reports and review of exemption reports of broker-dealers have been adopted by the PCAOB.

The PCAOB has also adopted a new auditing standard on supplemental information accompanying audited financial statements that broker-dealers and issuers file with the SEC, such as supporting schedules (AS 17).

Adopted and sent to SEC for approval on Oct 30, 2013.

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Other Developments Related Party Audit Standard (Proposed in May 2013) Expected to be adopted in Q1 2014 Amendments to other standards regarding significant

unusual transactions and financial relationships with Executive Officers.

Going Concern Awaiting FASB’s re-proposal

Reorganization (Codification) or PCAOB Standards expected in 2014

PCAOB Update

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Questions?

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