Dbriefs Financial Reporting Series - IAS Plus · PDF fileThe Dbriefs Financial Reporting...

The Dbriefs Financial Reporting series presents:

Quarterly Accounting

Roundup: An Update of

Important Developments

Bob Uhl, Deloitte & Touche LLP

Joe DiLeo, Deloitte & Touche LLP

Lyndsey McAlister, Deloitte & Touche LLP

Jason Nye, Deloitte & Touche LLP

September 25, 2013

Copyright © 2013 Deloitte Development LLC. All rights reserved.

Joint projects update

Other topics

EITF update

Other standard setters

Question and answer

Agenda


This webcast does not provide official Deloitte & Touche

LLP interpretive accounting guidance

Check with a qualified advisor before taking any action

See later slides for information on obtaining written

summaries of issues discussed today

Keep in mind


To enhance participants’ understanding of important

accounting issues and developments pertaining to

recent actions of the FASB, IASB, EITF, and others.

Learning objective


Which of the joint projects are you most interested in?

• Financial instruments

[Impairment, Classification & Measurement, Hedge Accounting]

• Insurance

• Leases

• Revenue recognition

Poll question #1

Joint projects— Overview


Joint projects

Expected date

Projects 2013

Q3

2013

Q4

Leases R

Revenue recognition F

Financial instruments:

• Classification and measurement

• Impairment

• Hedge accounting — General (IASB)

• Hedge accounting — Macro (IASB)

R

R

R

R

F

DP

Other joint projects

Insurance contracts FASB (IASB’s ED

issued in Q2 of 2013)

E

E — Exposure Draft F — Final Standard DP — Discussion Paper R — Re-deliberations

Financial Instruments Classification and Measurement

Classification and measurement

• Solely payments of principal & interest (SPPI)

- Mixed views – some recommend removing completely; others recommend

retaining but suggest significant revisions to the implementation guidance

- A majority of respondents suggest (1) removing the credit-risk analysis for

beneficial interests and (2) that the look-through concept would be

impractical

• Business model test

- Respondents generally agree that business model should drive

classification

- The overwhelming majority of respondents commented that the criteria for

permitted sales from the amortized cost (AC) classification are too

stringent

• Fair value option (FVO)

- Most banks recommended that the FASB expand the situations in which

election of the FVO would be permitted

- Either converge with IFRS 9 or make unconditional

Summary of comments and outreach


Classification and measurement

• Confirmed “principal” is amount transferred by current holder at initial

recognition

• Tentative decisions related to “interest” include:

− SPPI test is to identify instruments that provide a basic-lending type return

− Disregard features that would only have a de minimis effect on cash flows

− Interest includes several components:

• Compensation for credit risk

• Time value of money; however clarified that relates only to passage of time

• Others may include profit, costs associated with the lending, or liquidity

• Tentative decisions related to “contingent features” include:

− Nature of contingent triggering event is not determinative

• Consider both nature of the triggering event and its effect on cash flows

− No distinction between prepayment terms, extension options, and other features

− FASB and IASB split on how to assess contingent features that could result in non-

SPPI cash flows

• FASB – Would permit features if likelihood of contingent event’s occurrence is remote

• IASB – Basis is on the nature of the feature without consideration of contingent event’s

likelihood; however would permit “non-genuine features”

Summary of September redeliberations* - SPPI


* All decisions are tentative.

Financial Instruments Impairment

Impairment of financial instruments

• Boards encouraged to converge

• Many disagree with FASB’s proposals related to:

− Recognizing current expected credit losses on day one

− Projecting expected credit losses over the life of an

instrument

• Uncertainty inherent in long-term projections

• Concerns about the cost and complexity of these estimates

• Other concerns expressed about debt securities

− Model does not work well when insufficient information exists

to develop the current expected credit loss

• Questions about usefulness of the proposed practical

expedient

Summary of comments and outreach


Impairment of financial instruments

• Boards made all tentative decisions separately

• FASB clarified several elements of its model:

− Historical average loss for periods after those determined by reasonable

and supportable forecasts

− Contractual cash flow projections

• Should consider (1) prepayments and (2) TDRs − if reasonably expected to be

executed

• Exclude renewals, extensions, and modifications

− Consideration of risk of loss

• Always considered; even if remote

• Do not recognize credit loss if amount of loss is zero for an asset with

nonpayment risk that is greater than zero (e.g., collateralized assets)

• The IASB tentatively decided to:

− Retain the dual-measurement approach and “bucket 1”

− Clarified the definition of “default”

• Requires application to be consistent with credit risk management practices

• Rebuttable presumption of default when 90 days past due

Summary of September redeliberations*


* All decisions are tentative.


Under the FASB’s tentative decisions on impairment,

would an entity consider expected prepayments when

determining the contractual cash flow projections?

• Yes

• No

Poll question #2

Private Company Council


Role of the PCC

• Evaluating whether alternatives to existing and proposed U.S.

GAAP may be warranted

• Advising the FASB by identifying private company concerns and

communicating these to the FASB during its agenda- and

standard- setting activities

Private Company Council

Private company standard setting

NOTE: Proposed modifications to U.S. GAAP are subject to PCC

vote and FASB endorsement.


Overview

• FASB issued proposed ASU on August 7, 2013

• PBE’s not eligible to apply approved private company alternatives

• Comments on proposed ASU were due on September 20, 2013

• Redeliberations expected to occur at the October 1, 2013 PCC meeting

PBE is defined as an entity meeting the following criteria:

Proposed definition of a public business entity (PBE)


1. Required to or does file/furnish financial

statements with the SEC

2. Required to file/furnish financial

statements with a regulatory agency in

accordance with the 1934 Act

3. Required to file/furnish financial

statements with a regulatory agency for

the purpose of preparing for the sale or

issuance of securities

4. It has (or is a conduit bond obligor for)

unrestricted securities that are or can be

traded on an exchange or over-the-

counter

5. Its securities are unrestricted and it is

required to provide U.S. GAAP financial

statements to be made publicly available

on a periodic basis to meet a legal or

regulatory requirement

NOTE: Not-for-profit entities and employee benefit plans would not meet the

definition of a PBE; however these are outside of the scope of the ‘private-company

decision-making framework’ and not automatically eligible for PCC alternatives


Background

• Private companies may establish separate entities to hold assets

• Potential accounting concerns/complexities with model

• PCC’s conclusion that improved variable interest entities (VIE)

guidance needed

Path forward

• FASB issued a proposed ASU on August 22, 2013

• Comments on proposed ED are due by October 14, 2013

• Final proposal subject to PCC approval and FASB endorsement

• Effective date dependent upon issuance of final standard

• Retrospective application required with an adjustment to opening

earliest-period-presented balances

• Early adoption permitted

Proposed alternative consolidation requirements



Proposed alternative:

• ASC 810 ‘voting interest model’ would be applied in lieu of VIE

consolidation guidance

• Alternative would need to be applied to all lease arrangements

meeting conditions

• Additional disclosures would be required

Proposed alternative consolidation requirements (cont’d)


• Private companies can opt out of applying ASC 810 VIE

guidance if lease arrangement meets certain conditions:

Private company and legal entity under common control

Private company has a lease arrangement with legal entity

Substantially all activities between private company and legal entity are

related to leasing activities of the legal entity

Proposed ASU also

removes “Example

4” from ASC 810-10

Private Company Council Continued


Background

• The FASB issued three proposed ASUs on July 1, 2013,

recommending alternatives for private companies based

on PCC proposals related to:

– Intangible assets acquired in a business combination

– Goodwill

– Certain types of interest rate swaps

• Comments were due August 23 and the PCC is expected

to discuss the feedback on September 30

Alternative accounting proposed



Proposed alternative

Intangible assets acquired in a business combination


Entities would only be required to recognize intangible assets

meeting the contractual-legal criterion arising from non-

cancellable contractual terms or other legal rights.

Intangibles that only meet the separability criterion would not

be recognized as a separate intangible asset, but rather as

part of goodwill.

Contractual-legal intangibles such as

trademarks or trade names, domain

names, franchises, order backlogs,

patented technology, licensed

software, trade secrets, and customer

contracts would be recognized under

the proposed alternative accounting.

Customer lists, non-contractual

relationships, unpatented technology

and unregistered trade secrets,

processes, or recipes that only meet

the separability criterion under current

U.S. GAAP would not be separately

recognized at fair value.

What’s in scope… What’s not…



• Entities could elect simplified accounting for:

• Disclosure requirements related to amortizable goodwill

• Prospective application (early adoption permitted)

Goodwill


• Amortize goodwill on a straight-line basis over the useful life (not to exceed 10 years) of the primary asset acquired in a business combination

Amortization of goodwill

• Test goodwill for impairment only when a triggering event occurs instead of having to perform the test annually (or more frequently if indicators of impairment exist), as is required currently

Frequency of impairment

test

• Test goodwill for impairment at the entity level rather than the reporting unit level, applying only Step 1

Method of impairment

testing



• Private companies that are not financial institutions will be provided

with two alternatives to the hedge accounting requirements of ASC

815:

• Transition and disclosure considerations

Interest rate swaps


Combined Instruments Simplified Hedge Accounting

Variable-rate debt and interest rate swap

accounted for as combined instrument on

balance sheet.

• Must meet certain qualifying criteria

• Presented at amortized cost

• Subject to specific disclosure

requirements

• If approach is elected, it must be

applied to all existing and future swaps

meeting the qualifying criteria

Company can continue to account for the

interest rate swap and the variable-rate

debt separately on the face of the balance

sheet, assume no hedge ineffectiveness in

the hedging relationship, and is permitted

to measure the interest rate swap at its

settlement value rather than its fair value.

• Must meet certain qualifying criteria

• Can be elected on an instrument-by-

instrument basis

• Subject to hedge documentation

requirements

Going Concern Project


• Provide guidance on assessing uncertainties about an

entity’s going concern presumption and related

disclosures

• Reduce diversity in the timing, nature, and extent of

disclosures in the financial statement footnotes

Objectives and timeline

Going concern project

2008 ED

2013 ED

9/24/13

Comments due

Issuance and effective date?


Disclosure thresholds


MLTN (12 months)

Known/probable (24 months)

Substantial doubt

(24 months) (SEC filers only)

Liquidation is imminent

Going Concern Disclosures Required

Liquidation Basis of

Accounting

• Does not consider management’s actions “outside the normal course of business”

• Considers ALL management’s actions


Required disclosures


Conditions and events that give rise to the

entity’s potential inability to meet its obligations

Possible effects of those conditions and

events

Management’s evaluation of the

significance of those conditions and events

and any mitigating factors

Management’s plans to address the entity’s potential inability to meet its obligations

Mitigating conditions and events

Substantial doubt

SEC

filers only


How long is the going concern time horizon under the FASB’s

proposal?

• 12 months (same as current auditing literature)

• 24 months

• Indefinite (converged with IFRS)

• None of the above

Poll question #3

Revenue Project


Identify the contract

with a customer

(Step 1)

Identify the performance obligations

in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction

price to performance obligations

(Step 4)

Recognize revenue when

(or as) the entity satisfies a performance

obligation

(Step 5)

Overview

Revenue project

Core principle: Recognize revenue to depict the transfer of promised goods or

services to customers in an amount that reflects the consideration the entity

expects to be entitled in exchange for those goods or services

Revenue recognition under the above model is control based.


Revenue project Effective date/transition

• Effective date

– Public entities: annual reporting periods beginning after

December 15, 2016 including interim (early application not

permitted)

– Nonpublic entities: annual reporting periods beginning after

December 15, 2017 including interim (early application

permitted, but no earlier than public entities)

• Transition

– Apply retrospectively by applying ASC 250 (with certain

optional practical expedients) OR

– Modified approach

• Apply revenue standard to contracts not completed as of adoption

of standard and record cumulative catch up

• Do not apply standard to completed contracts


• Issues discussed at last week’s joint board meeting:

– Collectability

– Constraint

– Licenses

• Final standard expected by the end of the year

• Implementations groups (FASB, IASB, AICPA)

• Potential involvement from SEC and EITF

• Entities need to evaluate and plan for impact and then

implement the new standard

• Industry specific practices may develop as entities

adopt and implement the standard

Current status and what’s ahead

Revenue project


What is the proposed transition method for the revenue

recognition standard?

• Prospective

• Retrospective

• Modified retrospective

• Retrospective or modified retrospective

Poll question #4

EITF Update


• Consensus-for-Exposure reached in March would make

it easier for investments in affordable housing projects

(or Low-Income Housing Tax Credit (LIHTC)

investments) to qualify for the effective yield method

under ASC 323-740

• In September, the Task Force reached tentative

decisions to further modify the qualifying criteria and to

change the method of amortizing the original cost of the

investment

• The issue will come back in November

Background

Issue 13-B: Investments in tax credits


New decision would further modify one criterion

Tentative decisions reached


Consensus-for-exposure Tentative decision

The investor retains no operational

influence [other than certain

protective rights] over the

investment, and substantially all of the

projected benefits are from tax credits

and other tax benefits

The investor retains no [significant

ability to influence the operating

and financial policies of the limited

liability entity], and substantially all of

the projected benefits are from tax

credits and other tax benefits

And, it would permit other transactions between the investor and

investee (e.g., loans) if certain conditions are met (limited to LIHTC):

The reporting entity is in the business of entering into such other transactions…

The transactions are entered into at market rates…

The reporting entity does not acquire [a significant ability to influence the

operating and financial policies of the limited liability entity] as a result of such

other transaction


• Scope

– Investments in affordable housing projects (i.e., consistent with

the current scope of ASC 323-740), but only if all qualifying

conditions are met, including for transactions other than the

equity investment

– Other tax credit investments by analogy, but not if the entity

entered into other transactions with the investee

• Measurement: Apply a proportionate amortization

approach (effective yield method is eliminated)

• Presentation: Investments are combined with other

deferred tax assets in the statement of financial position

• Disclosure: Disclose the impact of LIHTC investments

on the entity’s financial statements

Tentative decisions reached



• Employee must work 2 years

(not retirement eligible)

• Award only transfers if IPO

within 4 years

Issue 13-D: Post-service performance targets

January 20X3 December 20X5

September 20X7

Grant Date Service Ends IPO Completed

$0 Compensation (comp) expense

$0 comp expense $0 comp expense $100 Grant date

FV

View A – Target is a performance condition that affects vesting

• Grant-date FV = $100

• Discount at grant date for

probability of IPO = $20

Consensus-for-Exposure

Performance targets that can be met after the requisite service period

should be treated as a performance condition that affects vesting

Example


• Scope: Hybrid financial instruments issued in the form of a

share

• An embedded derivative must be accounted for separately

from a host contract if:

– It is not clearly and closely related (CCR) to the host

– The hybrid instrument is not re-measured at fair value under other GAAP

– It is a derivative as defined in ASC 815-10-15

• Whether an embedded derivative is CCR depends on the

nature of the host

Background

Issue 13-G: Nature of a hybrid host


An embedded derivative that meets the

conditions above and does not meet

any of the scope exceptions in ASC

815-10-15 is accounted for separately

from the hybrid host and re-measured

at fair value each reporting period


• Issue: How do you determine the nature of a host contract in a

financial instrument issued in the form of a share for purposes

of determining if an embedded derivative is clearly and closely

related to a host?

• Common practice:

Background


– Whole instrument approach: consider all

economic characteristics and risks of the

instrument (i.e., all embedded features)

– Chameleon approach: exclude the terms and

features pertaining to the individual embedded

derivative being evaluated



• Convertible preferred share with fixed-price redemption, and:

– Dividend rights

– Voting rights

• When evaluating whether the conversion feature (an equity-

like feature) is CCR to the host, an entity first determines if the

host is more akin to equity or debt

Example


– Whole instrument approach: consider all features, but there is

diversity in practice

• Redemption is debt-like

• Conversion is equity-like

• Do these features offset, indicating the host is equity-like, because it is

issued in the form of a share and contains other equity-like features?

• Does the redemption feature, which is debt-like, indicate the host is also

debt-like, because the holder is not exposed to downside risk of a

residual interest?

– Generally no diversity under the chameleon approach (i.e., debt) Copyright © 2013 Deloitte Development LLC. All rights reserved.


• The Task Force reached a consensus-for-exposure that:

– Entities should apply the whole-instrument approach when

determining the nature of a hybrid financial instrument issued

in the form of a share (chameleon would not be permitted)

– There is no rebuttable presumption that a redemption feature is

determinative in concluding a convertible preferred share with a

fixed-price redemption feature is more akin to debt; instead, all

features should be evaluated and weighted based on facts and

circumstances

• Transition: Cumulative-effect adjustment to retained

earnings as of the beginning of the year of adoption for

instruments (and derivatives) held at the effective date.

Early adoption and retrospective transition permitted.

• Could diversity persist???

Consensus-for-exposure



Under the FASB’s consensus-for-exposure related to 13-G,

can an entity apply the chameleon approach to determine the

nature of the host in a hybrid financial instrument issued in

the form of a share?

• Yes

• No

Poll question #5

IASB Conceptual Framework


Project background 1989 – Original IASB framework published

2004 – IASB and FASB work jointly to

develop an improved, conceptual

framework

2010 – Boards finalize two chapters of a

new framework in September,

replacing existing related guidance.

– Boards discontinue work on joint

project late in 2010.

2012 – IASB restarts project as an IASB-only

project

2013 – IASB publishes DP on its Conceptual

Framework for Financial Reporting

IASB conceptual framework Project background and discussion paper

Next steps…

• Comments on the discussion

paper are due by January 14,

2014

• IASB expected to publish an

exposure draft of a revised

framework by the end of 2014

• IASB expected to finalize the

framework by the end of 2015

DP does not discuss the

concept of a reporting entity

because the boards already

issued an ED on this topic in

March 2010


• Assets and liabilities

– Role of probability in the definitions of assets and liabilities

– Control of an economic resource

– Constructive obligations and economic compulsion

– Obligations depending on an entity’s future actions

• Liabilities and equity

– Distinguishing between liabilities and equity

– Presentation of equity claims

• Presentation of profit or loss/OCI

– Profit and loss presentation requirements

– Income and expense presentation considerations

• Other framework elements

– Measurement

– Recognition and derecognition

– Presentation and disclosure

IASB conceptual framework Framework overview

PCAOB Proposed Standards Auditor Reporting Model


• On August 13, 2013 PCAOB proposed changes to:

– The auditor’s reporting model; and

– The auditor’s responsibilities for other information included in annual reports

filed with the SEC and information incorporated by reference in annual

reports (“other information”)

• Responding to feedback that the current auditor’s report contains

little or no information specific to that particular audit

– Proposal includes input from various outreach efforts, including:

• Discussion with its SAG and IAG

• Holding a roundtable

• Issuing a concept release

– The IAASB has also recently proposed similar changes to its auditor’s report

• New requirements would be effective for audits of financial

statements for fiscal years beginning on or after December 15,

2015

– Timing is subject to PCAOB standard setting process and the SEC’s

approval process

Overview


• Requires a new section in the auditor’s report describing

critical audit matters

• Critical audit matters are those that:

– Involved the most difficult, subjective, and complex auditor

judgments;

– Posed the most difficulty to the auditor in obtaining sufficient

appropriate evidence; or

– Posed the most difficulty to the auditor in forming an opinion on the

financial statements

• In this new section of the auditor’s report, the auditor would:

– Identify the specific critical audit matters;

– Describe the considerations that led to each matter being considered

a critical audit matter; and

– Refer to the related financial statement accounts and disclosures in

the financial statements (if applicable)

Significant aspects of the proposal


• The proposal also requires new elements to be

included in the auditor’s report regarding:

– Auditor independence

• Stating that the auditor is required to be independent in

accordance with federal securities laws and applicable rules and

regulations of the SEC and PCAOB

– Auditor responsibilities

• Incorporating statements regarding the auditor’s responsibilities

related to fraud and the notes to the financial statements

– Auditor tenure

• Stating the year the auditor began serving consecutively as the

company’s auditor



• The proposal also includes new auditor responsibilities to read and

evaluate other information for:

– Consistency of amounts with the financial statements;

– Consistency of qualitative statements with the financial statements;

– Comparability with relevant audit evidence obtained and conclusions reached; and

– Mathematical accuracy

• The auditor’s report would include new language to:

– Describe the auditor’s responsibilities for other information; and

– Based on the relevant audit evidence obtained and conclusions reached during the

audit, state whether the other information contains:

• Material inconsistencies

• Material misstatements of fact

• Both

• The proposal states that “other information” includes information (other

than the audited financial statements and related auditor’s report)

– Contained in the annual report that is filed with the SEC, and

– Information incorporated by reference in the annual report



• Comments are due to the PCAOB by December 11,

2013

• The PCAOB is considering holding a public roundtable

in 2014 to discuss the proposal and comments

received

Next steps


Have you been following the PCAOB’s Auditor Reporting

Model proposed auditing standard?

• Yes

• No

• Somewhat

Poll question #6

PCAOB Other Developments


PCAOB inspections

• Audit committee guidance

– On August 1, 2012, the PCAOB issued Release No. 2012-003

“Information for Audit Committees about the PCAOB Inspection

Process”

– The Release is intended to assist audit committees in:

• Better understanding the PCAOB’s inspections of their audit firms; and

• Gathering information from their audit firms about those inspections

• International inspections (China)

– PCAOB entered into an MOU with China to share information for

investigative and enforcement purposes (The SEC was not a party

to this MOU)

– The PCAOB has not yet reached an agreement with China on joint

inspections of PCAOB-registered accounting firms located in China


Project Action

Recent board actions

Auditor’s Reporting Model Proposal – comments due

12/11/13

Auditor’s Responsibilities Regarding Other Information Proposal – comments due

12/11/13

Related Parties, Significant Unusual Transactions and Other

Amendments

Re-proposal issued for public

comment - due 7/8/13

Framework for Reorganization of PCAOB Auditing

Standards

Proposal issued for public

comment – comments were due

5/28/13

Expected actions

Audit Transparency: Identification of the Engagement

Partner

Adoption or re-proposal

Audits of Brokers and Dealers1 Adoption or re-proposal

Going Concern2 Proposal

Auditor Independence and Audit Firm Rotation Concept release

1 On July 30, 2013, the SEC’s adopted applicable amendments to Rule 17a-5; two roundtables have been scheduled to solicit public feedback. 2 The timing of this project depends on the timing of the FASB’s going-concern project.

PCAOB standard setting


Do you plan to submit comments to the PCAOB on its

proposed standard regarding the Auditor Reporting Model?

• Yes

• No

• Not applicable to me

Poll question #7

Question and answer

Join us November 19 at 2 PM ET as our Financial Reporting series presents:

EITF Roundup: Highlights from the November Meeting


Eligible viewers may now

download CPE certificates.

Click the CPE icon in the dock at

the bottom of your screen.


Contact info

Bob Uhl [email protected]

Joe DiLeo [email protected]

Lyndsey McAlister [email protected]

Jason Nye [email protected]

mailto:[email protected]





ASC: FASB Accounting Standards Codification

ASU: Accounting Standards Update

EITF: Emerging Issues Task Force

FASB: Financial Accounting Standards Board

GAAP: Generally Accepted Accounting Principles

IAG: PCAOB Investor Advisory Group

IAASB: International Auditing and Assurance Standards Board

MOU: Memorandum of Understanding

PCAOB: Public Company Auditor Oversight Board

PCC: Private Company Council

SAG: PCAOB Standing Advisory Group

SEC: Securities and Exchange Commission

SPPI: Solely Payments of Principal and Interest

Acronyms used in presentation


This presentation contains general information only and Deloitte is not, by means of this

presentation, rendering accounting, business, financial, investment, legal, tax, or other

professional advice or services. This presentation is not a substitute for such professional advice

or services, nor should it be used as a basis for any decision or action that may affect your

business. Before making any decision or taking any action that may affect your business, you

should consult a qualified professional advisor. Deloitte shall not be responsible for any loss

sustained by any person who relies on this presentation.

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