Accounting Update 2015

Chris Rouse

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Accounting Update 2015Accounting Update 2015

For Windham Brannon Clients and Friends

Presented byChris RouseWindham Brannon, PCrouse@windhambrannon.com

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Accounting Update 2015• Current status of GAAP, IFRS, OCBOA,

AICPA, PCAOB, SEC, etc.• Recent FASB Standards• Some FASB Exposure Drafts

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Accounting Update 2015Who are the Players in the Financial Reporting Arena• Financial Accounting Standards Board (FASB)• International Accounting Standards Board (IASB)• American Institute of Certified Public Accountants (AICPA)• International Auditing and Assurance Services Board (IAASB)• U.S. Congress• State Boards of Accountancy• Public Company Accounting Oversight Board (PCAOB)• Securities and Exchange Commission (SEC)

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Accounting Update 2015• Financial Accounting Standards Board– In recognition of world-wide need for consistent

accounting, in 2002 FASB and IASB entered into the Norwalk Agreement, followed in 2006 by a Memorandum of Understanding• Established a dozen or so key areas (“Projects”) for

accounting principles to be “converged”• The SEC became involved with its “Roadmap” to

permitting US public companies to prepare their financials using IFRS

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Accounting Update 2015• Current status of financial reporting• FASB and IASB Convergence Project

– Since 2006 MoU, approximately 9 of 12 projects have been completed• Projects remaining include leases, financial instruments and

insurance– There are differences in measurement matters on all 3 projects

– Current situation – When current projects completed, no more will be undertaken (IASB Chair, Spring 2014)

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Accounting Update 2015Current status of financial reporting• SEC Roadmap to use of IFRS by US public companies

– 2008 Roadmap is suspended• Provided for allowing certain US public companies to use IFRS in 2014

– Indefinitely delayed– SEC Staff Study in 2012

• Looking for IFRS improvements in consistency, education, funding of the IASB and some other areas

– Current situation• Stress between IASB and SEC• SEC Chief Accountant says “US will need to have a strong voice” in

IASB standard setting• SEC is funding IASB $5million annually

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Accounting Update 2015Current status of financial reporting• SEC Roadmap to use of IFRS

– December 2014 – SEC Chief Accountant says SEC will seek input from interested parties as to whether filers should be permitted to include as supplemental info financial statements and/or disclosures prepared using International Financial Reporting Standards• To become effective, would be subject to Rule-making process• There could be some implementation in December 31, 2015

10k filings, but ….

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Accounting Update 2015FASB Accounting Standards Updates• 2015 – 16 ASUs issued thru November

19, 2015• 2014 – 18 ASU’s issued• Check out FASB web site for ASUs at

http://www.fasb.org/home, click on “Standards” tab

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 16 – Business Combinations (Topic 805):

Simplifying the Accounting for Measurement-Period Adjustments– Applies to business acquisitions where there are provisional amounts

where fair values could not be determined as of the financial statement date

– Changes current retrospective recognition of provisional amounts to recognize when determined

– Effective for public entities for fiscal years beginning after December 15, 2015 and interim periods within those years

– For non-publics effective for fiscal years beginning after 12-15-2016 and interim periods after 12-15-2017

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 15 — Interest – Imputation of

Interest (Topic 835): Debt issuance costs associated with line-of-credit (Amendments to SEC paragraphs) – Conforms SEC accounting to FASB (see ASU 2015-03)

• Update No. 2015-14 — Revenue from Contracts with Customers (Topic 606): Deferral of the effective date– Delays by one year the effective date of ASU 2014-09,

Revenue from Contracts with customers

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 13 — Derivatives and

Hedging (Topic 815): Accounting for certain electricity contracts – Narrow topic to clarify hedge accounting issues

for traders in electricity contracts – Simplifies determination of qualification as a

hedge

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 12 — Employee Benefit Plan Accounting

– Significant changes in accounting and disclosures for employee benefit plans

– Part I – Fully Benefit-Responsive Investment Contracts– Part II – Plan Investment Disclosures– Part III – Measurement Date Practical Expedient– Effective fiscal years beginning after 12-15-2015; early

application permitted• Applied retrospectively

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 12 — Employee Benefit

Plan Accounting – Part I – Fully Benefit-Responsive Investment

Contracts• Removes current requirement to account for guaranteed

investment contracts at fair value, requiring contract value be used for all reporting

• Also removes fair value disclosures for Contracts

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 12 — Employee Benefit Plan

Accounting – Part II – Plan Investment Disclosures

• No longer required to disclose 5% investments, appreciation by type investment, and investments by class– FASB said “does not provide decision useful information (emphasis

added)• Will continue to present information by type investment

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Accounting Update 2015• FASB Accounting Standards Updates• Update No. 2015 – 12 — Employee Benefit

Plan Accounting – Part III – Measurement Date Practical Expedient

• Rarely applicable provision that defined benefit plans with non-month end financial statement dates can use month-end date to determine investments and investment-related amounts

• ASU 2015-04 provides same provision for sponsors

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 11 — Inventory (Topic 330): Simplifying

the Measurement of Inventory– Changes “market” in LCM to Lower or cost or net realizable value

• NRV is estimated selling price less cost to complete, dispose and transport

• Does not apply to inventory valued using LIFO or Retail Method– Required to write down “when evidence exists” that NRV is lower

than cost– Effective for fiscal years beginning after 12-15-16 including

interim periods for publics

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-10 — Technical Corrections and

Improvements– Clarifies some differences in Original Guidance and the

Codification – no GAAP changes• Update No. 2015 – 09 — Financial Services—Insurance

(Topic 944): Disclosures about Short-Duration Contracts– New disclosures for insurance entities– No effect on policy holders

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-08 —Business Combinations

(Topic 805): Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)– Deletes SEC materials in Codification related to

push-down accounting, which is replaced by ASU 2014-17

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-07 – Fair Value Measurement: Disclosures for

Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) – (Course Manual p. 37)– Applies to investments in private investment funds that do not

frequently or timely measure net asset value– Removes requirement to categorize within the fair value hierarchy

assets measured using practical expedient– Requires disclosures for assets measured using practical expedient– Effective years beginning after 12-15-15 for publics, and after 12-

15-16 for non-publics

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 06 —Earnings Per Share (Topic

260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (a consensus of the Emerging Issues Task Force)– Narrow application to Master Limited Partnerships– Effective date for years beginning after December 15,

2015 and interim periods within those years

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-05 —Intangibles—Goodwill and

Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (Course Manual p. 41)– Provides for customers of cloud computing

arrangements to account for the arrangement as a contract or a license, depending on its provisions

– Effective years beginning after 12-15-15

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Accounting Update 2015• FASB Accounting Standards Updates• Update No. 2015-04 – Compensation—Retirement

Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets– Provides that an entity with a year-end that is not a

month end may use the month-end valuation of a defined benefit plan for measurement and disclosure purposes

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015 – 03 —Interest—Imputation of

Interest (Subtopic 835-30): Simplifying he Presentation of Debt Issuance Costs– Simplifies presentation of debt premiums, discounts

and issuance costs by netting issuance costs against the debt

– Effective years beginning after 12-15-15 for publics, and 12-15-16 for non-publics. Early adoption permitted

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-02—Amendments to the

Consolidation Process– Eliminates presumption that a General Partner should

consolidate a limited partnership• To qualify for exemption, must have substantive kick-out

rights or participating rights• To qualify for exemption, the general partner cannot have a

controlling financial interest (eg, through limited partner interest)

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-02—Amendments to the Consolidation Process

(continued)– Changes VIE considerations for partnerships, LLCs

• Fee arrangements that are customary and commensurate with level of service are excluded when considering primary beneficiary

• Reduces the application of related party interests to reporting entity

– Effective for publics fiscal years beginning after 12-15-15, and for non-publics years ending 12-31-17

– Changes would not impact private companies that have adopted ASU 2014-07 (discussed earlier)

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2015-01—Elimination of the

concept of extraordinary items– Just what it says– Retains disclosure requirements for unusual and

infrequent items– Effective fiscal years beginning after 12-15-15,

early adoption permitted

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-18—Business Combinations; Accounting for

identifiable intangible assets acquired (consensus of Private Company Council) – Covered earlier– Permits private companies to include in goodwill-

• Customer related intangibles not capable of being sold or licensed independently from other assets of the business (eg, customer lists, mortgage servicing rights)

• Non-compete agreements– To use this accounting, the entity must amortize goodwill under

ASU 2014-02– Effective after 12-15-15, early adoption permitted

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-17—Business Combinations:

Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)– Follows current practices closely– Applies upon change of control– Use amounts determined when applying acquisition

accounting– Effective upon issuance

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-16—Derivatives and Hedging: Determining

Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force)– FASB may know what a liability is, but they are still trying to

figure out what an equity is– Requires very detailed understanding of the contract– Effective for publics fiscal years beginning after 12-15-15, for

non-publics for fiscal years ending after 12-15-16 . Early adoption permitted

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-15; Going Concern

– Prior to this, going concern accounting was in audit and SSARS Standards

– FASB started out with a “Business Risks” approach to going concern

– FASB later moved to a 12 month – 24 month model– FASB ended with a Standard very similar to current GAAS/SSARS

Standard– Requires management to assess going concern for a period of 12

months from date financial statements are available to be issued

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-15; Going Concern (continued)

– List of factors to consider included in Standard• Negative financial trends• Possible financial difficulties, e.g. loan defaults or need to restructure

loans, denial of trade credit• Internal matters, e.g. labor issues, dependence on particular

projects, uneconomic long-term commitments, need to revise operations

• External matters, e.g. legal matters, new legislation, loss of key customer or supplier etc.

• Create a checklist of factors and complete checklist when preparing financial statements

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-15; Going Concern (continued)

– When conditions identified that raise substantial doubt, management should consider whether it’s plans to mitigate those conditions will alleviate the substantial doubt• Mitigating effect considered only to extent …

– It is probable that plans will be effectively implemented, and if so …

– It is probable that the plans will mitigate the conditions

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-15; Going Concern (continued)

– If substantial doubt alleviated, disclose …• Conditions and events giving rise to going concern, and

their possible effect(s) on the entity• Management’s evaluation of those conditions and events

in relation to ability to meet obligations• Mitigating conditions and events, and …• Management’s plans to address the conditions and events

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-15; Going Concern

(continued)– If substantial doubt not alleviated, disclose that

there is substantial doubt about etc, and the above disclosures of conditions, obligations and plans

– Effective for the annual period ending after December 15, 2016

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-14; Classification of Government

Guaranteed Mortgage Loans Upon Foreclosure– Applies to entities that own government guaranteed mortgage

loans– Requires loans with guarantee to remain classified as loans until

title is passed to government– Requires government guarantee amounts to be classified as

receivable– Effective for publics 12-15-14, for non-publics ending after 12-15-

15

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Accounting Update 2015FASB Accounting Standards UpdateThe following updates were covered in last years Insights and are repeated here as newly effective• Update No. 2014-13; Measuring assets and liabilities of

consolidated financing entity– Applies to special purpose entities of financial institutions– Fine tunes the fair value accounting differences required for

VIEs and for financing entities that carry loans at fair value– Effective for publics beginning after 12-15-15, for non-publics

ending after 12-15-16

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-10; Development Stage Entities –

Including VIEs– Removes definition of DSE from glossary– Simplifies accounting for DSEs by removing all “incremental

financial reporting requirements” • e.g., inception to date info• e.g., disclosures re activities• e.g., eliminates “sufficiency of equity at risk” criterion for

determining VIE status of DSEs– Instead are subject to “regular” VIE considerations

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-10; Development Stage

Entities – Including VIEs (continued)– Required to apply “Risk and Uncertainties”

guidance – Staged effective dates for elements, FY

beginning after 12-15-14

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-8; Discontinued operations and

disposal of a segment– Narrows application of discontinued ops and disposal

of segment• “strategic shift” that has “major effect” on operations

– Major geographical area– Major line of business– Major equity method investment– Other examples in ASU

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Accounting Update 2015FASB Accounting Standards Updates• Update No. 2014-8; Discontinued operations and disposal of a

segment (continued)– Additional disclosures required

• Major assets and liabilities• Major revenues and expenses• Cash flow information• Non-controlling interest information

– Continuing involvement disclosures required– If disposal does not qualify for discontinued/disposal accounting, disclosures

of income, etc required– Effective FY beginning after 12-15-14; early application permitted

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Accounting Update 2015The New Revenue Recognition Standard Accounting Standards Update 2014-09 Issued May 2014, now effective for publics beginning 2018 and for non-publics ending 2019• Eliminates all industry and transaction guidance for

revenues in current standards• Largest impact on service business, but potentially will

impact all businesses• Prior periods presented may be either recast or disclose

the effect on prior financials

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Accounting Update 2015The New Revenue Recognition Standard• Overarching principle for recognizing revenue

– 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 and services• In effect, revenue is recognized as changes in assets

and liabilities are recognized

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Accounting Update 2015The New Revenue Recognition Standard• Overarching principle for recognizing revenue

– Compare to Concept Statement #5 – “Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues”

– Compare to current recognition principles (1) persuasive evidence of transaction, (2) delivery has occurred, (3) fee is fixed or determinable and (4) collectability is assured

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Accounting Update 2015The New Revenue Recognition Standard• The following steps are used to apply the core principle

– Identify the contract with a customer– Identify the separate performance obligations in the

contract– Determine the transaction price– Allocate the transaction price to the separate performance

obligations– Recognize revenue when performance obligations satisfied

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Accounting Update 2015The New Revenue Recognition Standard• Getting ready for the new standard– Study the parts of the new standard that apply to

you, and review the implementation guidance on the FASB and AICPA websites

– Evaluate current contracts with customers• Identify performance obligations and information

systems• Identify transaction prices

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Accounting Update 2015The New Revenue Recognition Standard• Getting ready for the new standard– Evaluate current revenue recognition practices and

compare to requirements of new standard• Communication of completion of performance

obligations– Consider necessary changes in contract to achieve

desired revenue recognition timing• Transfer of risks and rewards of ownership

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Accounting Update 2015The New Revenue Recognition Standard• Getting ready for the new standard

– Consider effect on compensation arrangements, income taxes, etc.• May effect timing of compensation based on revenue or net income• Some tax revenues are determined by GAAP

– Consider changes to information system to capture necessary info• Much of the information necessary to implement the new standard

does not exist in the accounting department

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Accounting Update 2015The New Revenue Recognition Standard• Getting ready for the new standard– Evaluate current revenue recognition practices and

compare to requirements of new standard• Communication of completion of performance

obligations– Consider necessary changes in contract to achieve

desired revenue recognition timing• Transfer of risks and rewards of ownership

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Accounting Update 2015The New Revenue Recognition Standard• Getting ready for the new standard– Point: This is a complicated standard

– the first time – after that it’s a snap

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Accounting Update 2015Some important accounting exposure drafts• Leases

– Core principle – All leases will be capitalized based on the present value of future lease payments• Payments based on contract and contingent payments that are likely

to occur• Indexed changes recognized as they occur• Lease term includes non-cancellable period plus renewal periods when

“significant economic incentive” to renew is present • Discount rate is rate charged by lessor or lessee’s incremental

borrowing rate• Non-publics could use risk-free discount rate option• No specific guidance for measuring related party leases

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Accounting Update 2015Some important accounting exposure drafts• Leases (continued)

– Financial statements • Balance sheet, income statement and cash flow geography

changes • Classify leases as Type A or Type B

– Type A leases are personal property and Type B leases are land and buildings (or part of building)

– Type A leases …» Separately recognize interest and amortization

– Type B leases …» Recognize single lease cost

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Accounting Update 2015Some important accounting exposure drafts• Leases (continued)

– Disclosure • Reconcile opening and closing asset and obligation, by class

– Still considering non-public exemption • Undiscounted maturities for 5 years and thereafter, less

interest portion • Have added disclosures (vs. measurement) for service

elements of leases

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Accounting Update 2015Some important accounting exposure drafts• Leases (continued)

– Disclosure • Lease expense in tabular format, including –

– Amortization– Interest– Variable payments not in amortization– Expenses for any non-capitalized leases

• Future commitment for services or non-asset component of leases

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Accounting Update 2015Some important accounting exposure drafts• Financial instruments

– FASB and IASB cannot get together on certain measurement matters• Bad debt reserves• Fair value• Hedge accounting in limbo

– IASB has issued IFRS #9 on Financial Instruments• Departs from FASB ED in the above 3 areas

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Accounting Update 2015Some important accounting exposure drafts• Not-for-Profit Financial Reporting

– Numerous changes to format• Combines restricted net assets into one line• New approach to defining “operating activity” vs investing or financing• Adds a measure of operating excess(deficit) before and after transfers• Combines changes in restricted net assets• Requires direct method for cash flows• Requires expenses to be displayed “nature-by-function• Displays “underwater” endowments

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Accounting Update 2015Some important accounting exposure drafts• Not-for-Profit Financial Reporting (continued)

– Various additional disclosures• Enhanced endowment disclosures• New disclosures re board designations, liquidity

– Reporting of investment returns• Netting limited to direct investment expenses

– Disclose any internal investment expenses– Reporting of liquidity and financial availability

• Classified balance sheet• Display limited use assets• More disclosures re liquidity

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Accounting Update 2015Some important accounting exposure drafts• Stock-Based Compensation (Simplification)

– No separate accounting for related income taxes– Forfeitures could be estimated or recognized as they occur– Non-publics can elect practical expedient to estimate

expected term– Non-publics can elect to switch from fair value to intrinsic

value– Disclosures would not change significantly

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Accounting Update 2015Some important accounting exposure drafts• Equity Method and Joint Ventures (Simplification)

– Accounting for basis difference of equity method investments is costly and complex and not useful

– Proposal would recognize investment at cost (current is to recognize at fair value)

– Continue to recognize equity in income of equity method investees

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Accounting Update 2015In Conclusion …..Bon Auditpetite!

Contact Chris RouseWindham Brannon, PCcrouse@windhambrannon.com