Southern California Alumni and Friends CPE events...This presentation contains general information...

Southern California Alumni and Friends CPE eventsOrange County, August 25, 2017

Southern California Alumni and Friends CPE eventsCopyright © 2017 Deloitte Development LLC. All rights reserved. 2

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Today‘s agenda

Time Activity/topic Speaker

7:00 a.m.–7:30 a.m. Registration and continental breakfast

7:30 a.m.–7:40 a.m. Welcome and agenda overview Tim Brandt

7:45 a.m.–8:35 a.m. SEC & Regulatory Update Austin Lee

8:35 a.m.-9:25 a.m. Cloud Based Technologies Gayle Proctor

9:25 a.m.–9:45 a.m. Break

9:45 a.m.–10:35 a.m. Current Developments in Financial Reporting for Taxes Jimmy Onizuka

10:35 a.m.–11:25 a.m. Finance in a Digital World Barton Crist

11:25 a.m.–12:30 p.m. Networking lunch

12:30 p.m.-1:20 p.m. Accounting & Reporting Update Katherine O’Connor

1:20 p.m.–2:10 p.m. Global Economic Trends Ira Kalish

2:10 p.m.—2:30 p.m. Break

2:30 p.m.–3:20 p.m. Tax Policy in 2017 Matt Crosby

3:20 p.m.–4:10 p.m. Cyber Security Sean Peasley

4:10 p.m.–4:15 p.m. Wrap-up and closing remarks


SEC & Regulatory Update

Cloud Based Technologies

Current Developments in Financial Reporting for Taxes

Finance in a Digital World

Accounting & Reporting Update

Global Economic Trends

Tax Policy in 2017

Cyber Security


SEC and Regulatory Update

Austin LeeManaging DirectorDeloitte & Touche LLP


• SEC structure and rulemaking post-election

• SEC priorities and agenda

• Disclosure effectiveness

• New accounting standards

• Non-GAAP measures

• SEC review process

• SEC comment trends

Agenda


SEC structure and rulemaking post-election


Assistant Director

Branch Chief

Senior Assistant Chief Accountant

Branch ChiefLegal Branch Chief

Associate Director

Office of Chief Accountant OCA

Wes Bricker

InvestmentManagement

Trading & Markets

CommissionerPiwowar

CommissionerStein

22 other offices

Corporation FinanceBill Hinman

Economic and Risk Analysis Enforcement

Industry AD Group

10 other AD groups

Corp Fin—Office of the Chief Accountant

Mark Kronforst

Open positions to be nominated by President and confirmed by the SenateSource: Information from www.sec.gov/corpfin/Article/filing-review-process---corp-fin.html

Chairman Clayton

Nominated(Hester Pierce)

Open

SEC—Current Structure


Capital formation, IPO and M&A focus

• Expansion of certain JOBS Act benefit to all IPOs

Impact on Dodd-Frank

Approach to enforcement

Disclosure effectiveness

SEC significant focus areas

• New accounting standards (revenue, leasing, CECL)

− Disclosures about impact of standards

− ICFR

• Non-GAAP measures

• Contingencies

• PBE definition relief

SEC priorities and agenda




What is it?• Evaluation of type of information SEC rules require, where and

how information is presented and disclosed, and how technology can be leveraged

• Providing better information to investors—more understandable and useful, eliminating excessive, immaterial, and outdated disclosure, and reducing redundancies

• Could result in additional disclosures

What has the SEC staff done?• Request for comment on financial disclosures about entities other

than the registrant in Reg. S-X—comment period closed November 2015

• S-K concept release—comment period closed July 2016• Disclosure Update and Simplification proposed rule—comment

period closed Nov 2016


1

2

3

Tailor disclosures to company’s facts and circumstances

Reduce or eliminate redundant disclosures

Focus on material and relevant matters


What are companies doing?

• Almost 75% of respondents are taking action to improve disclosures(1)

• Increasing use of graphics, charts and technology

• Exploring alternative investor communications (e.g. integrated summary reports)

Why are companies doing it?

• Improve clarity and usefulness of information provided to investors

• Increase efficiency of preparation and review process

Disclosure effectiveness (cont.)

Focus on material and relevant matters

(1) Source—“Results Are In: Disclosure Effectiveness Study Findings Revealed and May Be Surprise to Some”, Financial Executive Research Foundation Staff, FEI Daily


New accounting standards


SAB Topic 11.M (SAB 74) disclosures on new revenue, lease and credit loss accounting standards

Newly issued accounting standards

Consider for Periodic Filings:

• Additional qualitative disclosure if impact cannot be reasonably estimated:

−The effect of any accounting policies you expect to select upon adopting the ASU, and how they differ from your current accounting policies

−The status of the implementation process and the nature of any significant implementation matters that have not yet been addressed

Revised financial statements in registration statements (discussed later)

“Investors should expect the level of disclosures to increase as companies make further progress in their implementation plans” in connection with newly issued standards.—

Wesley Bricker, Chief Accountant, Office of the Chief Accountant


Other considerationsDisclosures on newly issued standards

Example SEC Comment on Disclosure of the Impact of the New Revenue Standard

You state that you are in the process of evaluating the impact that the amended revenue recognition guidance in Topic 606 will have on your consolidated financial statements. Please revise to provide a qualitative discussion of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the standard’s provisions that you expect to apply and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 will have on your results, please also disclose such amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.


Implementation considerations—transition methodRevenue recognition

The following chart illustrates the percentage of SEC registrants that have disclosed their anticipated transition method in their most recent SEC filings (from Deloitte Heads Up):

Note: Based on public filings made by nearly 1,000 SEC registrants as of May 31, 2017, of which 15 have early adopted (8 companies applied the full retrospective transition method and 7 companies applied the modified retrospective transition method).

10%

39%51%

Full Retrospective Modified Retrospective Undecided/Other


Implementation considerations—transition method (cont.)Revenue recognition

Of those SEC registrants that stated their anticipated transition method (i.e., excluding undecided or undisclosed registrants), the following summarizes the anticipated transition method by industry sector:

0 10 20 30 40 50

Travel and HospitalityTelecom

TechnologyRetail and Distribution

Real EstatePower & Utilities

Oil & GasMedia & Entertainment

Life SciencesIndustrial Products & ServicesHealth Care Providers & Plans

Financial ServicesConsumer Products

Chemical & Specialty MaterialsAutomotive

Full Retrospective Modified Retrospective


Non-GAAP measures


Evolution of non-GAAP measure rules and regulationsNon-GAAP measures

SEC issues “cautionary advice” to

registrants

2001

SEC issues Regulation G and S-K Item 10(e)

2003

Compliance & Disclosure

Interpretations (C&DI’s) issued by

SEC

2010

SEC increases focus on non-GAAP measures as

measures increase in use and prominence

2015

New and updated C&DIs issued by SEC

2016


Updated compliance and disclosure interpretationsNon-GAAP measures (cont.)

• Prominence Issues (C&DI 102.10)

−Full non-GAAP income statement, omitting comparable GAAP measures from press release headlines, bolder or larger font, non-GAAP measure that precedes a comparable GAAP measure, forward looking non-GAAP measures

• Misleading measures (C&DI 100.01–100.04)

−Consistency over time and type of adjustments

• Financial measures using individually tailored accounting principles (C&DI 100.4) - e.g. pro-rata share of unconsolidated investees

• Prohibition on presenting liquidity measures on a per share basis (C&DI 102.05)

• Non-GAAP tax expense (C&DI 102.11)

“Non-GAAP measures are intended to supplement …and not supplant the information in the financial statements.”-Jim Schnurr, Chief Accountant, Office of the Chief Accountant


Focus of non-GAAP SEC Comments after updated Compliance and Disclosure Interpretations (C&DIs)

Non-GAAP measures (cont.)

Per Sullivan & Cromwell LLP—April 19 2017. The comment letters analyzed are for filings made after May 17, 2016, the date of issuance of the updated C&DI’s , and include comments made public through April 14, 2017


Roadmap to Non-GAAP Financial MeasuresNon-GAAP measures (cont.)

Resource devoted exclusively to Non-GAAP measures:

• Combines SEC guidance with interpretations and examples

• Presentation and disclosure of non-GAAP measures

• Disclosure controls and procedures

• Appendixes also includes

− Questions to ask when disclosing non-GAAP measures

− Highlights and remarks from recent SEC officials

− Example SEC comments on non-GAAP measures


SEC review process


• All issuers reviewed at least 1 out of every 3 years

• Focus on largest registrants that comprise 98% of market cap

• Percentage of issuers reviewed:

Not all reviews result in comment letters

Comments are publicly posted 20 days after completion of review

Staff is listening to analyst/earnings calls, reviewing press releases, Web sites, social media, etc.

SEC filing review process

FY 11 FY 12 FY 13 FY 14 FY15 FY16

48% 48% 52% 52% 51% 56%


SEC comment trends


SEC comment letter trends: Summary

Comment Letter trend information was derived from data provided by Audit Analytics based on the percentage of all comment-letter-yielding Form 10-K and 10-Q reviews that include a comment on topic.


Comment letters per reviewSEC comment letter trends and statistics

Source: Information in the table is derived from data provided by Audit Analytics, includes comments related to Forms 10-K and 10-Q, as well as related amendments, for reviews that have been “closed.” Review year information includes comments for the 12-month periods ended July 31 for each year.


Areas of focusSEC comment letter trends

Segments

• Who is the CODM—someone other than CEO?

• Identification of operating segments

− CODM package—no longer determinative; total mix of information

− Consider how shared costs are allocated

• Aggregation—consider both quantitative and qualitative factors

• Revenues by product line


Areas of focus (cont.)SEC comment letter trends

Other areas

• MD&A

• Metrics

• Revenue recognition

• Income Taxes

• Business Combinations and Goodwill

• Internal Control over Financial Reporting


Deloitte comment letter series

• Ninth Edition—October 2015• Insights into areas the SEC staff has focused on in recent comment letters

including:− Financial Statement Accounting and Disclosure Topics− Disclosure Topics in Initial Public Offerings− Industry-Specific Topics

◦ Consumer & Industrial Products◦ Energy & Resources◦ Financial Services◦ Health Sciences◦ Technology & Telecommunications◦ Real Estate

• Supplement issued October 2016 provides updated analysis, which includes:− Update of SEC’s strategic priorities− Updated top-10 list of most common trends− Expanded presentation of comment letter statistics− New trends in business combinations, leases and pensions

SEC comment letter trends and statistics


PCAOB update


PCAOB organization

Open‏board seat

James R. Doty

Chairman since 2011

Steven B. Harris

Board member since 2008

Lewis H. Ferguson


Jeanette M. Franzel


Open since 2016


Planned research agendaPCAOB standard setting agenda

The PCAOB has modified its process of developing a standard-setting agenda to now include a research phase before a topic is added to the standard-setting agenda.

An interdivisional team will perform research, outreach, and economic analyses of the topics on the Planned Research Agenda to assess whether there is a need for changes to the PCAOB standards or alternative regulatory response. Based on this analysis, a topic may be moved to the standard-setting agenda.

Project Action

Quality control (QC) standards, including assignment and documentation of firm supervisory responsibilities

The staff is exploring whether there is a need for changes to PCAOB quality control standards—including improvements related to assignment and documentation of firm supervisory responsibilities—that would prompt firms to improve their quality control systems and more proactively identify and address emerging risks and deficiencies, thereby enhancing audit quality.

Changes in the use of data and technology in the conduct of audits

The staff is exploring whether there is a need for guidance, changes to PCAOB standards, or other regulatory actions in light of auditors’ increased use of new technology-based tools in the conduct of audits.

Auditor’s role with respect to other information and company performance measures, including non-GAAP measures

The staff is reevaluating whether there is a need to revise the standards related to auditor’s responsibility over other information and, if so, how to change the auditor’s existing performance and reporting responsibilities related to other information accompanying audited financial statements.

Auditors’ consideration of noncompliance with laws and regulation

The staff is exploring whether there is a need for improvements to current standards to provide better direction to auditors regarding their responsibilities with respect to illegal acts.


Changes to the Auditor’s report—overviewPCAOB standard setting (cont.)

• On June 1, 2017, the PCAOB adopted a new auditing standard on the auditor’s report and related amendments to other standards.

• The purpose of the new standard is to enhance the value of the auditor’s report.

• While the new standard retains the current “pass/fail” opinion, it also significantly increases the information included in the auditor’s report.

• The most significant change is a new required section to communicate critical audit matters (CAMs).

− However, communication of CAMs is not required for audits of brokers and dealers; investment companies other than business development companies; employee stock purchase, savings, and similar plans; and emerging growth companies. The standard permits voluntary inclusion of CAMs in the auditor’s report for such entities.

• Other changes include:

− Standardization of the order and form of the auditor’s report, with the opinion section appearing first and section titles added to guide the reader.

− Enhanced descriptions of the auditor’s roles and responsibilities in the audit, including a statement that the auditor is required to be independent with respect to the company in accordance with the US federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.

− Disclosure of auditor tenure—The year the auditor began serving consecutively as the company’s auditor.


Disclosure of engagement partner and certain other participants in audits on Form APCAOB standard setting (cont.)

• The requirement to disclose the name of the engagement partner on new PCAOB Form AP, Auditor Reporting of Certain Audit Participants(Form AP) became effective for audit reports issued on or after January 31, 2017.

• The requirement to disclose other accounting firms became effective for audit reports issued on or after June 30, 2017.

• Each Form AP filed can be found on AuditorSearch, a public database of engagement partners and audit firms participating in audits of US public companies. AuditorSearch is maintained by the PCAOB.

Filing deadlines:

Form AP is required to be filed within 35 days (10 days for IPO) after the date the auditor’s report is first included in the document filed with the SEC.

Effective dates:

• Engagement Partner—reports issued on or after January 31, 2017

• Certain Other Audit Participants—reports issued on or after June 30, 2017

PCAOB Website:

The information in such filings is available in a searchable database on the PCAOB’s website.


PCAOB standard setting (cont.)Concept release on audit quality indicators

In July 2015, the PCAOB issued a concept release to seek public comment on Audit Quality Indicators (AQIs).

The PCAOB has identified 28 potential AQIs in three broad categories: Audit Professionals, Audit Process, and Audit Results. Examples of measures in each category are noted below (please note, not a complete list):

• While the PCAOB continues to review feedback and gather data about AQIs, the PCAOB has encouraged audit firms to voluntarily monitor and report on some of the most informative measures and has encouraged Audit Committees to discuss these measures with their audit engagement teams

Audit Professionals

• Staffing leverage• Experience of Audit Personnel• Turnover of Audit Personnel• Audit Hours and Risk Areas

Audit Process

• Quality Rating and Compensation• Compliance with Independence

Requirements• Audit Firms Internal Quality Review Results

Audit Results

• Fraud and other Financial Reporting Misconduct

• Timely Reporting of Internal Control Weaknesses

• Trends in PCAOB and SEC Enforcement Proceedings


Proposed amendments to auditing accounting estimates and the use of the work of specialists standards

PCAOB standard setting (cont.)

• On June 1, 2017 the PCAOB issued proposals to amend its performance standards on auditing accounting estimates, including fair value measurements, and the auditor’s use of the work of specialists.

• The PCAOB proposal on auditing accounting estimates, including fair value measurements, strengthens and enhances the requirements for auditing accounting estimates by establishing a single standard.

− It sets forth a uniform, risk-based approach and emphasizes the need for the auditor to apply professional skepticism and devote greater attention to potential management bias when auditing accounting estimates.

• The PCAOB proposal on the auditor’s use of the work of specialists amends two of its existing auditing standards to:

− Strengthen requirements for the auditor to evaluate the work of a company’s specialist, including establishing a uniform, risk-based approach when using the work of a company’s specialist as audit evidence.

− Apply a risk-based approach to supervising and evaluating the work of both auditor- employed and auditor-engaged specialists.

• Comment period ends August 30, 2017.


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.


Closing remarks








Tax Policy in 2017

Cyber Security


Cloud Based Technology

Gayle ProctorSr. ManagerDeloitte Services LP


• Cloud conundrum

• Trends and statistics

• Path to disruption

• Closing

Agenda

Southern California Alumni and Friends CPE eventsCopyright © 2017 Deloitte Development LLC. All rights reserved. 47Southern California Alumni and Friends CPE eventsCopyright © 2017 Deloitte Development LLC. All rights reserved. 47

D+A+C is an opportunity to Disrupt. Transform. Repeat.

DIGITALDigital is the means

through which we now interact with our environment, and

data is the byproduct of this interaction

ANALYTICSAnalytics is how we extract value from the data and gain insights for action

CLOUDCloud is reimagining and reinventing how all users (individuals,

companies, businesses) interact

via the internet

D+A+C in one word: inseparable


Cloud conundrum


Cloud

Cloud computing refers to running workloads over the internet remotely in a commercial provider’s data center. A more precise definition is “the virtualization and central management of data center resources as software defined pools”.

Hybrid cloud Private cloudPublic cloud


Cloud

IaaS PaaS FaasSaaS

• Browser access

• Most popular:

• Google’s G Suite

• Microsoft’s Office 365

• Enterprise applications:

• Salesforce

• Oracle

• SAP

• Workday

• Configurable

• Open Dev

Software as a service

• Large infrastructure web services

• Compute services on a pay-per-use basis with storage

• Highly scalable databases

• Virtual private networks

• Big data analytics with Dev tools

• Major players:

• Amazon Web Services

• Microsoft Azure

• Google Cloud Platform

• IBM Cloud

Infrastructure as a Service

• Platform development for Developers

• Shared tools, processes, and APIs to accelerate deployment of applications

• Offerings:

• Salesforce’s Heroku and Force.com

• Pivotal’s Cloud Foundry

• Red Hat’s OpenShift

• Note: Backend tools MBaaS, BaaS (back end as a service) are also PaaS

Platform as a Service

• Serverless computing

• Completely insulated from everything in the stack below their code

• Event triggered uploading

• Reduces pay-per-use fees

• Uses lower resources

• Major clouds offer FaaS on top of IaaS:

• AWS Lambda

• Azure Functions

• Google Cloud Functions

• IBM OpenWhisk

Functions as a Service


More cloud

IDaaS Message

IndustryiPaaS

• Platform strategy for large cloud consumers

• Pre-built connectors

• Popular or high volume shared applications for B2B usability

• Providers:

• Dell Boomi

• Informatica

• MuleSoft

• SnapLogic

• Configurable for data mapping, system testing and transformations and workflows

Integration platform as a service

• User identity, authentication and associated rights, permissions to use

• Perimeter policing is high risk and primary sleep disrupter for execs

• Dependency on Security, policies, user group definitions, privileges and barriers

• Integrates the various directory services (LDAP, Active Directory, etc)

• Major players:• Okta (leader)• CA• Centrify

• IBM• Microsoft• Oracle • Ping

Identity as a Service

• Targeted to a specific sector or industry

• Shortens time to market for PaaS solutions

• Intent is to nurture partners and Ecosystem intimacy

• Top industry attractors:

• Financial Services

• Healthcare

• Retail

• Manufacturing

• Life Sciences

• Enhances speed, agility and scalability

Vertical clouds

• Vital communications and collaboration tools increasing effectiveness

• Chat Solutions:

• Slack

• Microsoft Teams

• HipChat

• Simplified SaaS applications that create “chat-style” messaging

• Includes file sharing, audio, video transmissions

• Most offer API’s for 3rd party dev and integration ease to other systems

Collaboration platforms


Comparing Hosted and Multitenancy

On-Premise

LicenseBuild/Maintain Subscribe

Customer manages Appowns infrastructure

Customer owns license to App

Provider owns infrastructure

Hosted CloudMulti–Tenant

CloudSingle–Tenant

Provider manages AppOwns infrastructure

Single instance of software serves onetenant

Provider manages AppOwns infrastructure

Single instance of software serves multiple tenants


Fact check:

“large public clouds have proven themselves much less susceptible to attack than the average enterprise data center.”

Real threat:

“integration of security policy and identity management between customers and cloud providers”

Gov’t regulation:

“data protection rights, sensitive data removal, in-transit protection and access rights”

What about security?


Statistics and trends


Evolution of the cloud Web 2.0

1996Hotmail and RocketMail!

2010DropBox

1999SFDC

By 2015, some form of Cloud platform(s) have been implemented by nearly 80% of companies.

2002Amazon

Web Services

2005Workday

2006Amazon Elastic

Compute

HR & Payroll

2011Workday Financials

Enterprise sales planning Cloud-based Financials

2013Oracle Cloud

Cloud-basedERP Suites

2001SuccessFactors

EarlyHuman Capital

2015SAP/HANA

Game Changer

2009Anaplan

Size & StorageInternet

computing


Disruption by the numbers

Cloud adoptionhas accelerated.

With business leaders citing SPEED to VALUE as the TOP reason

61% of respondents say they use

analytics to increase the accuracy of forecasting, more than any other business area.

HR Analytics most commonly used in Workforce Planning

63% followed by Compensation and

Benefits at 60%

of respondents see cloud applications with the highest potential to produce the greatest productivity gains

43%

42%of mid-market companies surveyed are in process of deploying cloud-based technology

Security

37% of respondents ranked this as largest impact on business with Cloud

Infrastructure a close second at 32%

Keeping up

larger proportion of respondents across all industries reported that staying current with technology posed difficulty among their IT ranks.

Leaders more involved59% of company leaders were actively involved in technology investments in 2016

52% of respondents say they approach technology investments for strategic value

StrategyIncreased executive engagement having strong impact on business strategy

$19.4% of survey respondents who say their technology spend is “significantly higher” than prior year


CHALLENGES in cloud adoption

• Ensuring data integrity and reliability• Confidence in information security• Cost

REASONS for cloud adoption

• Time to Value (Implementation)• Reduced concerns about data security• Agility and Growth: scaling, M&A

activity, etc.

Cloud ERP trends

IT, HR and Marketing departments have been early adopters, while finance groups have historically been slower

Cloud ERP deployments are most mature in technology, media, telecoms, hospitality, travel, life sciences & health care industries – public and privately owned. Anyone interacting with consumers are evaluating cloud services

On-premise hosting and hosted solutions are equally popular deployment models, representing a big leap for hosted solutions this year


Deloitte’s cloud Partner ecosystem

LeasePoint™

Advanced Consulting Partners

Dedicated Team of Deep Cloud Expertise

Certified Solution Architects

Enterprise Ready Solutions


Path to disruption


Moving into the cloud

Cloud platforms facilitate both development and deployment of rapidly scalable platforms

Disaster recovery and backup policies are provided and maintained by service provider

Outsources management of the RDBMS to the cloud service provider, freeing IT resources for other activities

Only pay for what the organization utilizes

Large database shifts corporate spending to operate expenditure, avoiding large capital investments

Access to industry standard analytics models

BI application deployment agility


02Platform as a Service (PaaS)You rent the platform (akin to fixtures or furnishings), which defines what you can do with the applications you run. You always have the latest capability and can adapt to changing needs on demand.

03Software as a Service(SaaS)You rent fully configured spaces (akin to a kitchen or bath). That’s Software as a Service. Rent spaces by task at any time and scale the capacity and capability of those spaces as needed.

04Business Process as a Service(BPaaS)Own nothing and go full service. That’sBusiness Process as a Service. You rent end-to-end management of a process like payrollor supply chain planning through cloud-based applications.

DisruptTransformRepeat

01Infrastructure as a Service (IaaS)You rent the structure. It’s ownedand maintained by a technologyprovider whose sole focus is infrastructure development. Sowhat you rent is kept current,fast, and functioning.


cloudIts possible to deliver exponential value, and ultimately a transformative cloud solution that is distinctive, secure, andagile.

analyticsUnleash scientific rigor, comingle your data with benchmarking data to gain competitive advantages. Gain insights leveraging cognitive, predictive and robotic tools to generate meaningful business outcomes, fast.

digitalCreate experiences that run on cloud andare informed by analytics to help clientsdisrupt their market, beat their competition,and strengthen their customer connections.

Cloud powers transformation = D + A + C

Transformed experiences generateinsight, connection, and opportunity.

Empowered clients make fast,informed, and effective decisions.

00


Closing remarks








Tax Policy in 2017

Cyber Security



Jimmy OnizukaSr. ManagerDeloitte Tax LLP


Agenda

Standard setting update

SEC matters

Legislative updates

Questions


Standard setting update


Share-based payments


ASU 2016-09 (issued March 30, 2016)Share-based payments—Accounting guidance for income taxes

Current NewExcess tax benefits—intraperiodallocation

Realized benefits of tax return deductions in excess of compensation cost recognized are accounted for as a credit to APIC

All excess tax benefits and tax deficiencies are recognized within the income statement, thus eliminating the concept of “APIC pool” (ASC 718-740-35-2)

Excess tax benefits—EPS

Excess tax benefits/deficiencies are included in calculation of assumed proceeds available to repurchase shares

Dilutive EPS (treasury stock method)—Excess tax benefits/tax deficiencies are excluded from calculation of assumed proceeds available to repurchase shares

RealizationA tax benefit and a credit to APIC for the excess deduction would not be recognized until that deduction reduces taxes payable

Excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period

Cash flowPresent excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities

Excess tax benefits are not presented separately from other income tax cash flows and, thus, are classified along with other cash flows as an operating activity

InterimN/A Excess tax benefits or deficiencies are discrete items in the interim reporting

period in which they occur (i.e., not considered in AETR) (ASC 740-270-30-4)

ForfeituresCompensation cost accruals are based upon an estimate of the number of awards that are expected to vest

An entity can elect to continue to account for forfeitures based upon an estimate of the number of awards that are expected to vest, or can account for forfeitures when they occur


ASU 2016-09 (issued March 30, 2016) (cont.)Share-based payments—Accounting guidance for income taxes (cont.)

Transition guidance

• Excess tax benefits and deficiencies—Prospective (ASC 718-10-65-4(e)(1))

• Previously unrecognized excess tax benefits—Modified retrospective (retained earnings) (ASC 718-10-65-4(e)(2))

• Cash flow statement presentation—Prospective or retrospective (ASC 718-10-65-5)

Effective date

• Public entities—annual periods, including interim periods within those annual periods, beginning after December 15, 2016

• Non-public entities—one year later

• Early adoption is permitted; if elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period


Example disclosures ASU 2016-09Share-based payments

Example 1

…XYZ recognized compensation expense of $X million, $X million, and $X million for stock options during 2016, 2015, and 2014, respectively, which is included within other selling and administrative expenses in the consolidated statements of operations. Income tax benefits related to stock option activity during 2016, 2015, and 2014 totaled $X million, $X million, and $X million, respectively. The 2016 income tax benefit related to stock options includes $X million recognized as a result of the adoption of ASU 2016-09.

Example 2

ASU No 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" was issued in March 2016 and early adopted by the Company in the first quarter of fiscal 2017. ASU No 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This requirement is to be adopted prospectively by the Company. The impact of this section of the standard was a benefit of $X to income tax expense for the first quarter of fiscal 2017. In addition, the ASU requires that the excess tax benefit be removed from the overall calculation of diluted shares. The impact on diluted earnings per share of this adoption was not material. Finally, modified retrospective adoption of ASC 2016-09 eliminates the requirement that excess tax benefits be realized (i.e. through a reduction in income taxes payable) before they are recognized. The adoption of this section had no impact on the financial statements.


Intra-entity asset transfers


ASU 2016-16 (issued October 24, 2016)Intra-entity asset transfers

Entity Current New

Seller

If income taxes have been paid on intra-entity profits on assets remaining within the consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be appropriately reduced (ASC 810-10-45-8)

Removes prohibition on recognition of income tax expense for taxes paid for intra-entity transactions (except for transfers of inventory)

Buyer

Prohibits recognition of DTAs for the intra-entity differences between the tax basis of the assets in the buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements (ASC 740-10-25-3(e))

Removes prohibition on recognition of DTAs on intra-entity differences between the tax basis of the assets in a buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements (except for transfers of inventory)

Transition guidance: Modified retrospective (cumulative catch-up adjustment to opening retained earnings)Effective date: Public business entities—annual periods beginning after December 15, 2017 (includes interim periods within those annual periods). Non-public entities—generally, one year later (two years later for interim periods). Early adoption is permitted for all entities as of the beginning of an annual period.


Example disclosures ASU 2016-16Intra-entity asset transfers (cont.)

Example 1

In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $X million and $X million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $X million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $X million. In January 2017, the company had one transaction that generated a $X million benefit to income tax expense, income from continuing operations and net income and a benefit to basic and diluted earnings per share of $0.XX and $0.XX per share, respectively, for the three months ended March 31, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.

Example 2

In the first quarter of 2017, the Company adopted ASU No. 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a cumulative-effect adjustment is recorded in retained earnings as of the beginning of the period of adoption. The net impact upon adoption is a reduction to retained earnings of $X million. The Company does not expect any material impact on its future operations as a result of the adoption of this guidance.


Illustration—Before ASU 2016-16Intra-entity asset transfers—IP transfer

Assumptions

• Parent transfers self-created IP to Foreign Subsidiary

• IP has a 5-year book and tax life in the Foreign Subsidiary’s tax jurisdiction

No DTA recorded pursuant to ASC 740-10-25-3(e)

Tax expense deferred (e.g., recorded as a prepaid) pursuant to ASC 810-10-45-8

Consolidated FSPrepaid taxes $ 45DTA $ 0 Taxes payable $ 45Tax expense $ 0

Selling Price $ 150

Tax basis 0

Gain $ 150

Tax rate 30%

Tax paid $ 45

Tax basis $ 150

Book basis $ 0

Difference $ 150

IP$150

SellerPost-transfer years 1-5 entries

DR Tax expense $9

CR Prepaid taxes $9

BuyerPost-transfer years 1-5 entries

DR Taxes payable $3

CR Tax expense $3

ParentTax rate = 30%

Foreign SubTax rate = 10%


Illustration—ASU 2016-16Intra-entity asset transfers—IP transfer (cont.)

Assumptions

• Parent transfers self-created IP to Foreign Subsidiary

• IP has a 5-year book and tax life in the Foreign Subsidiary’s tax jurisdiction

Selling Price $ 150

Tax basis 0

Gain $ 150

Tax rate 30%Taxes payable/Income tax expense $ 45

Tax basis $ 150

Book basis $ 0

Difference $ 150DTA/Deferred tax benefit $ 15

Total tax expense $30

IP$150




Illustration—ASU 2016-16 (transition)Intra-entity asset transfers—IP transfer (cont.)

Assumptions

• Assume the adoption date is one year after the transfer when the prepaid balance is $36 and the tax basis of IP is $120

Transition journal entry

DR DTA $12

DR Retained earnings $24

CR Prepaid taxes $36

IP$150




Revenue recognitionASC 606/IFRS 15


Key points—Adoption of ASC 606/IFRS 15Introduction

Cash tax impactThe new revenue recognition standards may result in accelerated revenue recognition for tax purposes and associated cash outlays to taxing authorities

GAAP analysis

Will require companies to perform an in depth analysis of each type of revenue stream for financial statement purposes. Tax departments should be involved throughout this analysis to assess the areas of tax compliance and planning, as well as the associated magnitudes.

System impacts

May impact the way data is captured, as well as additional information that may be required

Effective date

Annual reporting periods beginning after December 15, 2017 and December 15, 2018 for public entities and nonpublic entities, respectively

IRS expectations

The Internal Revenue Service understands that the adoption of the new revenue recognition standards will have federal income tax implications and expects companies to perform the requisite procedures in order to address these implications *

Overall tax impacts

Will result in numerous tax impacts from both a technical and systems standpoint

Note: * On March 28, 2017, the IRS issued Notice 2017-17, proposing automatic consent procedures for companies to change their tax revenue recognition methods related to the adoption of the new revenue standards. The IRS is soliciting comments on the proposed procedural guidance.


Areas of impact:Common tax considerations and anticipated action items

Area Common Tax Considerations Anticipated Action Items

GAAP Revenue Recognition

• Current types of revenue streams and related GAAP treatment• Assess how the GAAP change in method of accounting under the new

standards for each of the various revenue streams will impact the current tax method

• Opportunity to leverage financial statement revenue stream analysis to proactively generate additional cash and fund project implementation costs

Tax Provision • Any changes to tax accounting methods or book tax difference computations must be incorporated into the tax provision process

• Consideration should be given to the correct period to reflect the change

• Computation and tracking of new or altered book-tax differences

Tax Accounting Methods

• Changes to revenue recognition will impact some combination of:− the amount of book-tax differences,− a change in the calculation of existing book-tax differences,− creation of a new book-tax difference, or− require a tax accounting method change

• Timing and impact of method changes must be considered (automatic vs. non-automatic, and IRC § 481 adjustment calculation)

• Enactment of tax reform could convert the timing benefits to permanent benefits thereby increasing the power of tax planning

• Requests for changes in tax method of accounting

• Identifying the most advantageous tax method for certain items impacted by the new standards during adoption can reduce the overall unfavorable tax impact (e.g., changing to recognize unbilled revenue upon the earlier of payment becoming due or performance occurring and to deduct contract costs as incurred)


Income tax disclosures


Disclose (all) • Domestic and foreign components of pretax income or loss• Disaggregation of income tax expense (or benefit) by

foreign/domestic• Disaggregation of income taxes paid by country • Indefinitely reinvested foreign earnings• Aggregate of cash, cash equivalents, and marketable securities held

by foreign subsidiaries• Enacted tax law change• Attribute carryforwards (more detailed for public business entities)

Disclose (public business entities)• ETR—Separately present rate item >5% of tax at statutory rate• Unrecognized tax benefits• Reason for changes in realizability estimates of deferred tax assets• Government assistance

OverviewProposed income tax disclosures

April 4, 2014Field study results and next steps

July 26, 2016Issued proposed ASU

Sept. 30, 2016Comment period ended

Jan. 25, 2017Discussed comments received

March 17, 2017Roundtable on all disclosure projects

???Final ASU

Jan. 7, 2015–June 8, 2016Board deliberations


Foreign earnings/Unrecognized tax benefitsProposed income tax disclosures (cont.)

Disclose (all entities)

• Pretax earnings from continuing operations disaggregated by domestic and foreign[1]

• Income tax expense (or benefit) from continuing operations disaggregated by foreign and domestic[1]

• Income taxes paid disaggregated by foreign and domestic (further disaggregation for any country that is significant to total income taxes paid)

• Amount of undistributed foreign earnings for which there is a change in assertion during period regarding indefinite reinvestment of such earnings and explain circumstances that caused such assertion change[2]

• Aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries[2]

Disclose (public business entities)

• In tabular reconciliation, disaggregate settlements between those using attributes versus those using cash

• “Map” unrecognized tax benefit total in tabular reconciliation to balance sheet lines where recorded

• Eliminates requirement to provide details of positions for which it is reasonably possible that total UTBs will significantly increase/decrease in next 12 months

Notes: [1] Existing requirement in SEC regulations [2] Commonly requested in SEC comments


Deferred tax assets for carryforwardsProposed income tax disclosures (cont.)

Disclose (public business entities)

• Total federal/state/foreign operating loss and tax credit CFs disclosed by expiration period (first five years after reporting date and total for all remaining years)

• Total federal/state/foreign DTAs for operating loss and tax credit CFs before VAs; amounts further disaggregated by expiration period (first five years after reporting date and total for all remaining years)

• Total UTBs that offset DTAs related to operating loss and tax credit CFs

Expires during FY

Loss CFs (not tax effected)

DTA for loss CFsbefore VA (tax effected)

Federal State Foreign Federal State Foreign Total

20X2 $1,800 $1,550 $1,900 $720 $155 $570 $1,44520X3 1,200 1,050 1,100 480 105 330 91520X4 850 700 900 340 70 270 68020X5 800 600 550 320 60 165 54520X6 500 300 400 200 30 120 350Thereafter 1,450 1,200 550 580 120 165 865Total 4,800Unrecognized tax benefits at December 31, 20X1 (2,000)Total tax effect of carryforwards after unrecognized tax benefits $2,800


Summary of comment letters receivedDisclosure framework—Income taxes

Topic Comments Received

Indefinitely reinvested foreign earnings

• Users may inappropriately assume that assets being disclosed are available for repatriation• Users may make incorrect assumptions as to amount and timing of repatriation based on proposed disclosure

Disaggregation of domestic and foreign

• Requested clarification as to whether pretax income(loss) and income tax expense(benefit) would be on pre- or post-consolidation/eliminations basis

Disaggregation of income taxes paid

• Requested term significant be defined either qualitatively, quantitatively, or both—or be replaced with term material

• Proposed disclosure would not be useful as tax payments for individual jurisdictions are impacted by items unrelated to current year profit or loss, and timing of payments can vary by jurisdiction

Change in tax law • Proposed disclosure would be costly and complex to prepare, requiring significant judgment by preparers

Government assistance

• Many government agreements contain confidentiality restrictions and as a result, proposed disclosure should be limited to information that does not violate confidentiality agreements

• Current rate reconciliation requirement of Topic 740 already provides disclosure of significant government assistance received


Summary of comment letters received (cont.)Disclosure framework—Income taxes (cont.)

Topic Comments Received

Valuation allowance• Redundant with existing disclosures in ASC 740-10-50-2 and 50-12

• Would be too complex and voluminous for users to understand

Carryforwards

• Proposed disclosure in ASC 740-10-50-6A(b) should be presented net of VAs

• Gross CFs could be misleading to users without the appropriate knowledge to compute tax effect (non-public business entities)

• Expiration dates of CFs are not decision useful as they are not representative of timing in which they may be used, as VAs are not contemplated in proposed disclosure

Unrecognized tax benefit

• Disaggregation of settlements between DTAs and cash may be challenging due to lack of available information

• Line items in which UTBs are presented does not provided decision-useful information (current requirements of ASC 740-10-50-15A are sufficient)

Transition, implementation, and adoption

• Supported prospective adoption with one-year implementation period and early adoption being permitted


Legislative updates


Tax reform proposals


ASC 740 effect of tax law changes

The effect of a change in tax laws or rates shall be recognized at the date of enactment

Income tax effects of changes in tax law or rates are allocated to continuing operations

Items/events partially excluded from the AETR may include changes in tax laws/rates

• Rate: Impact of tax law/rate changes on current taxes of the CY

• Discrete: Impact of tax law changes on DTAs/DTLs recognized in period of tax law/rate change (reflected in the period the changes are enacted)

• Rate: Impact of tax law changes on DTAs/DTLs arising in the CY subsequent to the enactment date

TimingIntraperiod allocations

Interim


Closing remarks








Tax Policy in 2017

Cyber Security



Barton CristSr. ManagerDeloitte & Touche LLP

93

Agenda

Exploring the Digital Era

Disruptive Technologies for Finance

Getting Started

Closing Remarks and Q&A

94

95

On the Path to “Business 4.0”

LEGENDIndustr ial Revolution

Early Stage Technology

Mature Technology

Future Event

(1) Robotic Process Automation (Source: Industry 4.0: Challenges and Solutions for the Digital Transformation of Exponential Technologies, Deloitte AG, 2015 and Deloitte proprietary research)

1700s

1st

Industrial Revolution• 1784: First

mechanical weaving loom

• Introduction of mechanical production facilities with the help of water and steam power

2nd


assembly line • Through

introduction of mass production with the help of electrical energy

3rd


programmable logic control system

• Through application of electronics and IT to further automate production BPM

Systems

Early Stage RPA

Early Stage

Cognitive

Capable RPA1

Solutions Deployed

Widespread Cognitive

Augmentation and Automation

Dependence on Global

Horizontal Category MLPs

4th Business 4.0• This revolution redefines what it means to be a professional

• RPA will have commenced deployment in most large businesses by 2018

• RPA and Cognitive Automation will be ubiquitous in business by 2020

• Horizontal Machine Learning Platforms (MLPs) become ubiquitous by 2025

1-3 4.0

2016

Within 10 Years

96

The exponential evolution of technology is transforming the way business is conducted and altering the competitive landscape, rewarding the adoption of Digital technologies

….and Digital value is rewarded

8x Mar

ket

capi

taliz

atio

nDigital models Product and Service business models

1: Deloitte ERS research, 2015

Digital models are valued at 8x product-based business models, 4x versus service models, and 2x software and IP based models1

1 trillion sensors will be connected to the internet by 2022

A government will collect taxes for the first time via Blockchain in 2023

Access to the Internet will become a basic right by 2024

The first AI machine will join a corporate board of directors by 2026

30% of corporate audits will be performed by artificial intelligence by 2025

10% of global gross domestic product will be stored using Blockchain technology by 2027

97

This is what a factory looks like today

98

…and this is how a typical office looks

99

What will Finance look like a few years from now?

100

In less than 5 years, leading Finance organizations will look very different

All of the technologies required to realize this vision of the future exist today

An automated robot begins populating the net revenue report and output to its analytics engine

5:00 AM

The data from the analytics engine is staged on a tableau or BI server and dashboards are refreshed

6:00 AM

The CFO has access to the updated reports and narratives as soon as they arrive in the office

The CFO further drills down into cost variance analyses for products/services with dropping margins

The natural language generator adds in narratives to the dashboard

7:00am

8:00am

The CFO interacts with the chatbot in natural language to drill down into splits by channel/product

8:10am

8:15am

Imagine a world where…

101

AUTOMATION & QUALITY• RPA, AI and Machine Learning to reduce

manual intervention, increase quality and influence outsourcing options

• P2P & O2C platforms and Blockchain to reduce manual intervention (first time right)

FinanceStrategy

Process & Policy

Information & Systems

Organization & People

Specialized Finance

Business Finance

Operational Finance

FORECASTING & HIGHER VALUE-ADDED TASKS• In-Memory and Data Analytics enable driver based and predictive insights

• RPA and NLP take away non added-value tasks

KNOWLEDGE WORK SUPPORTED• Expert Systems, Predictive Analytics and AI

will support knowledge work

FINANCE CUSTOMERS & COLLABORATION• Cloud and SaaS solutions drive adoption of

new solutions• Cyber & Fraud detection improves data quality• Digital collaboration tools available in the

cloud enable and support dialogue teams

IT, FINANCE & BUSINESS, TOGETHER• Flat organization model and empowerment

• Data analysts to complement / replace Finance specialists• Finance, IT and business become more integrated

HIGH MONITORING & STANDARDIZATION• Data & Process Analytics improve quality• Continuous Monitoring Solutions will

enhance control and replace audits

Technology is radically transforming how Finance delivers value

Copyright © 2016 Deloitte Development LLC. All rights reserved. 102

Exploring disruptive technologies

103

20151970 2000 2020Data storage to review prior performance Data analytics AI

Adde

d Va

lue

DataCapture

Performancetracking

Profitabilityanalysis

DesktopcomputingMainframes

Mobiledevices

Manual

Insight

Hindsight

Foresight

Historical reporting on keyperformance indicators

Reporting and analytic software

New technologies (Cloud, Robotics, AI, Machine learning, Natural

Language Processing, Blockchain)

Cloud

In-memory Computing

Visualization Process Robotics

AdvancedAnalytics

CognitiveComputing

Blockchain

ERP

EPM

Digital

New technologies have driven the development of Finance for decades but now a lot of new technologies come together

104

The Finance ToolsetSeven technologies have growing relevance for how the work of finance gets done

Cloud Process Robotics

Visualization

Cognitive Computing

In-Memory Computing

BlockchainAdvanced Analytics

Core Modernization

Exponentials

Here Now

Emerging Quickly

105

CloudCloud computing is a style of computing in which scalable and elastic IT – enabled capabilities are delivered as a service using internet technologies.

106

Cloud trend and perspectives

Current Cloud Trends Marketplace Perspective

“According to Gartner, at least 25 percent of new core financial application deployments in large enterprises will be cloud software-as-a-service (SaaS) by 2018.”

Maturing SaaS

Fewer Capital Intensive

Implementations

Desire for applications

upgrade

Acceptance of public cloud

More trust in security of

cloud

Service Types

Software as a Service

Platform as a Service

Infrastructure as a Service

107

Key considerations to moving from on-premises to cloud

Time of Value • Time to deploy software for production

Enterprise Impact

• Privacy, security and data protection

• Ability to scale with business and meet organization needs

• Compliance with data privacy rules in legal jurisdictions

Deployment

• Functionality maturity

• Platform, installation and maintenance & upgrade ease

• Staffing flexibility to manage software

Support• Customization to modify software code

• Configurability of the solution

Unfavorable- - - - - - Favorable

CloudOn-Premises

1 Source: Gartner Research

FU

FU

FU

FU

FU

FU

FU

FU

FU

Cloud vs. On-Premises Evaluation Criteria1

CFO and CIO Considerations

1. Application functionality not as robust on cloud (although this should change)

2. Cloud adoption of financial applications is expected to rise in coming years after lagging behind other domains

3. Cloud deployment of financial applications is in initial stages of consideration by large-cap publicly traded companies

4. Cloud models are designed to be used by multiple clients, and as such, do not offer the degree of customization of on-premises

108

VisualizationWith human attention spans today running at only eight seconds, we require methods and tools that allow us to more quickly decipher the ever-increasing volume of data available.

Visualization tools can bring analytics solutions to the enterprise faster, enabling rapid prototyping that reduces development time. These tools also allow companies to “see” developing stories that directly address decisions that matter.

109

What is Visualization?

What is it?Visualization tools allow you to implement corporate analytical solutions faster, providingrapid prototyping, which reduces development time. Visual indicators are generally easier toperceive by users, which allows you to distribute analytical reports beyond the community ofdata researchers and analysts. Such tools also allow companies to monitor the developmentof "stories" that directly affect key decisions.

ELEMENTS OF THE DATA VISUALIZATION SYSTEM

Data Source 3

Data Source 2

Data Source 1

Assimilation of data Data Storage Business Analytics Visualization

Data SourcesInformation Panels

(Dashboards)Data Model

110

Visualization perspectives

OverviewCurrent Visualization Trends Marketplace Perspective

“We have to be able to expand the information we provide and have it easily accessible. At the end of the day, that’s the strategic part. The fun part.”

Key Vendors and/or Tools

Analytical Apps

Agile Visualization

Multi-Dimensional Drill-Down

Mobility Access

Big Data Enabled

Predictive Modeler

111

Visualization examples and scenarios

Solution: • Interactive mobile dashboard to perform

“what-if” analysis

• Create a new model for same-store data that includes external data (e.g., demographics, competition)

Key question: How can I achieve insight by visualizing my inventory and sales in an interactive tool?

Solution: • Tableau-based data analytics with

interactive reporting

• Tracks more than 18,000 locations and 6 million usage records

Key question: How can I combine financial, energy and environmental metrics for data-rich decision making?

Key Question: To achieve my ambitious growth goals, how can I deepen my customer relationships to better address and personalize communications and target offers?

Identify key customer behaviors, drivers and business questions

Determine which stimuli drive behaviors with customers and how that may change

Derive key insights from the analyses using the recognize, reach, relevant framework and implement in pilot stores

Solution: • Association Analysis identifies

correlations between customer stimuli form the basis for fact-based, programmatic actions to be implemented new stores/channels and

112

Process RoboticsProcess robotics automates transaction processing and communication across multiple technology systems.

Robotic Process Automation (RPA) is a non-invasive means to automate repetitive, rules-driven processes to provide more efficiency and accuracy

113

What is Process Robotics?

What It Is What It Is Not

Computer coded software

Cheaper and faster way to automate processes

Cross-functional, cross-application macros

Physical hardware

A multi-year technology deployment

Artificial intelligence

What It Can Do

Pull data from the web

Obtain human input via email / workflow

Make calculations

Extract data from docs

Collect statistics

Follow decision rulesRead / write to DB’s

Fill in forms

Copy / paste

Move files & folders

Log into enterprise apps

Open, read and create emails

Benefits

Lower labor costs

Increased process throughput

Improved process quality

Greater delivery model flexibility

Better scalability

Better payback / ROI – relatively low cost to implement

Market Trends*

76% of Shared Service leaders plan to pursue RPA within the next year; those who have piloted or implemented at scale expect significant benefit

Survey Question: Do you think RPA will deliver significant financial benefits for your operation?

* Source: July 2016 Deloitte survey of 143 global Shared Services leaders

63%82%

100% 100%

37%18%

Heard AboutRPA

InvestigatedRPA

Piloted RPA ImplementedRPA at Scale

Yes No

114

What do we see our clients doing?

OPERATIONAL• Reduce manual accounting entries, cross-system manual processing, and/or reconciliation • Automate discovery of revenue leakage due to mismatch between rate card and invoices

MICRO-FINANCE• Automated financial analysis through next-gen software robots that utilize ML technology to

deepen analytical capabilities of “bots”

ACCOUNTING• Automated controls / compliance monitoring by coding controls into “bots” prior to performance

of repetitive rule-based tasks

TAX & TREASURY• Automated bank reconciliations and cash payments via

pre-programmed “bots”

MACRO-FINANCE• Enable cognitive computing by providing a larger quantity of data quickly and accurately for

decision making

COMPANIES TO FOLLOW

The global IT robotic automation market will grow at a CAGR of

between 2014 and 2020

Worldwide spending on robotics is estimated

by 202040B$

knowledge workers(9% of the global workforce)

Forecasts indicate a potential impact on

230 million

to reach

60.5 %

MARKET TRENDS

Common Robotic Process Automation Initiatives

GFS RPA Launch Piloting RPA across three processes: Intercompany, Chargebacks, and Management Reporting

Tax RPA Projects Automating calculations of key inputs into tax provisions Automate extraction of mass ERP invoices for indirect tax audits

CF DSOForecasting

Improve forecasting accuracy by implementing a standard calculation engine for AR and DSO and identify markets at risk of missing forecast

Opportunities for Robotic Process Automation

115

Case Study: RPA for a $10bn global manufacturerAutomation has the potential to reduce staffing while significantly increasing throughput for both Invoice Processing and Requisition Processing

To-BeAs-Is

# of FTEs, work-allocation

Individual Throughput 80 requisitions / FTE / day

Limitations and Considerations

• Employee utilization• Scalability• Accuracy and controls • Process consistency

Available Capacity 6.5 hours / FTE / day

1

1 - -

200 requisitions / FTE / day

• Specify format comments• Involves ongoing technical

maintenance of automations

18 hours / FTE / day

Key Metrics

60-80% fewer FTEs

2.5x throughput

3

2 - 0.5Requisition Processing

Audit Supervisory Exception Handling

Audit Supervisory

10# of FTEs, work-allocation 6 2 1.5

Data Entry Audit SupervisoryIndividual Throughput 115 invoices / FTE / day

Limitations and Considerations

• Employee utilization• Scalability• Accuracy and controls • Process consistency

Available Capacity 6.5 hours / FTE / day

2

1.5 0.5 -Data Entry Audit Supervisory

575 invoices / FTE / day

• Requires investment in OCR / 3rd party scanning

• Involves ongoing automation maintenance

9+ hours / automation / day

80% fewer FTEs

5X throughput

Invoice Processing

Requisition Processing

116

Where to look for opportunities?

Decision Criteria

1) Does the process require significant Manual Effort?

2) Does the process reference Cross-System Applications?

3) Is there scope for Standardization in the process?

4) Is the process a Rules-based Exercise?

5) Is the process scalable?


Exponential areas

118

Advanced Analytics – an overview

Look for common terms and classifications within data dictionaries

Dynamically build master data, catalogs, lineage, and security profiles

Dynamically maintain master data, attribution, and usage

Identify patterns in usage, consumption, changes, and compliance

Identify data owners and qualified stewards

Forecast data volumes & maintenance

Forecast quality issues and risks

Automate or guide directed actions

Data Driven Automation What is it?

Examples

Solve problems that can’t be solved with conventional technology by deploying systems

that continuously learn, gain experience through practice, and apply advanced models and algorithms to increase its knowledge and confidence over time, supporting operational

or tactical decision making

Ingest/acquire background knowledge

Perform reasoning tasks around knowledge/data

Create and identify intelligent patterns

Identify unusual behaviors and output suspicion score

Learn from decisions and fine tune algorithms continuously & automatically

Detecting Fraud

Predicting Consumer Product Purchases

1 2 3

4 5

119

Advanced Analytics – applications across Finance

Type Requirements

Core finance analytics • Basic reporting and querying

• Business Intelligence

• Traditional finance tools

Finance supported analytics • Data and process coordination with relevant organizations

Advanced Planning and Modeling (APM)

• Statistical analysis capabilities and tools

• Access to external data

Core finance analytics

Transaction processing FP&A Treasury and balance sheet Tax Investor relations

• Revenue recognition optimization

• Credit & Collection Management

• Fraud detection

• Acquisition evaluation • Reporting • Planning and forecasting

• Portfolio optimization• Cash management• FX and operation hedging

• M&A analysis• Rate Analysis• FX and repatriation• Legal entity structure

• GAAP Margin analysis• Earnings volatility

Finance-supported analytics

Procurement Business unit Sales and Marketing Supply Chain IT

• Spend analysis• Vendor management

optimization

• Margin erosion analysis• Pricing analytics• Service level and customer

profitability alignment

• Revenue leakage• Revenue driver• Demand / price elasticity• Cross-sell/up-sell

• Sales, Finance, Supply Chain linked forecasting

• New product introduction profitability and dollarization effect

• Technology investment planning and prioritization

Finance owned advanced analytics

• Model based forecasting • Advanced fraud detection • Capital portfolio optimization

Examples of Advanced Analytics

Lack of Data Analysis: Data aggregation gets in the way of analytics and insight

Metrics: Metrics have grown in number and do not effectively measure performance given the scope and scale of data available today (e.g. consumer sentiment)

Reliability: Internal challenges to maintain consistent and complete data to effectively measure business performance

120

Cognitive Computing

• Cyclical Narratives: Ongoing, manual generation of reports, memos, dashboards, etc.

• Data Analysis: Identification and/or interpretation of changes / patterns / outcomes in data

• Time-Consuming Reporting: Dependence on established methods and numerous people to extract insights from large volumes of data

• Insight Generation: Incorporation of and extraction of insights from structured data

Capabilities

Cognitive is a general term that covers machine learning, natural language generation, speech recognition, computer vision, and artificial intelligence. Taken together, these tools simulate human cognitive skills, grinding through mountains of data to automate insights and reporting in real time.

Overview

Key Vendors and/or Tools

121

Natural Language Generation (NLG)

• Ingests unstructured data (emails, tweets)

• Output designed for machine consumption

• Cognitive capacity lies in ability to disambiguate variations in speech

• Driven by machine learning

• Ingests structured data (spreadsheets)

• Output designed for human consumption

• Cognitive capacity lies in ability to imitate natural variability in human speech

• Driven by rulesets

Natural Language Processing Natural Language Generation

Natural Language Processing (NLP) “reads”, while NLG “writes”

122

Blockchain

A complex global network of connections facilitate trade

Intermediaries and record-keeping are required to facilitate transfer of assets and create trust

Distributed network of computers (nodes) that maintains a shared source of information

Each node keeps a full copy of the historical database

Trust is enabled by a collective immutable, distributed ledger

All transactions are logged in encrypted form

Current System Blockchain System

Decentralized and Distributed

Blockchain is a public record of alltransactions which is shared on all nodesand can be viewed by everyone

Irreversible and Immutable

Records cannot be changed. Blockchain enables transacting parties to directly interact without an intermediary.

Real-Time

Transactions can be verified and settled in minutes as opposed to days

Key Features


Getting Started

124

Digital technologies are changing how businesses operate and the ways companies engage with customers. CFOs can either help drive the Digital agenda or be left behind

How CFOs react to Digital disruption will determine the future of their organizations

Responsibilities of Finance that cannot be automated or centralized are “unbundled” and absorbed throughout other business areas

Finance becomes increasingly relied upon for providing objective assessments of business results throughout the organization

CFOs and Finance lag behind in adopting new Digital technologies as other business areas drive the Digital agenda

CFOs take a “business as usual” approach to Digital, focusing on stewardship through production of financial statements and operating efficiently and effectively

Automation and adoption of Digital disrupts business models and renders traditional Finance obsolete

In a failed attempt to retain control, CFOs and Finance take a protectionist approach to managing financial data and knowledge

Finance eventually becomes a pure Center Of Excellence, providing highly specialized expertise upon request from other business areas

CFOs take a strategic leadership role in driving the Digital agenda forward and act as a catalyst for change by positioning Digital as a key priority for Finance

CFOs and Finance lead by example in adopting Digital, leveraging financial acumen and new technologies to help other parts of the business perform better

Automation of low-value transactional work frees up Finance to focus on analytical, value-added work

CFOs and Finance prioritize partnering with the business, leveraging structured and unstructured data and Digital technologies to provide strategic insights

Finance is now also responsible for ensuring consistency in the decision and investment making processes across the company

Digital Agenda

Role of the CFO

Role of Finance

Relationships

Responsibilities

End-State

Scenario 2: CFOs and Finance Lead the Adoption of Digital Technologies

Scenario 1: CFOs & Finance are left behind in the Digital space

125

Driving the Digital agenda toward value creation requires an evaluation of the technologies according to the needs of each particular organization

Where should organizations first focus their efforts when adopting Digital Finance?

Level ofMaturity Benefits Friction

Mobilization Complexity

RPAAutomation of low and medium complexity processes resulting in operational efficiency gains of x3 to x10 depending upon application

Highest ROI can be found in transactionintensive processes

RPA with Cognitive Science

Automation of medium and high complexity processes resulting in true process exception management; bots learn from new stimuli and evolve as new scenarios are presented

Integrating RPA and cognitive predictions is at the leading edge of applications and requires Finance workers to develop new skillsets

CognitiveComputing

Deeper insights allow Finance to enhance business capabilities and move to granular exception management; can be a driver to improve enterprise value and increase speed to insight

Cross disciplinary support required to develop and manage technological and analytics platform; new skills are required in the Finance organization

In Memory Computing

Exponentially faster transaction and BI processing allows moment in time close and performance analysis; allows organizational data to be mined in real time to support business strategy

Requires organizations to refocus processes to support shorter cycle times; adoption is still in early stages

BlockchainDistributed ledger allows increased transparency of transactions, reduced auditing burden, and changes payment processing (AR/AP)

Early stages of adoption; commercially viable products are still evolving

InsightGeneration

Machine driven insights to sense patterns and trends in data, allowing for the automation of repetitive reporting, customer engagement, and data visualization insights

Early stages of adoption; use cases and ROI are still evolving

Opening PeakingDeclining Mature

Opening Peaking Declining Mature


High

Medium

Low

High

Medium

Low

High

Medium

Low

High

Medium

Low

High

Medium

Low

High

Medium

Low




126

How do you get started?

Join an immersive experience (e.g., Digital Finance Lab) to explore the “art of the possible” and determine a future

state vision, goals, and benefits

Immerse Yourself in Innovation

Use an agile, iterative piloting approach to move from strategy to prototyping as quickly as possible –“fail fast” and achieve rapid results

Prove it Works (Quickly)

Evolve your Finance organization by collaborating with other business

functions, BPO providers, and digital vendors

Build Your Ecosystem

THINK BIG

Disconnect from the core business and set up a digital leadership team to assess disruptive opportunities

within the organization

Scaling the Edges

START SMALL ACT FAST

ESTABLISH A DIGITAL LEADERSHIP TEAMIdentify a visionary program leader and assemble a team to accelerate your digital goals. Determine a governance model and understand

policies that might need to be adapted to execute successful change management and ensure the solution is absorbed into the business fabric

Prioritize your desired tactics and pick just one or two to get started

in order to establish proof of concept

Pick One or Two Plays

Seek opportunities to share digital experiences with other functions –

knowledge share

Market Your Own Success


Closing remarks








Tax Policy in 2017

Cyber Security


Accounting and Reporting Update

Katherine O’ConnorSr. ManagerDeloitte & Touche LLP


ASUs issued in 2017


Accounting Standards Updates issued in 2017

ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

ASU 2017-02, Not-for-Profit Entities—Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity That Is a General Partner or aLimited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)

ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

ASU 2017-05, Other Income—Gains and Losses From the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the FASB Emerging Issues Task Force)

ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities


Clarifying the definition of a business (ASU 2017-01)


Main provisions

• Begins with an evaluation of the gross assets acquired—called a “screen” test

− Not a business if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset (or group of similar identifiable assets)

− Gross assets acquired exclude cash and cash equivalents, deferred tax assets, and goodwill resulting from the effects of deferred tax liabilities. However, they include the consideration transferred in excess of the fair value of the net assets acquired

− No further evaluation is required if the screen test is met

• If the screen test is not met, for a set of activities and assets to be a business, it must have an input and a substantive process that together significantly contribute to the ability to create output

− Removes the evaluation of whether a market participant could replace the missing elements

Clarifying the definition of a business (ASU 2017-01)


Screen testClarifying the definition of a business (ASU 2017-01) (cont.)

• Screen test reduces the number of transactions that must be further evaluated

• Single identifiable asset includes:

− Tangible asset attached to, and that cannot be physically removed without incurring significant cost or reduction in value, from another tangible asset

− In-place lease intangibles and the related leased assets

• The following should NOT be combined as a group of similar assets:

− Tangible and intangible assets (exception: in-place lease intangibles and related leased assets)

− Intangible assets in different major intangible asset classes (e.g., customer-related intangibles and trademarks)

− Financial and nonfinancial assets

− Different major classes of financial assets (e.g., accounts receivable and securities)

− Different major classes of tangible assets (e.g., inventory and equipment)

− Assets within the same major asset class that have significantly different risk characteristics


Evaluation of substantive processClarifying the definition of a business (ASU 2017-01) (cont.)

• Substantive process criteria depends on whether a set has outputs or ability to create outputs

• A set with no outputs would be considered a business if it has both:

− An organized workforce

− Inputs that the workforce can convert into outputs

• A set with outputs would include a substantive process if any of the following criteria are met:

− An organized workforce that is critical to continued production of outputs

− A contract that provides access to an organized workforce

− Other acquired process (e.g., automated process) that significantly contributes to producing outputs


Effective date

• Public business entities: Annual periods beginning after December 15, 2017, and interim periods therein

• All other entities: Annual periods beginning after December 15, 2018, and within interim periods one year later

Transition

• ASU is applied prospectively

• No disclosures for a change in accounting principleare required

• Early adoption is permitted for transactions that were not reported in financial statements that have been issued or made available

Clarifying the definition of a business (ASU 2017-01) (cont.)


Simplifying the test for goodwill impairment (ASU 2017-04)


ASU 2017-04 was issued in January 2017

Key provisions:

• Eliminates Step Two from the goodwill impairment model

−No longer required to determine and assign the fair value of a reporting unit to its assets and liabilities

−Impairment will be measured as the excess of a reporting unit’s carrying value over its fair value

−Impairment is limited to the reporting unit’s recorded amount of goodwill

−Less precise than current Step Two model

• New model could result in a goodwill impairment that is not attributable to a decline in the fair value of a reporting unit’sgoodwill

• Applies to all reporting units, including those with zero or negative value

−Eliminates qualitative assessment for reporting units with zero or negative carrying values

−New requirement to disclose reporting units with zero or negative carrying values and the amount of goodwill allocated to them

Simplifying the test for goodwill impairment (ASU 2017-04)


Effective date

• Public business entities that are SEC filers: Annual and interim impairment tests for periods beginning after December 15, 2019

• Public business entities that are not SEC filers: Annual and interim impairment tests for periods beginning after December 15, 2020

• All other entities: Annual and interim impairment tests for periods beginning after December 15, 2021

Transition

• New guidance to be applied prospectively

• Early adoption is allowed for any impairment test after January 1, 2017

• Entities that apply the Private Company Council goodwill accounting alternative and who have not adopted the alternative to subsume certain intangibles into goodwill will not need to assess preferability under ASC 250 to apply the new guidance, provided they adopt on or before the effective date of the new ASU

Simplifying the test for goodwill impairment (ASU 2017-04) (cont.)


Improvements to nonemployee shared-based payment accounting—Proposed ASU


Proposed ASUNonemployee share-based payment accounting improvements

Would eliminate most of the differences between share-based payment accounting for employees and nonemployees:

• Determination of the measurement date

• Accounting for performance conditions

• Ability of a nonpublic entity to use practical expedients for measurement

• Accounting for share-based payments after vesting

Would supersede ASC 505-50 and expand scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees


Current GAAP

Measurement date: Generally, date on which the measurement of equity-classified share-based payments become fixed

Cost recognition of awards: Precluded from considering probability of performance conditions being met; must use “then-current lowest aggregate fair value” of the awards

Measurement: Fair value of either consideration received or equity instruments issued

Proposed ASU

Measurement date: Generally, the grant date

Cost recognition of awards: Recognize cost on the basis of the probable outcome of performance conditions

Measurement: Always measured on the basis of the fair value of equity instruments issued

Proposed ASUNonemployee share-based payment accounting improvements (cont.)


The New Revenue Standard (ASC 606)


Five-step model for recognizing revenue

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)

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 to in exchange for those goods or services.

This revenue recognition model is based on a control approach, which differs from the risks and rewards approach applied under current accounting principles generally accepted in the United States of America (GAAP).


Option 1: Full retrospective approachTransition methods

• Restate prior periods in compliance with ASC 250

• Optional practical expedients

January 1, 2018Initial Application Year

2018Current Year

2017Prior Year 1

2016Prior Year 2

New contracts New ASU

Existing contracts New ASU Restate under New ASU

Restate under new ASU

Completed contracts1 Restate under New ASU1

Restate under New ASU1

1Practical expedient available for completed contracts—an entity is not required to restate contracts that begin and end within same annual reporting period

Cumulative catchup


Option 2: Modified retrospective approachTransition methods

• Apply revenue standard to contracts not completed as of effective date and record cumulative catchup

• Required disclosures:

−Amount of each F/S line item affected in current period

−Explanation of significant changes

−Impact of adoption

January 1, 2018Initial Application Year

2018Current Year

2017Prior Year 1

2016Prior Year 2

New contracts New ASU

Existing contracts New ASU + cumulative catchup Legacy GAAP Legacy GAAP

Completed contracts Legacy GAAP Legacy GAAP

Cumulative catchup


Key observations and challenges of each approachTransition methods

Full retrospective Modified retrospective

Dual reporting requirements • Two years • One year

Comparability• Present historical periods as applicable

• Cumulative catch-up adjustment will be January 1, 2016

• No comparison for new standard

• Cumulative catch-up adjustment will be January 1, 2018

System considerations

• Retrospective will require information be prepared and validated prior to January 2018. Such procedures “trial runs” will provide opportunity to fix potential unforeseen/unplanned challenges

• More time to develop a one-time transition plan with more runway to fix data and system challenges ahead of “go-live” on January 2018

• Trial runs likely will still be required but may not be as in-depth as with retrospective

Transition relief requirements

• Provides relief for contracts with single fiscal calendar-year terms

• Provides relief for the “remaining performance obligations” disclosure requirement for contract longer than one year (e.g., multiyear maintenance)

• Provides relief for contract modifications

• Disclose the amount by which each financial statement line item is affected by the new guidance for 2018 as compared to the prior/legacy guidance

• Provides an explanation of the significant changes between applying the new guidance and prior/legacy guidance

• Provides relief for contract modifications


Internal controlsOther considerations

The implementation of the ASC 606 specifically impacts, but is not limited to, COSO Principle 9 regarding the identification and assessment of changes that could significantly impact the system of controls.

COSO Principle 9: The organization identifies and assesses changes that could significantly impact the system of internal control.

• Application of the new accounting standard represents a change that should be appropriately factored into the risk-assessment process.

Common COSO challenge Leading practice

Lack of consideration or evaluation of external events, such as changes in accounting standards and their impact on risk assessment and ICFR. For example:

• Impacts on roles are not considered• Adequate training is not provided• Roles and responsibilities related to changes not monitored

In response to risks arising from changes, management determines whether 1) new controls are needed or 2) the risks are adequately addressed by existing controls

Internal control is relevant to all organizations—public or private. Understanding your auditor’s expectations early in the implementation is critical.


Areas of impactIndustry-specific considerations

Technology

• Revenue allocation to all performance obligations (e.g., software licenses or SaaS arrangements)

• Licenses, if distinct or provides access (over time recognition) or a right to use (point in time recognition)

• Potential combination of contracts with the same customer

• Capitalization of costs to acquire customer contracts (e.g., sales commissions)

Life Sciences

• Collaborative arrangements

• License of Intellectual Property bundled with other services

• Variable consideration in pay-for-performance arrangements

• Timing of recognition: “point in time” or “over time” (e.g., contract manufacturing)

Aerospace & Defense

• Identifying performance obligation in complex arrangements

• Timing of recognition: “point in time” or “over time” (e.g., percentage-of-completion recognition)

• Capitalization of costs of fulfilling a contract

• Potential combination of contracts with the same customer when the pricing or economics of those contracts are interdependent


Areas of impactIndustry-specific considerations (cont.)

Retail

• Customer rewards, coupons, loyalty programs

• Rights of return

• Gift cards and layaway sales deposits

Consumer products and manufacturing

• Warranties

• Rights of return

• Sell-through approach

• Licenses

• Sales commissions

Disclosures are going to impact all industries


Illustrative project planDesigning your implementation strategy

Assessment Effort

2017

Q1 Q2 Q3 Q4Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Technical Accounting

Data and Systems Development

Process/Close and Report

Readiness and Training

Tax

Program Management

Scenario Documentation

Business Requirements

Systems Design and Architecture Systems Solution Development

Accounting Policy Development

Prepare Draft Disclosures

Draft Financial Statements

Systems Testing Deployment and Stabilization

Post Implementation Review

Reporting Controls/Reconciliation Monthly Close Process Controls Implementation Review

Dual Reporting Process Development

Design and Develop Training Program Roll Out Training

Evaluate Tax Reporting Requirements

Tax Planning/Reporting Process Enhancements

Tax Reporting Implementation

Communication to Stakeholders/Audit Committee

Update Stakeholders/Audit Committee

User Acceptance Testing




Auditor Concurrence on Accounting Policies and Scenarios

Analysis Phase Assessment Effort

Contract Reviews

The following presents the types of activities that are expected to be required in the implementation of the revenue recognition standard requirements:


Deloitte’s August 2017 implementation survey resultsMarket insights

6%

26%

42%

26%

Which of the following best describes your organization's current implementation status?

Completed Implementing Assessing Have not started


Sample deliverablesImplementation projects


The New Leasing Standard (ASC 842)


A quick glance at the standardOverview of ASC 842

What is ASC 842?

ASC 842 was issued by the FASB on February 25, 2016.

When will it impact?

The effective date for ASC 842 is annual periods beginning January 1, 2019, and interim periods therein (for calendar year-end public companies).

What is the impact?

The standard brings most lessee’s leases onto the balance sheet and introduces expansive quantitative and qualitative disclosure requirements.

Scope of ASC 842

An identified asset may be explicitly or implicitly specified in a contract. If supplier can substitute the asset and has both the practical ability to do so and the supplier would benefit economically from doing so, such right is a substantive substitution right and thus the contract is not or does not contain a lease.

Identified asset

A lease conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.Right to control the use

Lessees can elect not to recognize a lease liability and right of use asset for leases with a term of 12 months or less at lease commencement. Election is by class of underlying asset.

Short-term lease exclusion

Contract must convey a right to control the identified asset, which is conveyed through the entity’s right to (1) obtain substantially all of the economic benefits from the asset’s use and (2) right to direct the use of the identified asset.Right to control

Note: The standard applies to all leases, including subleases, but does not include leases of intangible assets, leases to explore for or use nongenerative resources, leases of biological assets, leases of inventory, or leases of assets under construction.


Assuming no early adoption, the first reporting under the lease standard will occur in Q1 2019 under a modified retrospective transition approach

Timing Your Transition

Feb 25, 2016

First quarterly reporting date reflecting the new standard*

FASB released new standard for lease accounting that will impact all public companies

Jan 1, 2017 January 1, 2019

Beginning of earliest comparative period presented*

ASC 842 effective date*

Dec 31, 2019

First annual reporting date (Form 10-K) post adoption*

Mar 31, 2019

*Assuming early adoption is not elected

Comparative periods to be restated

During this period, your operations do not cease. Your lease portfolio will need to continue to be maintained as new leases are entered into and some existing leases terminate


Dual-classification model drives on or off balance sheet treatment

Dual-classification model drives income statement characterizationOperating leases—lease expenseFinance leases—ROU asset amortization and interest expense

Operating leases are not recorded on balance sheet Operating leases will be reflected on the balance sheet as a right of use asset and lease liability

Companies must evaluate whether leases are Operating or Capitalleases

Companies will still evaluate whether leases are Operating or Finance (new term for Capital leases)

Current Standard compared to New StandardOverview From a Lessee Perspective

Today Future


Initial MeasurementAt the lease component commencement date, entities determine whether the lease is an operating or a finance lease. The classification tests are similar to those under previous GAAP however the “bright lines” have been eliminated and a more principles-based approach is articulated.

Most(1) leases are recognized on the balance sheet as a lease liability and a right of use asset, as follows:

• Lease Liability = Present value of total lease payments not yet paid

• ROU Asset = Lease Liability—lease incentives +/- prepaid lease payments/accrued rent + initial direct costs

(1) If the accounting lease term is less than 12 months and does not include a purchase option that the lessee is reasonably certain of exercise balance sheet recognition is not required.

Subsequent MeasurementSubsequent measurement for the lease liability follows an effective interest method of accounting. The amortization of the ROU asset and expense recognition pattern is dependent upon the classification of the lease (i.e. operating versus finance).

Lease Liability:Reduced over the lease term using an effective interest rate method

Lease Asset:Finance = Reduced straight-line over the lease termOperating = “Plug” approach

Expense Recognition Pattern for the Statement of Operations:• Operating = Straight-line expense pattern, reflected as “lease

expense”• Finance = Interest and amortization recognition (generally a

front-loaded expense due to higher interest costs in earlier periods)

Accounting Model


A simple lease arrangement under ASC 842Lessee Accounting Illustration

A lessee enters into a three-year lease and agrees to make the following annual payments at the end of each year: $10,000 in year 1, $15,000 in year 2, and $20,000 in year 3. The initial measurement of the right-of-use asset and liability to make lease payments is $38,000 at a discount rate of 8%.

The table below highlights the differences in accounting for the lease depending on whether it is classified by the lessee as a finance lease or an operating lease:

Year

0

1

2

3

Total

Both Methods

Lease Liability

$38,000

31,038

18,520

-

FinanceLease

Interest Expense

<X>

Amortization Expense

<Y>

Total Expense <X+Y>

ROUAsset

$38,000

$3,038 $12,666 15,704 25,334

2,481 12,667 15,148 12,667

1,481 12,667 14,148 -

$7,000 $38,000 $45,000

OperatingLease

Lease Expense

<Z>

Reduction in ROU Asset

<Z–X>ROU Asset

$38,000

$15,000 $11,962 26,038

15,000 12,519 13,519

15,000 13,519 -

$45,000 $38,000


Measurement considerationsLeases—Calculation Requirements

• Noncancelable period plus renewal options for those period(s) in which the lessee is reasonably certain to exercise the options

• Lessees would reassess lease term upon occurrence of a significant event or change in circumstances under the control of the lessee; which may result in remeasurement of ROU asset and lease liability

• Lessors would not be required to reassess lease term

Lease Term

• Fixed payments included within lease agreement

• In-substance fixed payments

• Variable payments based on an index/rate

• Amount probable of being paid under a residual value guarantee

• Purchase or termination options that a lessee is reasonably certain to exercise

Lease Payments

• Rate the lessor charges the lessee when available, which would be the rate implicit in the lease

• Incremental borrowing rate when the rate the lessor charges the lessee is not available

• Reassessment required in certain instances (change in lease term, certain modifications, change in purchase option considerations)

Discount Rate


Leases—Lease Modifications

Lessee Lessor

Modifications resulting in a separate contract

Would be accounted for as a separate contract when:

• Lessee is granted an additional ROU asset and the lease payments increase commensurate with the standalone price of the additional ROU

Would apply the lessee and lessor requirements to the separate contract

Modifications that do not result in a new lease

When modification grants an additional ROU, changes the lease term, or changes consideration:

• Adjust lease liability using revised lease payments and updated discount rate

• ROU asset adjusted by the difference between new and old liability

When modification reduces scope of original lease:

• Adjust lease liability using revised lease payments and updated discount rate

• Derecognize proportionate amount of ROU asset

Modification accounting would depend on the original lease classification and lease classification after the modification


Examples of when to complete a lease term reassessmentLease term

Constructing significant leasehold improvements that are expected to have significant economic value for the lessee when the option becomes exercisable

Making significant modifications or customizations to the underlying asset

Making a business decision that is directly relevant to the lessees’s ability to exercise or not exercise an option

Subleasing the underlying asset for a period beyond the exercise date of the option

Significant judgment is required for evergreen or perpetual leases.


What does the lessor model look like?Lessor accounting model

• Changes to Lessor model have significant interplay with ASC 606—Revenue

• Classification depends on an assessment of control of the underlying asset

Sales-type Direct financing Operating

• Lessee gains control of the underlying asset • Lessee does not obtain control of the asset, but the lessor relinquishes control

• Lessor retains control of the underlying asset

• Underlying asset is derecognized

• Net investment in a lease is recognized

• Selling profit or loss recognized at lease commencement

• Underlying asset is derecognized

• Net investment in a lease is recognized

• Profit deferred and amortized into income over the lease term

• Underlying asset remains on the lessor’s balance sheet

• Income recognized on a straight-line basis unless another systematic basis is more appropriate

• Initial direct costs recognized at lease commencement unless no selling profit or loss

• Initial direct costs deferred and amortized into income over the lease term

• Initial direct costs deferred and expensed over the lease term in a manner consistent with income


Illustrative example 1Lessor accounting model

A lessor leases equipment to a lessee. The leased asset has a carrying amount of $20,000 and a fair value of $25,000 at lease commencement. The terms of the lease are as follows:

Lease termAnnual lease paymentsEstimated useful life of the underlying assetRate the lessor charges the lessee (implicit rate in the lease)Estimated residual value at the end of the lease term

Terms

8 years$3,500 due at the end of each year12 years6.98%$7,000

Scenario 1Sales-type lease

Scenario 2Direct financing lease

Lessee gains control of the underlying asset. Lessee guarantees the full residual value of the underlying asset expected at the end of the lease

Lessor obtains a third-party residual value guarantee of $7,000, which is the expected value of the underlying asset at the end of the lease term


Illustrative example 1 (cont.)Lessor accounting model

*

The following table illustrates the accounting for the lease under the sales-type and direct financing approaches

Sales-type lease Direct financing lease

YearNet investment in lease

(balance sheet)Interest income Selling profit

Net investment in lease(balance sheet)

Interest income

0

1

2

3

4

5

6

7

8

Total

$ 25,000

23,244

21,366

19,356

17,207

12,447

14,907

9,815

7,000

$ 1,744

1,622

1,491

1,350

1,200

1,040

868

685

$ 10,000

$ 5,000

______

$ 5,000

$ 20,000

18,953

17,778

16,459

14,978

13,315

11,448

9,353

7,000

$ 2,453

2,326

2,181

2,019

1,837

1,633

1,404

1,147

$ 15,000

*Under the direct financing lease model, the lessor would not recognize the selling profit at lease commencement because the lease does not transfer control of the underlying asset to the lessee. Instead, the lessor would recognize the selling profit through higher interest income over the term of the lease.


• Information about the nature of the leases

• Maturity analysis of lease liabilities*

• Reconciliation of undiscounted cash flows related to lease liabilities*

• Short term lease expense

• Lease expense*

• Weighted-average remaining lease term*

• Weighted-average discount rate*

Presentation & Disclosure Requirements

Operating lease ROU assets and liabilities must be recognized in separate financial statement line items from those of finance leases

Disclosures from the existing standard have generally carried over

Various incremental qualitative and quantitative disclosures for Operating and Finance leases (below is not all inclusive):

* Amounts would be separately disclosed for operating and finance leases


Disclosure Requirements (cont.)

• Disclosures should “enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.”

• Nature of the leases• Leases that have yet to commence but

that create significant rights and obligations for the lessee

• Significant assumptions and judgments used

• Main terms and conditions of any sale and leaseback transactions

• Accounting policy exemption for short-term leases

• Maturity analysis of operating lease payments will continue to be required

• New tabular presentation with significant disaggregation of lease cost, weighted average calculations and transaction-specific amounts will be required

Objective Qualitative Disclosures Quantitative Disclosures


Presentation requirements

ROU assetLease liability

Amortization expenseInterest expense

Principal (Financing)Interest (Operating)

ROU assetLease liability

Lease expense (single line on straight-line basis)

Lease payments (Operating)

Balance Sheet Income Statement Cash Flow Statement

Financing Lease

Operating Lease

Lessee model

Presentation consistent with current lessor model:• Balance sheet—presentation depends on lease classification• Income statement—profit or loss recognized in a manner consistent with business model• Cash flow statement—recognized as cash inflows from operating activities

Lessor model


Transition

• Lessees and lessors are required to use a modified retrospective transition method for all existing leases

• Would apply the new model for the earliest year presented in the financial statements—“modified retrospective transition” is defined differently in ASC 842 Leases than it is under ASC 606 Revenue from Contracts with Customers

• Application of approach linked to current lease classification and new lease classification

• An entity can use hindsight when evaluating lease term and impairment

• Transition “Package of 3”—elect them all, or none at all

−Lessees and lessors are not required to reassess the following upon transition:

◦ Whether any expired or existing contracts are leases or contain leases

◦ The lease classification for any expired or existing leases

◦ Initial direct costs for any existing leases

Transition


• Sale and leaseback transactions

• Build-to-suit leases

• Leases acquired in business combinations

• Subleases

• Related party leases

• Leasehold improvements

• Contract combinations

• Leveraged lease accounting

• Accounting for leases at a portfolio level

• Leases in a business combination

• Impairment considerations

• US GAAP to IFRS comparison

But wait, there’s more…Other key provisions and resources


ASC 842 implementation process


Key challenges associated with the lease standard:Operational Challenges

The data being collected may be in a variety of formats, thus increasing the complexity and cost of organizing the data.

3Timeline for adoption: It can be a challenge to anticipate the data gaps and overcome the data abstraction hurdle. A typical timeline from planning to implementation is 18-24 months.

2IT systems: Need to store lease data and perform calculations. Consider modifying existing system or moving to new system. Given the long lead times of system initiatives, may need bridge system.

1 Data Challenges: High volume of lease agreements across multiple decentralized locations, in different business and operating units.

High volume of data fields

Multiple languages/contracting practices

Data housed in various systems

Agreements aren’t

electronic

Multiple currencies

Number of new data elements

Lack of resources

New analytics or

metrics needs

Information isn’t all in

one agreement

SOX regulations


The following challenges should be considered in the transition period:Operational Challenges (cont.)

Application of Judgment and Estimation

Apply judgment and make estimates under a number of the new lease requirements:• Judgment is often required in the assessment of a lease’s term, which would affect whether the lease qualifies for the short-

term exemption and therefore for off-balance-sheet treatment• Since almost all leases will be recognized on the balance sheet, an entity’s judgment in distinguishing between leases and

services becomes more critical under the new guidance• Lease classification without bright line classification tests• Determine whether the customer has the right or not to direct the use of the identified asset

Data Management

• Third-party data may be needed to ensure a high level of operational quality and efficiency• Numerous lease agreements at multiple decentralized locations, lease data in spreadsheets or physical documents.

Consequently, collecting and abstracting may be time-consuming and resource-intensive• Entities may need to gather information that may not be contained in lease agreements (e.g.: the fair value of an asset,

the asset’s estimated useful life, incremental borrowing rate, etc.)• Distinct data between the new requirements and to accomplish with the transition period data


Operational Challenges (cont.)

Internal Controls and Business Process Environment

• Increased relevance of new leasing to the financial statements, entities may face additional scrutiny from auditors and regulators regarding the design and effectiveness of associated controls under Sarbanes-Oxley

• Examine internal controls related to their processes for capturing, calculating, and accounting for their leases• Internal controls or processes are needed, entities may also need to issue organizational communications and establish

change management and employee training programs

Covenants and Capital

• Careful examination of the effects of increased leverage and potential impact on debt covenants will be required• This may depend in part on how various debt agreements define and limit indebtedness as well as on whether the debt

agreements use “frozen Generally Accepted Accounting Principals (GAAP)“ covenants.• The ASC requires entities to present operating lease liabilities outside of traditional debt, which may provide relief to some

entities. Nevertheless, it will be critical for all entities to determine the ASC’s potential effects on debt covenants.• Industries, such as banking, that are faced with regulatory capital requirements based on assets will need to assess the

potential impact on capital requirements.

Income Taxes

• Potential tax implications are situational requiring involvement of entities’ tax department


The new lease standard introduces additional considerations around a company's internal control structure:• Increased focus around internal controls—regulators and other

stakeholders• New balances and disclosures subject to internal controls• Complexity of requirements of the New Lease Accounting

Standard

Other internal control considerations• Data and access management

– Workflow management with approvals/reviews– Audit trails– Segregation of duties

• Technology/processing– Version control– Re-assessment/modifications

• Internal controls performed by service organization

Complexity throughout the organization Internal Control Considerations

Lease Cycle

Lease modification (renew, cancel, modify)


Control Considerations During the Lease Cycle

• Controls around classification—operating vs. financing leases

• Embedded leases

• Short term lease scope exception

• Portfolio approach

• Control Environment

– Building in the appropriate structure and accountability to handle the changes including Steering Committee and Project Management Office (PMO)

– Approach to areas where judgment is required

• Risk assessment

– Change creates risk

– Consider risks related to financial reporting change

– Monitoring controls implemented

– System change controls in place

– Appropriately trained personnel

– Coordination between various key stakeholders (e.g. technical accounting, tax, real estate, IT)

• Completeness of initial opening balance sheet

– Challenge of getting the lease data into an electronic repository

– Potential decentralization of the data gathering efforts

– Existing lease data used for operational purposes and may not be subject to internal controls

– Reconciliation to current ASC 840 footnote disclosures

• Controls during comparative reporting period

• Leases commonly are modified, renewed, extended, cancelled

– Challenge around frequency

– Completeness and timely identification of modifications as they occur

– Process for tracking and review/approvals for changes

• Version controls

Lease OriginationTransition Lease Modification

• Standard introduces “reassessment”

• Significant events or significant changes in circumstances may trigger a “reassessment event”

– Constructing significant leasehold improvements

– Making significant modifications or customizations of underlying asset

– Making a business decision directly relevant to the lessee’s ability to exercise or not exercise an option

– Subleasing the underlying asset for a period beyond the exercise date of the option

• Reassessment requires the lessee to remeasure the ROU asset and liability

• Changes in internal controls likely necessary to identify triggers to capture timely reassessment

Lease Reassessment


Control Considerations During the Lease Cycle (cont.)

Reporting and Disclosures Information Technology Controls Controls around Outsourced Service Providers

• Controls over source data and interfaces/data transfers

• General IT controls including access controls and segregation of duties

• Change management controls related to lease calculations

• Appropriate user acceptance testing

• Reviews/approvals and workflow management

– Especially important when decentralization exists

• Audit trails

• Significantly increased disclosure requirements—increased visibility to judgments used and nature of the lease portfolio

• Many of the disclosure requirements are data Intensive

– Weighted average calculations, variable lease payments, etc.

– Consider source and controls over the data

• Many organizations use outsourced service providers to assist in the management of parts or all of their lease portfolio

– Consider internal controls performed by the service provider

– Appropriate monitoring mechanisms over reporting from the service provider


Typical phases of a lease implementationLease Implementation Approach

Assessment, Visioning & Strategy

• Create governance and project management office structure

• Lease landscape/Portfolio assessment

• Analysis of a sample of leases

• Embedded lease and tax assessment

• Data quality/gap assessment

• Process and system assessment

• Plan for lease data abstraction

• Roadmap/work-plan development

Lease Abstraction & Migration

• Lease abstraction execution and review

• Data migration from existing systems

• Data sanitization and normalization

• Ongoing data maintenance

• Enhancements to data capture process

• Develop management judgements and estimates

• Determine training needs for staff

Dual Reporting & Long-term Solution

• Deploy/refine long-term technology solution for leases

• Integrate solution with existing lease accounting procedures

• Revise internal controls design and development

• Implement Interim accounting and reporting under current and future lease standards

• Develop management, reconciliation reports and reconciliation steps to monitor the dual recording results

On-going Accounting Maintenance

• Status reports, project management materials and communications

• Review governance model including ongoing business as usual activities

• Ongoing refinement of technology solution and steady-state process

• Technical accounting policy documentation and address additional topics

• Shared services and Center of Excellence development

• Lease accounting managed services

Development of Transition Process/Solutions

• Design/develop Interim accounting and reporting under current and future lease standards

• Embedded lease and tax transition process

• Pro-forma scenario analysis

• Transition election process and development

• Training

• Internal controls and process development


Area Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Ongoing

Program Management/Communications

Lease data collection

Process/Close, Consolidate, Report

Systems/Interfaces

Technical Accounting

Training and other

The following illustrates a high-level roadmap of key action steps management would execute related to their lease implementation

Illustrative implementation roadmap

Initial planning

and assessment

Documentation of key issues, status and considerations

Develop near-term and long-term system

strategy

Data validation and readiness

activities

Project tracking, status reporting, and communications

Execute data gathering efforts

Develop trainingplan

Define new lease work

flows

Design new reports, controls, and processes

Develop and implement temporary repository

Potential Implementation of

solutionenhancements

Repository and calculation engine

in operation

Development of balance sheet and income statement

impact; draft disclosures

Execute training plan

Development of final conclusions

Develop and implementlong-term repository

Activities performed in planning stage Critical activities (highly time sensitive) Activities performed in execution stage


Activities Work Products Outcomes

• Lease footprint analysis including:

‒ Overview of the lease landscape and footprint data assessment and data gap issues

‒ Summary of accounting and operational issues and key system related matters

‒ Project roadmap illustrating the approach and detailed steps towards implementation of the requirements of the proposed lease standard

‒ Preliminary resource timing

‒ Overall data gathering strategy

‒ Customized repository for lease contracts

• Interviews/workshops with key stakeholders to document lease requirements

• Identify high level potential data gaps

• Develop a strategy to project the potential impact of the proposed lease standard on key metrics

• Assess how to best capture the potential data gaps and perform data cleansing activities

• Enhance long-term implementation plans including:

• Detailed work plans and to address the issues noted above

• Approaches to providing input on business reporting requirements

• Develop a process to upload lease contracts to a centralized repository and reconciliation procedures to support completeness of data

• Visibility to lease footprint across the organization

• Understanding of key issues for implementation including accounting tax and control considerations

• Detailed executable plan for implementation

• High level vision for lease solution approach

What does a typical assessment involve?Getting Started


Resources


Industry focusDeloitte Accounting and Financial Reporting Updates


Roadmaps issued in 2016

► We are committed to continuing to expand our roadmap libraryWe are continually focused on expanding our roadmap library. We’ve issued eight new roadmaps in 2016 and will continue to issue more in 2017. All roadmaps are available for free on DART (https://dart.deloitte.com).

Roadmap Series


Assistance with implementationof new accounting standards, forexample:• Revenue recognition

• Leases

• Credit losses

Technical accounting analysis, such as:• Revenue recognition

• Preferred stock and equity agreements

• Business combinations

• Stock-based compensation

• Segment reporting

• Earnings per share

• Consolidation/VIEs

IPO readiness, including:• PMO services

• Assistance with drafting financialstatements, MD&A and other disclosures

• Assistance with preparation of interim financial information

• Assistance with drafting pro-forma financial statements

• Assisting the company with its response to SEC comments

Preparation of carve out financialstatements and SOX Assistance• PMO services

• Process flow narratives/flowcharts

• Risk assessment

• Walkthrough documentation

• Design and implementation testing

• Operating effectiveness testing

Assistance with restatement projects• Audit preparation

• PMO services

• Prepared by client schedules

• Stock compensation, capitalized softwaredevelopment costs, etc.

How Deloitte can helpAccounting & Reporting Advisory Services


Closing remarks








Tax Policy in 2017

Cyber Security


Global Economic Outlook

Ira KalishChief Global EconomistDeloitte LLP


• Full employment • Employment rising faster than needed to absorb new entrants into the labor force • Wages grow slowly as participation rises

USAStrong economy, despite slow growth

%

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source:

Average Hourly Earnings, % Change


• Consumer spending and housing

−Job growth and wages

−Better credit market conditions

−Better cash flow

−Low energy prices

−But retail sales decelerate as consumers save more

USAAreas of strength


• Weakness in investment, rebound in exports

− Strong dollar hurts exports

− Rebound in global economy helps exports

− Investment hurt by:

◦ Excess capacity causes declining margins

◦ Deflation discourages spending

◦ Political uncertainty causes slowdown in credit growth. Companies worried about healthcare costs, taxes, and regulation

◦ Temporary impact of new technologies has chilling effect on investment

USAAreas of weakness


• Core inflation is decelerating, raising questions about what the Fed should do

• Wages are not yet accelerating, despite a tight labor market

• The Fed has started interest rate normalization, but bond yields remain subdued

USAInflation and the Fed

The Fed’s favorite measure of inflation


Administration fiscal policyUSA

Goals:

• Cut taxes, reform tax code

• Boost spending on infrastructure

• Ease regulations

Impact:

• Stimulate economy already at full employment

• Temporarily boost growth

• Boost expectations of inflation, leading to tighter monetary policy

Political environment:

• Focus on healthcare first, and fail to end Obamacare

• Lose political capital by losing healthcare

• Fail to provide Congress with specific proposals, fail to decide on key issues

• Likely result: nothing happens—potentially a blessing in disguise


Administration trade policyUSA

Protectionism:

• Withdraw from TPP

• Renegotiate NAFTA

• Threaten steel tariffs

• Threaten “section 301” action against China

Impact of protectionism:

• Higher prices, lower incomes

• Redesigned supply chains

Focus on trade deficits:

• Trade deficits are not the result of trade policy


Why is economic growth slow?USA

• Due to demographics, declining female participation, and slow productivity growth

• Productivity grows due to technological innovation, implemented through investment

%

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source:

Population aged 15 to 64, % Chg

Ra

tio

30

35

40

45

50

55

60

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

United States, Socio -Demographic Labor Force Statistics, Civilian Labor Force Participation Rate, Wo men, 16 Years & Over, SA [m.a. 50 obs]

Source:

Female participation rate US growth of output per hour‏


Can tax policy boost growth?USA

• Probably not very much—although tax reform remains a good idea

• Tax policy will not influence labor force size

• Intended to boost investment, which will help productivity

• Yet other countries have low tax rates and slow productivity growth

• Many other factors influence productivity growth:

−Government R&D

−Investment in human capital

−Global demand and global capacity

• Other policy areas might hurt economic growth

−Protectionism

−Immigration restrictions

−Political uncertainty and dysfunction


Why are so many unhappy?USA

• Technology boosts demand for skilled workers, reduce demand for less skilled

• Labor supply fails to shift commensurately, resulting in widening income inequality

• Political leaders of both parties blame globalization

• End result is a large group of people who feel left behind


ReboundEurozone

• Strength stems from aggressive monetary policy

−Weakens euro, which helps exports

−Boosts inflation

−Boosts asset prices, which helps spending

−Lowers borrowing costs

• Particular strength in Germany, Spain, Netherlands

• Rebound in France

• Weakness in Italy

• Unemployment remains too high, inflation too low

• Risks:

−High unemployment weakens political support for EU institutions

−US protectionism


Brexit UK

• UK government prefers hard Brexit due to migration issue

• Recent election renders murky situation

• UK wants to negotiate free trade with EU.

• Potential outcomes:

−Further decline in pound boosts import prices, reduces consumer spending growth

−Chilling effect on inbound investment

−Some industries shift resources to continent (autos, pharma, financial services)

−Weak pound helps export competitiveness


Moderate growth, rising debtChina

• Slight rebound in growth, largely due to debt-fueled spending on infrastructure

• Government wants to restrain debt, but wants to buttress growth

• Declining and often negative return on debt, causes risks to economy:

−Not a Lehman style financial crisis

−Instead, zombie banks roll over debts of failing companies

−Weak investment and higher unemployment

−Risk: significant slowdown in growth, spilling over into the rest of Asia


Closing remarks

1. Technological disruption continues, but has yet to boost productivity and growth.

2. Disruptions will exacerbate income inequality. After manufacturing jobs disappeared, we are about to see a big loss of jobs in retailing. Artificial intelligence could lead to job losses in finance, professional services, healthcare, and education.

3. New technologies will create new industries that we have yet to imagine.

4. Coping with disruption will require a more educated workforce. Jobs that require human interaction and emotional intelligence will remain.

5. The backlash against globalization is easing, except in the US. Free trade deals are being reached between the EU and Japan, the EU and Canada, the EU and Latin America, and between China and the rest of Asia. This could leave the United States isolated.








Tax Policy in 2017

Cyber Security


Election 2016What does it mean for tax policy?

Matt CrosbySr. ManagerDeloitte Tax LLP

Why Have People Been Talking About Tax Reform?


High corporate tax rate

Narrow tax base

Worldwide tax system


Corporate income tax rates around the world

15 Highest Corporate Tax Rates 2016 Rate (%)

United Arab Emirates 55

United States 38.9

Argentina 35

Chad 35

Democratic Republic of the Congo 35

Equatorial Guinea 35

Guinea 35

Malta 35

US Virgin Islands 35

Zambia 35

India 34.6

Sint Maarten 34.5

France 34.4

Belgium 34

Brazil 34Source: Tax Foundation, Aug. 18, 2016, http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2016

20%

25%

30%

35%

40%

45%

50%

55%Marginal Tax Rates: US vs. OECD Average

OECD (weighted avg.)

US

Source: OECD historical data

38.9%

31.4%

http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2016


(And that’s part of the problem)But some industries fare better than others

12%

21%24% 26% 26% 28%

31% 33% 34%37%

0%

10%

20%

30%

40%

50%

60%

Utilities IT Industrials Telecom Pharma ConsumerProducts

Materials Financials Retailers Energy

Average Effective Tax Rate, by Industry

Note: Average Effective Tax Rates by Industry; Range of Effective Tax Rates of companies with Market Capitalization over $25B as of March 11, 2014.Source: “Across U.S. Companies, Tax Rates Vary Greatly.” New York Times, available at http://www.nytimes.com/interactive/2013/05/25/sunday-review/corporate-taxes.html?_r=2&

http://www.nytimes.com/interactive/2013/05/25/sunday-review/corporate-taxes.html?_r=2&


Congressional action on health care –potential impact on tax policy


Trump’s tax announcement


Key featuresTrump’s tax announcement

I n d i v i d u a l R e f o r m

• Tax relief for American families, especially middle-income families:

o Reducing the 7 tax brackets to 3 tax brackets of 10%, 25% and 35%

o Doubling the standard deduction

o Providing tax relief for families with child and dependent care expenses

• Simplification:

o Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers

o Protect the home ownership and charitable gift tax deductions

o Repeal the Alternative Minimum Tax

o Repeal the death tax

• Repeal the 3.8% Obamacare tax that hits small businesses and investment income

Source: White House fact sheet, April 26, 2017


Key featuresTrump’s tax announcement (2 of 2)

B u s i n e s s R e f o r m

• 15% business tax rate

• Territorial tax system to level the playing field for American companies

• One-time tax on trillions of dollars held overseas

• Eliminate tax breaks for special interests

Source: White House fact sheet, April 26, 2017


Note that Congress will want to be heard on tax policy…And it won’t be with one voice


House Republicans

Senate Republicans

House Democrats

Senate Democrats


Blueprint summaryHouse Republicans

Business Tax

• 20% corporate tax rate; 25% rate on pass-through business income

• 100% expensing (rather than depreciation); repeal deductibility of business interest

• Repeal corporate AMT

• Disallow NOL carrybacks; NOLs may be carried forward indefinitely

• R&D credit and LIFO retained; most other business tax credits and deductions assumed to be repealed

International Tax

• Full territorial system (no tax on repatriation of future foreign profits)

• Transition rule that has a deemed repatriation of past foreign profits (8.75% rate on cash and cash equivalents; 3.5% rate on everything else; payable over eight years)

• Moves to a destination-based border adjustable cash flow tax, which the blueprint says will obviate the need for most base erosion safeguards


Blueprint summary House Republicans

Individual Tax

• Reduce seven tax brackets down to three – 33%, 25%, 12%

• 50% exclusion for investment income (capital gains, dividends, interest)

• Combine and expand the standard deduction and personal exemption, allowing fewer taxpayers to go through the complexity of itemizing

• Retain, though possibly in a modified form, the deductions for mortgage interest and charitable contributions as well as incentives for savings and education

• Repeal most other individual income tax preferences, including for state and local taxes

• Repeal AMT

• Repeal estate and gift tax


Focused more on “flaws” in the tax codeCongressional Democrats

• Some Ways & Means Democrats seem interested in tax reform and have led the way on discrete parts (e.g., Rep. Richie Neal pairing with GOP Rep. Charles Boustany in 2015 to unveil an innovation box)

• However, the general approach of House Democrats has been to continue to push for action to address what they say are flaws in the tax code, and they are unlikely to be supportive of the sort of tax reform that Trump and House Republicans will pursue

• Senate Finance Committee Ranking Member Ron Wyden has urged Congress to act in the short term on the issue of inversions

• Unlike his House counterparts, he has worked on a broader vision of tax reform and last year released discussion drafts on three pieces of tax reform

• Incentives for Senate Democrats to push for tax reform are unclear under a Trump presidency, but there may be areas of agreement on which legislation can be built


2016: A good map (on paper) for Democrats; 2018: A very different story

Senate Seats Contested In 2016 Senate Seats To Be Contested in 2018


Senate Republicans

• Senate Finance Committee Chairman Hatch had been working on proposal for “corporate integration”

− Generally it was expected to give corporations a deduction for dividends paid while requiring all dividend recipients to pay tax on them at ordinary income rates

− Chairman Hatch delayed releasing it in 2016 and recently indicated he would suspend work on it to focus on broader tax reform


“Big Six” tax announcement


Big Six tax announcement

• On July 27, 2017, the so-called “Big Six” (House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Ways and Means Committee Chairman Kevin Brady, Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Steve Mnuchin, and National Economic Council Chairman Gary Cohn) issued a “Joint Statement on Tax Reform.”

• The leaders expressed their commitment to passing tax reform in 2017 and reiterated previously stated goals to:

• Reduce rates for families and businesses of all sizes;

• Reduce complexity;

• Make our international tax system more competitive;

• Move toward more expensing of capital purchases; and

• Make the changes on a permanent basis (which presumably means identifying “loopholes” to close to pay for those rate reductions).

• Of note, the Big Six agreed that tax reform would not include the border adjustable cash flow tax system that had been championed to that point by Speaker Ryan and Chairman Brady

• Leaves it to the taxwriting committees in Congress to fill in the many missing details this Fall.


Bottom line question: Is tax reform “more likely than not” in 2017?


There are at least eight reasons to keep expectations in check

1. Parties have real and deep differences over whether tax reform should raise more revenue

2. Parties remain badly divided over whether the tax code should be made more progressive or not

3. Tax reform entails very difficult choices — Members of Congress are rarely excited about taking away specific tax benefits for specific groups/industries


According to the CBO, a rate reduction of 1 point costs $100 billion (over 10 years)How do we get there?

Congressional Budget Office

1% Cut in Corp. rate

$100 Billion in Revenue


Amortization of research & experimental expenditures $192.6B

Requires

$500 billion

in Revenue

Amortization of advertising expenses $169.0B

Phaseout and repeal of 199 deduction $115.8B

Limit NOL deduction $70.5B

Total revenue raised from these: $547.9B

Path to 30%


Next Seven:• Repeal of deduction for entertainment expenses• Limitation on deduction for FDIC premiums• Repeal credit for small business health insurance• Modify limit on excessive employee compensation• Capitalization of certain policy acquisition expenses• Modify low income housing, repeal 4% credit• Repeal of rehabilitation creditGet you $84 billion or 0.84%

First Four:• Amortization of research & experimentation• Amortization of advertising expenses• Phaseout & repeal of 199• Cap NOL deductions at 90%Get you $547 billion or 5.47%

Final Six:• Modification of rules for life insurance proration• PTP exception limited to mining/natural resources• Repeal special treatment for Blue Cross/Blue Shield• Excise tax on excess tax-exempt org compensation• Repeal Lower of Cost or Market inventory• Cost basis of specified securities Get you $24 billion or 0.24%

Next Seven:• Rules for prevention of evasion by reinsurance• Repeal of advanced refunding bonds• Limitation on treaty benefits for certain deductible

payments• Modification of rules for long term contracts• Prevention of tax-free spinoffs involving REITs• Repeal of Percentage depletion• Terminate rules for gains on small business stockGet you $46 billion or 0.46%

Next Seven:• Excise tax on Systemically important financial

institutions (SIFIs)• Repeal of like-kind exchanges• Computation of life insurance reserves• Termination of Private Activity Bonds• Limitation of cash method accounting• Modification of discounting rules• Treatment of certain derivatives

Get you $233 billion or 2.33%

Next Seven:• Accrual method taxpayers include income once

included for financial statement purposes• Repeal credit for employer SS taxes paid w cash tips• Phaseout & repeal of renewable electricity credit• Coordination with rules on financial statement timing• Accelerate tax of nonqualified deferred compensation• Repeal credit for clinical testing of rare disease drugs• Revision of treatment of contributions to capitalGet you $67 billion or 0.67%

Path to 25% Requires

$1 trillionin Revenue

$548B

$233B

$84B

$67B$46B$24B




2. Parties remain badly divided over whether the tax code should be made more progressive or not


4. Politics as a whole seems to be broken




2. Parties remain badly divided over whether to reduce the top marginal rate for individuals; relatedly, they have very different views as to whether the tax code should be made more progressive or not


4. Politics as a whole is broken; the system today rewards “purists” not dealmakers

5. Republicans are using up a fair amount of political capital in 2017 on ACA repeal and the process of confirming President Trump’s cabinet and court nominees

6. You can never rule out the possibility of a “Black Swan” event (natural disaster, financial market turmoil, terrorism, etc.) that could stymie or re-direct the legislative process; and the 2018 midterm elections are less than 500 days away

7. Chaos coming out of the White House is not conducive to legislating

8. The clock is ticking


The 2017 legislative calendar

For the remainder of CY 2017, the House and Senate are scheduled to be in session on 55 overlapping days and an additional 22 days when either the House or Senate is in session

AUG5 week summer recess

SEPT1 week District work period

OCT1 week District work period

NOV1 week District work period

DECTarget Adjournment 12/15

Must dos

ACA repeal and replace

BY SEPT 30

• Pass FY18 spending bills… or shut down part of the gov’t• Reauthorize FAA • Raise or suspend federal debt ceiling?• Extend Children’s Health Insurance Program• Senate continues processing Trump’s nominees

Repeal through FY17 budget reconciliation process


A potential – and increasingly ambitious – tax reform timelineThe 2017 legislative calendar

For the remainder of CY 2017, the House and Senate are scheduled to be in session on 55 overlapping days and an additional 22 days when either the House or Senate is in session

AUG5 week summer recess

SEPT1 week District work period

OCT1 week District work period

NOV1 week District work period

DECTarget Adjournment 12/15

House

Senate

Pass FY18 budget resolution including reconciliation instructions; start tax reform hearings; negotiations with Senate and White House continue

House Ways & Means vote

Full House vote

Pass FY18 budget resolution including reconciliation instructions; negotiations with House and White House continue

Senate Finance vote?

Full Senate vote


Seven reasons to think it could really happen this time

1. There is substantial agreement that the current system — with high corporate tax rates, a narrow tax base riddled with credits and deductions, and an antiquated worldwide tax system — is not sustainable

2. External factors (including inversions, foreign acquisitions of U.S. firms, BEPS, and the state aid cases in the EU) are imposing real political and policy costs

3. Lots of groundwork has been laid

4. Reform is a high priority for key House and Senate leaders, so this likely won’t fall off the radar

5. Republicans are generally united on the idea of tax reform, and with the executive and legislative branches under the control this year, they may try to enact tax reform under reconciliation

6. If not now, when?

7. Republicans will need something to take to the voters in November of 2018


Final observations, takeaways, and questions


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, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this presentation.








Tax Policy in 2017

Cyber Security


Cyber SecurityA prudent approach

Sean PeasleyPartnerDeloitte & Touche LLP

Copyright © 2017 Deloitte Development LLC. All rights reserved.- 234 -

Evolution of cyber threatIn 1996, Intelligence Community agencies began to identify and test cyber vulnerabilities in our military command, control, and communication (C3), and nation’s infrastructure

Then

• Acknowledged but not seen as a near-term possibility

• Assumed nations would lead capability development

• Thought exploitation and attack capabilities would eventually find their way into Commercial Sector

Now

• Hackers and cyber criminals no longer main threat

• Most all major developed nations have cyber exploitation and attack capabilities

• Cyber warfare now routine part of our vocabulary


Cyber threat through connectivityOver the past two decades, we have woven a fabric of connectivity in our economy and society via the Internet – a platform that was designed primarily for sharing information, not protecting it

2

Connectivity (Internet)

Innovation

EfficiencyProfit &

Performance

InfrastructureDependence

VolatilityComplexity

The strategies that grow an organization’s business or achieve an organization's mission are at the heart of cyber risks that organization faces.


Cyber security: Essential truths

1. No industry or organization is immune• Determine your risk tolerance and the cost of protection

2. Cyber damages go beyond dollars• While the average cost is known, the long term effects on reputation, brand, morale, trust

are significant and take their toll on organizations• Consideration for Cyber Insurance

3. Traditional controls are necessary but not adequate• Preventative and detective security measures are no longer sufficient - New technologies

and approaches are required• Human error/lapses continue to be one of the key reasons for breaches

4. Speed of attack is increasing and response times are shrinking• Vigilance to understand new threats, anticipate and thwart future attacks • Resilience to minimize impact and/or recover gracefully and fast

5. Everything can’t be protected equally• Understanding the need to define ‘crown jewels’ and associated value chain, high risk

individuals/events – proportionate risk decisions; • Use of models such as Value at Risk (VaR) and Risk Adjusted Rate of Return On Capital

(RAROC) for planning, budgeting, tracking and reporting

6. Regulators / government are key stakeholders with ever increasing focus• Security and privacy rules, guidelines, and consumer protection are increasing

The threat landscape has changed, so you must realize the stakes are higher than ever


Social engineering

Phishing

Botnets

ExploitsRansomware

IT COMPLEXITY• Endpoint diversity• Rogue devices• Shadow users• Business innovation/ change• Third party entities

Cyber threat landscape, trends and impact

Actor ecosystem

Threat actors

Malware authors

Hosting entities

Domain generators

Command & control

Money mules

Payment processors

Tool, tactics, and procedures

Threat vectors Suppliers & partners

Employees Mobile devices

Customers EmailSmart devices

Common corporate challenges

Potential impact

DDoSWebsite

compromise

Password theft

Evasion tactics

SECURITY OPERATIONS• Signature-based controls• Data encryption• Device-focused monitoring• Insufficient skills/staffing

PROCESS /GOVERNANCE• Shadow IT• Change/asset management• Secure SDLC• Business risk alignment• Risk-asset mapping

Data loss IP theft Threat to life or safety

Operational disruption

Reputation damage

Fraud or revenue loss

Organized crime

Nation-state actors

Individuals

Ideological groups

A complex set of motivations, ecosystem, tools and tactics enable the adversaries

Not only have criminals and criminal organizations conducted sophisticated cyber attacks, but we also witnessed the first “known” cyber attack by a nation state against a private corporation.

Deloitte advises a risk based cybersecurity policy in which the greatest security is provided around the most important assets and core functions of the business.

We term our approach as “Being secure, being vigilant, and being resilient”.


Deloitte’s view on cyber security

Inputs Deloitte’s Cyber Security principles

ISO1 27001/2 NIST2 cybersecurity

framework Global privacy and

data protection laws ITIL3

…

Industry standards

Project / engagement experience

Published industry research

Preferred practices

Who might attack? What are they

after? What tactics will

they use?

Threat Landscape

IdentifyProtect

SECUREEstablish risk-prioritized controls to protect against known and emerging threats, and comply with standards and regulations

VIGILANTGaining detective visibility and preemptive threat insight to detect both known and unknown adversarial activityacross the environmentDetect Respond

RESILIENTEstablish the ability to handle critical incidents, quickly return to normal operations, and repair damage to the business

Recover

1 International Organization for Standardization2 National Institute for Standards and Technology3 Formerly known as the Information Technology Infrastructure Library

As used in this document, “Deloitte” means‏ Deloitte & Touche LLP and Deloitte Consulting LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Perfect security is not feasible. Instead, reduce the impact of cyber incidents by becoming: Secure. Vigilant. Resilient.TM

Rather than being a necessary burden, the Cyber Risk program is a positive aspect of managing business performance.

http://www.deloitte.com/us/about


• Perimeter defenses• Vulnerability management• Asset management• Identity management• Secure SDLC• Data protection• …

Cyber Risk Program and Governance

Executives should set risk appetite, and drive focus on what mattersIt starts by understanding who might want to attack, why, and how

• Cyber criminals• Hacktivists (agenda

driven)• Nation states• Insiders / partners• Competitors• Skilled individual hacker

• Theft of intellectual property or strategic plans

• Financial fraud• Reputation damage• Business disruption• Destruction of critical

infrastructure • Threats to health & safety

Who might attack?

What are they after, and what are the key business risks I need to mitigate?

What tactics might they use?

• Governance and operating model

• Policies and standards• Management processes and

capabilities • Risk reporting • Risk awareness and culture

• Spear phishing, drive by download, etc.

• Software or hardware vulnerabilities

• Third party compromise• Multi-channel attacks• Stolen credentials• … and others

• Incident response • Forensics• BC/DR, Crisis management• …

SECUREAre controls in place to guard against known and emerging

threats?

VIGILANTCan we detect

malicious or unauthorized

activity, including the

unknown?

RESILIENTCan we act and recover quickly

to minimize impact? • Threat intelligence

• Security monitoring• Behavioral analysis• Risk analytics• …


Threat actors and their motives vary by industry and organizationA typical Cyber Risk heat map

Very high

High

Moderate

Low

KEY

Notable insights:• The chief threat for companies is

theft of IP by nation states or competitors, especially those able to compromise insiders or business partners.

• Attacks are focused on maintaining hidden presence for years to access what makes the organization competitive.

• Criminals see the supply chain as a means of accessing information they wouldn't otherwise be able to get from well secured companies.

• Manufacturing plants and distribution centers utilize critical infrastructure to process the production of goods and coordinate the supply chain. Emerging threats exist to attack critical assets and disrupt business operations.

• Highly integrated supply chains make companies especially susceptible to compromises among their business partners and suppliers.

• Vulnerabilities in industrial control systems provide opportunities for adversaries to disrupt operations to create quality and safety issues.

• Companies that utilize big data technologies to harness and analyze increased amounts of information are becoming bigger targets for cyber threats.

• Cyber attacks can result in business disruption and lost revenue, especially during peak periods.

• With mergers & acquisition activity on the rise, corporate espionage for deal information becomes relevant.

• Innovations that drive growth likely increase the amount of consumer data collected and can also create Cyber Risk.

IMPACTS

ACTORS

Financial theft / fraud

Theft of IP or strategic

plans

Business disruption

Destruction of critical

infrastructure

Reputationdamage

Threats to life / safety Regulatory

Organizedcriminals

Hacktivists

Nation states

Insiders / Partners

Competitors

Skilled individualhackers


Executive sponsorship is the key to successLeaders play a key role in driving alignment

Board & CEO

Senior Management(CFO, COO, CAO, CRO)

IT Leadership (CIO)

IT Risk Leadership (CISO / CITRO)

Tone at the top, establish senior management accountability and a cyber-aware culture

Define the organization’s Cyber Risk appetite and be accountable for Cyber Risk management. Empower the extended leadership team.

Lead in defining and executing the strategy to become Secure.Vigilant.Resilient. Establish an effective interaction model with CISO and IT risk officer.

Define the right balance between threat-centric vs. compliance-centric programs. Be a business enabler, without shying away from the role of risk custodian.

Line of Business Leaders

Support integration of Cyber Risk management into business growth and development activities. Appoint line-of-business risk officers.

Architecture & Engineering Infrastructure Application

DevelopmentSecurityOperations

IT DOMAINS Manage and report on risks

Execute on strategy

Other functions…

CYBER RISK GOVERNANCE

Fully integrate Cyber Risk management into IT disciplines – design for Six Sigma, not quality control. Integrate current technologies to address the latest threats


2. Cyber lifecycle

Framework for cyber securityIn alignment with industry standards and leading practices, companies should leverage a Cyber Security framework

Cyber Security Framework

1. Governance and leadership

Board Executive management Technology leadership IT risk leadership

5. Organizational enablers

Operating model Policies & standards Talent & culture Risk identification & reporting

Identify

Protect

Detect

Respond

Recover

4. Solution lifecycle

Design

Build

Implement

Operate

Monitor

3. Solution capabilities

Risk & compliance

management

Identity and access

management

Secure development

lifecycle

Data management &

protection

Third-party management

Security operations

Information & asset

management

Security program & talent

management

Physical & environmental

security

Secure Vigilant Resilient

Threat & vulnerability management

Security awareness &

training

Crisis management &

resiliency


IT Cyber AttackSimulations

Business-WideCyber Attack Exercises

Sector-Wide & Supply Chain Cyber Attack Exercises

Enterprise-Wide Infrastructure & Application Protection

Global Cross-Sector Threat Intelligence Sharing

Identity-AwareInformation Protection

IT BC & DRExercises

Ad Hoc Infrastructure & Application Protection

Adaptive & AutomatedSecurity Control Updates

IT Service Desk& Whistleblowing

Security Log Collection& Ad Hoc Reporting

External & Internal Threat Intelligence Correlation

Cross-Channel Malicious Activity Detection

24x7 Technology Centric Security Event Reporting

Automated IT Asset Vulnerability Monitoring

Targeted Cross-PlatformUser Activity Monitoring

Tailored & IntegratedBusiness Process Monitoring

Traditional Signature-Based Security Controls

Periodic IT AssetVulnerability Assessments

Proa

ctiv

e Th

reat

Man

agem

ent

Level 1 Level 2 Level 3 Level 4 Level 5

Automated Electronic Discovery & Forensics

Situational Awareness of Cyber Threats

Basic OnlineBrand Monitoring

Automated Malware Forensics & Manual Electronic Discovery

Government / Sector Threat Intelligence Collaboration

Ad-hoc ThreatIntelligence Sharing

with Peers

Baiting & Counter-Threat Intelligence

Criminal / HackerSurveillance

Commercial & Open Source Threat Intelligence Feeds

Real-time Business Risk Analytics & Decision Support

Workforce / Customer Behaviour Profiling

Network & System CentricActivity Profiling

Business Partner CyberSecurity Awareness

Targeted Intelligence-Based Cyber Security Awareness

General Information Security Training & Awareness

Internal Threat Intelligence

Security Event Monitoring

Asset Protection

Cyber Attack Preparation

Training & Awareness

Behavioural Analytics

External Threat Intelligence

Intelligence Collaboration

E-Discovery & Forensics

Brand Monitoring

Cyber Security Maturity Levels

Basic Network Protection

AcceptableUsage Policy

Transfo

rmati

on

Operational Excellence

Blissful Ignorance

Online Brand &Social Media Policing

Ad Hoc System / Malware Forensics

Media & Small Businesses

Manufacturers &Life Sciences

Retail Banks & Energy Providers

Investment Banks

Military & Defense

Cyber security maturity modelAn organization’s Cyber Security program depends on its current posture


Cyber security and risk metricsHaving a framework is not enough, organizations should measure and monitor Key Performance Indicators and Key Risk Indicators

SecureMeasure Secure level of systems

VigilantMeasure monitoring effectiveness of systems

ResilientMeasure state of preparedness for cyber risk Incident

CYBER SECURITY MANAGEMENT

SECUR

ITYA

NALYTIC

S

INFRASTRUCTUREPROTECTION

IDEN

TITY

&

ACC

ESS

MA

NAG

EMEN

T CYBER

SECURITY

VEN

DOR

MAN

AG

EMEN

TN

ETW

ORK

SEC

URIT

Y SYSTEMSEC

URITY

PATC

H & VU

LNERA

BILITY

MA

NAG

EMEN

TPHYS

ICAL

SEC

URIT

Y

HR

SECU

RIT

Y

TRA

ININ

G &

AW

ARE

NES

SPOLIC

IES & STA

NDA

RDS

ROLES & RIGHTSMANAGEMENT NETWORK & SYSTEM

ANALYTICS


Key questions executives need to ask

1. Are we focused on the right things?• Often said, but hard to execute. • Understand how value is created in your organization, where your critical assets are, how they are vulnerable to key

threats. • Practice defense-in-depth.

2. Do we have the right talent? • Quality over quantity. • There is not enough talent to do everything in-house, so take a strategic approach to sourcing decisions.

3. Are we proactive or reactive? • Retrofitting for security is very expensive. • Build it upfront in your management processes, applications and infrastructure.

4. Are we incentivizing openness and collaboration?• Build strong relationships with partners, law enforcement, regulators, and vendors. • Foster internal cooperation across groups and functions, and determine that people aren’t hiding risks to protect

themselves.

5. Are we adapting to change?• Policy reviews, assessments, and rehearsals of crisis response processes must be regularized to establish a culture

of perpetual adaptation to the threat and risk landscape.

Leaders should determine if the organization has the right approach


1. Assign a senior executive to lead• Executive must be able to lead the program across diverse functions, drive collaboration & play a key role in a crisis.

2. Establish purpose & direction• Clearly articulate your cyber risk appetite and strategy. Support it by requisite action through funding and resourcing.• Establish priorities, and ensure funding and resourcing.

3. Adopt a framework & map threats to business assets• Gather top leaders and threat intelligence specialists.• Identify crown jewels and un-addressed cyber risks.

4. Accelerate behavior change among people• Create a corporate wide cyber mindset.• Create active learning scenarios that instill awareness of the impact of daily activity on cyber risk.• Embed cyber risk management goals into evaluation of Top 100 executives.

5. Provide regular updates to executives and the board• Provide ongoing communication to avoid surprises and gain assurance that security controls are in line with the risk

tolerance of the organization.• Conduct monthly or quarterly reviews about key risks and risk metrics, and address roadblocks.

Top actions for executivesThe actions that leaders take help balance risks and business needs


The board may ask management about cyber security

1. Does the C-Suite demonstrate due diligence, ownership and effective management of cyber risk?

2. Do we have the right leader and organizational talent?

3. Have we established an appropriate cyber risk escalation framework that includes our risk appetite and reporting thresholds?

4. Are we focused on, and investing in, the right things?

5. How do our cyber security program and capabilities align to industry standards and peer organizations?

6. Do we have an organization-wide cyber focused mindset and cyber conscious culture?

7. What has management done to protect the organization against third-party cyber risks?

8. Can we rapidly contain damages and mobilize diverse response resources should a cyber-incident occur?

9. How do we evaluate the effectiveness of our organization’s cyber program?

10. Are we helping to protect our industry, and the nation against cyber risks by taking a broad approach to knowledge and information sharing?

Executives should be prepared to answer questions that stakeholders have


Closing remarks


Contact Information

Deloitte & Touche LLPSuite 1000695 Town Center DriveCosta Mesa, CA 92626

Sean Peasley USAPartnerCyber Risk Services Tel: +1 714 436-7410

Fax: +1 714 424 1011Cell: +1 714 334 [email protected]

Member ofDeloitte Touche Tohmatsu Limited


Wrap up and close


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• Certificates will be delivered by email to the email address you provided in approximately 6–8 weeks.

Reminders

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2017 Deloitte Development LLC. All rights reserved.36 USC 220506

http://www.deloitte.com/about

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