FASB UpdateNick CappielloSupervising Project Manager, FASB
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March 7, 2016
Expressions of individual views by members of the FASB and staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberation.
FASB Staff Disclaimer
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• Accounting for Financial Instrumentso Hedgingo Impairment
• Business Combinationso Accounting for Identifiable Intangible
Assets
• Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
• Disclosure Framework
Topic Summary
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• Goodwill
• Conceptual Framework
• Government Assistance
• Simplifying the Equity Method of Accounting
• Accounting for Income Taxes EITF Issue 16-A: Restricted Cash
• PCC Agenda Decision No. 15-02: “Applying Variable Interest Entity Guidance to Entities under Common Control”
Accounting for Financial Instruments (AFI): Hedging
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“Highly effective”
Nonfinancial gets “thrown out”
Component hedging allowed for financial instruments
Cash flow hedges divided into “effective” and “ineffective” portions
Hedge ineffectiveness reported in earnings
Hedge Accounting – Current GAAP
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Nonfinancial hedging:- Qualifying threshold of current GAAP will be
retained- Separately recording “ineffectiveness” will be
effectively eliminated - May designate a contractually specified
component linked to an index as the hedged item
Hedged Item Designation
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AFI: Impairment
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Impairment . . . CECL Overview 8
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Allowance = Cash flows not expected to be collected
Model more forward-looking
Provides enhanced disclosures
Impairment . . . Summary of Board Decisions
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Loans Debt Securities
Held for Investment CECL Held to Maturity CECL
Held for Sale Lower of cost or market
Available for Sale New creditloss model
Trading FV-NI
Accounting for Identifiable Intangible Assets in a Business Combination
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Intangibles – Alternatives 11
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View A – No intangibles
View B – No intangibles except those capable of being sold or licensed
View C – No change to GAAP
Goodwill and Intangibles for Public Business Entities and Not-for-Profit Entities
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Project Approach
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Phase 1 • Simplify the impairment test
Phase 2 • Work concurrently with IASB to address any additional concerns
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
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• Present service cost with other compensation costs
• Service cost eligible for capitalization
Overview
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Disclosure Framework
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Improving the effectiveness of notes requires both:
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Disclosure Framework: Two Components
Appropriate exercise of discretion by reporting entities when assessing disclosure requirements
Phase II: Entity’s Decision Process
Consistent considerations by the Board in each standard-setting activity
Phase I: Board’s Decision Process
Purpose of notes
General limitations• Relevance• Costs• Some information oriented toward the
future
Information that could be appropriate for inclusion in notes
Considerations for interim reporting
Board’s Decision Process
Issues Addressed in EDComment period ended July 14, 2014
18Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Effectiveness of notes after applying two discretion criteria Materiality Entity-specific Relevance
Effectiveness of different criteria in removing disclosure that are not decision useful
Constraints of reporting system on entity’s ability to exercise discretion• Audit• Regulatory• Legal
Entity’s Decision Process
Field Study Provided Insights on
19Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Promote Discretion
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Changes to the Codification
“Provide to the extent material”
Eliminate language that limits discretion
Add guidance on applying materiality
Promoting Discretion (cont’d)
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US Supreme Court’s description
Omission not an accounting error
Applied individually and in the aggregate
Quantitative and qualitative
Guidance on Applying Materiality
Promote Discretion (cont’d)
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Applied individually and in the aggregate
Legal concept
Quantitative and qualitative
Omission not an accounting error
Guidance on Applying Materiality
Fair Value Measurement
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Disclosures provide information about:• Ways an entity arrives at fair value• The effects on financial statements• Uncertainty in measurement • Measurement change period to
period
Objectives based on proposed framework
Fair Value Measurement - Disclosure Updates
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“Sensitivity” Information
Possible Changes Forward-looking
Information
Process and Policies
Gains and LossesRollforwards
Defined Benefit Plans – Disclosure review
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Possible Additions
General characteristics
Interest crediting rate of
cash plansNAV disclosures
Reasons for significant
gains/losses
Defined Benefit Plans – Disclosure review (cont’d)
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Possible Removals
Amount in AOCI expected to be
recognized
Plan assets expected to be
returned
L3 plan asset rollforward
(nonpublic only)ABO
Income Taxes - Disclosure Review
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Disaggregation of Indefinitely Reinvested Earnings
Possible Changes to Unremitted Foreign
EarningsDomestic Tax
on Foreign Earnings
Changes in Circumstances
Disaggregation of Income Before
Tax
Income Taxes - Disclosure Review (cont’d)
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Change in next 12 months
Possible Changes to Unrecognized Tax Benefits
Enhance tabular reconciliation
Income Taxes - Disclosure Review (cont’d)
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Explanation of valuation allowance
Possible Changes to Other Income Tax Disclosures
Carryforwards
Domestic/foreign tax paid
Rate reconciliation
Change in tax law
Inventory Disclosures
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Scope and objectives
• Use decision questions from proposed framework to determine potential disclosures
• Evaluate alternatives for private companies based on PCDMF
Possible changes
• Incorporate SEC / AICPA guidance into GAAP
• Additional cost/measurement basis disclosures
• Disclosures of certain rights and obligations• Disclosures around changes in
value/quality/utility
Next steps• Small group meetings with FASB• Outreach with PCC members• User and preparer outreach
Defined Benefit Plans
Fair Value Measurement
Income Taxes
Inventory
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Exposure Drafts- Income Taxes- Inventory
Redeliberate Proposed Concepts in the Disclosure Framework
Redeliberate Entity’s Decision Process
Roundtable in 2nd half of 2016
Next Steps
Conceptual Framework
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Not a new conceptual framework- Try to address deficiencies- Try to clarify and improve understanding- Make amendments that experience in application have
suggested are necessary
Structure of the joint project was the same as the structure of the FASB and IASB Frameworks
Project Objective
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Joint financial statement presentation
Address deficiencies in Concept Statement 5 related to presentation- How should individual items be included in line items?- How should line items be grouped?
Research project on performance reporting added in July 2014
Overview of Past and Current Presentation Efforts
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Concept 1: Information should be combined into reasonably homogeneous groups
Concept 2: The association between different items that changed should be made apparent
Concepts
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Measurement – What does it mean?
Does measurement apply to revenues, expenses, gains, losses, or to cash flows?
For assets and liabilities:- Is systematic allocation measurement?- Is accrual of interest measurement?- Is adjusting to a market price measurement?- Is adjusting to a (discounted or undiscounted) amount of
estimated cash flows measurement?
Measurement
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What is a value?- Value to whom?- Is there an inherent worth that is (a) unchanging except for
consumption or deterioration and (b) independent of market changes?
What is a price? How is it different from value?
What is a cost? How is it different from a price or a value?
Value, cost, and price
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Government Assistance Disclosures
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Enable user to access:
Nature of assistance and related accounting policies
Significant terms/conditions of the agreement
Effect on organization’s financial statements
Assistance not recognized in the financial statements, but may have an effect on the financial statements in future periods
Objectives
Annual Disclosures
Nature of the assistance and the related accounting policies
Reflect a description of how the policies relate to nature of the agreements
Should include:- Nature of the assistance- Accounting policy- Presentation location
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Annual Disclosures Amounts not recognized in company’s financial statements, but
that affect cash flows in current period
Significant terms and conditions of the agreement, including:- The duration/period of the contract, the tax rate, or interest rate- Commitments made by both the reporting entity and the
government - Provisions, if any, for recapturing government assistance,
including the conditions under which recapture is allowed- Other contingencies
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Simplifying the Equity Method of Accounting
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Current equity accounting GAAP requires: - Difference between cost and equity- Determine the FV in the same manner as Business
Combinations- Presented as a single line item
Subsequent measurement requires recognition of proportionate share of: - Investee income/loss- Amortization or accretion of basis difference, - Other-than-temporary impairment
Background
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Costly and complex:- The information may be difficult to obtain- Increased cost when 3rd-party valuations are necessary- Ongoing tracking is time consuming
Generally not decision useful
Issues
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Remove concept
Transition method: modified prospective- Freeze any basis and apply the new guidance.
Transition disclosures
Board Decision - Basis
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Accounting for Income TaxesSimplification Initiative Project
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Balance Sheet Classification of Deferred Taxes
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Current GAAP requirement: Presented in balance sheet as:
- Current deferred tax asset and liability- Noncurrent deferred tax asset and liability
Classification:- Based on related asset or liability- Generally not based on when temporary differences will reverse
Proposed GAAP:
Classify all deferred tax asset and liability as noncurrent
Intra-Entity Asset Transfers
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Current GAAP requirement: Defer the recognition until the assets have been sold to an outside
third party
Exception for comprehensive recognition of income taxes
Proposed GAAP:
Eliminate the exception
Require recognition when the transfer occurs
EITF Issue 16-A, “Restricted Cash”
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Overview
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• Significant diversity in practice exists with respect to the classification of certain cash receipts and payments
• This diversity may exist because of a lack of specific accounting guidance
Project topics
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Three subissues being examined:1. Definition of restricted cash2. Classification of changes in restricted cash3. Presentation of cash payments and cash receipts that directly affect restricted cash
PCC Agenda Decision No. 15-02: “Applying Variable Interest Entity Guidance to Entities under Common Control”
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Overview
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Diversity in practice exists in application of the VIE consolidation guidance to entities under common control