FASB and IASB Convergence Efforts
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Agenda
Background and past developments
Current thinking of SEC
Joint Revenue Recognition Project
Joint Leasing Project
Background and past developments
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Accounting Convergence
What is Convergence?
Accounting standards based
on the sameconcepts
and principles
Accounting outcome
will be the sameregardless
whetherIFRS or U.S. GAAP
v
v
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Norwalk Agreement (September 2002)
– FASB and IASB pledged to make their existing financial reporting standards fully compatible and coordinate future work programs to ensure compatibility is maintained
Memorandum of Understanding between FASB and IASB (February 2006)
– Commitment to achieve convergence
– Sets guidelines on how to approach the task
– Presents standard-setting goals to be accomplished by the end of 2008
Updated Memorandum of Understanding (September 2008)
– Presents standard setting goals to be accomplished by the end of 2011
Convergence Plan
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Discussions by the FASB and the IASB regarding their approach to the convergence program indicated agreement on the following guidelines:
• Convergence of accounting standards can best be achieved through the development of high quality, common standards over time
• Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources—instead, a new common standard should be developed that improves the financial information reported to investors
• Serving the needs of investors means that the boards should seek to converge by replacing weaker standards with stronger standards
Report of IASB and FASB to G20 Finance Ministers, February 2013:
• Most of the short-term projects and several of the longer-term projects have been completed or are nearing completion
• In 2012 the boards made significant progress on the remaining joint projects and they continue to appreciate the importance of developing converged accounting standards
The 2006 MoU
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MoU Projects and Status According to FASB/IASB Update
Major Projects Reported Status Additional Information
Business Combinations CompletedMostly converged standards issued
2007/2008
Consolidations Completed Not fully converged
Fair Value Measurement Guidance CompletedMostly converged
standards issued 2011
Liabilities and equity distinctionsReassessed as a lower
priority projectNo longer on active
agenda
Performance Reporting/Financial Statement Presentation
CompletedOnly with respect to
reporting comprehensive income
Post-retirement Benefits CompletedStandards not converged
in several important respects
Revenue Recognition Complete Converged, but . . .
Derecognition CompletedSimilar disclosures, but
derecognition models not converged
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MoU Projects and Status According to FASB/IASB Update
Major Projects Reported StatusAdditional
Information
Financial Instruments In process
IASB project completed, FASB
expected to complete in 2015 but not
converged
Intangible Assets Not a priority
Leases In process2015 target, but not
fully converged
Insurance Contracts ED issued in July 2013
Several key differences.
“Obstacles to finding a converged solution
may be difficult to overcome”
Investment EntitiesIASB issued standard
2012; FASB issued standard in 2014
“The boards’ final requirements are
similar but not identical”
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FASB-IASB Status of Higher Priority Joint Projects (Status May 2015)
Areas Issues
Revenue Recognition Final standard ASU 2014-09 and IFRS 15 issued in May 2014Originally effective 2017 with earlier application permitted only under IFRS but not US GAAP
Leasing Re-exposed Q2 2013; final standard expected in 2015
Financial Instruments Final standard IFRS 9 issued in July 2014-Classification and measurement-Impairment-Hedge accountingEffective 1/1/2018 with earlier application permitted
Converged, but…….
Not Converged
Not Converged
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SEC’s Evaluation of International Accounting Standards 1973-2007
1973SEC supported the involvement of the
AICPA in the creation
of the International Accounting Standards
Committee (IASC)
1999
SEC took leading role in
reforming the IASC
2000
SEC played leading role in the decision by IOSCO to endorse the
IASC coreprinciples for cross-
border listings
2007
SEC allows ForeignPrivate Issuers tofile IFRS financial
statements
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Developments regarding potential U.S. move to IFRS2010 - 2012
SEC issued Work Plan to potentially
incorporate IFRS into the U.S. Financial Reporting SystemFebruary 2010
“The Commission has consistently
promoted the development of a single set of high-
quality globally accepted accounting
standards. I, too, support this goal…”
SEC Staff Final Reporton IFRS Work Plan
July 2012
Report to the Trusteesof the IFRS FoundationAnalysis of SEC Final
Staff ReportOctober 2012
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SEC concerns in regards to potentially incorporating IFRS for domestic issuers
.
Global Application and Enforcement
Development of IFRS
U.S. GAAP reference in laws, contracts etc.
Conversion costs
Current thinking of SEC
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SEC Strategic Plan 2014-2018
“The SEC will continue to promote the establishment of high-quality accounting standards in order to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider, among other things, whether a single set of high-quality global accounting standards is achievable.”
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SEC Chair Speech May 2014
“……..it is a priority for the Commission to position itself to make a further statement on the incorporation of IFRS in the U.S. for domestic issuers…”
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SEC Chief Accountant Speech December 2014
Many U.S. constituents are not supportive of full adoption of IFRS for a variety of reasons, including legal issues and cost-benefit concerns
Continued uncertainty around IFRS in the U.S. would result in uneasiness for investors across the globe
Suggested a new alternative approach
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Would permit voluntary additional IFRS financial information which could range from a complete set of IFRS financial statements to selected IFRS based financial data
Potential change to SEC Regulation S-K Item 10e and Regulation G in regards to Non-GAAP measures (i.e., no reconciliation to US GAAP financial information)?
Audit and/or assurance-related implications?
Legal and regulatory (e.g., banking) issues?
New Alternative Approach
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Potential approaches to incorporate IFRS into the U.S. financial reporting system considered by the SEC for domestic issuers:
Retain U.S. GAAP with continued convergence/endorsement
Full adoption of IFRS on a specified date(without any endorsement mechanism)
Full adoption of IFRS following staged transition
Optional adoption of IFRS for certain issuers
very unlikely
very unlikely
Still possible
Convergence appears to end after completion of major MoU projects
Voluntary Disclosure of IFRS financial information
Possibly proposed in 2015
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James SchnurrSEC Chief Accountant
IFRS in the United States
Next steps and timing?
Mary Jo WhiteSEC Chairwoman
Implementing the new revenue recognition standard
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Timeline of issuance
Joint FASB/IASB revenue standard issued in May 2014
Standard setting activities continue post issuance
Q2 2015
May 2014
Jul 2014
Oct 2014
Jan 2015
Feb 2015
Mar 2015
Apr 2015
Converged Standard Issued
TRG Meeting
TRG Meeting
TRG Meeting
Joint FASB/IASB
Board Meeting
Joint FASB/IASB
Board Meeting
TRG Meeting
FASB agrees to issue Exposure
Drafts on clarifications
FASB to released proposed deferral date?
IASB expected to
issue Exposure
Draft?
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Transition Resource Group (TRG)
How often do they meet?
What do they do?
How were they formed?
Who are they?
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AICPA task force updates
The AICPA Process
16 Industry Taskforces
Publish industry guides
Help preparers apply the
standard to common
fact patters
Scope of the standard
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Scope of the standard
Standard does not apply to:
Lease contracts
Insurance contracts issued by insurance entities within the scope of ASC 944
Financial instruments and other contractual rights or obligations (e.g., receivables, debt and equity securities, liabilities, debt, derivatives, transfers and servicing, etc.)
Guarantees (other than product or service warranties)
Non-monetary exchanges between entities in same line of business to facilitate sales to customers
Contract
Entity Customer
Goods and services
Consideration
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Contracts may be partially in scope
Is the contract fully in the scope of other accounting guidance?
Is the contract partially in the scope of other accounting guidance?
Apply ASC Topic 606 to the contract (or the part of the contract in its scope)
Exclude the amount initially measured under that guidance from the
transaction price
Apply that guidance to separate and/or initially measure the contract
Apply guidance in ASC Topic 606 to separate
and/or initially measure the contract
Apply that other guidance
Does that Codification Topic/Subtopic have separation and/or initial measurement guidance that
applies?
Yes
Yes
YesNo
No
No
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De-recognition of non-financial assets for transactions with non-customers
Single nonfinancial
asset
Subsidiary or group of assets
Revenue guidance for contract existence, measurement and recognition
Does it constitute a business or nonprofit activity?
Does it constitute an in-substance nonfinancial asset?
Deconsolidation guidance
Other U.S. GAAP
Yes
No
NoYes
The five step model
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The core principle and the five-step model
An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
Core Principle
Identify the contract(s) with a customer1
Identify the performance obligations in the contract 2
Determine the transaction price3
Allocate the transaction price to the performance obligations in the contract4
Recognize revenue when (or as) the entity satisfies a performance obligation5
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Where’s the FASB today?
If Proposals are Finalized, No Longer Converged with IFRS
■ FASB and IASB will issue separate exposure drafts for issues they decide to clarify
■ FASB’s proposed clarifications for licenses and performance obligations are different from the IASB’s clarifications
Ongoing Outreach and Research
■ Gross versus net revenue presentation
Practical Expedients
■ Presentation of sales taxes
■ Shipping and handling
■ Transition when a long-term contract has been modified prior to the effective date - Use of Hindsight (FASB & IASB)
■ Completed Contract expedient for retrospective approach (IASB only)
■ Impact of adopting the standard using retrospective transition
Other Proposals
■ Noncash consideration
■ Collectibility
■ On April 1 the FASB agreed to propose a one-year deferral of the effective date of its revenue recognition standard. The FASB is expected to issue an exposure draft on the deferral during the second quarter of 2015.
Joint FASB/IASB Leases Project
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Project Status*
Objectives:
Require lessees to recognize all leases on-balance sheet
Eliminate arbitrary accounting distinctions for transactions that are economically similar
Reduce complexity in lease accounting
Develop converged lease accounting requirements
JANUARY2018
JULY 2006
Discussion Paper Issued
Second Exposure Draft
Issued
Project added to Boards’ agendas
Final standard expected
H2 2015
MARCH 2009
MAY 2013
?
AUGUST 2010
First Exposure Draft Issued
Earliest likely effective date
ü
* This presentation reflects the Boards’ decisions through March 31, 2015.
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Lease Definition
Within scope
Short-term leases (lease term ≤ 12 months)
Small-ticket leases (IASB only)
Scope with exceptions Outside scope
Contracts that meet the definition of a lease:
A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
Definition focuses on control over the use of an identified asset.
Leases of assets
Long leases of land
Sale-leasebacks
Subleases
In-substance purchases / sales
Leases of inventory
Leases of:Intangibles (other
than ROU assets)Natural resources
and explorationBiological assets
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Lease Term
Non-cancelable period
Optional renewal periods if lessee reasonably certain to exercise
Periods after optional termination date if lessee reasonably certain
not to exercise
Lease Term
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Lease Payments
PV of future lease payments over lease term – includes:
Purchase options
Fixed payments
Termination penalties
RV guarantees
Variable lease payments (VLPs)
Discount rate
Exercise price of purchase options included if lessee is reasonably certain to exercise VLPs included only if based on a rate or index, or in-substance fixed Residual value guarantees (RVGs):
– Lessee includes amount expected to be payable
– Lessor excludes unless represent lease payments structured as RVGs Nonpublic business entities may make an accounting policy election to use a risk-free discount rate
(FASB only)
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Lease Classification Test
Ownership transfers at end of lease?
Bargain purchase option? Type A
Type B
Transfer substantially all risk and rewards of ownership?
No
No
No
Yes
Yes
Yes
• Assessment criteria similar to current IAS 17 classification test
• Lease classification test is not applicable for lessees applying IFRS
Lessee Accounting
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Lessees – Recognition
Lessor Lessee
ROU assetRight to use
underlying asset during lease term
Lease liabilityObligation to make
future lease payments
Right to use underlying
asset
Lease payments
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ROU Asset – Initial and Subsequent Measurement
Initially measured as the sum of:
Lease liability
Initial direct costs*
Lease incentives received
Prepaid lease
payments
Subsequent measurement:
Type A Leases Amortized, generally on a straight-line basis, over shorter of lease term or economic life of ROU asset
Together with interest expense results in a front-loaded pattern of total expense ASC 360 impairment testing
Type B Leases (FASB only) Amortized as a plug amount to produce straight-line total expense when combined with interest on lease liability
Not amortized when straight-line total expense would be less than interest on lease liability ASC 360 impairment testing
* Only incremental costs to obtain the lease qualify – no allocation of internal fixed costs permitted.
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Lease Payments – Reassessments (Lessees only)
Construction of significant leasehold improvements
Making significant modifications or customizations of the underlying asset
Subleasing the underlying asset for a period beyond the exercise date of a renewal option in the lease
Reassessment Triggers
Change in variable lease payments (VLPs) based on an index or rate (IASB only)
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Reassessment of lease payments due to increase in lessee’s right-of-use
Reassessment of lease payments due to decrease in lessee’s right-of-use
Changes in carrying amount of lease liability resulting from:
Adjust ROU asset Recognize in P&L
Amortized cost using the effective interest method; no fair value option
Lease Liability – Subsequent Measurement and Reassessments
Discount rate is revised only when the reassessment relates to whether a lease term or purchase option is reasonably certain to be exercised
Lessor Accounting
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Lessors – Type A Leases
Lessor Type A Model
Lessee
Right to use underlying
asset
Lease payments
Residual asset Right to return of underlying asset at end of lease
term
Lease receivable
Right to receive future lease payments
Up-front profit recognized (if any) includes profit related to residual interest The lessor’s lease receivable is amortized on the effective interest method Interest income is recognized on both the residual asset and the lease receivable (i.e., the
residual asset is accreted)
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Lessors – Type B Leases
Lessor Type B Model Lessee
Right to use underlying
asset
Lease payments
Underlying asset
No derecognition of underlying
asset
Lease income recognized generally on a straight-line basis Underlying asset remains on the lessor’s balance sheet and continues to be depreciated
Summary of Key Differences Between the FASB and IASB Proposals
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Topic FASB IASB
Lessee accounting
■ Dual lease accounting model (Type A and Type B) – most leases treated as executory contracts in P&L
■ Most cash flows presented as operating
■ Single lease accounting model (Type A only) – all leases treated as purchase of ROU asset on a financed basis (balance sheet and P&L)
■ Most cash flows presented as financing
Lessor accounting
■ Recognition of selling profit spread over lease term if the lease does not qualify as Type A without involvement by third parties
■ No restriction of recognition of selling profit for Type A leases
Small-ticket leases
■ No exemption for small leases ■ Exemption for small leases, even if material in aggregate
Lessee reassessment of VLPs
■ Reassessment required only when lease payments are remeasured for other reasons
■ Reassessment required when there is a contractual change and when lease payments are remeasured for other reasons
Subleases ■ Classification of sublease by sublessor based on the underlying asset
■ Classification of sublease by sublessor based on ROU asset
Key Differences Between FASB and IASB Proposals
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Topic FASB IASB
Sale-leaseback transactions
■ No sale accounting if Type A leaseback
■ Gain on sale based on the entire underlying asset
■ Sale accounting permitted for Type A leaseback
■ Gain on sale restricted to residual interest in the underlying asset
Related party transactions
■ Account for related party leases based on legally enforceable terms and conditions, even if different from substance
■ N/A, not addressed in its proposals
Lessee Disclosures
■ List of qualitative disclosure requirements
■ Quantitative disclosure requirements generally segregated by Type A and Type B leases
■ No specific presentation requirement for lessees’ quantitative disclosures
■ No list of qualitative disclosure requirements
■ Quantitative disclosure requirements link to other IFRS requirements in some cases
■ Present quantitative disclosures in a tabular format, unless another format is more appropriate
Key Differences Between FASB and IASB Proposals (Continued)
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Topic FASB IASB
Transition Lessees and lessors: Apply a modified retrospective
transition approach Full retrospective transition approach
prohibited
Lessees: Option to apply either a fully retrospective or
modified retrospective transition approach
Lessors: Apply existing accounting for any ongoing
leases at date of initial application, except for intermediate lessors in sublease
Key Differences Between FASB and IASB Proposals (Continued)
QUESTIONS?
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