Post on 15-Aug-2020
1
Year-End Update: Private Company EditionJohn Stewart, Heather Cozart, Nathan Clark & Jeff BryanDecember 14, 2017
2
Control PanelClick to expand or collapse the control panel.
Click here to mute or unmute your line
Click here to chat
Click here to download
materials if available
Donn Maiorino (Me)
3
New Accounting Standards Effective 2017 Calendar
Year-End
4
Consolidations
5
ASU 2015-02 – Consolidation Analysis
• Presumption in the voting model that a general partner controls a limited partnership is eliminated
• Fees paid to decision maker or service provider are less likely to be considered a variable interest
• Revised guidance for analyzing fees paid to a decision maker when evaluating the primary beneficiary of a VIE
• Variable interests held by related parties are less likely to be consolidated by the reporting entity
• Deferral of consolidation requirements in ASU 2009-17 for certain investment companies is eliminated
Summary of Changes
6
ASU 2015-02 – Consolidation Analysis
• Entities will need to re-evaluate their consolidation conclusions• May result in less consolidation
Impact
• Modified retrospective approach (cumulative effect adjustment to equity)
• Full retrospective approach (restating all periods presented)
Implementation
7
Consolidations – Partnerships
• Change to the evaluation of whether limited partners lack power to direct the activities that most significantly impact the entity’s economic performance
• Ignoring other VIE characteristics, a limited partnership will not be a VIE if either of the following are true:
+ A simple majority or lower threshold of limited partners is able to exercise substantive kick-out rights over general partners
+ Limited partners with equity at risk are able to exercise substantive participating rights over the general partners
VIE Model – Evaluating if the entity is a VIE
• Removed presumption that a general partner controls a limited partnership
• Generally only a single limited partner that is able to exercise substantive kick-out rights will consolidate
Voting Model
8
VIE Analysis – Related Party Considerations
Does the reporting entity have both
power and economics?
Yes – Consolidate
No – does another party, including related parties,
individually have power and economics
No – Does the enterprise including
related parties together have power
and economics
Yes – related party tie-breaker
• Primary beneficiary analysis prior to the release of ASU 2015-02
9
VIE Analysis – Related Party Considerations
Does the reporting entity have both power and
economics?
Yes – Consolidate No – Is there a single decision maker or is
power shared?
Shared – Does the enterprise including
related parties together have power and
economics
Single – Considering direct and indirect
interests, does reporting entity have power and
economics?
Yes – Consolidate No – Next slide
• Primary beneficiary analysis under ASU 2015-02
• Indirect interests are proportional. E.g. entity owns 20% interest in related party that has 40% interest in VIE: entity has an 8% interest.
• (n/a - if related party is under common control)
NEW STEPS
10
VIE Analysis – Related Party Considerations
No - Does the enterprise including related parties together have power and
economics
No – stop consolidation analysis Yes – Are one or more of the related parties
under common control with decision maker, and together do they have power and
economics?
Yes – related party tie-breaker
No – are substantially all of activities conducted on behalf of a single VIE
holder?
Yes – Single VIE holder consolidates
No – Stop consolidation analysis
NEW STEPS
• Primary beneficiary analysis under ASU 2015-02
• Single decision maker
• Special consideration is given to a related party that receives substantially all of the activities of a VIE
11
Related Party Tie Breaker
• The party within the related party group that is most closely associated with the VIE is the primary beneficiary
• Somebody has to win!
The Tie Breaker Test
• Existence of principal-agency relationship
• Relationship and significances of the activities of the VIE to the various parties within the group
• A party’s exposure to the variability associated with the anticipated economic performance of the VIE
• The design of the VIE
Significant judgment: consider the following
12
Reconsideration
• Arrangement that changes the adequacy of equity at risk
• Return of equity that exposes other interest to expected losses of the entity
• Additional equity investment or legal entity curtails expected losses
• Changes that occur in which equity holders at risk lose power
Variable Interest Reconsideration
• Assessment should occur continuously, not just at each reporting period
• Often changes to the primary beneficiary determination will coincide with changes in power.
Primary Beneficiary Reconsideration
13
ASU 2016-17Interest Held through Related Parties Under Common Control
• Changes how the second criteria of primary beneficiary is applied (i.e. obligation to absorb VIE losses or receive VIE benefits)
• Reporting entity who is single decision maker of a VIE must consider all direct interests, and indirect interests in a VIE on a proportionate basis
• Changes the way indirect interests held through related parties under common control are evaluated
• Now consider the economics of potential exposure before determining the party most closely associated with the VIE (related party tie-breaker)
14
ASU 2017-02Clarifying When a NFP Should Consolidate a For Profit Entity
• Clarifies when a NFP that is a general or limited partner should consolidate a for profit entity.
• Under current GAAP, a NFP entity that is general partner applies consolidation guidance in Subtopic 810-20. When amendments of Update 2015-02 become effective, guidance in 810-20 will no longer exist, creating uncertainty.
• Retains the consolidation guidance from Subtopic 810-20 (will become Subtopic 958-810 when ASU 2015-02 becomes effective).
Effective Dates • FYEs beginning after 12/15/16• Interim periods with FYs beginning after 12/15/17
15
Polling Question #1
Will the new consolidation guidance affect your business?a. Yesb. Noc. Undecided
16
Opportunities for Simplification
17
ASU 2015-04 Simplification for Measurement Date of Employer’s Defined Benefit Obligation
• For a reporting entity with a fiscal year-end that does not coincide with a month-end
• This Update permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year.
18
ASU 2015-07 Simplification to Fair Value Measurement and NAV
• ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.
• Removes requirement to make certain disclosures for all investments eligible to be measured at FV using the NAV practical expedient.
19
Simplifying the Measurement of Inventory • ASU 2015-11 requires inventory to be measured at the lower of cost
or net realizable value+ vs. at the lower of cost or market. Market could be replacement
cost, net realizable value, or net realizable value less a normal profit margin
• Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation
• Subsequent measurement of inventory is unchanged using the LIFO or retail inventory method
• Should be applied prospectively
20
ASU 2015-16• Business Combinations – Simplifying the Accounting for Measurement-Period
Adjustments+ Requires an acquirer to recognize adjustments to provisional amounts as
identified during the measurement period– Eliminates retrospective accounting for measurement period adjustments– Calculate adjustments as if accounting had been completed at acquisition
date
+ Effective date• Public business entities - fiscal years beginning after 12/15/15
– Including interim periods with those years• All other entities - fiscal years beginning after 12/15/16
– And interim periods within fiscal years beginning after 12/15/17
21
ASU 2016-07• Investments – Equity Method and Joint Ventures – Simplifying the Transition to the Equity Method of
Accounting
+ Changes how to account for an investment in the period it qualifies for equity method accounting due to an increase in level of ownership or degree of influence
• Eliminates requirement to account for the investment as if the equity method had been in effect during all previous periods
– No retroactive step-by-step adjustment required• Requires cost to acquire additional equity interest be added to current basis
– Adopt equity method of accounting as of the date the investment becomes qualified – Recognize through earnings unrealized gains/losses on AFS securities that become
qualified for equity method
+ Effective for fiscal years beginning after 12/15/16• Including interim periods within those fiscal years• Early application permitted• Prospective application
22
Other Notable Accounting Standard Updates
23
• Income Taxes – Balance Sheet Classification of Deferred Taxes
+ Requires deferred income tax assets and liabilities be classified as noncurrent in classified balance sheet, net
• No change to recognition, measurement, or disclosure requirements
• Report only one single net noncurrent deferred tax asset or liability
+ Effective dates• Public business entities – fiscal years beginning after 12/15/16
– Including interim periods within those fiscal years• Other entities – fiscal years beginning after 12/15/17
– And interim periods within fiscal years beginning after 12/15/18– Early adoption is allowed
ASU 2015-17
24
ASU 2016-14• Presentation of Financial statements of Not-for-Profit Entities• Changes presentation of components of net assets:
+ Replaces 3-class presentation (unrestricted, temp restricted, permanently restricted) with 2-class presentation (without donor restrictions, with donor restrictions)
• Present or disclose analysis of expenses by natural and functional classification • Present investment returns net of direct investment expenses• Change presentation and add disclosures re: underwater endowments• Disclose qualitative and quantitative info re: liquidity and available resources
+ Better enable NFPs to “tell their financial story”• See AICPA NFP Section illustrative financial statements and footnotes
Effective Dates• Fiscal years beginning after 12/15/17• Early adoption permitted, modified retrospective
25
ASU 2016-15
• Cash outflows = financing activityDebt Prepayment or Debt Extinguishment Costs
• Cash flows attributable to principal = financing activity• Cash flows attributable to accreted interest related to debt
discount = operating activity
Settlement of Zero (or insignificant) Coupon Debt
Instruments
• Cash receipts from payments on a transferor’s beneficial interest in securitized trade receivable = investing activity
• Transferor’s beneficial interest obtained = noncash activity (disclose)
Beneficial Interests in Securitization Transactions
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
26
ASU 2016-15
• Cash receipts = operating, investing, or financing activity…• … based on related insurance coverage (nature of loss)
Proceeds from the Settlement of Insurance Claims
• Cash inflows = investing activity• Cash outflows for premiums paid = investing or operating activity, or
combination thereof
Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies
• Accounting policy election to classify using one of two approaches• Cumulative earnings approach• Nature of distribution approach
Distributions Received from Equity Method Investees
• FYs beginning after December 15, 2017 and interim periods within for public companies
• FYs beginning after December 15, 2018 and interim periods within FYs beginning after December 15, 2019 for private companies
EFFECTIVE DATES
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
27
ASU 2016-18Statement of Cash Flows (230): Restricted Cash• Requires cash flow statement include changes in “restricted cash and equivalents”
• “Restricted cash and equivalents” to be included when reconciling beginning of period and end of period cash and cash equivalents.
Effective Dates (Public)• FYs beginning after 12/15/17, and interim
periods within
Effective Dates (Private)• FYs beginning after 12/15/18, and interim
periods within beginning after 12/15/19
Retrospective application Early adoption is permitted
28
ASU 2017-01 Business CombinationsClarifying the Definition of a Business• Provides “screen” to determine when a set (inputs, processes, outputs) is not a business• When substantially all fair value of assets acquired is concentrated in single asset or group of
similar assets, the set is not a business• If screen is not met, to qualify as a business, at minimum, it must include an input and a
substantive process that together significantly contribute to the ability to create an output• Intended to reduce number of transactions accounted for as business combinations
Effective Dates (Public)• Annual periods beginning after 12/15/17,
including interim periods within
Effective Dates (Private)• Annual periods beginning after 12/15/18,
& interim periods w/in annual periods beg. after 12/15/19
Early adoption is permitted
29
ASU 2017-04 Intangibles – Goodwill and OtherSimplifying the Test for Goodwill Impairment• Eliminates Step 2 from goodwill impairment test
+ No longer required to calculate implied fair value of goodwill if Step 1 indicates impairment• If reporting unit carrying value exceeds FV in Step 1, then difference = goodwill impairment• Eliminates requirement for reporting unit with zero or negative carrying amount to perform a qualitative
assessment
Effective Dates: Public SEC filer• Adopt for annual or any interim impairment test for FYs beginning after 12/15/19.
Effective Dates: Public non-SEC filer• Adopt amendments for annual or interim impairment test in FYs beginning after 12/15/20.
Effective Dates: Private• Annual or interim impairment test in FYs beginning after 12/15/21.
Early application is permitted for testing dates after 1/1/17.
30
Private Company Council Alternatives
31
PCC Alternatives – Original Transition Guidance
Accounting Standards Update Original Effective Date Transition
Goodwill Amortization (2014-2)
Annual Periods Beginning After December 15, 2014 Prospective
VIEs – Common Control Leasing(2014-7)
Annual Periods Beginning After December 15, 2014 Retrospective
Interest Rate Swaps(2014-3)
Annual Periods Beginning After December 15, 2014 Modified or Full Retrospective
Identifiable Intangibles(2014-18)
First in-scope transaction in FY beginning after December 15, 2015
Prospective
32
ASU 2016-03• Goodwill and Other, Business Combinations, Consolidation,
Derivatives & Hedging – Effective Date and Transition Guidance+ Makes PCC alternatives effective immediately by removing effective
dates+ Allows private companies to avoid the preferability assessment when
first electing a PCC alternative• Any subsequent change requires justification that the change is
preferable• Retains the original transition guidance
33
On the Horizon
SURPRISE!
34
Polling Question #2Has your company adopted any of the PCC alternatives?
a. Goodwill amortizationb. Common Control Leasing c. Identifiable Intangiblesd. Interest Rate Swapse. More than one of the above
35
Going Concern
36
ASU 2014-15Presentation of Financial Statements: Going Concern
• Management required to evaluate whether conditions / events raise substantial doubt about ability to continue as a going concern
• Aligns with new auditing standard• Effective for fiscal years beginning after 12/15/15.
STEP 1Determine whether conditions or events give rise to substantial doubt (before considering management’s plans)• Based on ability to meet
contractual obligations for period 12 mos. from issuance date
STEP 2Consider management’s plans to alleviate substantial doubt.• Disclosure requirements if substantial doubt is raised• If not alleviated, must explicitly disclose “substantial
doubt”• If alleviated, must still disclose conditions/events and
plans which alleviate
37
Why a New Revenue Standard?
38
Scope (Includes)•All contracts with customers, except:
+ Leases (Topic 840)+ Insurance contracts (Topic 944)+ Financial instruments (Topic 825)+ Guarantees (Topic 460)+ Non-monetary exchanges between organizations in same line of
business to facilitate sales to customers (Topic 845)
•Sales of Non-Financial Assets + Outside organization’s ordinary activity (Topic 610)
39
Major Concept Changes•Created single principle based guidance
+ Core Principle
•Focus is on analyzing the contract not analyzing the transactions by industry
•Changed+ From when “Realized/Realizable” and “Earned”+ To “When Performance Obligation is Satisfied”
• Increased emphasis on disclosures
40
5 Step Process
ID Contract
ID Performance Obligations
Determine Transaction
Price
Allocate Transaction
PriceRecognize Revenue
41
Identify the Contract
Parties have approved and are committed
Rights of each and payment terms can be identified
Commercial substance Collection is probable
Contract Exists When
ID Contract
42
Identify the Performance Obligations
Good or Service is Distinct
Customer can benefit from good or service• On its own• Together with other readily
available goods or services (including goods or services previously acquired from org.)
Good or Service is Distinct (within the contract)
Promised good or service is separable from other promises Indicators for separate P.O.’s• No significant service of integrating the
goods or services• Good or service does not modify
another good or service in the contract• Good or service is not highly
dependent on or interrelated with other goods or services
It is a Separate Performance Obligation When Both Criteria are Met:
ID Performance Obligations
43
Determine the Transaction Price
• The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes).
Determine Transaction
Price
44
Allocate Transaction PriceAllocate to each performance obligation the amount to which the entity expects to be entitled.
Based on relative stand alone selling price: •Observable•Estimate•Residual estimation techniques
Discounts and contingencies applied entirely to specific performance obligation only if specified criteria met
Allocate Transaction
Price
45
Revenue Recognition
Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service
Recognize Revenue
Performance obligations satisfied over time, if specified criteria are met
All other performance obligations satisfied at a point in time
Revenue is recognized by measuring progress towards complete satisfaction of
the performance obligation
Revenue is recognized at the point in time when the customer obtains control of the
promised asset
46
Performance Obligations Over Time• Determine if satisfied (and revenue recognized) over time based on meeting
any of the following criteria:+ Customer simultaneously receives and consumes benefits as the entity
performs
+ Entity’s performance creates or enhances an asset that customer controls as it is created or enhanced
+ Entity’s performance does not create an asset with an alternative use to the entity and there is an enforceable right to payment for performance completed to date
• If satisfied over time, select method of progress toward completion (e.g., output or input method)
Recognize Revenue
47
Disclosures
• Annual and interim disclosures for public business entities greatly expanded
• Private company disclosure requirements are extensive as well, but substantially less than those of public business entities
To enable users of financial statements to understand the nature, timing, and uncertainty of revenues and cash flows arising from
contracts with customers.
48
Differences for Non Public Entities•Disclosures not required
+ Quantitative disaggregation + Contract balances + Remaining performance obligations+ Explanation of why methods used provide a faithful depiction of the
transfer of goods or services + Significant judgments made in evaluating when a customer obtains
control+ Methods, inputs, and assumptions used to determine the transaction
price and to allocate the transaction price
49
Effective Dates•Current Effective Dates
+ 2018 for Public Organizations• If using retrospective transition contracts entered into in 2016 must
be evaluated
+ 2019 Non Public Organizations
50
Transition Options• Full retrospective application
+ Apply new standard to all prior periods+ Certain practical expedients are allowed
• Retrospectively with cumulative effect adjustment + No restatement of prior periods+ Apply new standard to in-progress contracts as of the initial application date and
to subsequent contracts+ Recognize a cumulative effect adjustment at initial application date for effects of
applying new standard to in-progress contracts+ Disclose in the period of adoption the effect on each line item in the financial
statements as a result of adoption (ie: how things would have been recognized differently under standards in effect for prior years)
51
Implementation Planning• Socialize the changes
+ Within the organization+ With key stakeholders
• Create a transition plan+ Team (internal and external)+ Obtain education + Analyze process and timing + Decision making framework + Documentation + Timeline
52
How prepared is your company for the new revenue recognition standard?
a. Fully prepared and ready to implementb. Mostly prepared and ready to implementc. Somewhat prepared but not ready to implementd. Not prepared but starting to plane. There’s a new revenue recognition standard?
Polling Question #3
53
Leases
54
Significant Financial Statement Impact• New lease standard generally requires all leases to be capitalized and
recognized on the balance sheet
• Exception for short term leases
• Implementing the new leasing standard may:+ Change key ratios used for debt covenants+ Affect bonus and share-based payment calculations+ Alter dividend information
55
Key Questions in Accounting for Leases
If not within scope of lease standard, must look to different ASC
WHY ASK
Required for initialaccounting
Required for subsequentaccounting
Account for non-lease components differently
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
56
Key Questions in Accounting for Leases
Lease defined as “the right to control the use of an identified asset for a period of time in exchange for consideration.”• Control:
-Right to economic benefits-Right to direct use of asset
• Determining “right to direct use” may require judgment
• If supplier has substantive substitution rights, customer does not have control; therefore no lease.
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
GUIDANCE
57
Key Questions in Accounting for Leases
• Term: Noncancelable period for which lessee has right to use asset plus periods covered by—- Option to extend if lessees is reasonably
certain to exercise the option- Option to terminate if lessee is
reasonably certain not to exercise option- Renewals or extensions of lease at option
of lessor• Exception to the general rule to recognize all leases on the balance sheet for leases with terms of 12 months or less.
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
GUIDANCE
58
Key Questions in Accounting for Leases
Rate implicit in the lease is rate that causes the PV of the net investment in the lease to equal sum of:• Fair value of asset minus related
investment tax credit • Capitalized initial direct costs
incurred by lessor• If rate cannot be determined, use
incremental borrowing rate• Private companies may elect a
policy for all leases to use risk-free discount rate
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
GUIDANCE
59
Key Questions in Accounting for Leases
• Non-lease components accounted for separately
• Example: equipment lease contract also includes maintenance services
• Allocate contract consideration and initial direct costs to components based on relative standalone price of separate components
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
GUIDANCE
60
Finance vs. Operating Lease Classification
FINANCE LEASE
Substantially the same as a capital lease plus•Lease of specialized asset for which no alternative use at end of lease term
All leases that do not meet criteria for finance lease
OPERATING LEASE
61
Initial Measurement
Very narrowly defined – excludes costs that would have been incurred regardless of whether the lease was obtained
62
• “Leases between related parties should be classified in accordance with the lease classification criteria applicable to all other leases on the basis of the legally enforceable terms and conditions of the lease.”
• ASC 842-10-55-12
Related Party Leases
Change from ASC 840 GUIDANCE
A complete “about face” by FASB+ ASC 840 was economic substance over
legal form+ ASC 842 is legal form over economic
substance
63
Transition: Effective Dates• Effective dates for public companies
+ Fiscal years beginning after December 15, 2018, including interim periods – i.e., calendar 2019 starting in Q1
• Effective dates for private companies+ Fiscal years beginning after December 15, 2019
– i.e., calendar 2020 year-end and calendar 2021 interim statements
• Modified retrospective application with optional practical expedients
+ Must apply new standard as of beginning of the earliest period presented
64
Transition: Practical Expedients• You may be able to elect “practical expedients” to ease burden of adoption
+ Re-assess whether expired or existing contracts are or contain leases
+ Re-assess lease classification for any expired or existing leases
+ Re-assess initial direct costs for existing leases
+ May use hindsight in determining lease term
You do not need to
You may
65
Possible Implementation Challenges
Systems
Operations
Financial Reporting
• Lessees with significant lease portfolio may need to evaluate current system and evaluate whether it can capture relevant data for new standard
• Compliance with debt covenants and other contracts
• May affect lease vs. buy decisions• System change may require change to internal controls
• Increased use of management judgment• Deferred income taxes may be affected• New disclosure requirements
POSSIBLE CHALLENGES
66
Implementation Next StepsInventory all existing lease contracts
+ Aggregate similar leases to avoid redundant analyses+ Identify short term leases that will not be capitalized
Assess implementation challenges and options+ Existence of substantive substitution rights+ Choice of discount rate+ Determination of lease term+ “Practical expedients”
Estimate impact implementation will have on financial statements, key ratios and metrics+ Evaluate impact changes will have on other contracts, e.g., loan agreements, management
compensation+ If necessary develop plan to mitigate impact on other contracts
1
2
3
67
Polling Question #4How prepared is your company for the new leasing standard?
a. Fully prepared and ready to implementb. Mostly prepared and ready to implementc. Somewhat prepared but not ready to implementd. Not prepared but starting to plane. There’s a new leasing standard?
68
Polling Question #5With the new leasing standard in mind do you plan to seek out software to track and properly record leases for your business?
a. Yesb. No c. Maybed. Undecided
69
Financial Instruments
70
Financial Instruments Project - Background
Answer: To reduce complexities in accounting for financial instruments!
FASB Response: Retain current guidance with targeted improvements to classification and measurement of equity investments, fair value option for liabilities and disclosures for financial instruments.
Why was there a need for the financial instruments project?
71
What is changing (Assets)?
Equity Investments:Measured at each reporting period at fair value through net income, except for:
Investments accounted for
under the equity method
(ASC 323)
Equity investments
without readily determinable
FV; only marked to observable
price changes
Investments in consolidated subsidiaries
Federal Home Loan Bank and
Federal Reserve Bank
stock
Certain derivative
instruments
72
What is changing (Assets)? (cont.)
Will now have a measurement alternative that determines value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or
similar investment of the same issuer.
Equity Investments:Measured at each reporting period at fair value through net income, except for:
73
What is changing? (Disclosures)
Financial assets and financial liabilities required to be presented separately, grouped by measurement category and form of instrument
Reduces the number of disclosures for PBEs including methods and assumptions used to estimate FV for financial instruments not carried at FV on the balance sheet
FV Measurements for financial instruments to be based on exit price notion
74
What is changing? (Disclosures)
Expanded disclosures concerning the effects of instrument-specific credit risk and financial liabilities measured under the FVO
New disclosures for equity investments without readily determinable fair values under the new measurement alternative
Entities will also need to disclose the portion of unrealized gains and losses that relate to equity investments held at the reporting date
75
Non-public business entities (including not-for-profit and employee benefit plans) annual and interim reporting periods beginning after December 15, 2019
All public business entities annual and interim reporting periods beginning after December 15, 2017
Non-public business entities (including not-for-profit and employee benefit plans) annual reporting periods beginning after December 15, 2018
Effective Dates
Non PBEs Interim Reports
PBEs
Non PBEs Annual Reports
76
TransitionRetrospective
application with a
cumulative-effect
adjustment to the statement
of financial position at
beginning of year in which new guidance
is adopted, with two
exceptions
Equity investments without readily determinable fair values (including
disclosure requirements) will be applied prospectively
Exit price notion to measure fair value of financial instruments for disclosure
purposes will be applied prospectively
77
Current Expected Credit Losses (CECL)
78
Introduces approach based on expected losses to estimate
credit losses
Modifies impairment model for AFS debt
securities
Provides simplified model for purchased financial assets with credit deterioration
Addresses recognition,
measurement, presentation and
disclosure of credit losses
Applies to ALL ENTITIES
What is included under the new standard?
79
Does• Loans made to participants by defined contribution employee benefit plans• Policy loan receivables of an insurance entity
NOT• Pledges receivable (promises to give) of a not-for-profit entity• Related party loans and receivables between entities under common control
Apply to:• AFS debt securities (continue to be assessed for impairment under current
guidance with limited amendments)
CECL Scope
80
Current Expected Credit Loss “CECL” Scope
Applies • TRADE RECEIVABLES• LEASE RECEIVABLES
To• Reinsurance receivables that result from insurance transactions• Most debt instruments (not measured at fair value)
:• Financial guarantee contracts• Loan commitments
81
CECL Scope
Applies • Receivables that result from revenue transactions in the scope of ASC 606• Financing receivables
To• Contract assets• Lessor’s net investment in sales-type and direct financing leases
:• Off-balance sheet credit exposures
82
CECL Model
Recognize an allowance for credit losses that results in the financial statements reflecting the net amount expected to be collected from the financial asset
Core Concepts
Objective
Based on an asset’s
amortized cost
Reflect the risk of loss
Consider available relevant
information
Reflect losses over an asset’s contractual life
83
CECL Model (Impact on Trade Receivables)Entities will need to adjust their existing processes for estimating credit losses on trade receivables. Risk of loss factors will reflect:
Current balances, even if the entity historically has
recorded no credit loss allowance
Individually significant balances for which an entity
has historically concluded there is
no risk
Very short-term receivables that are typically settled in a
matter of days
84
CECL – Financial Statement Effects
Recognition of expected credit losses
Balance Sheet• Allowance equal to the amount of current expected
credit loss is recorded at origination/acquisition
Income Statement• Initial recognition of impairment allowance recognized
through earnings (except for PCD assets and certain beneficial interests)
• Subsequent changes in impairment allowance (up or down) recognized through earnings
• Reversal of impairment is required
Write-Off
Direct Write-Off• When asset
is deemed uncollectible – no change from current standards
85
New model has targeted improvements to existing impairment model
Eliminates concept of “other-than-temporary”
Allows for reversal of credit losses through current-period earnings
AFS Debt Securities (New Model)
86
Must disclose information concerning:
Credit qualityAllowances for expected credit
losses
Policies for determining
write-offs
Past-due status Nonaccrual status
Collateral-dependent
financial assets
New Disclosures
87
CECL– Effective Dates
• Annual and Interim: reporting periods beginning after Dec. 15, 2019
PBEs that are SEC filers
• Annual and Interim: reporting periods beginning after Dec. 15, 2020
PBEs that are not SEC filers
• Annual: reporting periods beginning after Dec. 15, 2020• Interim: reporting periods beginning after Dec. 15, 2021Other entities
• Available after Dec. 15, 2018Early
application
88
• (modified retrospective approach)
Record cumulative-effect adjustment to the statement of
financial position as of the beginning of the first reporting
period in which guidance is effective
• Other-than-temporarily impaired debt securities
• PCD assets• Certain beneficial interests within the
scope of ASC 325-40
Provides instrument-specific transition guidance for
Transition
89
Polling Question #6Do you believe that CECL will have an affect on your business?
a. Yesb. No c. Maybed. Undecided
90
Derivatives and Hedging
91
ASU 2017-12 Derivatives and HedgingTargeted Improvements to Accounting for Hedging Activities
• Better reflect economic results and simplify hedge accounting guidance
• No requirement to measure ineffectiveness or record separately
• More time to perform initial quantitative hedge assessment
• Subsequent effectiveness assessment may be qualitative
• “Critical terms” method - assume matching maturities if within 31-day period
• Change in FV recorded in same line item as effects of hedging instrument
Effective Dates (Public)• FYs beginning after 12/15/18 and interim
periods within
Effective Dates (Private)• FYs beginning after 12/15/19 and interim
periods beginning after 12/15/20
92
Tax Reform
93
Your PresentersNathan Clark | Partner, DHG Tax704.367.5930nathan.clark@dhgllp.com
Nathan has 18 years of public accounting experience, including fifteen years with Big-4/national firms, with a deep focus on accounting method changes. His experience ranges from working with small privately held businesses to publicly traded, Fortune 500 companies. He has significant experience in retail, manufacturing, real estate, and hospitality industries, among others.
Nathan specializes in capitalization, depreciation, and revenue recognition. He routinely implements engagements for tangible property regulation compliance, as well as studies focused on capitalization issues including, depreciation reclassification, Sec. 174, bonus depreciation, cost segregation, internally developed software, and ready and available. He is also a national resource for tax issues associated with the FASB/IASB Revenue Recognition Standard (ASC 606) and Lease Standard (Topic 842).
94
Major Tax Reform Issues Impacting ASC740• 25% pass-through tax rate• 20% corporate tax rate• Interest expense limitation• Full expensing of property• Small business reforms• Net Operating Losses – indefinite carryforward, 90% utilization• AMT – elimination/modification• Consider State Conformity to IRC if operating in multiple jurisdictions
95
Major Tax Reform Issues Impacting ASC740• Elimination – various credits and deductions• Like Kind Exchange – only allowed for real property• Deemed repatriation of foreign earnings• International tax reforms
96
Polling Question #7Which of the following tax reform changes will likely impact you or your business?
a. Maximum pass-through tax ratesb. Reduced corporate income tax ratec. International tax reformsd. Other
97
Timing of Tax Reform
Tax Law Enacted
President Signs Tax Bill
House/Senate Compromised Bill
Joint Conference Committee (This week)
Full Senate (passed December 2, 2017)
Senate Finance Committee (passed November 16, 2017)
Full House (passed November 16, 2017)
House Ways and Means Committee (passed November 9, 2017)
98
Effective Date of Tax Reform• If signed into law in 2017:
+ Most tax effective dates January 1, 2018+ Select effective dates in 2017, e.g. full expensing of property
• If signed into law in January, 2018:+ Same effective dates as above
• ASC740 application: + Reflect law as of the date when signed into law+ If signed in 2018, disclosures to 2017 financial statements?
99
Tax Reform Implications – Accounting for Income Taxes
• When tax rates are reduced:+ Existing DTA/DTLs repriced at new rates in the period enacted+ Scheduling of deferred realization may be required if new rates
not effective 1/1/2018+ If in a DTA position, credit the DTA and debit income statement
(expense)+ If in a DTL position, debit the DTL and credit the income
statement (benefit)+ DTA/DTLs originally recorded through Other Comprehensive
Income are re-measured through income tax expense, not OCI
100
Other Assurance Concerns• You may only have days/weeks to record/reprice
DTAs/DTLs and provision
• What will significant provision to return adjustments mean?
• Communicate with your assurance team
101
More Information• Dixon Hughes Goodman Tax Reform Center –
www.dhgtax.com
• DHG:TV Financial Statement Implications of Tax Reform -http://ow.ly/bjJP30h9V4C
102
Polling Question #8What have you done to prepare for tax reform?
a. Modeled taxable income to understand its impactb. Currently implementing tax savings strategies in advance of
tax reformc. I’m going to wait and see what happensd. I do not believe tax reform will happen