2015 Audit & Accounting Update

2015 Audit & Accounting Updatepresented by

Vince Leo, CPATim McLaughlin, CPAMike Giess, CPA

November 17, 2015

Insero & Company’s 2015 Accounting & Finance Education Series

Vince Leo, CPA

Vince is a Partner in our Audit and Business Advisory Services Group. He has more than 25 years’ experience serving some of the area’s largest companies. He joined Insero & Company as a Partner during 2002 from Arthur Andersen where he was a Partner in their Rochester office. He has advised his clients on technical accounting matters, private placements, public offerings, and numerous acquisitions, mergers, and divestitures.

Tim McLaughlin, CPA

Tim has 30 years of audit and accounting experience and is the head of our Audit and Business Advisory Services Group. Tim is the lead partner on a wide variety of engagements. Tim provides consulting services to manufacturing, real estate, service, and high tech clients. Tim also serves as our Quality Control/Auditing and Accounting Director and consults with our partners and managers as well as the senior management of our clients regarding technical audit and accounting issues. Tim also provides litigation support and expert witness services on a variety of accounting and auditing engagements.

Mike Giess, CPA

Mike is a Partner in the Audit and Business Advisory Services Group. He has more than 20 years of experience servicing private and public companies in the manufacturing, service, retail, and wholesale/distribution sectors. Mike frequently consults with companies on technical accounting matters including business combinations, implementation of new accounting pronouncements, equity and debt transactions, pension accounting, and revenue recognition.

Agenda

• Overview• FASB Update• FASB Pipeline• Cyber Security• Economic Outlook• Questions

FASB Update

Accounting Standards Updates

SUMMARY

ASU 2014-17—Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)

ASU 2014-18—Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

ASU 2015-01—Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

ASU 2015-02—Consolidation (Topic 810): Amendments to the Consolidation Analysis

ASU 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB/Document_C/DocumentPage&cid=1176164564812









SUMMARY (continued)

ASU 2015-04—Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets

ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

ASU 2015-06—Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (a consensus of the FASB Emerging Issues Task Force)

ASU 2015-07—Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force)

ASU 2015-08—Business Combinations (Topic 805): Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)










SUMMARY (continued)

ASU 2015-09—Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts

ASU 2015-10—Technical Corrections and Improvements

ASU 2015-11—Inventory (Topic 330): Simplifying the Measurement of Inventory

ASU 2015-12—Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force)

ASU 2015-13—Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets (a consensus of the FASB Emerging Issues Task Force)










SUMMARY (continued)

ASU 2015-14—Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

ASU 2015-15—Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)

ASU 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments







ASU 2014-17

Business Combinations (Topic 805): Pushdown Accounting• Pushdown accounting refers to establishing a new basis for reporting

assets and liabilities in an acquired company’s separate financial statements based on a push down of the buyer’s basis.

• Generally results in a step up in basis of assets and liabilities to fair value and recording goodwill in the acquired entity’s financial statements.

• Provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.

• Disclose information to enable users to evaluate the effect of pushdown accounting.

• Effective upon issuance.

ASU 2014-18

Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

• Intended to simplify private company accounting for identifiable intangible assets acquired in a business combination.

• Private company can elect to no longer recognize the following separate from goodwill: (a) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and (b) noncompetition agreements.

• Must also adopt the private company goodwill accounting alternative.

ASU 2015-01

Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

• Eliminates from U.S. GAAP the concept of extraordinary items.

• Event or transaction that is considered to be unusual or infrequent (or both): Report as a separate component of income from continuing operations Disclose nature and financial effects of each event

• Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

ASU 2015-02

Consolidation (Topic 810): Amendments to the Consolidation Analysis

• Issued in response to concerns by stakeholders Legacy consolidation guidance provided information that was not useful Users sometimes had to request supplemental deconsolidating financial

statements

• Targeted to address concerns in the asset management industry but new guidance will affect all companies.

• Intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships and limited liability corporations

• May lead to consolidating entities that previously were not and deconsolidating others.

ASU 2015-02 (continued)

• While the overall approach to consolidation under U.S. GAAP is not affected (retained both the voting interest and variable interest models), certain aspects of applying that approach were changed.

• Situations involving contractual arrangements, related parties, and limited partnerships could trigger additional analysis or different consolidation conclusions.

• Effective for periods beginning after December 15, 2015 (for public companies) and periods beginning after December 15, 2016 (for private companies and not-for-profits).

ASU 2015-03

Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

• Requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

• Better aligns GAAP with IFRS.

• Does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements (addressed in ASU 2015-15).

• Effective for fiscal years beginning after December 15, 2015 and should be applied retrospectively.

ASU 2015-04

Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets

• Applicable to an entity with a fiscal year-end that does not coincide with a month-end (e.g., 52/53 week fiscal year).

• Provides a practical expedient that 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.

• Must be applied consistently from year to year and should be applied consistently to all plans if an entity has more than one plan.

ASU 2015-04

• If the practical expedient is elected, a company needs to consider contributions or significant events (e.g., plan amendment, curtailment) occurring between the valuation date and the period end.

Example:A company, sponsoring a defined benefit pension plan, with a

February 2nd year end elects the practical expedient and uses January 31st as the plan measurement date. On February 1st, the company makes a contribution to the plan. This contribution will need to be reflected in the valuation to report an updated pension liability.

Note: Changes in economic conditions and interest rates do not need to be reflected.

• Should disclose accounting policy election and the date used to measure plan assets and liabilities.

ASU 2015-05

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

• Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements.

• Previous GAAP did not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement.

• If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses (record asset and depreciate).

• If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract (record prepaid/operating expense).


Financial Statement EffectBalance Sheet Treatment of up-front fee

• Capitalized or not• If capitalized, classified as prepaid asset, intangible or

otherIncome Statement

Costs could be expensed immediately or depreciated/amortized

Cash Flow Operating (prepaid asset) or investing (intangible)Other Effect on EBITDA

ASU 2015-06

Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions

ASU 2015-07

Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

• Applies to reporting entities that elect to measure the fair value of an investment using the net asset value (NAV) per share (or its equivalent) practical expedient.

• Eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV practical expedient.

• Change is being made to eliminate inconsistencies in presentation of these investments.


• Eliminates certain disclosure requirements, primarily the roll forward for level 3 investments valued using NAV as a practical expedient.

• Does not affect all other investments and a roll forward is still required for level 3 investments not valued using NAV.

• Effective for fiscal years beginning after December 15, 2015 for public business entities, with a one year deferral for all others. Early adoption permitted. Apply retrospectively.


Assets at Fair Value as of December 31, 2016Level 1 Level 2 Level 3 Total

Cash & Cash Equivalents 250,000 - - 250,000

Equity Securities 1,500,000 - - 1,500,000

US Government Securities - 5,000,000 - 5,000,000

Corporate Bonds - 6,000,000 50,000 6,050,000

Real Estate - - 3,000,000 3,000,000

Derivatives - - 500,000 500,000

Total assets in FV Hierarchy 1,750,000 11,000,000 3,550,000 16,300,000

Investments Measured at Net Asset Value (a)

- - - 2,225,000

Investments at Fair Value $1,750,000 $11,000,000 $3,550,000 $18,525,000(a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

ASU 2015-08

Business Combinations (Topic 805): Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)

• Amends various SEC paragraphs of the FASB Accounting Standards Codification.

ASU 2015-09

Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts

• Applies to insurance entities that issue short-duration contracts.

• Requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses.

• Effective for annual periods beginning after December 15, 2015 (for public business entities) with a one year deferral for all others.

ASU 2015-10

Technical Corrections and Improvements

• Amendments cover a wide range of topics.

• Clarify and simplify existing guidance.

ASU 2015-11

Inventory (Topic 330): Simplifying the Measurement of Inventory

• Current accounting requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less a normal profit margin.

• ASU requires measurement of inventory at the lower of cost and net realizable value.

• Net realizable value = estimated selling price less reasonably predictable costs of completion, disposal and transportation

• Does not apply to inventory measured using LIFO or the retail inventory method.

ASU 2015-12

Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient

• Part of the simplification initiative.

• Applies to benefit plan financial statements.

• Update is divided into three sections.


Part I—Designates contract value as the only required measurement for fully benefit-responsive investment contracts.

Part II—Eliminates certain employee benefit plan disclosures• Investments representing 5% or more of net assets• Net appreciation/depreciation by investment type• Disaggregated investment information

Part III—Provides practical expedient to permit plans to measure investments and investment-related accounts as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end.

ASU 2015-13

Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets

• Applies to entities that enter into contracts for the purchase or sale of electricity on a forward basis and arrange for transmission through, or delivery to a location within, a nodal energy market whereby one of the contracting parties incurs charges (or credits) for the transmission of that electricity based in part on locational marginal pricing differences payable to (or receivable from) an independent system operator.

• Clarifies certain criteria for meeting the normal purchase and sales scope exception.

• Effective upon issuance (August 2015) and applied prospectively.

ASU 2015-14

Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

• In May 2014, the FASB issued new guidance for revenue recognition.

• Effective date for the new guidance has been deferred by one year.

• Public business entities annual reporting periods beginning after December 15, 2017.

• All other entities annual reporting periods beginning after December 15, 2018.

ASU 2015-15

Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements

• In April 2015, the FASB issued updated guidance requiring the presentation of debt issuance costs as a direct deduction from the carrying amount of the related debt liability.

• That update does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements.

• It would be acceptable for an entity to record debt issuance costs as an asset and amortize that asset ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

ASU 2015-16

Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

• GAAP requires an acquirer in a business combination to report provisional amounts when measurements are incomplete (e.g., when the valuation of intangibles is incomplete).

• Adjustments occur when new information is obtained (during the measurement period) about facts and circumstances that existed at the acquisition date that would have affected the original accounting.

• Simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirements to retrospectively account for those adjustments.


Current GAAP

• Adjustments to provisional amounts recognized at the acquisition date are made retrospectively with a corresponding adjustment to goodwill.

• Revise comparative information for prior periods presented , including depreciation, amortization, or other income effects.

New GAAP

• Adjustments to provisional amounts are made in the period in which the adjustments are determined.

• Effect on earnings of changes in depreciation, amortization, or other income effects are recorded in the period the adjustments are determined, calculated as if the accounting had been completed at the acquisition date (i.e., catch-up adjustment).


• Material adjustments may result in earnings volatility in the adjustment period and may reduce income statement comparability.

Presentation and Disclosures

• Present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current period earnings by line item that would have been recorded in previous periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

Questions ?

FASBPipeline

FASB Pipeline

Project Status Timing

Financial Instruments• Classification &

MeasurementDrafting final standard Q4 2015

• Hedging Drafting exposure draft Q1 2016• Impairment Drafting final standard Q1 2016Leases Drafting final standard Q4 2015Income Taxes• Balance sheet classification

of deferred taxesDrafting final standard Q4 2015

• Intra-entity asset transfers ED redeliberations

FASB Pipeline


Revenue Recognition• Identifying performance

obligations and licensesDrafting final standard Q4 2015

• Narrow scope improvements and practical expedient

Exposure draft Comment period ends Nov. 16, 2015

• Principal vs. agent ED redeliberationsContingent put and call options in debt instruments

ED redeliberations

Liabilities & equity Drafting ED Q4 2015Equity method accounting ED redeliberations

FASB Pipeline


Disclosures• Defined benefit plans Drafting ED Q4 2015• Fair value measurement Drafting ED Q4 2015• Income taxes Initial deliberations• Inventory Initial deliberations• Interim reporting Initial deliberations• Entity’s decision process EDs out for public

commentComment period ends Dec. 8, 2015

• Financial statements for NFP

ED redeliberations

• Classification of debt Drafting ED Q4 2015

Lease Accounting

Current Accounting

• Most lease assets and liabilities are off-balance sheet

• Limited information about operating leasesLessee• Lack of transparency about residual values• Consistency with leases and revenue

recognition guidanceLessor

Right-of-Use Model

A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

Right-of-use asset

Lease payments

Lessor Lessee

Scope Reliefs

Short-Term Lease Exemption for Lessees

Recognition and measurement exemption for leases with a term of 12 months or less

Lessee Model

All leases are recognized on the lessee’s balance sheet

Current U.S. GAAP New GAAPCapital Leases Finance Leases

Operating Leases Operating Leases

Classification is based on existing U.S. GAAP

Lessee Accounting Overview

Right-of-use asset and Lease

liability

Amortization expenseInterest expense

Cash paid for principal and

interest payments

Right-of-use asset and

Lease liability

Single lease expense on a

straight-line basis

Cash paid for lease

payments

Finance Leases

Operating Leases

Balance Sheet Income Statement Cash Flow Statement

Lessor Accounting Overview

Net investment in

the lease

Interest income and any selling profit on

the lease1

Cash received for lease

payments

Continue to recognize

underlying asset

Lease income, typically on a straight-line basis

Cash received for lease

payments

Direct Financing & Sales-Type

Operating

Balance Sheet Income Statement Cash Flow Statement

1 Selling profit recognized at lease commencement for sales-type leases, over the lease term for direct financing leases (note: selling profit is rare

for direct financing leases).

Variable Lease Payments

Initial MeasurementOnly include variable lease payments that are linked to an index or a rate or are

“in-substance fixed”

Subsequent MeasurementLessee

Reassess only when the lessee re-measures the lease liability for other reasons (e.g., change in lease term)

Lessor

Not required to reassess

Subleases

Intermediate lessor should account for as separate contracts, unless they meet the contract combination guidance

Head Lease Sublease

Determine classification of the sublease with reference to the underlying asset

Sale and Leaseback Transactions

Determine if a sale occurred

• Apply Topic 606• If there is a sale, apply Topic 842 to account for leaseback• Finance leasebacks preclude a sale• Guidance on repurchase options: sale not precluded if

option exercisable at the then-prevailing fair value, provided the asset is nonspecialized and readily available

Accounting for the

sale/purchase

• Gain on sale is recognized same as for the sale of any other nonfinancial asset

• Loss on the sale is recognized by seller-lessee• Buyer-lessor accounts for purchase consistent with that of

other nonfinancial assets

Reducing Cost and Complexity

• Lessor Model• Maintaining current model with

only minor updates• Lessee Model

• Classification line is the same as current accounting

• Short-term leases• Aligned definition with the

definition of lease term• Reassessment

• No reassessment for lessor• Limited reassessment for lessees

Revenue Recognition

Revenue Recognition

Background• In May 2014, the FASB issued its new revenue recognition guidance in

ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

• The new guidance is a move towards more principles based accounting.

• Converges GAAP with IFRS.

• FASB established a transition resources group to aide transition to the new guidance.

• Replaces virtually all US GAAP guidance on revenue recognition with a single model applied to revenue from contracts with customers. Does not apply to lease contracts or insurance contracts.

Revenue Recognition (continued)

Background• Accounting for most revenue transactions (e.g., retail sales to

consumers) will likely remain the same.

• Certain industry specific guidance has been eliminated.

• Certain industries (e.g., software, telecommunications, real estate) may be significantly affected and are likely to recognize revenue earlier.

• Other industries (e.g., asset management) are likely to recognize revenue later.

• Should improve comparability across industries.

Five steps to apply Standard

Recognize revenue to depict the transfer of goods or services in an amount that reflects the consideration to which the entity expects to be entitled

Identify the contract(s) with a customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price to the performance obligations in the contractRecognize revenue when (or as) the entity satisfies a performance obligation

1

2

3

4

5

Step 1: Identify the contract(s)

Existence of a contract

Combine contracts

Contract modifications

Objective: To identify the bundle of contractual rights and obligations to which an entity would apply the revenue model

Step 1: Identify the contract(s)

• Must meet specified criteria to apply the model• Key criterion: Collectibility threshold – to apply model must be probable of

collecting consideration to which the entity will be entitled; otherwise, recognize revenue when performance obligation is satisfied and cash is collected

Existence of a contract

• Negotiated as a package• Consideration in contracts is linked• Goods or services from one performance obligation

Combine contracts

• Separate contract if add distinct goods/services at standalone selling price• If do not treat as separate contract, prospective treatment if remaining

goods/services distinct; otherwise, cumulative catch-up

Contract modifications

Step 2: Identify the performance obligation(s)

Objective: To identify the promised goods or services that are distinct and should be accounted for separately

• On its own• Together with other readily available goods

or services (including goods/services previously acquired from entity)

Customer can benefit from good

or service

• No significant service of integrating the good/service• Good/service does not significantly modify or customize

another good or service in the contract• Good/service is not highly dependent on or interrelated

with other goods or services promised in the contract

Promised good or service is separable

from other promises

Promise to transfer a distinct good or service

Step 3: Determine transaction price

Objective: To determine amount of consideration to which an entity expects to be entitled in exchange for promised goods or

services

Estimate using:•Expected value•Most likely amountbut ‘constrained’

Adjust consideration if timing provides customer or entity with significant benefit of financing

Measure at fair value unless that can’t be reasonably estimated

Reduction of the transaction price unless in exchange for a distinct good or service

Variable consideration

Significant financing

Non-cash consideration

Consideration payable to customer

Step 3: Determine transaction price

Include estimate of variable consideration in the transaction price only if it is probable that a significant revenue reversal will not

occur when the uncertainty is resolved

For licenses of intellectual property,

include sales or usage-based royalties in the

transaction price when the sales or usage occurs

Update the transaction price at each reporting

date

Step 4: Allocate the transaction price

• Estimate selling prices if not observable• Residual estimation techniques may be

appropriate in certain situations

Relative standalone selling price basis

Discounts & contingent amounts allocated entirely to specific performance obligation if specified criteria met

Objective: To allocate to each performance obligation the amount to which the entity expects to be entitled

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

• An entity satisfies a performance obligation over time if one of the following criteria is met:• The customer simultaneously receives and consumes

the benefits provided by the entity’s performance as the entity performs

• The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced

• The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

• If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which control transfers, consider the following indicators:• Present right to payment• Legal title• Physical possession• Risks and rewards of ownership• Customer acceptance

Contract costs – if no other guidance applies

Incremental costs of obtaining a contract Costs to fulfill a contract

Recognize as an asset if:• Incremental• Expect to recover

For example:Selling commissions

Practical expedient: May recognize as an expense when incurred if the amortization period is one year or less

Recognize as an asset if:• Relate directly to a contact• Generate or enhance

resources of the entity that will be used to satisfy performance obligations in the future

• Expect to recover

For example: Pre-contract or setup costs

Implementation guidance

• Performance obligations satisfied over time

• Methods for measuring progress

• Sale with a right of return• Warranties• Principal versus agent

considerations• Customer options for

additional goods or services• Customer’s unexercised

rights

• Nonrefundable upfront fees• Licensing• Repurchase agreements• Consignment arrangements• Bill-and-hold arrangements• Customer acceptance• Disclosure of disaggregated

revenue

Implementation guidance: Licenses

No

Yes

Step 2: Identify the performance

obligation(s)

Account for bundle of goods

and services

Is the license distinct?

Apply criteria to determine whether nature of entity’s promise in granting license is to provide:• A right to access the entity’s intellectual property as it exists throughout

the license period (i.e. a performance obligation satisfied over time); or• A right to use the entity’s intellectual property as it exists at the point at

which the license is granted (i.e. a performance obligation satisfied at a point time)


2015 Activity:

• In April 2015, the FASB deferred the effective date by one year (ASU 2015-14).

• In May 2015, the FASB issued a proposed update that would affect identifying performance obligations and licensing implementation guidance.

• In August 2015, the FASB issued a proposed update intended to clarify implementation guidance on principal versus agent considerations .

• In September 2015, the FASB issued a proposed update intended to improve the guidance on collectibility, noncash consideration, and completed contracts at transition.


May 2015 Proposed Update: Identifying performance obligations and licensing implementation guidance

Identifying Performance Obligations• Proposed amendments clarify the guidance on determining

if the promises in a contract are “distinct” goods or services and therefore, should be accounted for separately

• Specifically addresses whether the good or service is “separately identifiable” from other promises in the contract.


Licensing• Proposal would amend the licensing guidance by categorizing all

licenses into two categories—“symbolic” and “functional”—that will determine whether revenue is recognized at a point in time or over time.

• Functional—does not include supporting or maintaining the IP during the license period.

• Symbolic—includes supporting or maintaining the IP during the license period.

• A license would be classified as “functional,” and recognized at a point in time, if the license has significant standalone functionality (e.g., software, television shows, music). Otherwise, a license would be classified as “symbolic,” and recognized over time (e.g., trade names, logos, franchise rights).


Licensing Example

An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a fixed fee of $1 million, as well as a sales-based royalty of 5 percent of the customer’s monthly sales for the term of the license. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.


• License is for symbolic IP (has limited stand-alone functionality)

• Apply five step revenue model

• Identify performance obligations—a) promise to grant a license; b) promise to transfer equipment. Each are distinct because the customer can benefit from each good on its own.

• Determine transaction price—a) fixed consideration of $1,150,000; b) variable consideration for 5% royalty on sales

• Allocate transaction price–a) allocate $150,000 to the equipment; b) allocate sales based royalty and $1 million fee to the license

• Recognize revenue as performance obligations are met—a) recognize sale of equipment when delivered; b) recognize license fee ratably over the term; c) recognize royalty as sales occur


August 2015 Proposed Update: Principal versus agent considerations

• Principal Controls a good or service before it is transferred to a customer Provides goods or services to the customer Reports revenue based on the gross amount received from the customer

• Agent Arranges for another party to provide goods or services Reports only its fee or commission (that is, net of amounts it remits to the

other party)

• Gross versus net revenue reporting


• Proposed update clarifies and simplifies the principal vs. agent guidance in two specific areas:

1. Determining the unit of account (i.e., specified good or service being provided to the customer)

2. Determining control


Principal vs. Agent Example

Entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, the entity is entitled to a commission that is equal to 10 percent of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity has no further obligations to the customer after arranging for the products to be provided to the customer. • What is the unit of account?—goods to be provided by suppliers• Does the entity have control?—No.

No ability to direct the use of the goods No control over suppliers’ inventory/no inventory risk No discretion in establishing price

• Conclusion?—Entity is an agent. Recognize revenue in the amount of the commission when goods are purchased.


September 2015 Proposed Update: Collectibility, noncash consideration, and completed contracts at transition

• Proposed update addresses the following aspects of the new revenue recognition guidance: Assessing collectibility Accounting when collectibility is not probable Noncash consideration—clarifies that noncash consideration

should be measured at its fair value at contract inception Sales taxes collected from customers Contract modification in transition

Balance sheet classification of deferred taxes• Will require all deferred tax assets and liabilities to be

presented as noncurrent.

• Why is FASB making this change? Presenting as current and noncurrent provides limited benefit to

users of the financial statements because the classification does not always align with how the deferred tax amounts will be recovered or settled.

• Effective date: Public entities—annual reporting periods beginning after

December 15, 2016. All other entities—annual reporting periods beginning after

December 15, 2017.

• May be applied either prospectively or retrospectively.

Liabilities & Equity

• Addresses the accounting for equity-linked financial instruments, such as a warrant or convertible instrument, containing “down round” features.

• GAAP requires an equity-linked instrument to be reviewed to determine if it qualifies for equity classification or liability classification.

• Under current GAAP, a down round feature generally results in liability classification of the financial instrument, requiring fair value measurement and changes in the value reflected in the income statement.

Exercise price used for settlement is not fixed due to the down round feature

Liabilities & Equity (continued)

• Tentative guidance would exclude the down round feature from the assessment.

• Should result in fewer equity-linked instruments requiring liability classification, particularly for private companies where down round provisions are more common.

• Recognize the effect of the down round feature when it is triggered.

Not-for-Profit Financial Statements

• Current reporting guidance was established in 1993 (SFAS No. 117).

• In November 2011, FASB added Not-for-Profit (NFP) financial statement project to Agenda.

• In April 2015, FASB issued an exposure draft.

• Open for comments until August 20, 2015

• Focus on improving: 1. Net asset classification requirements2. Information provided in financial statements about liquidity,

financial performance, and cash flows

• Significant changes to the NFP financial reporting model.


Net Asset ClassificationCurrent GAAP Proposed Changes

• Requires NFPs to present three classes of net assets based on the presence of donor restrictions:

1. Unrestricted2. Temporarily restricted3. Permanently restricted

• Present two classes of net assets:1. Net assets with donor

restrictions2. Net assets without donor

restrictions


Statement of ActivitiesCurrent GAAP Proposed Changes

• Present the amounts of the net change in three classes of net assets and total net assets

• Present the amounts of the net change in two classes of net assets and total net assets

• Present two measures of operating activities (before and after internal transfers) both of which are within changes in net assets without donor restrictions

• Present information about expense by function, nature, or both with enhanced disclosure in notes

• Present investment return net of related investment expenses


Reporting of Expenses - Statement of Activities

Current GAAP Proposed Changes

• Present revenues and expenses segregated in the three classes of net assets

• Health and welfare organizations required to provide information about expenses by function or nature

• Present revenues and expenses for two classes of net assets

• All NFPs present information about expenses by function, nature, or both

• Present certain operating measures

• Present investment return net of related investment expenses

Cash Flows


Current GAAP Proposed Changes

• Present operating cash flows using indirect method with additional presentation of direct method permitted

• Present operating cash flows using the direct method with additional presentation of the indirect method permitted but not required

• Certain items reclassified among cash flow categories to better align with statement of activities


Status

• Received over 250 comment letters (many comments focused on components of the revised guidance that is not specific to NFPs, such as measures of operations and cash flow reporting)

• Currently in redeliberation

• Project has been broken into two phases:• Net Asset Classification, Liquidity, Expense Reporting, Direct

Method of Cash Flows• Operating Measurements and Cash Flow Statement realignment.

Cyber Security Issues

• Virtual Environment Encourages:• Connectivity• Productivity• Efficiency

• But Virtual Environment Breeds:• Cyber crime• Identity theft• Information/data breaches

• AICPA Report October, 2013• Available on www.aicpa.org

http://www.aicpa.org/


• Top 5 Cyber Crimes1. Tax Refund Fraud2. Corporate Account Takeover3. Identity Theft4. Theft of Sensitive Data5. Theft of Intellectual Property (IP)


• McAfee/Center for Strategic and International Studies (CSIS) estimated in 2014 that global cost of cyber crime is $445 Billion• 1% of Global Income• $200 Billion in U.S., Germany and China alone

• Credit Card fraud in U.S. was $30+ Billion up 40% since 2013.

Tax Refund Fraud

Steps• Obtain name and social security number• Make up wage, withholding and deduction info• File return electronically• Refund direct deposit or deposit to “safe” bank• By the time IRS matches data refund is PAID!

In 2013, $30 billion of fraudulent refunds were filed and $6 billion were paid.

Corporate Account Takeover

• Electronic Funds Transfer Fraud• Illicitly acquire login credentials

• Email• Malware

• Access account• Transfer assets (offshore)

• Small to medium sized businesses are targets• Less controls• More vulnerable

• Targets – CFO, CEO, Controller

Identity Theft

• Focus on name, address, social security number and birth date

• Opening credit cards or lines of credit• Unauthorized purchases• Rental/home mortgage fraud• Victims spend 200 hours regaining credit• Businesses and employers must protect

data

Theft of Sensitive Data

• Targets businesses• Retailers• Online orders• Any business with personally identifiable

information• Credit card data• Personally identifiable information• Need to focus on security and controls• Added costs• Cost to remediate very large

Theft of Intellectual Property

• Targets businesses and higher education• Trade secrets• Copyrighted material• Patents/R&D

Other Items

• Security controls• Security audits• Insurance• Response plan

Excerpts from the AICPA Business and Industry Economic Outlook Survey2015

Bonus Payments

What is your current projection for your incentive compensation and bonus payments for 2015?

Employee Turnover

What has the experience of your company been with employee turnover in 2015?

Compensation/Benefits

What has the experience of your company in 2014 been in terms of compensation and benefit costs for hiring?

What has the experience of your companyin 2015 been in terms of compensation andbenefit costs for hiring?

Recruiting Competition

In your recruiting efforts during the past several months, what level of competition are you seeing for candidates as compared to the end of 2014?

Industry, Region and Business-size Outlook• Optimism mixed across sectors

• Retail trade optimism fell to 65% in Q3, consistent with 2014 levels, after topping the charts at 85% optimistic in Q2. Retail hiring also fell, but continues to be relatively strong at 2.6%, ranking 3rd among key sectors

• Wholesale trade also declined in Q3 from 65% optimistic in Q2, returning to the Q1 level of 54%

• Manufacturing eased another 2 points in Q3 from 55% optimistic in Q2 to 53% in Q3

• Construction maintained the same level of optimism as Q2 at 64% optimistic. However, the expected in crease in headcount in construction for the coming 12 months fell back to only 1.2% in Q3 after rebounding to 3.2% in Q2, 2105

• Technology hiring also fell to only 1.1% in Q3, after improving to 2.6% in Q2, in spite of a recovery in optimism from 60% to 67% in Q3

• Banking is also projecting a headcount decrease of .9%, a decline from a 1.5% increase projected in Q2, 2015

Industry, Region and Business-size Outlook (continued)• Other sectors

• Professional Services optimism improved from 64% to 68%. However, the expected headcount eased from 1.9% in Q2 to 1.5% in Q3.

• Mining and Natural Resources respondents are now projecting a .9% increase in headcount for the coming 12 months after projecting a decrease in headcount of 2.7% in Q2.

• Optimism in West recovers; South continues to decline• West recovers from 57% to 63%, now leading national optimism• Midwest and Northeast follow closely at 61% and 62%,

respectively• The south remains soft, declining 2 points from 56% in Q2 to 54%

in Q3

Industry, Region and Business-size Outlook (continued)• Expansion plans recover strongly for smallest of

companies• The number of companies with revenues < $10 million having

expansion plans increased from 47% in Q2 to 61% in Q3• The percentage of companies with revenues > $1 billion

recovered 3 points in Q3, improving from 53% to 56%• The $10-$100 million range of companies eased from 66% to

62%, and the $100 million to $1 billion range of companies also eased from 65% to 60% in Q3

• Consistent with Q2, only 3% of companies overall expect to “contract a lot”, compared to 19% in Q1

Top Challenges Facing Organizations• Regulatory requirements/changes and employee and

benefits costs• Availability of skilled personnel• Domestic economic conditions• Domestic competition maintained• Domestic political leadership• Stagnant/declining markets, developing new

products/services/markets and changing customer preferences

Key Performance Indicators

• Outlooks for revenue and profit recover slightly in Q3• Headcount plans ease slightly, salary and benefit, and

healthcare costs remained essentially constant• Key spending plans mixed

• Increased spending for IT continues to be the strongest category• Other capital spending plans increased• Expected increase in training spending fell• R&D spending increased to a new post-recession high

Outlook for the U.S. and Organizations• Optimism for the U.S. Economy falls

• Construction, employment and lower oil prices were cited as reasons for optimism

• Lingering concerns about regulation/leadership/political gridlock and about global economic turmoil were cited as the primary reasons for those with pessimistic views

• Inflation concerns remain low

Questions ?

Thank You

Thank you for your attendance attoday’s program.

For more information regarding the topics discussed today, please feel free to contact:

Vincent Leo, CPA Mike Giess, [email protected] [email protected]

585.697.9683 585.697.9639

Tim McLaughlin, [email protected]

585.697.9680

Insero & Company CPAs, P.C.

www.inserocpa.com

Insero & Company CPAs, P.C.Certified Public AccountantsBusiness & Financial Advisors

Rochester >> 585.454.6996Corning >> 607.973.2075

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2015 Audit & Accounting Update

Business

Transcript of 2015 Audit & Accounting Update