ACCOUNTING & AUDITING UPDATE Jennifer Blake, Senior Manager.

ACCOUNTING & AUDITING UPDATE

Jennifer Blake, Senior Manager

The material appearing in this presentation is for informational purposes

only and should not be construed as advice of any kind, including, without

limitation, legal, accounting, or investment advice. This information is not

intended to create, and receipt does not constitute, a legal relationship,

including, but not limited to, an accountant-client relationship. Although

this information may have been prepared by professionals, it should not

be used as a substitute for professional services. If legal, accounting,

investment, or other professional advice is required, the services of a

professional should be sought.

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Agenda

• New Accounting Standards

• Proposed Standards

• Private Company Council

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What’s new for 2013?

• Comprehensive Income

• Intangible Assets

ASU 2013-02 COMPREHENSIVE INCOME

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Comprehensive Income

• What is other comprehensive income?– Gains and losses that are included in equity but that

bypass the income statement• Unrealized gains/losses on available for sale securities• Changes in defined benefit pension plans• Cash flow hedge gains and losses• Foreign currency gains and losses

• What is accumulated comprehensive income?

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• Adds additional disclosures for items reclassified out of accumulated other comprehensive income

Does not change the current requirements for reporting net income or other

comprehensive income

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• Additional disclosure requirements:– Changes in the balances of each component of

accumulated other comprehensive income (AOCI)

– The effect of significant reclassifications out of each component of AOCI on the line items in the statement of income

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Changes in AOCI Balances by Component

• Disaggregate the total change of each component of other comprehensive income and separately present:1. Reclassification adjustments2. Current-period other comprehensive income

• Both before-tax and net-of-tax presentations are acceptable

• Presented on the face of financial statements or as a separate disclosure in the notes

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Entity ABC

Notes to Financial Statements

Changes in Accumulated Other Comprehensive Income by Component {a}

Fore the Period Ended December 31, 2013

Gains and Losses on Cash

Flow Hedges

Unrealized Gains and Losses on Available for Sale

Securities Total

Beginning Balance $ (5,000) $ 8,000 $ 3,000

Other Comprehensive Income Before Reclassifications 7,000 8,000 15,000

Amounts Reclassified from Accumulated Other Comprehensive Income (2,250) (3,000) (5,250)

Net Current Period Other Comprehensive Income 4,750 5,000 9,750

Ending Balance $ (250) $ 13,000 $ 12,750

{a} All amounts are net of tax. Amounts in debit indicate debits.

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Significant Items Reclassified Out of AOCI

• Required to present information about significant items reclassified out of AOCI by component either:1. On the face of the statement where net income is

presentedor

2. As a separate disclosure in the notes to the financial statements.

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Entity ABCNotes to the Financial Statements

Reclassifications out of Accumulated Comprehensive Income {a}

For the Period Ended December 31, 2013

Details about Accumulated Other Comprehensive Income Components

Amount Reclassified from Accumulated Other

Comprehensive IncomeAffected Line Item in the Statement Where Net Income is

Presented

Unrealized Gains and Losses on Available for Sale Securities:

$ 2,300 Realized gain/(loss) on Sale of Securities

(285) Impairment expense

Insignificant Items (15)

$ 2,000 Total before tax

(500) Tax (expense) or benefit

$ 1,500 Net of tax

Amortization of defined benefit pension items:

Prior Service Costs $ (2,000) {b}

Transition Obligation (2,500) {b}

Actuarial gains/(losses) (1,500) {b}

$ (6,000) Total Before Tax

1,500 Tax (expense) or benefit

$ (4,500) Net of tax

Total Reclassifications for the Period $ (3,000) Net of tax

{a} Amounts in parentheses indicate debits to profit/loss{b} These accumulated other comprehensive income components are included in the computation of net periodicpension cost (see pension footnote for additional details).

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Entity ABC Statement of Income

For the Period Ended December 31, 2013 Interest Income (includes $1,000 accumulated other comprehensive income reclassifications for net gains on cash flow hedges) $ 122,500

Interest Expense (32,000)

Net Interest Income Before Provision Expense 90,500

Provision Expense (5,000)

Net Interest Income After Provision Expense 85,500 Other Income

Fee Income 10,000

Gain on Sale of Securities (includes $4,000 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities) 7,300

Other income 2,000

19,300

Other Expense (54,000)

Net Income Before Provision for Income Taxes 50,800

Income Tax Expense (includes ($1,750) income tax expense from reclassification items) (15,240)

Net Income $ 35,560

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• Effective Date– Public Companies

• Fiscal years, and interim periods within those years, beginning after December 15, 2012 (December 31, 2013 financial statements).

– Nonpublic Companies• Fiscal years beginning after December 15, 2013 (December 31,

2014 financial statements).

– Disclosures applied prospectively

ASU 2012-02 INTANGIBLES – GOODWILL AND OTHER

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Indefinite-Lived Intangible Assets

• Amends the current guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment.

• Under the current guidance an entity must:– Atleast annually– Calculate and compare the asset’s fair value with its

carrying value– Record impairment loss if asset’s carrying value exceeds

its fair value

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• Under new guidance an entity has the option of first performing a qualitative assessment– Determine whether it is more likely than not that the

asset is impaired– Evaluate events and circumstances that may affect the

significant inputs used to determine the fair value of the asset

• If based on qualitative assessment it is determined that it is more likely than not the asset is impaired, then the entity could proceed to the quantitative impairment test

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Qualitative Assessment

• Cost factors• Financial performance• Legal, regulatory, contractual, political, business,

or other factors• Other relevant entity-specific events• Industry and market considerations• Macroeconomic conditions

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Considerations

• Do internal personnel have skills and knowledge to perform assessment?

• What supporting documentation do we need to substantiate conclusions about each event and circumstance considered in the qualitative assessment?

• Is the most recent determination of fair value a good proxy for the current-period fair value?

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• Effective Date– Annual and interim impairment tests performed in

fiscal years beginning after September 15, 2012– Early adoption is permitted

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Significant Proposed Guidance

• Credit Impairment• Leases• Financial Instruments

PROPOSED CREDIT IMPAIRMENT MODEL

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Proposed Credit Impairment Model

• Changes the requirement for accounting for the estimate of credit losses from an “incurred” to an “expected” loss model

• Provides a single impairment approach for all financial assets measured at amortized cost or fair value through OCI

• Certain limited circumstances would allow a practical expedient

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Expected vs. Incurred Loss Model

Subject Expected Loss Incurred Loss

Recognition threshold No recognition threshold. At the end of every reporting period, impairment allowance recognized on the basis of expected credit losses

Impairment recognized only after a loss event has occurred or its occurrence is probable

Measurement approach No prescribed methodology, however is based upon lifetime of expected losses by incorporating forecasted loss factors

Generally relies on historical loss rates adjusted for various qualitative factors

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Measurement of Expected Credit Losses

• No prescribed methodology however the proposal requires the estimate of current expected credit losses to:– Incorporate the time value of money– Reflect all internally and externally available information

considered relevant in making the estimate– Reflect at least two possibilities

1. That a credit loss exists, and2. That no credit loss exists

– Reflect how credit enhancements mitigate expected credit losses

• Does not require a discounted cashflow analysis

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Examples of Estimating Credit Losses

• Loss rate approach• Base component and a credit risk adjustment• By-vintage basis• Collective estimation method and an individual

asset estimation method

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Other Key Aspects

• Interest Income– Based on contractual cash flows– Should remain separate from the credit losses

• Accounting for Nonaccrual– Not probable that an entity will receive payment of

substantially all of the principal• Cost recovery method

– Probable entity will receive substantially all principal but not probable the entity will receive all of the interest

• Cash basis method

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Other Key Aspects

• Troubled debt restructurings– Definition and determination of TDRs remain the same– Cost basis adjusted

• Post modification effective interest rate equals the pre-modification effective interest rate

– Impairment from restructuring recorded as direct write-off

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Effective Date and Transition

• Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective

• No effective date has been proposed for the final guidance

PROPOSED LEASE ACCOUNTING

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Leases – Lessee Accounting

• Right of Use (ROU) approach• Recognize and record all leases

1. Asset = right to use the underlying asset2. Liability = future lease payment obligations

• Both asset and liability initially measured at the present value of the future lease payments

• Leases with maximum lease term of 12 months or less may be excluded

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Initial Measurement

Subject Description

Lease term Noncancellable period of the lease, together with both of the following 1) renewal options, and 2) termination options if there is significant economic incentive for an entity to exercise or not exercise the option

Lease payments Include fixed payments and only variable payments that are: 1) based on an index or rate, and 2) in-substance fixed lease payments

Discount rate Rate the lessor charges the lessee, if available. If that rate is not available then the lessee’s incremental borrowing rate as of the date of lease commencement would be used.

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Subsequent Measurement

• Liability– Effective interest method used to make lease payments

• Asset– Two different approaches dependent on underlying

asset and terms of lease• Financing• Straight-line

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Subsequent Measurement

Type A – Financing Lease - Other than Property Lease

Type B – Straight-line – Property Lease

Lease term: Major part of the remaining economic life of the underlying asset, or

Lease term: insignificant part of total economic life of the underlying asset, or

Present value of lease payments accounts for substantially all of the fair value of the underlying assets, or

Present value of lease payments is insignificant relative to the fair value of the underlying assets

Lessee has a significant economic incentive to exercise an option to purchase the underlying asset

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Example

• Assume lessee enters into a 3- year lease with the following annual payments

• Year 1 - $20,000• Year 2 - $24,000• Year 3 - $28,000

• Initial Measurement of the ROU asset and liability to make lease payments is $64,012 based on a discount rate of 5%.

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Example

0 65,012$ 65,012$ 65,012$ 1 3,242$ 21,670$ 24,912$ 43,342 24,000$ 20,758$ 44,254 2 2,413 21,671 24,084 21,671 24,000 21,587 22,667 3 1,333 21,671 23,004 - 24,000 22,667 -

Total 6,988$ 65,012$ 72,000$ 72,000$ 65,012$

{a} Effective-interest method used to calculate lease liability under both methods

{b} Straight-line method: ROU amortization calculated as difference between lease and interest expense

{c} Financing method: amortized in the same manner as other non-financial assets

Interest Expense

<1>

Amortization Expense

<2> {c}

Total Lease

Expense ROU Asset

Straight-Line Approach (Type B)Lease

Expense <3>

Reduction in ROU Asset

<3-1> {b} ROU AssetYear

Both Methods Financing Approach (Type A)

Lease

Liability {a}

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Example Year 1 Dr. Interest Expense 3,242 -

Dr. Amortization Expense 21,670 - Dr. Lease Expense - 24,000 Dr. Lease Liability 16,758 16,758

Cr. ROU Asset 21,670 20,758 Cr. Cash 20,000 20,000

Year 2 Dr. Interest Expense 2,413 - Dr. Amortization Expense 21,671 - Dr. Lease Expense - 24,000 Dr. Lease Liability 21,587 21,587


Year 3 Dr. Interest Expense 1,333 - Dr. Amortization Expense 21,671 - Dr. Lease Expense - 24,000 Dr. Lease Liability 26,667 26,667


Financing Straight-Line

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Transition - Lessee

• Capital Leases– Carry forward amounts recorded as of the date of initial

application, or– Apply full retrospective approach

• Operating Leases– Full retrospective approach, or– Modified retrospective approach at the beginning of the

earliest comparative period presented

PROPOSAL ON CLASSIFYING AND MEASURING FINANCIAL INSTRUMENTS

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Financial Instruments

• Applies to most financial instruments, except for the following:– Instruments classified in stockholders’ equity– Stock compensation arrangements– Pension plan assets and obligations– Lease receivables and payables– Financial guarantee contracts

• Derivative instruments under ASC 815

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Classification of Financial Assets

• Classification dependent on:1. their contractual cash flow characteristics2. The business model in which they are managed

• Three classification and measurement categories1. Fair Value – Net income (FV-NI)2. Fair Value – OCI (FV-OCI)3. Amortized Cost

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Contractual Cash Flow Characteristics Assessment• Do the contractual terms of the financial asset

“give rise on specified dates to cashflows that are solely payments of principal and interest on the principal amount outstanding (SPPI)”?– No, then generally classified and measured FV-NI

• Examples: equity securities, debt instruments with commodity-indexed payments

– Yes, then assess business model

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Business Models

• Three distinct business models1. Hold to collect

• Amortized Cost

2. Hold and sell • FV-OCI or FV-NI (optional)

3. Other that is not consistent with (1) and (2) above• FV-NI

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Classification of Financial Liabilities

• Measured at amortized cost, with the following exceptions:1. Short sale obligations – FV-NI2. Financial liabilities for which entities business

strategy is to subsequently transact at fair value – FV-NI

3. Nonrecourse financial liabilities that are contractually required to be settled with only the cash flows from related financial assets – accounted for on same basis as related financial asset

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Presentation

• The following is required to be presented on the face of the entity’s balance sheet– Financial assets and liabilities, by measurement category– Separate line item for hold-to-collect financial assets

that have been identified for sale– Parenthetical fair value information for all financial

assets and liabilities accounted for at amortized cost (exception: demand deposits and receivables/payables due in less than one year)

– Parenthetical amortized cost information for its own outstanding debt instruments accounted for at FV-NI

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Effective Date and Transition

• Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective

• No effective date has been proposed for the final guidance

PRIVATE COMPANY COUNCIL

Private Company Council (PCC)

• Created in 2012 to identify and vote on differences in U.S. GAAP for private companies

• Will decide on exceptions and modifications to U.S. GAAP for private companies

• FASB will be responsible for “endorsement” rather than ratification of the PCC’s decisions– 60 days to act of PCC decisions– Must provide public, written notice if FASB fails to

endorse

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Differentiating Factors for Public and Private Companies• Types and number of financial statement users• Financial statement user access to management• Investment strategies of equity investors• Ownership and capital structures• Accounting resources• Learning about new financial reporting guidance

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Proposed Decision Making Framework

• Identifies five areas for possible alternative guidance for private company1. Recognition and measurement2. Disclosures3. Presentation4. Effective date5. Transition

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Questions

Jennifer BlakeMoss Adams [email protected]

ACCOUNTING & AUDITING UPDATE Jennifer Blake, Senior Manager.

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