FSA Consortium Accounting Standard Setting Update May 2015 Deloitte Foundation/Federation of Schools...

FSA ConsortiumAccounting Standard Setting Update

May 2015

Deloitte Foundation/Federation of Schools of Accountancy Faculty Consortium

May 2015

2 Copyright © 2015 Deloitte Development LLC. All rights reserved.

Agenda

Topic

Major Projects

Consolidations

Financial Instruments

Leases

Disclosure Effectiveness

Other FASB Standard-Setting Activity

Foundational Projects

Simplification Projects

New Revenue Recognition Standard

Consolidations


Overview

Amendments to the Consolidation Analysis

• Issued February 2015

• Original Plan:

− Address when Decision Maker of a Variable Interest Entity is acting as principal (controls) or agent (does not control) ◦ The ASU reduces the likelihood that fees paid to a decision maker or service

provider will result in consolidation

− Eliminate deferral for investments in certain investment funds

• Additional provisions:

− More entities will be Variable Interest Entities◦ A limited partnership would be considered a VIE unless a simple majority or lower

threshold (including a single limited partner) of the LPs have substantive kick-out rights or participating rights

ASU 2015-02 guidance


• Entities other than limited partnerships

− The ASU clarifies that a two-step process should be used to determine whether the equity holders have power:

Determining whether an entity is a VIE

Step 1: Do the equity at risk holders (as a group) have power over the most significant activities of the entity through their equity interests?

Step 2: Does a single equity holder have a kick-out or participating right? Or:

Is the decision maker an agent of the equity holders (does not own a variable interest)?

The equity holders do not have power

No — a decision maker has power

No

Yes

Yes

The equity holders have power —consider other VIE conditions


Voting interest model

Who should consolidate?

Limited partnerships:

• A general partner will not consolidate a partnership that is not a VIE

• A limited partner is required to consolidate a partnership that is not a VIE if the limited partner has the substantive ability to unilaterally dissolve the partnership or remove the general partner without cause

All other entities:

• No change from current guidance

• Ownership of more than 50 percent of the outstanding voting shares of another entity would generally result in consolidation

Financial instruments

Classification and measurement


Changes to U.S. GAAP


Equity investments

• Most equity securities will be carried at fair value through net income

− Practicability exception will be permitted for equity securities (1) that do not have readily determinable fair values and (2) that do not qualify for the net asset value (NAV) practical expedient

− Equity method investments (including impairment) are excluded from the scope of the new guidance

• Simplified impairment model would apply to equity securities for which the practicability exception has been elected

− Eliminates the notion of other than temporary impairment


Changes to U.S. GAAP (cont’d)


Instrument-specific credit risk for fair value option liabilities

• An entity would be required to separately recognize in OCI changes in fair value attributable to instrument-specific credit risk

• However, for derivative liabilities any changes in fair value attributable to instrument-specific credit risk would continue to be presented in net income

• An entity can use one of two methods to measure the change in fair value attributable to instrument-specific credit:

− The excess of total change in fair value over the change in fair value that results from a change in a base market risk (e.g., risk-free interest rate) or

− Use another method that it believes is a more faithful representation

Next steps

• Effective date will be determined at a future FASB meeting

• A final standard will be issued in second half of 2015

Impairment


Where we are today

Impairment project

• Expected to issue final guidance in the second half of 2015

• Currently finalizing amendments to impairment guidance

• Not yet deliberated effective date. Do not expect anything sooner than January 1, 2018

• Issued final amendments to IFRS 9, Financial Instruments, on July 24, 2014

• IFRS 9 (2014) will be effective for periods beginning on or after January 1, 2018

• Early adoption is permitted

FASB IASB

KEY TAKEAWAY: Ready or not, here it comes!

Drivers of impairment project

• Response to global financial crisis

• Opportunities to simplify guidance

• Opportunities for international convergence


Determining which impairment model to apply

Impairment project

Debt instrument (in scope of the current expected credit loss model) or available-for-sale (AFS) debt security?

Current expected credit loss (CECL) model

HTM debt security or loan

ASC 320 (subject to amendments)

AFS debt security

Purchased credit-impaired (PCI) assets or certain beneficial interests in scope of ASC 325-40?

Gross-up approach

Recognize Allowance and day 1 expense for all expected credit losses

Purchased or originated


CECL model: Expected credit losses

Impairment project

Topic Considerations

Recognition • No minimum threshold for recognition of impairment losses• Credit impairment would be recognized as an allowance (or contra-

asset) instead of a direct write-down• In certain situations an entity can recognize zero credit losses.

However, no explicit guidance will be provided on what these situations would be

Measurement • Estimate of expected credit losses represents all contractual cash flows that an entity does not expect to collect over the life of the asset

• Consider information about historical loss experience, current conditions, and reasonable and supportable forecasts

• Must reflect the risk of loss (best estimate not permitted)

• Variety of methods to develop an estimate of current expected credit losses are permitted (e.g., DCF, loss-rate methods, provision matrix, etc.)


CECL model: Expected credit losses (cont’d)

Impairment project

Topic Considerations

Unit of account

• Credit losses should be evaluated on a collective (i.e., pool) basis when similar risk characteristics are shared (including HTM securities)

• When similar risk characteristics are not shared, a financial asset should be evaluated for impairment individually

Practical expedients

• Collateral-dependent financial assets

• Financial assets for which the borrower must continually adjust the amount of securing collateral (e.g., repurchase agreements and securities lending arrangements)

Write-offs • Consistent with current practice, an entity will write off the carrying amount of a financial asset when the asset is deemed uncollectible


Available-for-sale (AFS) debt securities

Impairment project

• CECL Model would not apply to AFS debt securities. Instead, impairment of AFS debt securities would continue to be accounted for under ASC 320, Investments — Debt and Equity Securities

• The impairment model in ASC 320 will be revised to:

1. Require an allowance approach (vs. permanently writing down the security’s cost basis)

2. Remove the requirement to consider “duration” of time fair value has been less than amortized cost when assessing whether an impairment is OTTI

3. Removing the requirement that an entity must consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists

• Write-off guidance will apply to AFS debt securities

Proposed guidance


Next steps, transition, and effective date

Impairment project

• Modified retrospective application

• Recognize a cumulative-effect adjustment in the first period of adoption

• Early adoption not permitted

• Certain disclosures required

• Not yet determined

• Expected to be addressed near the end of deliberations

• Not expected to be sooner the January 1, 2018

Transition Effective date

• Further deliberations by the FASB

• Address effective date

• Issue final standard

Next steps


IASB’s three-bucket approach

Impairment project

• All financial assets initially categorized in this bucket**

• Evaluation performed on groups of financial assets and individual financial assets

Bucket 1: 12 months expected credit loss allowance*

Buckets 2 and 3: Lifetime expected credit loss allowance

… when there has been a significant deterioration in credit quality since initial recognition (except high quality assets)

Transfer out of Bucket 1

* 12 month expected credit losses = lifetime expected credit losses for financial assets for which a loss event is expected within the next 12 months

** Except for purchased debt instruments with explicit expectation of credit losses at acquisition, and some trade/lease receivables.

Hedging project


Highlights of redeliberations

Hedging project

• Simplify hedge accounting/ potentially permit hedge accounting for more hedging strategies

• the FASB will discuss the following issues:

− Hedge effectiveness requirements

− Whether the shortcut and critical-terms-match methods should be eliminated

− Voluntary dedesignations of hedging relationships

− Recognition of ineffectiveness for cash flow underhedges

− Hedging components of nonfinancial items

− Benchmark interest rates

− Simplification of hedge documentation requirements

− Presentation and disclosure matters

Leases project update


• Generally similar to current U.S. GAAP

• Excludes leases to explore for/use nonregenerative resources, leases of biological assets, and leases of intangible assets

• Lease term of 12 months or less (changed from ED)• Elective in nature by underlying asset class• Accounted for in a manner similar to today’s operating leases

What’s in and what’s out

Leases project

Scope

Short-term lease

More pressure on differentiation between leases and services because leases will be on balance sheet!


Definition of a lease

Leases project

A contract that conveys the right to use an asset for a period of time, in exchange for consideration

Identified asset

Requires an identified asset• Explicitly or implicitly specified• Substitution rights must be considered if substantive

(i.e., practical ability + economic benefit)

Control Must have right to direct the use and obtain substantially all economic benefits from use• Direct the use — should focus on the ability to direct “how

and for what purpose” the asset is used • Obtaining substantially all economic benefits from use

— can be obtained directly or indirectly in many ways and includes the underlying assets primary output and by-products


Lessee accounting model

Leases project

Overview

• Leases (except short-term leases) on balance sheet

Measurement

• Introduces the right-of-use asset approach under which a lessee records:

− Lease Liability: PV of minimum lease payments over lease term◦ Excludes renewal periods unless reasonably certain of exercise

◦ Excludes variable lease payments similar to current GAAP

− ROU asset: right to use the leased asset◦ Initially at present value (PV) of lease payments + lessee’s initial direct costs

◦ Re-measurement depends on lease classification (FASB only)


Lessee accounting model (cont’d)

Leases project

Subsequent measurement• ROU asset

− Boards are not converged on the subsequent measurement:

FASB approach IASB approach

Dual-model approach — a lessee would apply guidance similar to IAS 17 when determining whether a lease should be classified as Type A or Type B

Single-model approach — a lessee would account for all leases as a financed purchase of the ROU asset

Type A lease Type B lease

Consistent with today’s capital leases — expense will be front-loaded

Expense will be recorded on a straight-line basis


FASB lease classification criteria

Leases project

Although the evaluation is similar to current U.S. GAAP, the bright-line rules in current U.S. GAAP would be eliminated

Would account for as a Type A lease when the lease… Transfers ownership by end of lease term; Includes a purchase option that the lessee is reasonably certain to

exercise; or There is a transfer of substantially all of the risks and rewards of

ownership of the asset

CLASSIFICATION CRITERIA

Some Type A lease indicators… Transfers ownership by end of lease term; Includes a purchase option that is reasonably certain of exercise; Lease term is major part of economic life of asset; or PV of MLP amount to substantially all of FV of asset.

Otherwise the asset would be classified as a Type B lease.


Lessor accounting model

Leases project

Existing lessor accounting retained with minimal changes:

• Classification criteria would be similar to IAS 17

− Type A lease: generally consistent with today’s sales-type/direct-finance leases

− Type B lease: generally consistent with today’s operating leases

• Differing views on recognizing dealer profit for sales-type leases:

− FASB view: up-front recognition of manufacturer’s profit would be precluded if control of asset is not transferred to lessee

− IASB view: manufacturer’s profit, if any, should be recognized up front


Lessee accounting model (cont’d)

Leases project

Illustrative example:

* The straight-line expense approach only applies to the FASB’s proposed approach under U.S. GAAP. In March 2014, the IASB tentatively decided on a single-model approach that would treat all leases as the financing of the purchase of the ROU asset whereas the FASB decided on a dual-model approach.


Final thoughts

Leases project

Other provisions redeliberated• Presentation in Balance Sheet, Income Statement, and Cash Flow Statement• Subleases

• Related-party leases

• Leveraged leases

• Build-to-suit transaction

• Sale and leaseback accounting

• Lease modifications

• Disclosure requirements

• Transition

Next steps• Effective date

• Sweep issues

• Other consequential amendments


What’s Next?

Other Major Projects

Disclosure Framework Projects


Disclosure framework projects

Overall:Board Decision ToolEntity Decision Process

Projects:

Fair Value Disclosures Income Tax Disclosures

Defined Benefit Plan Disclosures Inventory Disclosures

Interim Disclosures Other Accounting Topics

FASB Other Projects

Background

Copyright © 2015 Deloitte Development LLC. All rights reserved.35

FASB Project StructureFocused Initiatives on Improving Standard Setting

Foundational Projects

Long term projects to improve the “core” of financial reporting: Conceptual framework Disclosure framework

General Standard Setting

Improve transparency through its projects on recognition, measurement, presentation, and disclosure: Definition of a Business Insurance Goodwill for PBE Intangible Assets Liabilities and Equity

Simplification Initiatives

Short-term, targeted improvement of existing U.S. GAAP: Extraordinary/Unusual Items Presentation of Debt

Issuance Costs Measurement Date for Plan

Assets Cloud Computing Costs Subsequent Measurement of

Inventory Accounting for Income Taxes Share-Based Payment

Improvements Balance Sheet Classification

of Debt


• FASB simplification initiative commenced in 2014• Designed to identify limited-scope projects to simplify U.S.

GAAP in the near term

FASB’s Simplification InitiativeBackground and Objectives


Simplification Initiative – Final Standards

Extraordinary Items

Debt Issuance Costs

Pension Plan Measurement

Date


Notable short-term, targeted improvements to existing U.S. GAAP:

Subsequent Measurement of Inventory

Accounting for Income Taxes

Share-Based Payment Improvements

Balance Sheet Classification of Debt

Current Simplification Projects

Questions?

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2015 Deloitte Development LLC. All rights reserved.36 USC 220506Member of Deloitte Touche Tohmatsu Limited

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

on this presentation.

http://www.deloitte.com/about

http://www.deloitte.com/us/about

FSA Consortium Accounting Standard Setting Update May 2015 Deloitte Foundation/Federation of Schools...

Documents

Transcript of FSA Consortium Accounting Standard Setting Update May 2015 Deloitte Foundation/Federation of Schools...