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UNIVERSITY OF NORTH ALABAMA

2014 ACCOUNTING SEMINAR

ACCOUNTING UPDATE A REVIEW OF RECENT AND PENDING CHANGES IN GAAP

DEREK DANIEL, CPA | July 18, 2014

Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation.

Some entities present unrecognized tax benefits as a liability and some entities present as a reduction of a deferred tax asset. The objective of this amendment is to eliminate diversity in practice.

An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under certain conditions.

If NOL carryforward is not available at the report date under tax law jurisdiction and entity does not plan to use the benefit, then unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets.

Effective for periods beginning after December 15, 2013 (public) and 2014 (private).

2

FASB ASC Update No. 2013-11 Income Taxes (Topic 740)

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss

Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

The assessment of whether a deferred tax asset is available is based on the

unrecognized tax benefit and deferred tax asset that exist at the reporting

date and should be made presuming disallowance of the tax position at the

reporting date.

For example, an entity should not evaluate whether the deferred tax asset

expires before the statute of limitations on the tax position or whether the

deferred tax asset may be used prior to the unrecognized tax benefit being

settled.

3

The Board has decided that it should proactively determine which entities

would be within the scope of the Private Company Decision-Making

Framework: A Guide for Evaluating Financial Accounting and Reporting for

Private Companies (Guide).

This was also specifically requested from stakeholders for the board to

clarify.

The primary purposes of this Update are to:

Have one definition of public businesses for future use in U.S. GAAP to be

use by the Board, Private Company Council and Emerging Issues Task

Force in specifying scope of reporting guidance (ASC includes multiple

definitions).

Identify types of businesses that are excluded from the Guide (NFPs and

employee benefit plans).

4

FASB ASC Update No. 2013-12

Definition of a Public Business Entity

The definition of public business entity differs from some of the existing definitions of public entity in the Accounting Standards Codification. The amendment specifies that:

1) An entity that is required by the SEC to file or furnish financial statements with the SEC, or does file or furnish financial statements with the SEC, is considered a public business entity. Some of the existing definitions of public entity in the Accounting Standards Codification do not include this criterion to define public entity.

2) A consolidated subsidiary of a public company is not considered a public business entity for purposes of its standalone financial statements other than those included in an SEC filing by its parent or by other registrants or those that are issuers and are required to file or furnish financial statements with the SEC. Some of the existing definitions of public entity in the Accounting Standards Codification consider a consolidated subsidiary of a public company to be public.

3) A business entity that has securities that are not subject to contractual restrictions on transfer and that is by law, contract, or regulation required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis is considered a public business entity. The existing definitions of public entity in the Accounting Standards Codification do not include this criterion and do not consider an entity to be public unless it meets one of the other criteria included in the definition (for example, if it has debt or equity securities that trade either on a stock exchange or an over-the-counter market).

5

NFPs now will be excluded from the definition of public business

entities for future standard setting (regardless if a NFP has public

debt securities).

The Board will consider factors such as user needs and NFP

resources on a standard-by-standard basis when applying new

GAAP for private companies.

Same for employee benefit plans

No actual effective date

Update 2014-01 and 2014-2 uses the term public business entity

6

IFRS provides for financial accounting and reporting alternatives for

entities that do not have public accountability through the use of a

separate set of standards for small and medium-sized entities

(SMEs).

FASB and the PCC aim to achieve an appropriate cost-benefit

balance by providing financial accounting and reporting alternatives

to entities that are within the scope of the Guide.

7

PCC decided that it should make changes in determining how private companies should account for goodwill after a business combination.

PCC obtained feedback from private company stakeholders that the benefits of the current accounting for goodwill after initial recognition do not justify the related costs.

Goodwill impairment losses are generally disregarded.

Private companies acknowledge the Board’s effort to implement qualitative assessment of goodwill impairment but overall cost reduction has not been significant (See ASC 2011-8).

8

FASB ASC Update No. 2014-02 Intangibles – Goodwill and Other (Topic 350)

Accounting for Goodwill

This update does not apply to public businesses (as previously

defined in ASC Update 2013-12), NFPs and employee benefit plans.

An entity within the scope of the amendments that elects to apply

the accounting alternative in this Update is subject to all of the

related subsequent measurement, derecognition, other presentation

matters, and disclosure requirements within the accounting

alternative.

The Board has recently added a project to its agenda on subsequent

accounting for goodwill for public businesses and NFPs.

Considering changes made for private companies as described

on next slide and also directly writing off goodwill at the

acquisition date or using a simplified impairment test.

9

Main Provisions Of The Update:

An entity within the scope of the amendments that elects the

accounting alternative in this Update should amortize goodwill on

a straight-line basis over 10 years, or less than 10 years if the

entity demonstrates that another useful life is more appropriate.

An entity that elects the accounting alternative is further required to

make an accounting policy election to test goodwill for impairment at

either the entity level or the reporting unit level.

Goodwill should be tested for impairment when a triggering event

occurs that indicates that the fair value of an entity (or a reporting

unit) may be below its carrying amount.

10

When a triggering event occurs, an entity has the option to first

assess qualitative factors to determine whether the quantitative

impairment test is necessary.

If the qualitative assessment indicates that it is not more likely than

not that goodwill is impaired, further testing is unnecessary.

If that qualitative assessment indicates that it is more likely than

not that goodwill is impaired, the entity must perform the quantitative

test to compare the entity’s fair value with its carrying amount,

including goodwill (or the fair value of the reporting unit with the

carrying amount, including goodwill, of the reporting unit).

The goodwill impairment loss, if any, represents the excess of the

carrying amount of the entity over its fair value (or the excess of the

carrying amount of the reporting unit over the fair value of the

reporting unit). This is different than current U.S. GAAP.

11

The PCC further simplified goodwill impairment by eliminating step two of the current impairment test, which requires the hypothetical application of the acquisition method to calculate the goodwill impairment amount.

The goodwill impairment loss cannot exceed the entity’s (or the reporting unit’s) carrying amount of goodwill.

Amortizing goodwill will produce less circumstances of goodwill impairment. This will reduce excess costs related to testing goodwill for impairment.

Should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized after December 15, 2014

Early application is permitted including financial statements that have not yet been made available for issuance.

12

The objective of the amendments in this Update is to address the

concerns of private company stakeholders by providing an

additional hedge accounting alternative within Topic 815 for

certain types of swaps that are entered into by a private company for

the purpose of economically converting a variable-rate borrowing

into a fixed-rate borrowing.

Under current GAAP, a swap is a derivative instrument.

Topic 815 requires that swaps to be measured at fair value and recognize an asset or liability.

Hedge accounting can be difficult to understand and apply.

13

FASB ASC Update No. 2014-03 Derivatives and Hedging (Topic 815)

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps –

Simplified Hedge Accounting Approach

This update applies to all entities, except for public business entities,

not-for-profit entities, employee benefit plans and financial

institutions.

The income statement charge for interest expense will be similar

to the amount that would result if the entity had directly entered

into a fixed-rate borrowing instead of a variable-rate borrowing

and a receive-variable, pay-fixed interest rate swap.

Reduces income statement volatility.

The amendments in this Update allow the swap to be measured at

its settlement value instead of fair value when applying the simplified

hedge accounting approach.

14

This approach can be applied to a cash flow hedge of a variable-rate borrowing with a receive-variable, pay-fixed interest rate swap provided all of the following criteria are met:

a. Both the variable rate on the swap and the borrowing are based on the same index and reset period (for example, both the swap and borrowing are based on one-month London Interbank Offered Rate [LIBOR] or both the swap and borrowing are based on three-month LIBOR). In complying with this condition, an entity is not limited to benchmark interest rates described in paragraph 815-20-25-6A.

b. The terms of the swap are typical (in other words, the swap is what is generally considered to be a “plain-vanilla” swap), and there is no floor or cap on the variable interest rate of the swap unless the borrowing has a comparable floor or cap.

c. The repricing and settlement dates for the swap and the borrowing match or differ by no more than a few days.

d. The swap’s fair value at inception (that is, at the time the derivative was executed to hedge the interest rate risk of the borrowing) is at or near zero.

e. The notional amount of the swap matches the principal amount of the borrowing being hedged. In complying with this condition, the amount of the borrowing being hedged may be less than the total principal amount of the borrowing.

f. All interest payments occurring on the borrowing during the term of the swap (or the effective term of the swap underlying the forward starting swap) are designated as hedged whether in total or in proportion to the principal amount of the borrowing being hedged.

15

Because Topic 815 permits election of hedge accounting on a swap-

by-swap basis, a private company can elect to apply this approach

to any qualifying swap, whether existing at the date of adoption of

this Update or entered into after that date.

In determining whether an existing swap otherwise meets all of the

requirements for applying this approach at adoption, the criterion

that the swap’s fair value at the time of the application of this

approach is at or near zero does not need to be considered as long

as the swap’s fair value was at or near zero at the time the swap

was entered into by the private company.

The current disclosure requirements in Topic 815 and Topic 820 on

fair value measurement continue to apply for a swap accounted for

under the simplified hedge accounting approach.

16

In providing those disclosures, amounts recorded at settlement value may be used in place of fair value wherever applicable with amounts disclosed at settlement value subject to all of the same disclosure requirements as amounts disclosed at fair value. Any amounts disclosed at settlement value should be clearly stated as such and disclosed separately from amounts disclosed at fair value.

This Update also addresses scope requirements contained in Topic 825 on financial instruments, which provides guidance on required disclosures about the fair value of financial instruments for assets and liabilities that are not measured at fair value in the statement of financial position for which it is practicable to estimate fair value. In accordance with paragraph 825-10-50-3, entities are exempt from Topic 825 fair value disclosures only if all of the following conditions are met:

a. The entity is a nonpublic entity.

b. The entity’s total assets are less than $100 million on the date of the financial statements.

c. The entity has no instrument that, in whole or in part, is accounted for as a derivative instrument under Topic 815 other than commitments related to the origination of mortgage loans to be held for sale during the reporting period.

17

Effective for annual periods beginning after December 15, 2014 and

interim period with annual periods beginning after December 15,

2015

Early adoption permitted

18

Must be implemented using one of two approaches:

A modified retrospective approach in which corresponding adjustments should be made to the assets, liabilities, and opening balance of accumulated other comprehensive income and retained earnings (or other appropriate components of equity) of the current period presented to reflect application of hedge accounting from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity.

A full retrospective approach in which financial statements should be adjusted to reflect the period-specific effects of applying hedge accounting from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity and corresponding adjustments should be made to the assets, liabilities, and opening balance of accumulated other comprehensive income and retained earnings (or other appropriate components of equity) of the earliest period presented to reflect application of hedge accounting from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity.

19

Previous GAAP guidance indicates that a creditor should reclassify

a collateralized mortgage loan such that the loan should be

derecognized and the collateral asset recognized when it

determines that there has been in substance a repossession or

foreclosure by the creditor, that is, the creditor receives physical

possession of the debtor’s assets regardless of whether formal

foreclosure proceedings take place.

The terms in substance a repossession or foreclosure and

physical possession are not defined in the accounting literature

and there is diversity about when a creditor should derecognize the

loan receivable and recognize the real estate property.

This update clarifies when a creditor should recognize repossessed

assets and derecognition of the loan receivable.

20

FASB ASC Update No. 2014-04 Troubled Debt Restructurings by Creditors

(Subtopic 310-40) Reclassification of Residential Real Estate Collateralized

Consumer Mortgage Loans upon Foreclosure

Holding foreclosed real estate property presents different

operational and economic risk to creditors compared with holding an

impaired loan.

Therefore, consistency in the timing of loan derecognition and

presentation of foreclosed real estate properties is of qualitative

significance to users of the creditor’s financial statements.

21

The amendments in this Update clarify that an in substance

repossession or foreclosure occurs, and a creditor is considered to

have received physical possession of residential real estate property

collateralizing a consumer mortgage loan, upon either:

1. The creditor obtaining legal title to the residential real estate

property upon completion of a foreclosure or

2. The borrower conveying all interest in the residential real estate

property to the creditor to satisfy that loan through completion of

a deed in lieu of foreclosure or through a similar legal

agreement.

Additionally, the amendments require interim and annual disclosure of

both:

1. The amount of foreclosed residential real estate property held

by the creditor and

2. The recorded investment in consumer mortgage loans

collateralized by residential real estate property that are in the

process of foreclosure according to local requirements of the

applicable jurisdiction. 22

Effective for public businesses for annual, and interim periods within

those annual periods, beginning after December 15, 2014.

Effective for annual periods beginning after December 15, 2014, and

interim periods within annual periods beginning after December 15,

2015 for all non public entities.

An entity can elect to adopt the amendments in this Update using

either a modified retrospective transition method or a

prospective transition method.

23

Under the modified retrospective transition method, an entity

should apply the amendments in this Update by means of a

cumulative-effect adjustment to residential consumer mortgage

loans and foreclosed residential real estate properties existing as of

the beginning of the annual period for which the amendments are

effective.

Assets reclassified from real estate to loans as a result of adopting

the amendments in this Update should be measured at the carrying

value of the real estate at the date of adoption.

Assets reclassified from loans to real estate as a result of adopting

the amendments in this Update should be measured at the lower of

the net amount of loan receivable or the real estate’s fair value less

costs to sell at the time of adoption.

24

For prospective transition, an entity should apply the amendments

in this Update to all instances of an entity receiving physical

possession of residential real estate property collateralized by

consumer mortgage loans that occur after the date of adoption.

Early adoption is permitted.

IFRS does not contain any guidance specific to the reclassification

of collateralized mortgage loans to foreclosed residential real estate

property.

25

Current U.S. GAAP requires a reporting entity to consolidate an

entity in which it has a controlling interest.

Voting interest model

VIE model – must have:

1. Power to direct activities that most significantly affect economic

performance

2. Obligation to absorb losses or the right to receive benefits of the

entity that could potentially be significant to the entity

26

FASB ASC Update No. 2014-07 Consolidation (Topic 810)

Applying Variable Interest Entities Guidance to Common Control Leasing

Arrangements

Under the amendments in this Update, a private company could

elect, when certain conditions exist, not to apply VIE guidance to a

lessor entity under common control.

Improve financial reporting for the users or private company financial

statements while reducing cost and complexity

Consolidation of lessor entities under common control distorts

financial statements of private company financial statements

Assets held by the lessor entity would not be available to satisfy the

obligation of the lessee entity and reach beyond lessee’s creditors

Common owners establishes lessor entity separate from the private

company lessee for tax, estate-planning, and legal liability purposes

Not to structure off-balance-sheet debt arrangements

27

This amendment does not apply to public business entities, not-for-profit entities or employee benefit plans.

The amendments permit a private company lessee (the reporting entity) to elect an alternative not to apply VIE guidance to a lessor entity if:

a. the private company lessee and the lessor entity are under common control,

b. the private company lessee has a lease arrangement with the lessor entity,

c. substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities (including supporting leasing activities) between those two entities, and

d. if the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor entity.

28

Required disclosures:

1. the amount and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lessor entity and

2. a qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the private company lessee to providing financial support to the lessor entity

Effective for annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015

Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been available for issuance.

29

Update improves definition of discontinued operations.

Under current GAAP, many disposals (even those which are routine

in nature) are reported in discontinued operations.

Limits discontinued operations to disposals of components of an

entity that represent strategic shifts that have (or will have) a major

effect on an entity’s operations and financial results

Examples: a disposal of a major geographical area, a major line of

business, a major equity method investment

30

FASB ASC Update No. 2014-08 Presentation of Financial Statements (Topic

205) and Property, Plant and Equipment (Topic 360)

Reporting Discontinued Operations and Disclosures of Disposals of

Components of an Entity

A component of an entity comprises operations and cash flows that

can be clearly distinguished, operationally and for financial reporting

purposes, from the rest of the entity.

A component of an entity may be a reportable segment or an

operating segment, a reporting unit, a subsidiary, or an asset group.

31

This update requires many additional disclosures about

discontinued operations:

Major classes of line items constituting the pretax profit or loss

of the discontinued operation

Total operating and investing cash flows of the discontinued

operation OR depreciation, amortization, capital expenditures

and significant operating and investing noncash items

Pretax profit or loss attributable to the parent of discontinued

operations

Reconciliation of major classes of assets and liabilities

classified as held for sale to total assets and total liabilities of

the disposal group

Reconciliation of major classes of profit and loss of the

discontinued operation to after-tax profit or loss of the

discontinued operation.

Amount of any cash inflows (outflows) from (to) the

discontinued operation

Many more… 32

This update becomes effective for most entities for all disposals of

components of an entity that occur within annual periods beginning

on or after December 15, 2014, and interim periods within annual

periods beginning on or after December 15, 2015.

An entity should not apply the amendments in this Update to a

component of an entity, or a business or nonprofit activity, that is

classified as held for sale before the effective date even if the

component of an entity, or business or nonprofit activity, is disposed

of after the effective date.

Early adoption is permitted, but only for disposals (or classifications

as held for sale) that have not been reported in financial statements

previously issued or available for issuance.

33

This Update removes the definition of a development stage

entity from the Master Glossary of the Accounting Standards

Codification, thereby removing the financial reporting distinction

between development stage entities and other reporting entities

from U.S. GAAP.

A development stage entity is defined in the Master Glossary of the

Accounting Standards Codification as follows:

An entity devoting substantially all of its efforts to

establishing a new business and for which either of the

following conditions exists:

a. Planned principal operations have not commenced.

b. Planned principal operations have commenced, but there

has been no significant revenue therefrom.

34

FASB ASC Update No. 2014-10 Development Stage Entities

Elimination of Certain Financial Report Requirements, Including an

Amendment to VIE’s Guidance in Topic 810, Consolidation

In addition, the amendments eliminate the requirements for

development stage entities to:

1. Present inception-to-date information in the statements of income,

cash flows, and shareholder equity

2. Label the financial statements as those of a development stage

entity

3. Disclose a description of the development stage activities in which

the entity is engaged, and

4. Disclose in the first year in which the entity is no longer a

development stage entity that in prior years it had been in the

development stage.

35

36

Former GAAP guidance stated that a development stage entity does

not meet the condition to be a VIE if:

1. The entity can demonstrate that the equity invested in the legal

entity is sufficient to permit it to finance the activities that it is

currently engaged in and

2. The entity’s governing documents and contractual arrangements

allow additional equity investments.

37

This update also eliminates the “sufficiency-of-equity-at-risk”

criterion.

Will result in entities that have an interest in a development stage

entity to apply consistent guidance for transactions that are

economically the same or similar.

Same guidance will be applied for determining whether an entity is a

VIE and if it should be consolidated, regardless of whether that

entity has commenced operations.

38

This Update has two separate effective dates:

Elimination of inception-to-date presentation is to be applied

retrospectively:

Public business entities – all periods beginning after December

15, 2014

All other entities – annual reporting periods beginning after

December 15, 2014, and interim periods beginning after

December 15, 2015

Elimination of the “sufficiency-of-equity-at-risk” criterion applied

retrospectively:

Public business entities – all periods beginning after December

15, 2015

All other entities – annual reporting periods beginning after

December 15, 2015 and interim periods beginning after December

15, 2017

39

Entities issue share-based payment awards that require specific

performance targets to be achieved before the employee is eligible to

vest in the awards.

In some cases, the terms of the reward provide the performance target

could be achieved after the employee completes the requisite period

(employee does not have to be rendering services on the date

performance target is achieved).

Before this update, U.S. GAAP did not address how to account for

these share-based payments.

40

FASB ASC Update No. 2014-12 Compensation – Stock Compensation (Topic

718)

Accounting for Share-Based Payments When the Terms of an Award Provide

That a Performance Target Could be Achieved after the Requisite Service

Period

The amendments require that a performance target that affects

vesting and that could be achieved after the requisite service period

be treated as a performance condition.

This update requires the performance target to not be reflected in

estimating the grant-date FMV of the award.

Compensation cost should be recognized in the period in which it

becomes probable that the performance target will be achieved and

should represent the compensation cost attributable to the period(s)

for which the requisite service has already been rendered.

If the performance target becomes probable of being achieved

before the end of the requisite service period, the remaining

unrecognized compensation cost should be recognized

prospectively over the remaining requisite service period.

41

The requisite service period ends when the employee can cease

rendering service and still be eligible to vest in the award if the

performance target is achieved.

As indicated in the definition of “vest”, the stated vesting period

(which includes the period in which the performance target could be

achieved) may differ from the requisite service period.

42

For all entities, the amendments in this Update are effective for

annual periods and interim periods within those annual periods

beginning after December 15, 2015.

Earlier adoption is permitted. The effective date is the same for both

public business entities and all other entities.

Entities may apply the amendments in this Update either:

(a) prospectively to all awards granted or modified after the

effective date or

(b) retrospectively to all awards with performance targets that are

outstanding as of the beginning of the earliest annual period

presented in the financial statements and to all new or modified

awards thereafter.

43

If retrospective transition is adopted, the cumulative effect of

applying this Update as of the beginning of the earliest annual

period presented in the financial statements should be recognized

as an adjustment to the opening retained earnings balance at that

date.

Additionally, if retrospective transition is adopted, an entity may use

hindsight in measuring and recognizing the compensation cost.

44

Intended to provide preparers with guidance in U.S. GAAP on

management’s responsibilities for evaluating and disclosing going

concern uncertainties – reduce diversity in footnote disclosures.

Liquidation basis of accounting ASC 2013-7 added for official

guidance in U.S. GAAP (previously only in audit standards).

Original exposure draft issued in June 2013 stated that entities would

begin disclosures of going concern uncertainties when “early warning

disclosures criteria” were met.

Also would access whether there is substantial doubt about the entity’s

ability to continue as a going concern for a period of 24 months.

Board decided not to do this and keep “substantial doubt” similar

under existing audit standards.

45

FASB Project Update - Going Concern – project began May 2007

Decisions reached at last meeting on May 7, 2014:

Management’s assessment of an entity’s ability to continue as a

going concern should be based on relevant conditions or events

known or reasonably knowable at the date the financial statements

are issued (or for a nonpublic entity, the date the financial

statements are available to be issued).

The look-forward period (that is, the period over which the entity’s

ability to meet its obligations is assessed) should be one year from

the date the financial statements are issued (or for a nonpublic

entity, the date the financial statements are available to be issued).

Applies to both public and nonpublic entities.

All entities will apply the new requirements prospectively for annual

periods beginning after December 15, 2015, and in interim periods

thereafter. Early adoption is permitted.

46

The Board decided not to define the term going concern

presumption, but rather to specify that the going concern basis of

accounting would be used until an entity’s liquidation is imminent

(consistent with ASC 2013-7).

The Board decided that the definition of substantial doubt would

incorporate a likelihood component defined using the term

probable.

To be assessed at each annual and interim reporting period.

The Board also decided that management should consider the

mitigating effect of its plans to the extent it is probable that:

Those plans will alleviate the adverse conditions within the

assessment period.

Those plans will be effectively implemented.

47

The Board decided that when there is substantial doubt about an

entity’s ability to continue as a going concern, the notes to the

financial statements should disclose:

A statement indicating that there is substantial doubt about the

entity’s ability to continue as a going concern

The principal conditions and events giving rise to substantial

doubt

Management’s evaluation of the significance of those conditions

and events

Any mitigating conditions and events including management’s

plans.

48

The Board decided to require management to disclose in the

financial statements when substantial doubt about an entity’s ability

to continue as a going concern has been alleviated primarily by

management’s plans.

Those disclosures would include the principal conditions and events

that initially raised the substantial doubt, and management’s plans

that alleviated the substantial doubt, unless the information is

disclosed elsewhere in the financial statements.

49

Before this Update, very minimal guidance in US GAAP that address when it is appropriate to apply, or how to apply the liquidation basis of accounting

An entity should prepare statements on a going concern basis unless liquidation is imminent

Liquidation occurs when an entity converts its assets to cash and settles its obligations with creditors in anticipation of ceasing activity

Liquidation is imminent when likelihood is remote that the entity will exit the liquidation and either: a. A liquidation plan has been approved by one with

authority and it is remote that liquidation will not occur b. A liquidation plan is imposed by others (involuntary

bankruptcy) If liquidation plan is part of governing documents, liquidation

basis of accounting is only applied if approved liquidation plan is different than original plan since entity’s inception.

50

FASB ASC 2013-07 (Topic 205)

Liquidation Basis of Accounting

Assets and liabilities should be shown at the amount of cash expected to be received or paid

Also includes assets not recognized under GAAP but expected to sell in liquidation (example, trademarks).

Costs expected to accrue or income to be earned during liquidation are included, as well as disposal costs

Financial statements in this situation should have titles such as “Statement of Net Assets in Liquidation” and “Statement of Changes in Net Assets in Liquidation”

Disclosure should include liquidation plan and significant assumptions used in measurement of accounts

Disclose expected duration of the liquidation

Effective for periods beginning after 12/15/13. Apply prospectively from date liquidation is imminent.

51

DEREK DANIEL, CPA Assurance Manager | derekdaniel@decosimo.com

Derek Daniel is an assurance manager with ten

years of experience in public accounting. Derek

leads Decosimo’s Huntsville office.

Derek manages audit engagements for clients in various

industries including manufacturing, government contractors,

and healthcare. He has experience in assisting clients to

achieve compliance with the requirements of the Sarbanes-

Oxley Act. He also performs due diligence and agreed-upon

procedures.

Questions