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BDO USA, LLP, a Delaware limited liability partnership, is

the U.S. member of BDO International Limited, a UK

company limited by guarantee, and forms part of the

international BDO network of independent member firms.

Accounting

Update

Mark Carlie, CPA

Brett Cowan, CPA

BDO USA, LLP

DISCUSSION OUTLINE FASB Projects Nearing/At Completion

► Revenue

► Leases

► Extraordinary Items

► Debt Issuance Costs

► Going Concern

BDO KNOWLEDGE SERIES ‒ SURETY ASSOCIATION OF ST. LOUIS

REVENUE


REVENUE RECOGNITION

► Effective dates (early adoption permitted):

PUBLIC BUSINESS ENTITIES ALL OTHER ENTITIES

• FYs beginning after 12/15/17

(and interim periods within)

• Early adoption permitted only

as of FYs beginning after

12/15/16 (and interim periods

within)

FYs beginning after 12/15/18

(interim periods within FYs beginning after

12/15/19)

• Early adoption permitted as of either:

‐ FYs beginning after 12/15/16 (and interim periods

within), or

‐ FYs beginning after 12/15/16 and interim periods

within FYs beginning one year after the annual

period in which an entity first applies the new

standard.


REVENUE RECOGNITION

Remarks of Wes Bricker, Deputy Chief Accountant

Bloomberg BNA Conference on Revenue Recognition – Sept. 17, 2015

Topics

► Obtaining resources from senior management

► Internal controls: disclose changes

► SAB 74: disclose anticipated impact as more is known

► Cautioned against conclusions designed to preserve current accounting

► Second guessing: consider the CAQ Professional Judgment Resource

• http://www.thecaq.org/docs/reports-and-publications/professional-

judgment-resource.pdf?sfvrsn=4

Complete speech: http://www.sec.gov/news/speech/wesley-bricker-remarks-

bloomberg-bna-conf-revenue-recognition.html

http://www.thecaq.org/docs/reports-and-publications/professional-judgment-resource.pdf?sfvrsn=4

http://www.sec.gov/news/speech/wesley-bricker-remarks-bloomberg-bna-conf-revenue-recognition.html


REVENUE FROM CONTRACTS WITH CUSTOMERSIntroduction and Transition

Core principle

Steps to apply the core principle are:

Recognize revenue to depict the transfer of goods or services to

customers in an amount that reflects the consideration to which the

entity expects to be entitled in exchange for those goods or services


REVENUE FROM CONTRACTS WITH CUSTOMERSStep #2 – identify separate performance

obligationsDefinition of a ‘distinct’ good or service

STEP TWO

Can the customer benefit from the good or service, either on its own, or

with other readily available resources?

(‘readily available resources’ are those that the customer possess or is

able to obtain from the entity or another third party)

The good or

service is not

‘distinct’

(these are then

grouped into

‘bundles’ of goods

and services that

are themselves

‘distinct’)

No

Yes

Is the promise to transfer a good or service separate from the other

promised goods or services in the contract? Indictors may include:

The good or service is distinct

Yes

The entity does not

provide a significant

service of integrating

the goods and services

A good or service does

not significantly modify

or customize the other

goods and services

A good or service is not

highly dependent or

interrelated with the

other goods and services

No


ASU 2016-08, PRINCIPAL VERSUS AGENT

CONSIDERATIONS (Reporting Revenue Gross versus Net)

► Does not change core principle of new revenue standard

► Clarifies principal vs. agent implementation guidance:

• Determination for each distinct good or service (or a distinct bundle)

• Application of control principle to goods, services, or rights to services

• Clarified purpose and application of control indicators

• Revised and new examples

► Same effective date and transition provisions as Topic 606

BDO Alert:

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(6)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(6)


INDUSTRIES EXPECTED TO SEE SIGNIFICANT

CHANGES

► Technology

► Software

► Communications

► Life Sciences

► Construction Contractors

► Professional Services Organizations

► Certain Aspects of Non-Profits (i.e. membership fees, subscriptions)


BDO – INFORMATION ON REVENUE RECOGNITION

https://www.bdo.com/insights/advanced-search?filter=1&busi=11&cat=873


LEASES


NEW LEASE STANDARD INTRODUCTION

• ASU 2016-02, Leases (Topic 842) issued February 2016

• Dual approach for lessees and lessors

• Effective dates (early adoption permitted):






12/15/20)


INTRODUCTION

Lessees

• Right of use (consumption) model – recognize ROU asset and lease liability at

inception for all leases

- Optional exemption for leases with terms < 12 months

• Classify all leases as finance or operating (5 criteria)

- Finance lease – lessee effectively obtains control of underlying asset

- Operating lease – lessee does not effectively obtain control of underlying asset

• Similar balance sheet impact; different income statement and cash flow results


INTRODUCTION

Lessors

• Classify all leases as sales-type, direct finance, or operating (similar to existing

U.S. GAAP) based on same criteria as lessees, plus a few others

- Sales-type lease - transfers all risks and rewards, plus control of underlying asset, to

lessee

- Direct financing – transfers risks and rewards but not control

- Operating – does not transfer risks and rewards or control

• Subsequent accounting is consistent with existing U.S. GAAP*

• Control principle aligned with new revenue standard

* Leveraged lease treatment no longer available for new leases


IDENTIFYING A LEASE

LeaseA contract, or part of a contract, that conveys the right to control the use of

identified property, plant or equipment (an identified asset) for a period of time

in exchange for consideration.

Determine at inception based upon:

• Whether contract fulfillment depends on use of an identified asset*

• Whether contract conveys right to control use of identified asset for

consideration for a time period

* Consider whether supplier has substantive right of substitution


IDENTIFYING A LEASE

Right to control use of the identified asset depends upon:

• Right to obtain economic benefits from the use of the identified asset (e.g.,

through using, holding, or subleasing the asset).- “Economic benefits” is fairly broad

- Consider within defined scope of customer’s contractual right to use the asset

• Right to direct the use of an identified asset. This exists when customer has the

right to direct how and for what purpose the asset is used, including the right

to change how and for what purpose the asset is used, throughout the period of

use.


SHORT-TERM LEASES

Two criteria for short-term leases:

• Lease term of 12 months or less

• No option to purchase underlying asset that lessee is reasonably certain to

exercise

If short-term lease, lessee can elect not to apply recognition requirements (no

balance sheet gross-up for ROU asset and related lease liability)

• Recognize lease payments in P&L on straight-line basis

• Recognize variable lease payments as they are incurred

Accounting policy must be made by class of underlying asset and be disclosed


LEASE TERM AND PAYMENTSTwo elements form basis for PV of lease payments:

Lease Term

• Estimated as the non-cancellable

period of the lease

• Include periods under option to

extend IF lessee is reasonably certain

to exercise option

• Include periods under option to

terminate IF lessee has is reasonably

certain NOT to exercise option

• Same analysis for purchase options

Lease Payments (Rentals)

• Fixed lease payments (less incentives

to be paid by lessor)

• Variable payments tied to an index

• Variable payments which are in-

substance fixed payments

• Residual value guarantees (probable

amount)

• Exercise price of purchase option IF

lessee is reasonably certain to

exercise option

• Termination penalties IF lease term

reflects lessee exercising option

• Fees paid to structure an SPE


LEASE TERM

• Reasonably certain is a high threshold substantially the same as reasonably

assured in existing U.S. GAAP.

- Includes assessment of economic incentives.

• Reassess the lease term only upon the occurrence of a significant event or

change in circumstances that are within the control of the lessee.


INITIAL

MEASUREMENT

Right-of-use asset

• Present value (PV) of lease payments + lessee’s initial direct costs

• Initial direct costs: Incremental costs directly attributable to negotiating and

arranging a lease

• Recognize lease incentives as a reduction in the right-of-use asset

Lease liability (LL)

• PV of lease payments

• Private company practical expedient - use risk-free rate to measure LL

SUBSEQUENT

MEASUREMENT

Right-of-use asset

• Amortized cost: Method of amortization depends on lease classification

(finance or operating)

• Impairment: Refer to existing standards (ASC 360)

Lease liability

• Amortized cost: Use the effective interest method

• Private company practical expedient - use risk-free rate to measure LL

LESSEE ACCOUNTING


LESSEE ACCOUNTINGPresentation for Lessees:

Balance Sheet

All leases:

Present separately* or within similar

classes of assets and liabilities with

proper disclosure

*No co-mingling of finance and operating

leases

Income Statement

• Finance: Display interest on lease

liability and amortization of ROU

asset consistently with other interest

and amortization expenses (combine

or separate)

• Operating: Display interest on lease

liability together with amortization

of ROU asset, within income from

continuing operations


OTHER CONSIDERATIONS

► Impairment of net investment

► Modifications – change in lease type

► Components

► Sale/leasebacks

► Leveraged leases

► Alignment of principles with Topic 606


TRANSITION

Lessee & lessor transition

• Modified retrospective approach with hindsight allowed for evaluating renewal

and purchase options on existing leases. No option for full retrospective.

• Significant relief provisions allowed as a policy election – No reassessment of:

‐ Whether any expired or existing contracts are or contain leases

‐ Classification for any expired or existing leases

‐ Initial direct costs for expired or existing leases

• Leveraged lease treatment grandfathered

Sale-leaseback transition

• No reassessment of initial sale/leaseback conclusions

• Specific transition for deferred gains (or losses) related to capital or operating

leases


BALANCE SHEET EXAMPLELease Example

$15,000 of operating leases over next 10 year

(for ease of presentation, does not included discounting)

After

Current New Standard

Assets

Cash 1,000$ -$ 1,000$

Accounts Receivable 1,500 - 1,500

PPE 3,500 - 3,500

Right of Use Asset - 15,000 15,000

Total assets 6,000$ 15,000$ 21,000$

Liabilities

A/P 2,000$ -$ 2,000$

Debt 3,000 - 3,000

Lease Liability - 15,000 15,000

Total Liabilities 5,000 15,000 20,000

Equity 1,000 - 1,000

Total liabilities and equity 6,000$ -$ 21,000$

Liabilities to total equity 5.0 20.0


EXTRAORDINARY ITEMS


ASU 2015-01Extraordinary Items

• Eliminates “extraordinary items” from GAAP

• Items that are unusual AND/OR infrequently occurring to be reported as

separate component of income from continuing operations

• Alternatively, disclose in the footnotes

• Effective for all entities for FYs beginning after 12/15/15 (and interim periods

within); early adoption permitted (beginning of FY only)

• Apply prospectively or retrospectively

• BDO Flash Report:

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2015-

1

• Simplifying Income Statement Presentation by Eliminating the Concept of

Extraordinary Items

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2015-1


DEBT ISSUANCE COSTS


ASU 2015-03Simplifying the Presentation of Debt Issuance Costs

• Debt issuance costs to be reported in the B/S as a direct deduction from the

face amount of the related liability (rather than as an asset)

• Does not address debt issuance costs incurred before an associated liability is

recognized (no change to current practice)

• Effective date (early adoption is permitted):

• Transition: Retrospective

• BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-

april-2015-(1)






12/15/16)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2015-(1)


ASU 2015-15Debt Issuance Costs Related to Line-of-Credit Arrangements

• SEC staff announcement: won’t object when debt issuance costs related to a

revolving debt arrangement are presented as an asset regardless of whether

there is an outstanding balance on the revolving debt arrangement

• ASU codifies the SEC staff announcement

• Effective date: Upon issuance

• BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-

september-2015-(1)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-september-2015-(1)


ASU 2015-15 Debt Issuance Costs – What Will Change

Debt Issuance Cost Example

Debt with $200 issue costs

After

Current New Standard

Assets

Cash 1,000$ -$ 1,000$

Accounts Receivable 1,500 - 1,500

PPE 3,500 - 3,500

Debt Issuance costs 200 (200) -

Total assets 6,200$ (200)$ 6,000$

Liabilities

A/P 2,000$ -$ 2,000$

Other liabilities 200 - 200

Debt 3,000 (200) 2,800

Total Liabilities 5,200 (200) 5,000

Equity 1,000 - 1,000

Total liabilities and equity 6,200$ -$ 6,000$

Debt to Equity Ratio 3.0 2.8


GOING CONCERN


Issued August 27, 2014

• Effective date

- Fiscal years beginning after December 15, 2015

- Prospective

- Early adoption permitted

Requires management to perform interim and annual assessments

• Presume entity is going concern until liquidation is imminent.

• Disclosures required when substantial doubt exists.

ASU 2014-15 - GOING CONCERN


Substantial doubt about an entity’s ability to continue as a going concern:

• Exists when conditions and events considered in the aggregate indicate it is

probable an entity will be unable to meet obligations as they become due

within one year from date financial statement issued and or available to be

issued

Information to be assessed including management’s plans:

• Management should consider mitigating effect of its plans only to the extent

it is probable that plans will

- Mitigate conditions or events giving rise to substantial doubt.

- Be effectively implemented.

ASU 2014-15 - GOING CONCERN


GOING CONCERN - DEFINITION

Going Concern:

An entity’s ability to continue to meet

its obligations as they become due

without:

• Substantial disposition of assets

outside the ordinary course of

business;

• Restructuring debt;

• Externally forced revisions of its

operations; or

• Other similar actions.

Source: AU-C Section 570

Substantial Doubt about an Entity’s

Ability to Continue as a Going Concern:

• Exists when conditions and events,

considered in the aggregate, indicate

that it is probable that the entity will

be unable to meet its obligations as

they become due within one year

after the date that the F/S are

issued (or within one year after the

date that the F/S are available to be

issued when applicable).

• The term probable is used

consistently with its use in FASB Topic

450 on contingencies.

Source: ASC 205-40


MANAGEMENT’S RESPONSIBILITY – ASU 2014-15

Management’s evaluation initially shall not take into consideration potential

mitigating effect of management’s plans that have not been fully implemented as

of the date that the F/S are issued

- E.g. Plans that have been approved but that have not been fully implemented

Consider both qualitative & quantitative information:

a. Entity’s current financial condition, including its liquidity sources (e.g. available

liquid funds and available access to credit)

b. Entity’s conditional and unconditional obligations due or anticipated (regardless of

whether those obligations are recognized in the entity’s F/S)

c. Funds necessary to maintain the entity’s operations considering its current financial

condition, obligations, and other expected cash flows

d. Other conditions and events, when considered in conjunction with (a), (b), and (c)

above, that may adversely affect the entity’s ability to meet its obligations. See

paragraph 205-40-55-2 for examples of those conditions and events.


DISCLOSURE

Management’s Disclosure Requirements (NEW)

If, after considering management’s plans, substantial doubt about an entity’s

ability to continue as a going concern is alleviated, an entity shall disclose:

a. Principal conditions or events that raised substantial doubt about the entity’s

ability to continue as a going concern (before consideration of management’s

plans)

b. Management’s evaluation of the significance of those conditions or events in

relation to the entity’s ability to meet its obligations

c. Management’s plans that alleviated substantial doubt about the entity’s ability

to continue as a going concern.

If substantial doubt is NOT alleviated, the entity shall include a statement in the

footnotes indicating that there is substantial doubt about the entity’s ability to

continue as a going concern within one year after the date that the F/S are issued.

Additionally, the entity shall disclose a. through c. above.


BE ON THE LOOK OUT!

► Ascertain if information in management’s plan is contrary to what

management is asserting or disclosed elsewhere

► Ascertain if the plan is not prudent and feasible, challenge it

► Should not be based upon a “gut” feel from management

► Reject or discount assumptions that cannot be verified

► Incomplete disclosures of going concern situations


RESOURCES


GET TO KNOW BDOBDO commits significant resources to keep our professionals and our clients up to date on

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https://www.bdo.com/member/my-profile


BDO – WEBINARS

Recent Archived Webinars:

• M&A Execution: Planning with Post-Integration in Mind – May 26, 2016

• FASB Makes Good on Simplifying GAAP for Stock Options and Tax Effects in

ASU 2016-09

• Quarterly Technical Update (Q2 2016) – July 11, 12 & 14, 2016

• The New Lease Accounting Standard – May 2016

• How is Your Board Positioned to Respond to Illegal Acts? – May 2016

• Board Diagnostics and Enhancing Your Governance Practices – April 2016

• Quarterly Technical Update (Q1 2016) - April 2016

• Managing Risk: Elevation of Cybersecurity to the Boardroom – February 2016

• The Board’s Role in Emerging Practices in Risk Management – January 2016

• What’s On the Minds of Boards – January 2016

• Quarterly Technical Update (Q4 2015) – January 2016


BDO BOARD GOVERNANCE – PUBLICATIONShttps://www.bdo.com/services/assurance/board-governance/overview

• FASB Exposure Draft on Income Tax Disclosures (ASC 740)

• FASB Clarifies Identifying Performance Obligations and Licenses Guidance in New

Revenue Standard

• SEC Publishes Concept Release on Regulation S-K

• Significant Accounting & Reporting Matters – Q1 2016

• FASB Simplifies Aspects of Accounting for Stock Compensation

• SEC Staff Updates the Financial Reporting Manual

• FASB Clarifies Principal Versus Agent Considerations Under Topic 606

• FASB Simplifies Transitioning to the Equity Method of Accounting

• FASB Issues ASU on Contingent Put and Call Options in Debt Instruments

• FASB Issues ASU on the Effect of Derivative Contract Novations on Existing Hedges

• FASB Issues ASU on Recognizing Breakage for Prepaid Stored-Value Products

• FASB Removes Effective Dates on Private Company Accounting Alternatives

For a complete listing of BDO publications, refer to: https://www.bdo.com/insights/

https://www.bdo.com/services/assurance/board-governance/overview

https://www.bdo.com/insights/


BDO BOARD GOVERNANCE – PUBLICATIONShttps://www.bdo.com/services/assurance/board-governance/overview

• PCOAB Report on Inspection Observations Related to Audit Communications with Audit

Committees

• U.S. IPO Activity Comes to Virtual Halt in Q1 of 2016

• The BDO 600: 2015 Survey of Board Compensation Practices of 600 Mid-Market Public

Companies

• Elevating Cybersecurity to the Board – Questions Board Should Be Asking

• 9 Questions Boards Should Ask About Risk Management

• BDO Shareholder Meeting Alert – March 2016

• The BDO 600: 2015 Survey of CEO and CFO Compensation Practices of 600 Mid-Market

Public Companies

• PCAOB Adopts rules Requiring Disclosure of the Engagement Partner and Other Accounting

Firms Participating in the Audit

• Zero Growth Forecast for U.S. IPOs in 2016

• Proxy Voting Policies Focus on Overboarding

• CAQ Issues 2015 Audit Committee Transparency Barometer

For a complete listing of BDO publications, refer to:


https://www.bdo.com/services/assurance/board-governance/overview



Thank You


BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to

a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active

involvement of experienced and committed professionals. The firm serves clients through over 60 offices and more than 450 independent

alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a

global network of 1,408 offices in 154 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee,

and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the

BDO Member Firms. For more information please visit: www.bdo.com.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s

individual needs.

© 2016 BDO USA, LLP. All rights reserved.

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