Webinar Slides: Accounting and Finance Issues of Technology Companies
Webinar Slides: Implementation Issues of the New Private Company Accounting Alternatives
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Transcript of Webinar Slides: Implementation Issues of the New Private Company Accounting Alternatives
CBIZ & MHM Executive Education Series™ Private Company Council (PCC)
Accounting Alternatives Presented by: Mike Loritz
and Mark Winiarski May 15, 2014
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Before We Get Started…
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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.
External participants will receive their CPE certificate via email immediately following the webinar.
CPE Credit
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The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
Disclaimer
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Today’s Presenters
Mike Loritz, CPA Shareholder, MHM 913.234.1226 | [email protected] Mike has 18 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.
Mark Winiarski, CPA Senior Manager, CBIZ MHM 913.234.1656 | [email protected] Mark has 12 years of experience in an audit and advisory function and is located in our Kansas City office. In addition to serving his clients which are primarily in the manufacturing, retail and distribution industries, Mark supports our Professional Standards Group by consulting with clients and engagement teams across the country on accounting and auditing issues in areas including revenue recognition, consolidations and business combinations.
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Today’s Agenda
1
2
Implementation
3
Goodwill Amortization
4
Interest Rate Swaps
5
Variable Interest Entities
Additional Projects
IMPLEMENTATION
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Private Company Decision-Making Framework
Considerations before adopting any alternative Evaluate if an accounting alternative may be elected
independently of others
Ensure appropriate disclosures are made of private company accounting alternatives
Check with the users of the financial statements
Does the cost-benefit ratio justify adopting the accounting alternative?
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Step 1: Ensure the entity is a qualifying private company
Step 2: Ensure the transaction(s) meets all additional requirements of the accounting alternative
Step 3: Document elections that are required by the accounting alternative and any other applicable US GAAP
Step 4: Apply transition requirements
Step 5: Ensure the financial statement presentation and disclosure requirements are met
Implementation – A Step by Step Approach
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Application to Private Company Alternatives
Accounting alternatives may include only those entities that do not meet the definition of a public business entity, or
May exclude additional entities that are scoped out of the definition (such as not-for-profits and employee benefit plans), or
May exclude some otherwise qualifying entities (such as financial institutions)
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What entities are public business entities? Scope exceptions Not-for-profit entities under ASC Topic 958 Employee benefit plans under ASC Topic 960
through 965
PCC and the FASB could decide to include these entities for accounting alternatives
Definition of a Public Business Entity
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All other entities that meet any one of these five criteria are public business entities 1. Those required by the SEC to file or furnish financial
statements, or does file or furnish financial statements with the SEC.
Including voluntary filers and entities whose financial statements or information
is included in a filing
Definition of a Public Business Entity
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Five criteria continued: 2. Those required by the Securities Exchange Act of
1934, as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
3. Those required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
Definition of a Public Business Entity
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Five criteria continued:
4. Those that issued conduit bonds (or is a conduit bond obligor for securities) that are traded, listed or quoted on an exchange or over-the-counter market.
5. Those with securities not subject to contractual restrictions on transfer, and that by law, contract or regulation is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods).
Definition of a Public Business Entity
ASU 2014-02
ACCOUNTING FOR GOODWILL
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In a return to “the past,” goodwill will once again be amortized over an estimated useful life, which cannot exceed ten years.
Any entity that is not scoped out of the definition of a public business entity and does not meet the definition of a public business entity.
Excludes not-for-profits, employee benefit plans, and public business entities
The FASB has undertaken a project to consider changes to goodwill for all entities.
Accounting for Goodwill
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Without the Alternative • Goodwill is indefinitely lived • Three-step impairment test performed annually at the reporting unit level:
1. Optional qualitative assessment
2. Fair value test of the reporting unit
3. Measurement of impairment loss
With the Alternative • Elect to amortize goodwill
• 10 year period (or shorter) • Amortize all goodwill
• Simplified impairment test only if a triggering event occurs
• Elect perform the impairment test at the entity or reporting unit level
Accounting for Goodwill
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Must amortize all goodwill, including goodwill arising from an equity method investment
Must elect whether to perform an impairment test at the entity or reporting unit level.
Must determine the amortization period
Evaluate whether an impairment test is required for the year of adoption
Impairment testing is required when an event or circumstances occur that indicate that it is more likely than not the fair value of the entity is below its carrying value.
Requirements and Elections
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Effective for periods beginning after December 15, 2014, but may be elected early.
Apply the election prospectively – calculate goodwill amortization starting at the beginning of the year of adoption.
A qualifying private company may elect this alternative for any financial statements not
yet made available for issuance.
Transition
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Presentation and Disclosure
Presentation and disclosure is mostly consistent with existing goodwill, additional disclosures include:
Amortization expense
Accumulated amortization and impairment losses
Information about the amortization period when goodwill is acquired
How impairment loss was allocated to amortizable units of goodwill
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Implementation Challenges
Evaluating the impact of amortization on covenants and other contracts
Determining the amount of goodwill related to an equity method investment
Allocating the impairment loss when if it occurs
ASU 2014-03
ACCOUNTING FOR CERTAIN RECEIVE-VARIABLE, PAY-FIXED
INTEREST RATE SWAPS
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Simplified Hedge Accounting provides a more cost effective method of applying hedge accounting for qualifying transactions.
Effective date is for periods beginning after December 15, 2014.
Early adoption is permitted.
Simplified Hedge Accounting
This alternative can not be elected by an entity that is a public business entity, a not-for-profit entity,
employee benefit plan or financial institution.
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Simplified Hedge Accounting - Advantages
Documentation of the hedging relationship is required, but can occur after the swap is entered into, up until the financial statements are ready for issuance, instead of concurrently. The hedge is assumed to have no ineffectiveness.
The swap may be recorded at settlement value instead of fair value.
Disclosures for the swap may be elected to be presented at settlement value instead of fair value.
Exempts companies for which all of their derivatives qualify for the simplified short-cut method from fair value disclosures required by ASC 825.
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The standard may be adopted for interest rate swaps that meet the following criteria:
1. Debt (hedged cash flows) and swap use the same index and reset period
2. “Plain-vanilla” swap, any floor or cap on the variable interest rate of the swap must be comparable to the same term in the debt
3. Re-pricing and settlement match or differ by no more then a few days
Simplified Hedge Accounting - Requirements
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Criteria continued: 4. Fair value of the swap at inception is at or near zero
5. Swap notional value is equal to or less then the principal of the related debt
6. All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the amount being hedged
Simplified Hedge Accounting - Requirements
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Document the election on a swap by swap basis to use simplified-hedge accounting and that the swap meets all of the criteria
Document the election to record and disclose the swap at settlement value or fair value
Elect to adopt using the retrospective approach or a modified retrospective approach
Documentation and Elections
ASU 2014-07
APPLYING VARIABLE INTEREST ENTITY GUIDANCE TO COMMON
CONTROL LEASING ARRANGEMENTS
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Variable Interest Entity model requires consolidation when the following conditions are met:
A reporting entity has a variable interest that absorbs losses or receives benefits of the VIE that could be significant to the VIE, and
Has the power to direct the activities that most significantly impact the VIE’s economic performance
In many cases, a reporting entity has consolidated a commonly controlled lessor entity under this guidance.
Variable Interest Entity and Common Control Leasing Arrangements
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Variable Interest Entity and Common Control Leasing Arrangements
Cindy
Distribution, Inc. (Reporting Entity) Lease, LLC
100% of equity
100% of equity
Guaranty
Lease
Bank
Debt
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Variable Interest Entity and Common Control Leasing Arrangements
A qualifying private company does not have to evaluate a qualifying lessor entity for consolidation under the VIE model
The alternative is applied to all qualifying lessor entities
The adoption is applied retrospectively -> prior financial statements are changed to show the effect of the election
The financial statements include enhanced disclosures
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1) The lessor entity and the private company are under common control,
2) The private company has a lease arrangement with the lessor entity,
3) Substantially all the activity between the two entities is related to the leasing activities between the two entities, and
4) If the private company explicitly guarantees or provides collateral for obligations of the lessor entity, then the principal amount of the obligation must be less then the value of the asset at inception of the guarantee.
Requirements
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Other Applicable GAAP
Unlike the other alternatives, a private company must apply other US GAAP to a qualifying lessor entity. Other consolidation guidance
Lease accounting
Accounting for guarantees
Accounting for joint and several obligations
Accounting for investments
Related party disclosures
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Transition
Effective for periods beginning after December 15, 2014, but may be elected early
Must apply the retrospective approach Deconsolidation, if required, for all periods presented Apply the impact of deconsolidation and other applicable
GAAP to beginning equity
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Implementation Challenges
Evaluating the impact of the adoption on financial covenants, contracts and expectations of users of the financial statements.
Evaluating whether the value of the collateral property is greater than the principal of a debt obligation of the lessor guaranteed by the reporting entity.
Computing the impact of other applicable US GAAP over multiple periods.
Evaluating common control…
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Variable Interest Entity and Common Control Leasing Arrangements
Cindy
Distribution, Inc. (Reporting Entity) Lease, LLC
100% of equity
25% of equity
Guaranty
Lease
Bank
Debt
Cindy’s Uncle
75% of equity
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Implementation Challenges - Evaluating Common Control
The SEC staff concluded common control exists when: An individual or enterprise holds more than 50 percent of the
voting ownership of each entity A group of shareholders holds more than 50 percent of the
voting ownership of each entity and have contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists
Immediate family members (i.e. married couples and their children, but not their grandchildren) hold more than 50 percent of the voting ownership interest of each entity…and there is no evidence those family members will not vote their shares in concert.
The FASB and PCC have said that the definition of common control is broader then the SEC interpretation
ADDITIONAL PROJECTS
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PCC Issue No. 13-01A
Accounting for Identifiable Intangible Assets in a Business Combination
Intent is to reduce the cost incurred to account for the acquisition of an entity
Two views are being researched:
Recognize only intangible assets that are capable of being sold or licensed independent of the other assets of the business
Includes rebuttable presumption of which assets qualify
Exclude non-compete agreements and customer related intangibles (that cannot be independently licensed or sold) from recognition
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PCC Issue No. 14-01
Definition of a Public Business Entity (phase 2)
The intent is to harmonize the many definitions of public business entities within U.S. GAAP.
This could impact whether an entity qualifies for scope limitations, reduced disclosures and delayed effective dates for various standards.
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Questions?
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Join us for these courses: June 16: Repeat broadcast May 20: Is an ESOP Right for Your Company? May 27, June 12 & June 25: Is Your Company Ready for the New
Revenue Recognition Standards?
Read these related publications: Changes to the Accounting for Interest Rate Swaps used in Hedging
Relationships - Private Companies Changes in Accounting for Goodwill for Private Companies Accounting Election for Common Control Leasing Arrangements
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