Year-End Update From the SEC, PCAOB and FASB - FEI Houston...FASB ASU No. 2015-01 – Extraordinary...
Transcript of Year-End Update From the SEC, PCAOB and FASB - FEI Houston...FASB ASU No. 2015-01 – Extraordinary...
Year-End Update From the SEC,
PCAOB and FASB
January 19, 2016
Agenda for Today
• Topics to Discuss:
– Update from AICPA Conference on Current SEC & PCAOB
Developments
– ASU FASB Updates for 2015 and 2014
– Leases
– Revenue Recognition
– Private Company Council Reporting Update
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Conference Themes
SEC very pleased with PCAOB
– Restatements down
Desire for more “credible” reporting
– Segments
– MD&A
– Disclosures
– ICFR
2014 – 874
2015 – 541
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SEC
Initiatives
• Segments – taking deep dive
– Discreet financial information (CODM) • May be adequate with only gross profit
• Even if costs below shared/allocated
(point is not to conclude not a segment if unable to
produce full set of financial information)
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SEC
Segments (continued)
• Reassess periodically; consider: – Organization structure changes
– Significant acquisitions/dispositions
– Change on CODM
– Reconcile w/ executive pay
– Congruent w/ budgeting
• Consider aggregation when all are true: – Operating segments have similar economic characteristics
– Operating segments are similar with respect to qualitative criteria
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SEC
Segments (continued)
– ICFR Over Process
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SEC
ICFR
• Segments
• Income taxes – Use of specialist; ownership by Company
• Governance – Audit committees “gate-keeper” for investors and should not be
management advocates
• Material Weakness should consider: – Likelihood (what COULD occur)
– Magnitude
– Nature and severity of weakness
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SEC
Auditor Independence
• Watch scope creep
• Non-audit services (w/out pre-approval)
• Preparing financial statements
• Preparing tax provisions
• Computer system installations
• Work for RP’s – Affiliates – Board Members
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SEC
Disclosures
• Common deficiencies – Transparency surrounding tax planning strategies
– Transparency surrounding permanently reinvested funds
– Valuation assumptions & methodologies
• Tabularize narrative information w/ significant numerical data
Restatements
• Debt versus equity treatment
• Statement cash flow classifications and presentations
• Income tax disclosures
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SEC
MD&A
• Make sure “story” is consistent – Financial statements
– MD&A
– Internal story – press releases, etc.
• Fresh look each year versus filling in blanks
• Use of metrics and KPIs
• Non-GAAP measures – Very good reasons why important and useful to reader
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SEC
MD&A (continued)
• MD&A is forward looking (while F/S are back)
• OK to reference to F/S from MD&A, but never refer to MD&A from F/S
• Strong recommendation to use trends to tell story (don’t simply use year-over-year)
• Tell WHY; not just what
• If estimates change, be transparent on why change occurred
Litmus test: potential investors awakens and reads – complete story understood?
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SEC
Enforcement
• 500+ actions in 2015 – 23%
• Financial reporting and auditing violations a focus
• Actively pursuing audit firms for: – Violating independence
– Lack of adequate audit evidence
– Inadequate documentation of audit findings
– Inadequate support of judgmental and subjective issues
– Inadequate testing of valuation assumptions
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SEC
Enforcement (continued)
• ICFR lacking
• Renewed emphasis of earnings management cases
• Accounting issues, most frequently:
– Revenue recognition
– Complex financial instruments
– Valuation issues and assumptions
– Inadequate or misleading disclosures
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SEC
Miscellaneous
• Pursuing IFRS disclosure without reconciliation
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PCAOB Developments
PCAOB
• Focus Areas for 2016 – ICFR
• Auditors often only considering errors found
• Need to assess control effectiveness on “Potential” errors
– Assessing and responding to Risks of Material Misstatement (RMM)
– Accounting estimates
– Segments • ICFR over process
• CODM identification
– Income taxes • ICFR over process
• Disclosure around indefinite reinvestment
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PCAOB Developments
PCAOB
• Focus Areas for 2016 – Related party transactions
• Auditors need to improve identification
• RP’s often part of frauds
– Auditing work of specialists • Auditors must audit inputs
– Going concern
– M & A
– Cybersecurity
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PCAOB Developments
Miscellaneous
• Adoption of Form AP
– Auditor to file within 35 days of rendering auditor’s report
– Names audit partner
– Identifies other firms that participated in the audit (5% audit
hours)
– Effective 2017
• Pursuing Critical Audit Matters
– Proposed as part of auditor’s report
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Learning Objectives
• ASU FASB Updates for 2015 and 2014
• Leases
• Revenue Recognition
• Private Company Council Reporting Update
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Debt Issuance Costs – ASU 2015-03
• Relates to debt issuance costs or costs incurred to
obtain debt
• Not defined as an asset
• Classify as a reduction of the related debt liability
• Does change the income statement treatment
• Line of Credit arrangements (ASU 2015-15) allowed
to continue to present as an asset.
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Debt Issuance Costs – ASU 2015-03
• Public Business Entities: fiscal years beginning
after 12/15/2015, and interim periods within those
years
• Private Entities: fiscal years beginning after
12/15/2015,
• Early adoption is permitted
• Retrospective application required
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Customer Accounting for Cloud Computing
Fees – ASU 2015-05
• A hosting arrangement is defined as when an end user
of the software does not take possession of the
software. Instead, the software application resides on
the vendor’s or a third-party’s hardware, and the
customer accesses and uses the software on an as-
needed basis over the Internet or via a dedicated line.
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Customer Accounting for Cloud Computing
Fees – ASU 2015-05
• Under the new standard, fees paid by a customer
will be within the scope of the internal-use software
guidance if both of the following criteria are met:
– The customer has the contractual right to take possession of the
software at any time during the CCA period without significant
penalty.
– It is feasible for the customer to run the software on its own
hardware (or to contract with another party to host the software).
Customer Accounting for Cloud Computing
Fees – ASU 2015-05
• If you meet both the criteria then you record as
fixed asset – Software and amortize to depreciation/
amortization expense.
• If you do not meet the criteria then record as a
Prepaid Asset and amortize to operating expense.
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Customer Accounting for Cloud Computing
Fees – ASU 2015-05
• The new standard is effective for public companies
for annual periods, including interim periods within
those annual periods, beginning after December 15,
2015.
• For private companies, it is effective for annual
periods beginning after December 15, 2015.
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Balance Sheet Classification of
Deferred Taxes – ASU 2015-17
• Current GAAP requires the deferred taxes to be presented as a net current asset or liability and net noncurrent asset or liability.
• New guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.
• Cannot offset DTA/DTLs for different tax paying components or jurisdictions
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Balance Sheet Classification of
Deferred Taxes – ASU 2015-17
• The new guidance will be effective for public
business entities in fiscal years beginning after
December 15, 2016.
• For Private entities, the amendments are effective
for fiscal years beginning after December 15, 2017.
• Early adoption is permitted
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Going Concern – ASU 2014-15
• What does going concern mean?
– In preparing financial statements under GAAP, there is a
presumption that an entity will “continue as a going concern”
– There are instances in which there is “substantial doubt about an
entity ability to continue as a going concern”
• Why: Currently, there is no guidance in GAAP
regarding management’s responsibility to evaluate
whether there is substantial doubt.
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Going Concern – ASU 2014-15
• Auditors are required to assess whether an entity can
continue as a going concern for 12 months after the
balance sheet date.
• New rules require:
– Management should evaluate whether its probable an entity can meet
its future obligations for 12 months after the financial statements are
issued.
– If conditions exist, disclosure is required concerning management’s
plans to alleviate the substantial doubt or conditions.
– Require an evaluation every reporting period including interim periods
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Going Concern – ASU 2014-15
Going concern disclosures:
• Conditions that raised substantial doubt issue
• Managements evaluation of the significance of the
conditions and events
• Management’s plans that alleviated substantial doubt
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Going Concern – ASU 2014-15
• Public business entities: Fiscal years, and interim
periods within those years, beginning after 12/15/2015
• Private entities: Fiscal years beginning after
12/15/2016
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Discontinued Operations – ASU 2014-08
• What is Discontinued Operations?
– A component of an entity that has been disposed of or is held for
sale
• Why:
– Too many small disposals qualify as discontinued operations
– Disclosures can be onerous and time consuming
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Discontinued Operations – ASU 2014-08
• Main Provisions:
– Under the new guidance, a discontinued operation is defined as
a component or group that: • Has been disposed of or is classified as held for sale and
• Represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results.
– Strategic shift could include: • (i) a major geographical area of operations,
• (ii) a major line of business,
• (iii) a major equity method investment, or
• (iv) other major parts of an entity.
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Discontinued Operations – ASU 2014-08
• When:
– Prospectively for annual periods in fiscal years beginning after
12/15/14.
– 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.
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FASB ASU No. 2015-01 – Extraordinary Items
• Companies could present an item net of tax on the
income statement that was extraordinary which is both:
– Infrequent
– Unusual in nature
• Eliminates the concept and presentation guidance of
extraordinary items
• Effective date
– Annual periods beginning after December 15, 2015
– Early adoption permitted
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FASB ASU No. 2014-17: Business Combinations (Topic
805): Pushdown Accounting
• Applies to the standalone separate financial statements of an acquired entity, both public and nonpublic, that is a business or nonprofit activity, upon the occurrence of an event in which an acquirer obtains control of the acquired entity.
• Objective is to provide guidance on when and how an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. – This subject is not currently addressed in the codification
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FASB ASU No. 2014-17: Business Combinations
(Topic 805): Pushdown Accounting
• Allows an acquired entity the option to apply
pushdown accounting
• Effective date
– November 18, 2014
– Applicable to future acquisitions or most recent acquisitions
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Lease Exposure Draft
• Why are they issuing this new standard?
– Existing lease accounting does not meet users’ needs • accounting depends on classification
• contractual rights and obligations (assets and liabilities) are off balance
sheet
• many users adjust financial statements
– Structuring opportunities • current lease classification often based on bright lines
• significant difference in accounting on either side of operating/finance
lease line
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Lease Exposure Draft
• Who does this apply to?
– All leases. (with limited exceptions of leases of intangibles)
– Includes capital and operating leases
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Lease Exposure Draft
• What are the major provisions?
– All leases (except certain short term leases) would be presented
on the balance sheet • DR. Right of Use Asset
• CR. Liability
– Short-term leases would be defined as a lease with a potential
maximum period of 12 months or less
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Lease Exposure Draft
• Two types of leases
– Type A (Capital or Finance Lease) - Accelerated leases –
Lessee consumes more than insignificant portion of leased asset
– Type B (Operating Lease) - Straight-Line lease – Lessee does
not consume more than insignificant portion of leased asset
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Lease Exposure Draft
• Type A – Capital/Finance Lease
• Accelerated leases – Lessee consumes more than
insignificant portion of leased asset
– Lease term is major part of economic life of asset
– PV of lease payments is substantially all of FV of asset
– Examples: Airplane with a 10 year lease; Vehicle lease,
equipment loans, etc.
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Lease Exposure Draft
• Type B – Operating Lease
• Straight-Line lease – Lessee does not consume
more than insignificant portion of leased asset
– Lease term is insignificant relative to economic life of asset
– PV of lease payments is insignificant relative to FV of asset
– Example: Land or building
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Lease Exposure Draft
• Accounting for each type of lease:
– Both leases will have a ROU Asset and Liability at inception • Calculate the PV of all future cash payments
– Finance Lease- Accelerated method: • Recognize amortization expense and interest expense (financing
transaction)
– Operating - Straight-line method • Recognize lease expense
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Lease Exposure Draft
• Agreements with lease and non-lease components
– Separate the non-lease components and expense as incurred
– Elect an accounting policy to combine lease and non-lease
components as a single lease component
• Taxes and Insurance
– Activities or costs that do not transfer a good or service to the
lessee are not components in a lease contract
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• Present Value of Future lease payments =
– Fixed Payments (less lease incentives)
– Variable lease payments (CPI)
– Variable items, if applicable, and reasonable certain to exercise –
Termination penalties, Purchase options, Residual Value
Guarantees
– @ Discount rate – Use the rate implicit in the lease. If not
determinable, can use the lessee incremental borrowing rate.
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Lease Exposure Draft
• Lease Term =
– Noncancellable lease period
– Optional renewal periods if reasonable certain to exercise
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Lease Exposure Draft
Leases: Next Steps
• FASB is targeting January 2016 for final standard
• Estimated target of 2019 for Public Co’s and 2020
for private
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FASB ASU No. 2014-09 – Revenue from Contracts with
Customers (Topic 606)
• Issued May 28, 2014
• Creates FASB ASC 606
– Revenue from Contracts with Customers
• Eliminates FASB ASC 605
– Revenue Recognition
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Revenue From Contracts with Customers – ASU 2014-
09
• Joint Project between FASB and IASB
• US GAAP
– Many standards (over 100)
– Significant Industry specific guidance
• IFRS
– Two key standards: IAS 18, Revenue and IAS 11, Construction
Contracts
– Little industry guidance
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Revenue From Contracts with Customers – ASU 2014-
09
• Why?
– The new standards will be more principle based (i.e.: IFRS)
– Will be consistent across industries (i.e.: Construction
Contractors, Software, Airlines, etc.)
– Will take time for interpretations and practices to evolve
– More judgment and estimates involved in the recognition
process
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Revenue From Contracts with Customers – ASU 2014-
09
• Applies to:
– Contracts with customers
– Gain/loss recognition on sale of some nonfinancial assets
(intangibles and PP&E)
– Certain nonmonetary exchanges
– Many industry specific transactions such as real estate sales
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Revenue - ASU No. 2014-09
The following topics are scoped out:
• Lease contracts
• Insurance contracts
• Financial instruments
• Guarantees
• Non-monetary exchanges
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5-Step Recognition Process
1. Identify the contract(s) with the customer – Some contracts would be combined and accounted for as one contract (change orders)
2. Identify the separate performance obligation(s) – Good services and separate components
3. Determine transaction price – Estimate variable consideration at expected value or most likely amount (unapproved
amounts)
4. Allocate the transaction price – Estimate selling prices if they are not observable
– Residual estimation techniques may be appropriate
5. Recognize revenue – To recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service (that is, when the customer obtains control)
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Revenue Recognition Observations
• Software, technology, media and multiple deliverable revenue generation will be impacted the most
• Construction contractors – Completed contract method is no longer acceptable
– Non-refundable fees a focus
– Determination if a service and product are highly related (one deliverable)
– Manufacture an asset with an alternative use
• More estimation of variable consideration (i.e.: rebates, discounts, penalties, interest)
• Bill and Hold
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PCC Responsibilities
• PCC Responsibilities?
– The Private Company Council (PCC) has two principal
responsibilities: • The PCC and FASB, working jointly, will review and propose rule
alternatives within U.S. GAAP to address the needs of users of private
company financial statements.
• The PCC also serves as the primary advisory body to the FASB on the
appropriate treatment for private companies for items under active
consideration on the FASB’s technical agenda.
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PCC Standards
• ASU No. 2013-012, Definition of a Public Business
Entity:
– Required to file F/S w/ the SEC
– Required to file F/S w/ a foreign or domestic regulator in preparation for
selling or issuing securities that are not subject to contractual
restrictions on transfer
– Has securities that are traded, listed, or quoted on an exchange or
over-the-counter market
– Has securities that are not subject to contractual restrictions on transfer,
and it is required by law, contract, or regulation to prepare U.S. GAAP
F/S and make them publicly available on a period basis
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PCC Standards – Goodwill
• Goodwill – ASU 2014-02
– Cost and complexity of applying goodwill impairment testing
– Elect 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.
– Qualitative test
– Elect to amortize goodwill over 10 years
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Accounting for Intangible Assets in a Business
Combination – ASU 2014-18
• Why
– Reduces the cost and complexities in determining identifiable
intangible assets in a business combination (i.e.: customer lists)
• Main Provisions
– Customer-related intangible assets unless they are capable of
being sold or licensed independently from the other assets of the
business and;
– Non-compete agreements
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Accounting for Intangible Assets in a Business
Combination – ASU 2014-18
• An entity that elects the accounting alternative in
this Update must adopt the private company
alternative to amortize goodwill as described in
ASU No. 2014-02, Intangibles—Goodwill and Other.
• However, an entity that elects the accounting
alternative in ASU 2014-02 is not required to adopt
the amendments in this Update.
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Questions?