FASB Update
Rahul Gupta
Project Manager
Financial Accounting Standards Board
August 14, 2013
The views expressed in this presentation are those of the presenter.
Official positions of the FASB and IASB are reached only after extensive due process & deliberations.
1
Topics
 FASB projects
–Recent Standards
–Going Concern
–Definition of a Public Business Entity
 EITF Issues
 Private Company Council
2
Topics
 Joint projects with the IASB
–Financial Instruments
»Classification & Measurement
»Impairment
–Revenue Recognition
–Leases
–Insurance
3
Recent Standards
Accounting Standards Update
Effective Dates
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 (a consensus of the FASB Emerging Issues Task Force)
Fiscal years and interim periods
within those years beginning after
December 15, 2013. Nonpublic
entities: after December 15, 2014.
Update No 2013-10—Derivatives and Hedging (Topic 815):
Inclusion of the Fed Funds Effective Swap Rate (or Overnight
Index Swap Rate) as a Benchmark Interest Rate for Hedge
Accounting Purposes (a consensus of the FASB Emerging
Issues Task Force)
Qualifying new or redesignated
hedging relationships entered into
on or after July 17, 2013
Update No. 2013-09—Fair Value Measurement (Topic 820):
Deferral of the Effective Date of Certain Disclosures for
Nonpublic Employee Benefit Plans in Update No. 2011-04
Effective July 2013
Update No. 2013-08—Financial Services—Investment
Companies (Topic 946): Amendments to the Scope,
Measurement, and Disclosure Requirements
Interim and annual reporting
periods in fiscal years beginning
after December 15, 2013
4
Recent Standards
Accounting Standards Update
Effective Dates
Update No 2013-07—Presentation of Financial Statements
(Topic 205): Liquidation Basis of Accounting
Annual reporting periods
beginning after December 15,
2013, and interim reporting
periods therein
Update No. 2013-06—Not-for-Profit Entities (Topic 958):
Services Received from Personnel of an Affiliate (a consensus
of the FASB Emerging Issues Task Force)
Fiscal years beginning after June
15, 2014, and interim and annual
periods thereafter
Update No 2013-05—Foreign Currency Matters (Topic 830):
Parent’s Accounting for the Cumulative Translation Adjustment
upon Derecognition of Certain Subsidiaries or Groups of Assets
within a Foreign Entity or of an Investment in a Foreign Entity (a
consensus of the FASB Emerging Issues Task Force)
Fiscal years (and interim reporting
periods within those years)
beginning after December 15,
2013. Nonpublic entities: annual
period beginning after December
15, 2014, and interim and annual
periods thereafter
5
Recent Standards
Accounting Standards Update
Effective Dates
Update No. 2013-04—Liabilities (Topic 405): Obligations
Resulting from Joint and Several Liability Arrangements for
Which the Total Amount of the Obligation Is Fixed at the
Reporting Date (a consensus of the FASB Emerging Issues
Task Force)
Fiscal years, and interim periods
within those years, beginning
after December 15, 2013.
Nonpublic entities: fiscal years
ending after December 15, 2014,
and interim periods and annual
periods thereafter.
Update No 2013-03—Financial Instruments (Topic 825):
Clarifying the Scope and Applicability of a Particular Disclosure
to Nonpublic Entities
February 2013
Update No. 2013-02—Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income
Reporting periods beginning after
December 15, 2012; Nonpublic
entities: December 15, 2013
Update No 2013-01—Balance Sheet (Topic 210): Clarifying the
Scope of Disclosures about Offsetting Assets and Liabilities
Fiscal years beginning on or after
January 1, 2013, and interim
periods within those annual
periods
6
Going Concern
7
Going Concern - Background
 Going Concern (GC) presumption is critical to
financial reporting
 Today, auditors are responsible for assessing
uncertainties about the GC presumption
 U.S. GAAP has no guidance on management’s
disclosures of GC uncertainties
 Proposal intended to reduce diversity,
standardize disclosure timing & content
 ED issued in June 2013; comment period
concludes September 24, 2013
8
Management’s Assessment of GC
Uncertainties
Proposed model:
 Management at each reporting period would assess an
entity’s potential inability to meet its obligations
 Start disclosures if it is more-likely-than-not that an
entity will not meet obligations in 12 months, or
known/probable that it will not meet obligations in 24
months
 Do not consider mitigating impact of plans outside the
normal course of business
 If likelihood reaches probable (considering all plans),
declare substantial doubt (SEC filers only)
9
Definition of a Public Business Entity
10
Definition of a Public Business Entity
Issue: Multiple definitions of Nonpublic
Entity and Public Entity in U.S. GAAP
Objectives
 Clarify organizations within the scope of
private company decision making framework
for potential modifications to U.S. GAAP
 Simplify & increase comparability
11
Public Business Entity Definition
A business entity that meets any one of the following
criteria:
 It is required by the U.S. SEC to file/furnish financial
statements, or does file or furnish financial statements,
with the U.S. SEC (including entities whose financial
statements or financial information are required to be or
are included in a filing).
 It is required by the Securities Exchange Act of 1934, as
amended, or rules and regulations promulgated
thereunder, to file/furnish financial statements with a
regulatory agency.
 It is required to file/furnish financial statements with a
regulatory agency for purposes of issuing securities to
be traded in a public market.
12
Public Business Entity Definition
A business entity that meets any one of the following
criteria:
 It has (or is a conduit bond obligor for) unrestricted
securities that are traded or can be traded on an
exchange or an over-the-counter market.
 Its securities are unrestricted, and it is required to
provide U.S. GAAP financial statements to be made
publicly available on a periodic basis pursuant to a legal
or regulatory requirement.
This excludes a not-for-profit entity or an employee benefit
plan within the scope of Topics 960 through 965 on plan
accounting.
13
Definition of a Private Company
Next steps
 Issuance of an Accounting
Standards Update in August
2013
 Would not affect existing
requirements.
 Comment period ending
September 2013
14
Financial Accounting Standards Board
EITF
15
EITF Consensuses Out for Comment
Consensus
Comment Deadline
Proposed Accounting Standards Update—Receivables—
Troubled Debt Restructurings by Creditors (Subtopic 31040): Reclassification of Collateralized Mortgage Loans upon
a Troubled Debt Restructuring
September 17, 2013
Proposed Accounting Standards Update—Service
Concession Arrangements (Topic 853)
September 17, 2013
Proposed Accounting Standards Update—Consolidation
(Topic 810): Measuring the Financial Liabilities of a
Consolidated Collateralized Financing Entity
September 17, 2013
16
EITF―Open Issues
12-F: Recognition of New Accounting Basis (Pushdown) in Certain Circumstances
13-B: Accounting for Investments in Tax Credits
13-D: Determining Whether a Performance Target That Is Allowed to Be Met after the
Requisite Service Period Is a Performance Condition or a Condition That Affects the GrantDate Fair Value of the Awards
13-F: Accounting for the Effect of a Federal Housing Administration Guarantee
17
Private Company Council
18
Private Company Council: Projects

Accounting for identifiable intangible assets
in a business combination (Issue 13-01A)

Accounting for goodwill subsequent to a
business combination (Issue 13-01B)

Applying variable interest entity guidance to
common control leasing arrangements
(Issue 13-02)

Accounting for Certain Receive-Variable,
Pay-Fixed Interest Rate Swaps (Issue 13-03)
Next Meeting: September 2013
19
PCC Issue 13-01A Proposed Changes
Accounting for Identifiable Intangible Assets in a
Business Combination
 Modifies requirement for private companies to
separately recognize fewer intangible assets
acquired in a business combination
 Enables private companies to recognize only those
intangible assets arising from noncancelable
contractual terms or assets from other legal rights
 Other intangible assets would not be recognized
separately from goodwill even if separable
20
PCC Issue 13-01B Proposed Changes
Accounting for Goodwill Subsequent to a Business
Combination
 Goodwill amortized for a period not to exceed 10
years, and tested for impairment only when a
triggering event occurs
 Goodwill tested for impairment at the companywide level as compared to the current requirement
to test at the reporting unit level
 Impairment testing would also involve a one step
approach as opposed to two-step approach
21
PCC Issue 13-01B Proposed Changes
Accounting for Goodwill Subsequent to a Business
Combination
 Step two of the current impairment test, which
requires the application of a hypothetical purchase
price allocation to calculate the goodwill
impairment amount, would be eliminated
 Instead, the goodwill impairment amount would
represent the excess of the company’s carrying
amount over its fair value
22
PCC Issue 13-02 Proposed Changes
Applying Variable Interest Entity Guidance to Common
Control Leasing Arrangements (FIN 46(R)/FAS 167)
 Exempts private companies from applying the
consolidation guidance for variable interest entities
under common control leasing arrangements
– If substantially all activities between private company
and lessor are involved with leasing activities of the
lessor
 When the arrangement between a private company
lessee and a lessor entity meets certain conditions,
the private company lessee can elect the alternative
23
PCC Issue 13-02 Proposed Changes
Applying Variable Interest Entity Guidance to Common
Control Leasing Arrangements (FIN 46(R)/FAS 167)
 Conditions to qualify for alternative
a) Lessor entity and the private company lessee are
under common control
b) Company lessee has a leasing arrangement with the
lessor entity
c) Substantially all of the activity between the two entities
is related to the leasing activity of the lessor entity
– Ex: guarantee on the lessor entity’s mortgage on a
leased asset
24
PCC Issue 13-03 Proposed Changes
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swaps
 Gives private companies the option to use two
simpler approaches to accounting for certain types
of interest rate swaps that are entered into the
purposes of economically converting its variablerate borrowing to a fixed-rate borrowing
1. Combined instruments approach
2. Simplified hedge accounting approach
25
PCC Issue 13-03 Combined Instruments
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swaps
 An accounting alternative to account for a swap
and a variable-rate borrowing as one combined
financial instrument. I
 Swap would not be recorded in the company’s
financial statements (except for the period-end
accrual relating to the next swap settlement)
26
PCC Issue 13-03 Combined Instruments
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swaps
 Applied provided certain criteria are met:
– Swap term approximates the term of the borrowing and
the swap becomes effective at the same time as the
borrowing.
– Approach would be applicable to all of its swaps,
whether entered into on or after the date of adoption or
existing at that date, provided that the requirements of
applying this approach otherwise are met.
 Under this approach the settlement value of the
swap would be disclosed in the notes to the
financial statements.
27
PCC Issue 13-03 Simple Hedge Accounting
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swaps
 Practical expedient to qualify for hedge accounting
 Criteria to qualify for simplified hedge accounting
similar to combined instruments approach criteria
– However, term of the swap could be shorter than the
term of the borrowing and the swap does not have to
become effective at the same time as the borrowing
28
PCC Issue 13-03 Simple Hedge Accounting
Accounting for Certain Receive-Variable, Pay-Fixed
Interest Rate Swaps
 Under approach, swap and the related borrowing
would continue to be accounted for as two separate
financial instruments
– However, no ineffectiveness would be assumed for
qualifying swaps designated in a hedging relationship
 Designated swap may be recorded at settlement
value in the company’s financial statements instead
of at fair value
29
Joint FASB/IASB Projects
30
Financial Instruments
31
Financial Instruments: Overview




Improve decision usefulness
Reduce complexity
Convergence
Three phases:
‒ Classification & Measurement
‒ Impairment
‒ Hedge Accounting
32
Financial Instruments: Status
FASB
IASB
Exposure Draft on Classification
and Measurement issued in
February 2013
Amendments to IFRS 9 on
Classification & Measurement
exposed November 2012
Exposure Draft on Impairment
issued in December 2012
Exposure Draft on Impairment
issued March 2013
Hedging likely to begin in 2013
Review Draft on Hedging posted
until December 2012
33
Financial Instruments:
Classification & Measurement
34
Classification & Measurement: Timeline
Fall 2010 –
December 2012
Re-deliberations &
Outreach
May 2010
Exposure
Draft
June – Sept
2010
Outreach
1H 2013
Outreach
Feb 2013
Exposure
Draft
June 2013
Begin
Re-deliberations
35
Classification & Measurement: Background
FASB Exposure Draft (May 2010)
 Fair value model
 Feedback:
 Key aspects opposed
 Lack of convergence
Joint Redeliberations (Jan 2012)
 FASB’s tentative model
 Guidance in IFRS 9
 Converged in principle
36
Classification & Measurement:
FASB Proposal
37
Classification & Measurement:
Financial Assets
Classified in one of three categories:
 Amortized cost—financial assets with solely payments of principal
and interest that are held for the collection of contractual cash flows
 Fair value through other comprehensive income (OCI)—
financial assets with solely payments of principal and interest that
are both held for the collection of contractual cash flows and for
sale
 Fair value through net income—financial assets that do not
qualify for measurement at either amortized cost or fair value
through other comprehensive income. (residual category)
38
Classification & Measurement:
Financial Assets
Equity investments
 Equity investments measured at fair value through net income
 Practicability exception – No readily determinable fair value
• Observable price changes in orderly transactions for the
identical or similar assets of the same issuer
• One-step impairment model
Hybrid Financial Assets
 No bifurcation
 Apply solely principal & interest test to entire instrument
39
Classification & Measurement:
Financial Liabilities
Generally amortized cost, unless:
 Business strategy is to transact at fair value
 Short sale
 Nonrecourse debt
Hybrid Financial Liabilities
 Bifurcation and separate accounting of embedded derivatives
based on existing U.S. GAAP
40
Classification & Measurement:
Fair Value Disclosure
Public Companies
 Financial assets & financial liabilities measured at amortized cost
 Parenthetical presentation of fair value on the face of the balance
sheet
• Except for receivables/payables due in less than a year and
demand deposit liabilities
Private Companies
 NOT required to disclose fair value information either parenthetically
or in the notes to the financial statements.
41
Financial Instruments:
Impairment
42
Impairment: Timeline
Feb 2011 –
October 2012
Re-deliberations
& Outreach
May 2010
Exposure
Draft
January 2011
Supplementary
Document
1H 2013
Outreach
December
2012
Exposure
Document
2H 2013
Re-deliberations
43
Impairment: Project Objectives
Timely Recognition of Credit
Losses
- Address concerns about
delayed recognition of losses
under incurred loss approach
- Present value of cash flows an
entity expects to collect
consistent with classification &
measurement objective for
assets held for collection
- Single model for loans and debt
securities
44
Impairment: Project Objectives
Separate Presentation of Interest
Income & Credit Losses
- Rate of return includes lender
compensation for credit risk
inherent in debt instrument
- Investors want separate
presentation of credit losses from
interest income (“decoupled”
approach)
- Effective rate as discount rate (in a
DCF approach) isolates credit loss
& does not introduce noise related
to market changes
45
Impairment: Basics of FASB Model
 Every reporting period, expected credit losses would be
re-estimated
- Favorable and unfavorable changes reported in earnings
 Current estimate of expected credit losses based on:
- current risk ratings of the assets
- historical loss experience for assets with similar risk
ratings and remaining lives adjusted for changes in
current circumstances
- reasonable & supportable expectations about the
future
46
Impairment: Basics of FASB Model
Expected losses are inherent in groups of similar
assets; inability to identify which asset will deteriorate
should not interfere with timely recognition of losses
that are expected in the individual assets held
47
Impairment: Basics of FASB Model
FASB used term “full” rather than
“lifetime” to avoid suggesting that
projections through the remaining
life are necessary.
Rather, we expect estimates will
start with historical information,
and be adjusted using available
information that indicates that
current expectations differ from
past experience
48
Impairment:
Debt Securities and FV-OCI Assets
 Same approach as loans
 As a practical expedient, entity may elect not to
recognize expected credit losses for financial assets
classified at FV-OCI when both of the following conditions
are met:
- FV of financial asset is greater than amortized cost basis
- Expected credit losses on financial asset are insignificant
 For high-quality assets; cost-benefit consideration
49
Impairment:
Purchased Credit Impaired (PCI) Assets
 Common issue for business combinations & portfolio
transfers; current U.S. GAAP is complex & confusing
 Same approach to estimating expected credit losses as
originated and non-PCI assets
 Initial estimate of expected credit losses is recognized
as an adjustment to the cost basis of the asset (an
allowance) and would not be recognized as interest
income
50
Impairment: Summary
A model that leverages existing internal credit risk
management tools and systems (inputs will change)
A consistent measurement approach throughout the
portfolio with no barriers or thresholds for recognition
An approach for PCI assets that is
 less complex and costly to implement
 easier to explain to investors
51
Revenue Recognition
52
Revenue Recognition: Project status
2010
2011
2011
2013
June 2010
November 2011
March 2012
Q2 2013
Exposure
draft
Revised exposure
draft
Comment letter
deadline
Revenue from
Contracts with
Customers
Re-exposure of
Revenue from
Contracts with
Customers
April 2012
Final ASU for US
GAAP and final
standard for
IFRS
974 comment
letters
358 comment letters
Roundtables
May 2012
onwards
Redeliberations
and drafting
53
Revenue Recognition: Background
 Current U.S. GAAP
- 200+ pieces of literature
- Broad concepts
- Many industry-specific
requirements
- Inconsistency
 Objective
- Create single, joint
standard
- Consistent across
industries/markets
- More robust framework
54
Revenue Recognition: Scope
CONTRACTS WITH
CUSTOMERS
Excluded
Included
Lease contracts
Insurance contracts
Financial instruments
All other contracts with
customers
including unbundled services
from lease & insurance
contracts
including financial services fees
that are integral part of effective
interest rate
55
Revenue Recognition: Core Principle
Core Principle
Recognize revenue to depict the transfer of promised 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
56
Revenue Recognition:
Steps to Apply the Core Principle
Identify contract(s)
with the customer
Identify separate
performance
obligations
Allocate transaction
price
Recognize revenue
when performance
obligation is
satisfied
Determine
transaction price
57
Revenue Recognition:
Onerous performance obligations
 The revenue standard will not include an onerous test
 Instead, an entity will apply the onerous tests in existing
IFRS or US GAAP
IFRS
Requirements in IAS 37 for onerous contracts
would apply to all contracts with customers
US
GAAP
Existing guidance for recognition of losses will be
retained, including guidance in Subtopic 605-35 for
losses on construction and production contracts
58
Revenue Recognition:
Implementation Guidance










Warranties
Licenses
Right of return
Customer options for additional goods or services
Breakage (customers’ unexercised rights)
Principal versus agent
Bill and hold arrangements
Repurchase agreements
Nonrefundable upfront fees
Customer acceptance
59
Leases
60
Leases: Where We Are Now
2010
2013
August 2010
Exposure Draft
Leases
1H 2013
Second Exposure
Draft
Leases
Comment period: 4
months
Re-expose
proposals
786 comment letters
received
Comment period
120 days
Contained proposals
for both lessees and
lessors
Focus on revisions
to 2010 proposals
2013
Consultation
Outreach
Working group
meetings
Redeliberations
TBD
TBD
Final Standard
Leases
Effective date: TBD
Will contain
guidance for both
lessees & lessors
Will contain
proposals for both
lessees & lessors
61
Insurance Contracts
62
Insurance: Timeline
Sept 2010
FASB issues
Discussion Paper
June 2013
Exposure Draft
Dec 2010 –
Mar 2013
Outreach and Joint
Redeliberations
2H 2013
Outreach
63
Questions & Answers
64