Jennifer Blake, Senior Manager
ACCOUNTING &
AUDITING
UPDATE
The material appearing in this presentation is for informational purposes
only and should not be construed as advice of any kind, including, without
limitation, legal, accounting, or investment advice. This information is not
intended to create, and receipt does not constitute, a legal relationship,
including, but not limited to, an accountant-client relationship. Although
this information may have been prepared by professionals, it should not be
used as a substitute for professional services. If legal, accounting,
investment, or other professional advice is required, the services of a
professional should be sought.
Agenda
• New Accounting Standards
• Proposed Standards
• Private Company Council
3
What’s new for 2013?
• Comprehensive Income
• Intangible Assets
4
ASU 2013-02
COMPREHENSIVE
INCOME
Comprehensive Income
• What is other comprehensive income?
– Gains and losses that are included in equity but that
bypass the income statement
•
•
•
•
Unrealized gains/losses on available for sale securities
Changes in defined benefit pension plans
Cash flow hedge gains and losses
Foreign currency gains and losses
• What is accumulated comprehensive income?
6
Comprehensive Income
• Adds additional disclosures for items reclassified
out of accumulated other comprehensive income
Does not change the current requirements for
reporting net income or other comprehensive
income
7
Comprehensive Income
• Additional disclosure requirements:
– Changes in the balances of each component of
accumulated other comprehensive income (AOCI)
– The effect of significant reclassifications out of each
component of AOCI on the line items in the statement of
income
8
Changes in AOCI Balances by Component
• Disaggregate the total change of each component
of other comprehensive income and separately
present:
1. Reclassification adjustments
2. Current-period other comprehensive income
• Both before-tax and net-of-tax presentations are
acceptable
• Presented on the face of financial statements or
as a separate disclosure in the notes
9
Entity ABC
Notes to Financial Statements
Changes in Accumulated Other Comprehensive Income by Component {a}
Fore the Period Ended December 31, 2013
Beginning Balance
Gains and
Losses on Cash
Flow Hedges
Unrealized Gains and
Losses on Available for Sale
Securities
$
$
Other Comprehensive Income Before
Reclassifications
Amounts Reclassified from Accumulated
Other Comprehensive Income
Net Current Period Other Comprehensive
Income
Ending Balance
$
(5,000)
8,000
Total
$
3,000
7,000
8,000
15,000
(2,250)
(3,000)
(5,250)
4,750
5,000
9,750
(250)
$
13,000
$
12,750
{a} All amounts are net of tax. Amounts in debit indicate debits.
10
Significant Items Reclassified Out of AOCI
• Required to present information about significant
items reclassified out of AOCI by component
either:
1. On the face of the statement where net income is
presented
or
2. As a separate disclosure in the notes to the financial
statements.
11
Entity ABC
Notes to the Financial Statements
Reclassifications out of Accumulated Comprehensive Income {a}
For the Period Ended December 31, 2013
Amount Reclassified from
Accumulated Other
Comprehensive Income
Details about Accumulated Other Comprehensive Income Components
Affected Line Item in the Statement Where Net Income is
Presented
Unrealized Gains and Losses on Available for Sale Securities:
$
2,300
Realized gain/(loss) on Sale of Securities
(285)
Insignificant Items
Impairment expense
(15)
$
2,000
Total before tax
(500)
Tax (expense) or benefit
$
1,500
Net of tax
$
(2,000)
{b}
Transition Obligation
(2,500)
{b}
Actuarial gains/(losses)
(1,500)
{b}
(6,000)
Total Before Tax
Amortization of defined benefit pension items:
Prior Service Costs
$
1,500
Total Reclassifications for the Period
Tax (expense) or benefit
$
(4,500)
Net of tax
$
(3,000)
Net of tax
{a} Amounts in parentheses indicate debits to profit/loss
{b} These accumulated other comprehensive income components are included in the computation of net periodic
pension cost (see pension footnote for additional details).
12
Entity ABC
Statement of Income
For the Period Ended December 31, 2013
Interest Income (includes $1,000 accumulated other comprehensive income
reclassifications for net gains on cash flow hedges)
$
Interest Expense
122,500
(32,000)
Net Interest Income Before Provision Expense
90,500
Provision Expense
(5,000)
Net Interest Income After Provision Expense
85,500
Other Income
Fee Income
10,000
Gain on Sale of Securities (includes $4,000 accumulated other comprehensive income
reclassifications for unrealized net gains on available for sale securities)
7,300
Other income
2,000
19,300
Other Expense
(54,000)
Net Income Before Provision for Income Taxes
50,800
Income Tax Expense (includes ($1,750) income tax expense from reclassification items)
Net Income
(15,240)
$
35,560
13
Comprehensive Income
• Effective Date
– Public Companies
• Fiscal years, and interim periods within those years, beginning
after December 15, 2012 (December 31, 2013 financial
statements).
– Nonpublic Companies
• Fiscal years beginning after December 15, 2013 (December 31,
2014 financial statements).
– Disclosures applied prospectively
14
ASU 2012-02
INTANGIBLES –
GOODWILL AND
OTHER
Indefinite-Lived Intangible Assets
• Amends the current guidance on testing
indefinite-lived intangible assets, other than
goodwill, for impairment.
• Under the current guidance an entity must:
– Atleast annually
– Calculate and compare the asset’s fair value with its
carrying value
– Record impairment loss if asset’s carrying value exceeds
its fair value
16
Indefinite-Lived Intangible Assets
• Under new guidance an entity has the option of
first performing a qualitative assessment
– Determine whether it is more likely than not that the
asset is impaired
– Evaluate events and circumstances that may affect the
significant inputs used to determine the fair value of the
asset
• If based on qualitative assessment it is determined that it is
more likely than not the asset is impaired, then the entity could
proceed to the quantitative impairment test
17
Qualitative Assessment
• Cost factors
• Financial performance
• Legal, regulatory, contractual, political, business,
or other factors
• Other relevant entity-specific events
• Industry and market considerations
• Macroeconomic conditions
18
Considerations
• Do internal personnel have skills and knowledge
to perform assessment?
• What supporting documentation do we need to
substantiate conclusions about each event and
circumstance considered in the qualitative
assessment?
• Is the most recent determination of fair value a
good proxy for the current-period fair value?
19
Indefinite-Lived Intangible Assets
• Effective Date
– Annual and interim impairment tests performed in
fiscal years beginning after September 15, 2012
– Early adoption is permitted
20
Significant Proposed Guidance
• Credit Impairment
• Leases
• Financial Instruments
21
PROPOSED CREDIT
IMPAIRMENT MODEL
Proposed Credit Impairment Model
• Changes the requirement for accounting for the
estimate of credit losses from an “incurred” to an
“expected” loss model
• Provides a single impairment approach for all
financial assets measured at amortized cost or fair
value through OCI
• Certain limited circumstances would allow a
practical expedient
23
Expected vs. Incurred Loss Model
Subject
Expected Loss
Incurred Loss
Recognition threshold
No recognition threshold.
At the end of every
reporting period,
impairment allowance
recognized on the basis
of expected credit losses
Impairment recognized
only after a loss event
has occurred or its
occurrence is probable
Measurement approach
No prescribed
methodology, however is
based upon lifetime of
expected losses by
incorporating forecasted
loss factors
Generally relies on
historical loss rates
adjusted for various
qualitative factors
24
Measurement of Expected Credit Losses
• No prescribed methodology however the proposal
requires the estimate of current expected credit losses
to:
– Incorporate the time value of money
– Reflect all internally and externally available information
considered relevant in making the estimate
– Reflect at least two possibilities
1.
2.
–
That a credit loss exists, and
That no credit loss exists
Reflect how credit enhancements mitigate expected credit
losses
• Does not require a discounted cashflow analysis
25
Examples of Estimating Credit Losses
•
•
•
•
Loss rate approach
Base component and a credit risk adjustment
By-vintage basis
Collective estimation method and an individual
asset estimation method
26
Other Key Aspects
• Interest Income
– Based on contractual cash flows
– Should remain separate from the credit losses
• Accounting for Nonaccrual
– Not probable that an entity will receive payment of
substantially all of the principal
• Cost recovery method
– Probable entity will receive substantially all principal
but not probable the entity will receive all of the
interest
• Cash basis method
27
Other Key Aspects
• Troubled debt restructurings
– Definition and determination of TDRs remain the same
– Cost basis adjusted
• Post modification effective interest rate equals the premodification effective interest rate
– Impairment from restructuring recorded as direct
write-off
28
Effective Date and Transition
• Cumulative effect adjustment to the balance sheet
as of the beginning of the first reporting period in
which the guidance is effective
• No effective date has been proposed for the final
guidance
29
PROPOSED LEASE
ACCOUNTING
Leases – Lessee Accounting
• Right of Use (ROU) approach
• Recognize and record all leases
1. Asset = right to use the underlying asset
2. Liability = future lease payment obligations
• Both asset and liability initially measured at the
present value of the future lease payments
• Leases with maximum lease term of 12 months or
less may be excluded
31
Initial Measurement
Subject
Description
Lease term
Noncancellable period of the lease,
together with both of the following 1)
renewal options, and 2) termination
options if there is significant economic
incentive for an entity to exercise or not
exercise the option
Lease payments
Include fixed payments and only variable
payments that are: 1) based on an index
or rate, and 2) in-substance fixed lease
payments
Discount rate
Rate the lessor charges the lessee, if
available. If that rate is not available then
the lessee’s incremental borrowing rate as
of the date of lease commencement
would be used.
32
Subsequent Measurement
• Liability
– Effective interest method used to make lease payments
• Asset
– Two different approaches dependent on underlying
asset and terms of lease
• Financing
• Straight-line
33
Subsequent Measurement
Type A – Financing Lease - Other than
Property Lease
Type B – Straight-line – Property Lease
Lease term: Major part of the remaining
economic life of the underlying asset, or
Lease term: insignificant part of total
economic life of the underlying asset, or
Present value of lease payments accounts
for substantially all of the fair value of the
underlying assets, or
Present value of lease payments is
insignificant relative to the fair value of
the underlying assets
Lessee has a significant economic
incentive to exercise an option to
purchase the underlying asset
34
Example
• Assume lessee enters into a 3- year lease with the
following annual payments
• Year 1 - $20,000
• Year 2 - $24,000
• Year 3 - $28,000
• Initial Measurement of the ROU asset and liability
to make lease payments is $64,012 based on a
discount rate of 5%.
35
Example
Both
Methods
Year
0
1
2
3
Total
Financing Approach (Type A)
Interest Amortization Total
Lease
Expense Expense
Lease
{a}
{c}
Liability
<1>
<2>
Expense ROU Asset
$ 65,012
$ 65,012
$ 3,242 $ 21,670 $ 24,912
43,342
2,413
21,671
24,084
21,671
1,333
21,671
23,004
$ 6,988 $ 65,012 $ 72,000
Straight-Line Approach (Type B)
Lease Reduction in
Expense ROU Asset
<3>
<3-1> {b} ROU Asset
$ 65,012
$ 24,000 $
20,758
44,254
24,000
21,587
22,667
24,000
22,667
$ 72,000 $
65,012
{a} Effective-interest method used to calculate lease liability under both methods
{b} Straight-line method: ROU amortization calculated as difference between lease and interest expense
{c} Financing method: amortized in the same manner as other non-financial assets
36
Example
Financing
3,242
21,670
16,758
21,670
20,000
Straight-Line
24,000
16,758
20,758
20,000
24,000
21,587
Year 1
Dr. Interest Expense
Dr. Amortization Expense
Dr. Lease Expense
Dr. Lease Liability
Cr. ROU Asset
Cr. Cash
Year 2
Dr. Interest Expense
Dr. Amortization Expense
Dr. Lease Expense
Dr. Lease Liability
Cr. ROU Asset
Cr. Cash
2,413
21,671
21,587
Dr. Interest Expense
Dr. Amortization Expense
Dr. Lease Expense
Dr. Lease Liability
Cr. ROU Asset
Cr. Cash
1,333
21,671
26,667
Year 3
21,671
24,000
21,587
24,000
24,000
26,667
21,671
28,000
22,667
28,000
37
Transition - Lessee
• Capital Leases
– Carry forward amounts recorded as of the date of initial
application, or
– Apply full retrospective approach
• Operating Leases
– Full retrospective approach, or
– Modified retrospective approach at the beginning of the
earliest comparative period presented
38
PROPOSAL ON
CLASSIFYING AND
MEASURING
FINANCIAL
INSTRUMENTS
Financial Instruments
• Applies to most financial instruments, except for
the following:
–
–
–
–
–
Instruments classified in stockholders’ equity
Stock compensation arrangements
Pension plan assets and obligations
Lease receivables and payables
Financial guarantee contracts
• Derivative instruments under ASC 815
40
Classification of Financial Assets
• Classification dependent on:
1. their contractual cash flow characteristics
2. The business model in which they are managed
• Three classification and measurement categories
1. Fair Value – Net income (FV-NI)
2. Fair Value – OCI (FV-OCI)
3. Amortized Cost
41
Contractual Cash Flow Characteristics
Assessment
• Do the contractual terms of the financial asset
“give rise on specified dates to cashflows that are
solely payments of principal and interest on the
principal amount outstanding (SPPI)”?
– No, then generally classified and measured FV-NI
• Examples: equity securities, debt instruments with commodityindexed payments
– Yes, then assess business model
42
Business Models
• Three distinct business models
1. Hold to collect
• Amortized Cost
2. Hold and sell
• FV-OCI or FV-NI (optional)
3. Other that is not consistent with (1) and (2) above
• FV-NI
43
Classification of Financial Liabilities
• Measured at amortized cost, with the following
exceptions:
1. Short sale obligations – FV-NI
2. Financial liabilities for which entities business strategy
is to subsequently transact at fair value – FV-NI
3. Nonrecourse financial liabilities that are contractually
required to be settled with only the cash flows from
related financial assets – accounted for on same basis
as related financial asset
44
Presentation
• The following is required to be presented on the
face of the entity’s balance sheet
– Financial assets and liabilities, by measurement
category
– Separate line item for hold-to-collect financial assets
that have been identified for sale
– Parenthetical fair value information for all financial
assets and liabilities accounted for at amortized cost
(exception: demand deposits and receivables/payables
due in less than one year)
– Parenthetical amortized cost information for its own
outstanding debt instruments accounted for at FV-NI
45
Effective Date and Transition
• Cumulative effect adjustment to the balance sheet
as of the beginning of the first reporting period in
which the guidance is effective
• No effective date has been proposed for the final
guidance
46
PRIVATE COMPANY
COUNCIL
Private Company Council (PCC)
• Created in 2012 to identify and vote on differences
in U.S. GAAP for private companies
• Will decide on exceptions and modifications to U.S.
GAAP for private companies
• FASB will be responsible for “endorsement” rather
than ratification of the PCC’s decisions
– 60 days to act of PCC decisions
– Must provide public, written notice if FASB fails to
endorse
48
Differentiating Factors for Public and Private
Companies
•
•
•
•
•
•
Types and number of financial statement users
Financial statement user access to management
Investment strategies of equity investors
Ownership and capital structures
Accounting resources
Learning about new financial reporting guidance
49
Proposed Decision Making Framework
• Identifies five areas for possible alternative
guidance for private company
1.
2.
3.
4.
5.
Recognition and measurement
Disclosures
Presentation
Effective date
Transition
50
Questions
Jennifer Blake
Moss Adams LLP
509-777-0173
Jennifer.blake@mossadams.com