ACCOUNTANTS ONE
2012 ACCOUNTING UPDATE
FEBRUARY 22, 2012
Presented by
Chris Rouse
Windham Brannon, PC
2012 ACCOUNTING UPDATE
Topics To Be Covered
• Questions, Questions, Questions
oWhat’s going on at FASB?
oWill IFRS be adopted?
oWill all operating leases be capitalized?
oWhen are we going to have “Little GAAP”?
oWill the balance sheet still balance?
oWhere have all the VIEs gone?
oWhen is revenue “earned”?
oWhat is equity?
• Pot Pourri of Other New Standards
2
2012 ACCOUNTING UPDATE
What’s Going On At FASB?
• Board members
Leslie Seidman (Chair)
Industry
Dir Acctg Policy & Stds
(JP Morgan)
Larry Smith
Public Accounting
Former EITF Chair
(KPMG)
Tom Linsmeier
Education
Derivatives Expertise
(Michigan State)
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2012 ACCOUNTING UPDATE
What’s Going On At FASB?
• Board members
Russell Golden
Public Accounting
EITF Chair/FASB Staff
(Deloitte & Touche)
Marc Siegel
Industry
Forensic Accounting
(RiskMetrics Group)
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2012 ACCOUNTING UPDATE
What’s Going On At FASB?
• Board members
Daryl Buck
CFO, Private Company
Blue Ribbon Panel
Harold Schroeder
Investment Manager
EITF Member
5
2012 ACCOUNTING UPDATE
Will IFRS be adopted, rendering all our GAAP
accounting skills obsolete?
• FASB continues to advance Convergence with
international accounting standards
o All recent FASB Standards reflect convergence
with IFRS
o FASB believes international standards are best
for worldwide markets
o Pressure for convergence is moving faster than
FASB anticipated
o Conceptual Framework focus is on private
sector
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2012 ACCOUNTING UPDATE
Will IFRS be adopted, rendering all our GAAP
accounting skills obsolete?
• Uncertainty regarding completion of projects
remaining on MOU
• Both FASB and IASB have said there will be
no future projects once current agenda is
completed
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2012 ACCOUNTING UPDATE
Will IFRS be adopted?
• In 2008, SEC proposed Roadmap for potential
use of IFRS by US issuers beginning 2014
• In 2009, both SEC and Congress expressed
concerns about progress on the Roadmap
• In 2010, SEC said prior Roadmap timing is no
longer in play – Work Plan adopted
• In 2011, SEC said progress on Work Plan is
slower than expected
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2012 ACCOUNTING UPDATE
Will IFRS be adopted?
• SEC “Work Plan” examines 6 areas impacted
by adoption of IFRS by US companies
o Consistency of application
o Independence of IASB
o Investor understanding of IFRS
o Impact on US laws and regulations
o Impact on preparers
o Impact on auditors
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2012 ACCOUNTING UPDATE
Will IFRS be adopted?
• IASB has issued IFRS for Small and Mediumsized Entities (SMEs)
o 230 pages, with separate illustrative financial
statements and disclosure checklist
o “Not exactly” IFRS or US GAAP
o Plan to issue changes every 3 years
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized? Will the
entire balance sheet become “fair valued”?
•
Overarching principle – A right to use
o Leasing is a financing transaction
o Recognize lease payment obligation and
leased asset on balance sheet
o Includes all leases of tangible assets, not
just property leases
 Board is still considering software and
inventory leases
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o Existing leases would be recognized
2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessee accounting
o Lease obligation recognized at present value




Contingent payments that are likely to occur
would be included
Indexed changes would be recognized as they
occur
Lease term includes non-cancellable period
plus renewal periods when “significant
economic incentive” to renew is present
Discount rate is rate charged by lessor or
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lessee’s incremental borrowing rate
2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessee accounting
o Lease asset recognized at obligation plus
direct costs
o Subsequent changes reflected as they
occur
 In earnings if change arises from current
or prior periods
 In obligation (and asset) if related to
future periods
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessee accounting
o Financial statements
 Balance sheet, income statement and
cash flow measurement and geography
changes
 Disclosures
 Reconcile
opening and closing asset and
obligation, by class
Undiscounted maturities for 5 years and
thereafter, less interest portion
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessee accounting
o Disclosures
 Lease expense in tabular format,
including
Amortization
Interest
Variable payments not in amortization
Expense for any non-capitalized leases

Future commitment for services or non15
asset component of leases
2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o A dual model
 Performance obligation approach for
financing transactions
 De-recognition approach for sale
transactions
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o Performance obligation approach



Applies when lessor retains risks and rewards
of asset
Recognize asset for contractual terms, plus
contingent rentals, renewals, termination
payments, etc
 Changes as lease payments are made
Recognize liability to provide asset
Amortize based on pattern of use (revenue)
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o Performance obligation approach
 Recognize interest income using effective
interest method
 Reassess estimates each reporting period
Recognize changes in lease terms on balance

sheet
Changes in contingent/index payments added
to asset and liability
Included in current period revenue if effects
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prior or current period
2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o Performance obligation approach
 Leased asset remains on books
Depreciation/amortization in accordance
with GAAP
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o De-recognition approach
When ownership transfers at end of lease, or
when there is a bargain purchase option
 Recognize receivable and sale revenue
 De-recognize asset and recognize cost of sales
Amount is based on relationship of fair values
of receivable and asset
Residual is not accreted
 While similar to current sales-type lease,
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
2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o De-recognition approach



Reassess upon change in lease terms
Contingent/index cash flows are recognized in
revenue
On balance sheet, present lease receivable
separately from other financial assets
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Lessor accounting
o De-recognition approach


Any residual asset is presented separately
within that asset’s class
Income statement depends on lessor’s
business
Financing business – net lease income and
expense on one line
Seller business – separate lines for lease
income and expense
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
Sale- Leasebacks
o
o
o
Recognized as two transactions
“Control” criteria in revenue recognition ED
would determine if sale occurred
Accounted for as (1) sale of “whole” asset, and
(2) lease of a right-to-use underlying asset
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2012 ACCOUNTING UPDATE
Will all operating leases get capitalized?
•
The Devil is in the details
o Second exposure draft due out “soon”
Some key lessor items still being discussed
 Second ED may still have some tentative
positions
Preparing financial statement preparers
Preparing auditors
Preparing financial statement users

o
o
o
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2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP” for
smaller companies?
• FASB is considering GAAP Differences vs.
Separate GAAP approach
o Criteria considers different user needs
 Differences in user access to information
 Cost/Benefit considerations
 Small/Large business vs. Public/Nonpublic
business
Note – FASB does not believe there is a lack of
investor users for non-public entities
• FASB has named a staff-member to oversee
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all nonpublic entity issues
2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Small Business Advisory Committee formed in
2004
o Purpose is to obtain more active involvement
by the business community in accounting
standards
 Representatives include public and nonpublic companies
o Twenty members representing users,
preparers and auditors
o Meets twice a year, discusses issues and
submits recommendations to the Board
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2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Private Company Financial Reporting
Committee started in 2007
o Joint initiative of FASB and AICPA
o Purpose is to provide recommendations to
FASB on accounting standards for privately
held companies
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2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Private Company Financial Reporting
Committee
o Has submitted over 40 recommendations on
specific standards
 eg, has issues with revenue from contracts
exposure draft
 eg, is supportive of the lease accounting
exposure draft
 Says FASB continues to show an
unwillingness to consider and approve
measurement, recognition or presentation
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differences
2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Blue Ribbon Panel on Private Company
Accounting formed in 2010
o Joint initiative of AICPA and FAF
o Purpose is to address how accounting
standards can best meet the needs of users
of private company financial statements
 Lack of relevance for many users of private
company financials
 Overall complexity concerns private
company preparers
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2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Blue Ribbon Panel on Private Company
Accounting
oRecommended near-term exceptions and
modifications to US GAAP for private
companies rather than a separate, selfcontained GAAP for private companies
 Recommended a separate private company
accounting standards board to address both
existing and new standards
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2012 ACCOUNTING UPDATE
When are we going to have “Little GAAP”?
• Blue Ribbon Panel on Private Company
Accounting
oReport submitted in January 2011 – see it at
http://www.accountingfoundation.org
• In late 2011, the FAF rejected the Panel’s
recommendation in favor of increasing FASB
staff and input to FASB from non-public
entity groups
• AICPA has asked FAF to reconsider separate
standard setting body for non-public entities
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2012 ACCOUNTING UPDATE
Will the balance sheet still balance?
• FASB Project; Financial Statement
Presentation
o Tentative conclusion is a full set of financial
statements is comparative information for two
full years, consisting of statements of:
 3 years of financial position
 2 years of earnings and comprehensive
income
 2 years of cash flows
 2 years of changes in equity
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2012 ACCOUNTING UPDATE
Will the balance sheet still balance?
• FASB Project; Financial Statement
Presentation
o All statements would classify accounts as
operating (business), financing and
investing
 Format is similar to current cash flow
statement
 See examples in Attachments
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• Improving VIE disclosures – ASU 2009-17 et al
o Redefines primary beneficiary in qualitative
manner
 The Power to direct the activities of the VIE
that significantly impacts the VIE’s economic
performance
“Power” relates to management, not
governance
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• Improving VIE disclosures
o Redefines primary beneficiary in qualitative
manner (cont)
 The obligation to absorb losses or receive
benefits that could be potentially significant to
the VIE
Also assess whether the PB has implicit
financial responsibility to ensure the VIE
operates as designed
 Requires ongoing re-assessment of whether
entity is PB of VIE
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• Related party “trap” still in play
o“… in determining the primary
beneficiary, a variable interest holder will
consider its related party interests as its
own”
oTie Breaker rule says the Primary
Beneficiary is the entity that is most
closely associated with the VIE
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• Disclosures about cash flows, financial
position and performance
o How they are accounted for
o Fair values in tabular form
o Balance sheet and income statement
locations
o Notional amounts of derivative instruments
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• Disclosures about cash flows, financial position
and performance
o How they affect financial position, financial
performance and cash flows
 Existence and nature of contingent features
 Timing and likelihood
 Cash effects
 Credit risk related contingencies
 Potential effect on liquidity
o Additional disclosures required to increase
transparency of PB’s involvement with VIEs
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2012 ACCOUNTING UPDATE
Where have all the VIE’s gone?
• The Devil Is In The Details
o Disclosures significantly exceeds those for
entities consolidated because of majority
ownership
o Determining whether an entity is a VIE is a
complex process and should not be
undertaken “off the top of your head”
o Determining who is the PB is a complex
process and …
• Effective for years ending after 11-15-10,
and interim periods within that year
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
•
Overarching Principles in Current Standards
o Persuasive evidence of an arrangement
exists
Documentation required
The fee is fixed or determinable
 No clear definition, but several examples
 Overarching principle – Cannot be
dependent on future events

o
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
•
Overarching Principles in Current Standards
o Delivery or performance has occurred
Identifiable deliverables
 Seller has fulfilled obligation
 Proportional performance deliverables
recognized
Collectability is reasonably assured
 Determined at time of revenue recognition
 Factors for determining bad debt reserves
are applicable
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
o
2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
• Revenue recognition; Milestone method
(ASU 2010-17)
o Applies only to R&D vendors
o Applies to payments earned upon achievement
of milestones
o In the absence of specific relevant GAAP,
provides good accounting concepts for projecttype services
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
• Revenue recognition; Revenue arrangements
that include software (ASU 2009-14)
o Changed prior GAAP for recognizing revenue
for sales of tangible products that include
software essential to the functionality of the
tangible product
 Clarifies what guidance should be used to
measure revenue for product and software,
not when to recognize it
 Includes revenue recognition for post-contract
services and undelivered software
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
• Revenue recognition; Multiple deliverables
(ASU 2009-13)
o Divide arrangements into separate units and
recognize revenue based on relative selling
prices
o Selling prices are determined using vendorspecific objective evidence
o Effective beginning after 6-15-2010
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
•
Revenue recognition exposure draft
o Uses “contract” basis
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“Contract” is an understanding, and does
not have to be in writing
Identify rights and obligations of contracts
with customers
Determine transaction price(s)
Allocate transaction price to performance
obligations
Recognize revenue when performance
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obligation is satisfied
2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
•
Revenue recognition exposure draft
o Performance obligations


Single performance obligation if entity
integrates goods or services into a single
item
Accounted for as multiple performance
obligations if pattern of transfer is different
for different goods or services, and …
Each good or service has a distinct
function
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2012 ACCOUNTING UPDATE
When is Revenue “Earned”?
•
Revenue recognition exposure draft
o Measurement
Multiple obligations would be measured on
basis of relative standalone selling prices
of the goods or services
Next steps
 Re-expose a revised draft (imminent)
 Comment period 60-90 days
 Final standard in summer 2012
 Effective date periods after 12-15-??
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
o
2012 ACCOUNTING UPDATE
What is “Equity”?
• Financial Instruments with Characteristics of
Equity
o Basic ownership approach
 Only the most residual claim would be equity
 Approach preferred by FASB
 Currently the approach used in International
Financial Reporting Standards
o Ownership-Settlement approach
 Adds Perpetual and Indirect Ownership
Interests to Basic Ownership Interests in
equity
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2012 ACCOUNTING UPDATE
What is “Equity”?
• Financial Instruments with Characteristics of
Equity
o Reassessed Expected Outcomes approach
 Would include instruments that change in fair
value with changes in Basic Ownership
instruments
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2012 ACCOUNTING UPDATE
Pot Pourri
• Loans in 401(k) plans (ASU 2010-25)
o Participant loans in 401(k) plans are not
investments and will be carried at unpaid
principal balance plus accrued interest
o Effective for 2010 financial statements
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2012 ACCOUNTING UPDATE
Pot Pourri
• Disclosures about credit quality (ASU 2010-20)
o Applies to financing receivables
 Does not apply to trade receivables due in less
than one year, or financing receivables carried
at fair value
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2012 ACCOUNTING UPDATE
Pot Pourri
• Disclosures about credit quality (ASU 2010-20)
o Purpose is to improve user information about
credit quality
 Nature of credit risk inherent in portfolio
 How credit risk is analyzed and assessed in
determining the allowance for credit losses
 Changes, and their reasons, in allowances
 Many new disclosures
o Effective for issuers 12-15-10, and for nonissuers 12-15-11
52
2012 ACCOUNTING UPDATE
Pot Pourri
• Improving fair value disclosures (ASU 2010-06)
o Users requested greater level of disaggregated
information and more robust disclosures
 Disclose separately amounts of significant
transfers in and out of Levels 1 and 2, including
reasons
 For Level 3, disclose separately information
about purchases, sales, issuances and
settlements (ie, gross, not net)
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2012 ACCOUNTING UPDATE
Pot Pourri
• Improving fair value disclosures (ASU 2010-06)
o Provide fair value measurement disclosures for
each class of assets and liabilities carried at fair
value
 Recognizes that judgment is required –
consider user needs
o Disclosure of valuation technique for Level 2
increased
 Separately for “similar” vs “identical”
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2012 ACCOUNTING UPDATE
Pot Pourri
•
Additional Fair Value Disclosures – ASU 2011-04
o Part of Convergence project – not many
changes, and they are not significant
o Clarifies that blockage factor is not
appropriate, but control premium “may” be
appropriate
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2012 ACCOUNTING UPDATE
Pot Pourri
•
Additional Fair Value Disclosures
o
Additional level 3 disclosures
 Valuation process used
 Sensitivity information
 Fair value categories for items not
measured at fair value but for which fair
value is disclosed
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2012 ACCOUNTING UPDATE
Pot Pourri
•
•
Consider user needs when preparing fair value
disclosures
o Creditor needs are different than investor
needs – cover both
o Level 2 – comparable/active, or
identical/inactive
o Level 3 – Describe key assumptions and
estimates
Use a Great disclosure checklist
o FASB ASC 820-10-50; Fair Value Disclosures
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2012 ACCOUNTING UPDATE
Pot Pourri
• Fair Value of Private Investment Partnerships
(ASU 2009-12)
o Applies to investments in entities that permit
redemption at specified times at net asset value
determined using fair value accounting
o Provides guidance as to how to use reported
net asset value in determining fair value
o Would be classified as Level 2; Identical
security in inactive market
 Disclose observable and unobservable data
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2012 ACCOUNTING UPDATE
Pot Pourri
•
Other Comprehensive Income (ASU 2011-05)
o Required to be on income statement or
separate statement
 Re-title Statement of Income to
Statement of Comprehensive Income
o Effective years beginning after 12-15-2011
for publics, and 12-15-2012 for non-publics
o Board has tweaked reclassification
adjustment provisions in ASU 2011-12
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2012 ACCOUNTING UPDATE
Pot Pourri
•
Some on Healthcare Entities
o Display and disclosure of revenue and bad
debts (ASU 2011-07)
o Gross up malpractice insurance claims and
recoveries (2010-24)
o Measuring charity care (at cost)-(2010-23)
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2012 ACCOUNTING UPDATE
Pot Pourri
•
More on financial instruments
o Disclosure of gross information about assets
and liabilities that have been offset (2011-11)
o Credit quality of financing receivables (201020)
o Loan pool modifications (2010-18)
o Troubled debt restructurings (2011-02)
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2012 ACCOUNTING UPDATE
Pot Pourri
•
A couple on goodwill and other intangibles
o Making qualitative assessment of goodwill
impairment (ASU 2011-08)

Annually consider whether it is more likely
than not that goodwill fair value is less than
carrying amount
 Negative change in economic conditions
Negative change in financial performance
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2012 ACCOUNTING UPDATE
Pot Pourri
•
A couple on goodwill and other intangibles
o Making qualitative assessment … (cont)
Annually consider … (cont)
 Negative change in management,
personnel, customers, etc
 Others listed
If qualitative assessment “passes”, no need
to perform 2-step test

o
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2012 ACCOUNTING UPDATE
Pot Pourri
•
Goodwill
o Testing goodwill impairment when investment
is negative (ASU 2010-28)



When carrying value is negative, presumably
fair value exceeds carrying amount, so
technically the impairment test is not called
for
Revised Standard requires a Step 2 test of
goodwill impairment, which may result in
additional negative investment
Note previous discussion of ASU 2011-08 64
2012 ACCOUNTING UPDATE
Pot Pourri
•
Complete listing of Accounting Standards
Updates for 2012 – 2010 in Exhibit to slide deck
o 2012; None issued at 2/15/2012
o 2011; # 01 – 12
o 2010; # 01 – 29
o 2009; # 01 – 17
• Visit
http://www.fasb.org/jsp/FASB/Page/Section
Page&cid=1176156316498
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2012 ACCOUNTING UPDATE
In Conclusion…
• Monitor the FASB web site (www.fasb.org)
• Monitor the AICPA web site (www.aicpa.org)
• Call Chris Rouse at
Windham Brannon 404-898-2000
Bon Auditpetite!
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