{FASB A&A Update}
Southwest Ohio HFMA Chapter
October 17, 2014
Andrew Gentzkow and Dawn Stark
www.plantemoran.com
Overview
Issued
•
•
•
Private
Company
Council
Updates
•
Going
Concern
•
Discontinued
Operations
•
Proposed
Donated
Personnel
Services from
Affiliates
Joint and
Several
Liability
Revenue
Recognition
•
Financial
Statement
Presentation for
Not-for Profits
(NFP)
•
Simplification
Agenda
•
Goodwill
for NFP
•
Extraordinary
Items
•
Pushdown
Accounting
•
Leases
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Private Company Reporting
Newly established Private Company Council
• Characteristics of private companies that are different from public:
o
Types and number of financial statement users
o
Access to management
o
Investment strategies
o
Ownership & capital structures
o
Accounting resources
o
Learning about new financial reporting guidance
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Private Company Reporting
• PCC identifies, deliberates and proposes specific exceptions and modifications
to US GAAP for private companies
• FASB considers the PCC proposals and, if approved, issues them for public
comment
• Final standards are issued as FASB ASU’s, not as PCC Standards
• Not-for-Profit Organizations are not “private companies”
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Private Company Reporting
What’s changing under ASU 2013-12
• Clarifies definition of “public” and “nonpublic” business entities for financial
reporting purposes
• Not-for-profit entities treated as a class unto themselves
Effective date and transition
• New definition apply prospectively to new accounting and reporting
standards issued after December 2013
• Prior definition continues to apply to standards issued on or before
December 2013
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Private Company Reporting
ASU 2013-12 modifies the master glossary to define a “Public
Business Entity” as a business entity meeting any one of the
following criteria:
• Files financial statements with SEC
• Required by Securities Exchange act of 1934 to file
• Required to file with Regulatory agency for upcoming issuance of securities
• Has securities that are traded on an exchange or OTC Market
• Securities are unrestricted and required by law or contract to issue GAAP
statements
This update defines who can use PCC standards
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Private Company Reporting
Remains in
effect for all
standards
previously
issued
Old
Approach
New
Approach
“Public entity”
(including NPO
conduit
obligators)
Public for-profit
entity
“Nonpublic
Entity”
Nonpublic forprofit entity
Applies
prospectively
to new
standards
going forward
Special
handling for
NPOs
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Private Company Reporting
Issued
• Accounting for Goodwill (ASU 2014-02)
• Variable Interest Entity Guidance for Common Control Leasing
Arrangements (ASU 2014-07)
• Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
(ASU 2014-03)
Proposed
• Business Combinations- Accounting for Identified Intangible Assets
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Going Concern
What’s changing under ASU 2014-15:
•
Shifts responsibility to management to evaluate
•
Requires management to consider if:
o
Probable that the entity will be unable to meet its obligations as they become
due within one year after the date the financial statements are issued.
o
Without taking into account management’s plans to alleviate doubt that have
not been fully implemented by the date of the financial statements
o
Disclosures:
 Conditions or events giving rise to doubt
 Management’s evaluation of the significance of those conditions or
events
 Management’s plans that either alleviate or are intended to alleviate the
doubt
•
Effective for periods ending after December 15, 2016
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Reporting Discontinued
Operations
What’s changing under ASU 2014-08:
• Raises the bar for when disposals can be reported as discontinued operations
• Eliminates the concept of “continuing involvement”
• Extensive new disclosures, including disclosure of “significant dispositions” that do
not qualify for discontinued operations
Transition:
• Applied prospectively
• Early adoption permitted
• Adopt 1st quarter of calendar year 2015/fiscal year 2016
• All others: for annual financial statements with fiscal years beginning on or after
December 15, 2014
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Reporting Discontinued
Operations
Existing rules
Rules under ASU 2014-08
Component of an entity that
comprises operations and cash
flows that can be clearly
distinguished
Major strategic shifts in an entity’s
operations
Significant continuing involvement
and permitted
Not applicable
Disclosures required only for
transactions that qualify as
discontinued operations
Disclosures also required for
disposals of “individually significant
components” that do not qualify for
discontinued operations
Neither requires or prohibits
reclassification of assets and
liabilities of discontinued
operations for prior periods
presented
Assets and liabilities must be
reclassified for all comparative
periods presented
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Donated Personnel Services
Received from Affiliates
What’s changing under ASU 2013-06:
• Applies to not-for-profit entities, including not-for-profit, business oriented health
care entities, that receive services from personnel of an affiliate that directly benefit
the recipient not-for-profit entity AND for which the affiliate does not charge the
recipient not-for-profit entity
• Provides guidance that not-for-profit entities apply for recognizing and measuring
services received from personnel of an affiliate
o
Expense and “contribution” associated with donated personnel services
received must be recognized in the recipient’s financials
o
Transaction would be measured based on affiliate’s actual costs unless cost
would over/understate the value received, then can elect fair value
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Donated Personnel Services
Received from Affiliates
•
Addresses reporting by recipient entity only (not the entity providing the services)
•
Applies only to recognition and measurement of personnel costs
•
Applies only when services are provided by employees of an affiliate that controls, is
controlled by, or is under common control with the recipient entity
•
Does not apply to situations where recipient compensates the affiliate for the services
provided
•
Applies to services received from for-profit affiliates as well as not-for profit affiliates
Transition:
•
Effective for periods beginning after June 15, 2014 with early adoption permitted
•
Prospective application with option to apply modified retrospective application
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Joint and Several Liability
What’s changing under ASU 2013-06:
•
Provides guidance for the recognition, measurement, and disclosure of obligations
resulting from joint and several liability arrangement to reduce diversity in practice
•
Entity measures obligations resulting from joint and several liability arrangements as the
sum of:
o
Amount the reporting entity agreed to pay on the basis of its arrangement among its
co-obligors
o
Any additional amount the reporting entity expects to pay on behalf of its co-obligors
Transition:
•
Effective for annual periods ending after December 15, 2014.
•
Early adoption permitted
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Joint and Several Liability
Health System
Obligated Group
Hospital A
Hospital B
Hospital C
$150 million
$100 million
$50 million
Facts:
• Obligated group issued debt totaling $300 million
• Hospitals are joint and severally liable for repayment of debt
• In addition to the consolidated financial statements, each hospital issues
standalone statements
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Joint and Several Liability
Health System
Obligated Group
Hospital A
Hospital B
Hospital C
$150 million
$100 million
$50 million
Conclusion:
•
Each hospital’s standalone statements should display its share of the obligation with
disclosure of the amount contingently owed (Hospital B’s statement shows $100 million
liability and disclose $200 million contingent obligation)
•
Disclosures should include nature and amount of obligation as well as information about
risks such obligations pose to entity’s future cash flows
•
If in a future period it becomes probable that Hospital A will be required to pay Hospital C’s
portion, Hospital A would record incremental additional liability at that time
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Revenue Recognition
Finally issued!
Effective Date: for periods beginning after 12/15/2016 (Public)
and December 15, 2017 (nonpublic)
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Revenue Recognition
Contracts with customers
Joint project with IASB
(Convergence)
Revenue
Recognition
Project
One common model across
industries
Principles vs. rules based
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Overview
Step 1
• Identify the contract with a customer
• Identify the separate performance obligations in the
contract
Step 2
Step 3
• Determine the transaction price
• Allocate the transaction price to the separate
performance obligations
Step 4
• Recognize revenue when (or as) the entity satisfies a
performance obligation
Step 5
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Overview
Healthcare entity implications:
• Recognition and measurement of revenue from self pay patients
• Estimating “variable consideration”
• Pattern of recognition of revenue under CCRC contracts
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Identifying Contracts
with Customers
The definition of contract and customer establish the scope of the
model
• Contract: An agreement between two or more parties that creates enforceable
rights and obligations. Can be written, oral or implied by an entity’s customary
business practice
• Customer: A party has contracted with an entity to obtain goods or services
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Identifying Contracts
with Customers
An entity shall account for a contract with a customer that is within
the scope of this Topic only when the following criteria are met
• Parties have approved the contract in writing, orally, or in accordance with other
customary business practices
• Both parties have enforceable rights and obligations
• Parties can identify the payments terms
• Contract has commercial substance
• Probable that the entity will collect the consideration to which it is entitled
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Identifying Contracts
with Customers
If contract does not meet the previous criteria in ASC 606-10-25-1
• An entity shall continue to assess the contract to determine whether the criteria in
paragraph in ASC 606-10-25-1 are subsequently met.
• When consideration is received from the customer, the entity shall recognize the
consideration received as revenue only when either of the following events has
occurred:
o
Entity has no remaining obligations to transfer goods or services to the
customer, and all or substantially all, of the consideration promised by the
customer has been received by the entity and is nonfundable.
o
The contract has been terminated, and consideration received from the
customer is nonrefundable.
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Determine the
Transaction Price
Amount expected to be entitled to in exchange for transferred
goods/service
• In some cases the promised consideration may be variable because facts and
circumstances indicate that the entity may accept a lower price that the amount
stated in the contract- price concession.
• If a portion of the transaction price is variable or contingent on the outcome of
future events, adjust transaction price to reflect the uncertainty
• Use probability-weighted estimate or most likely amount expected, whichever is
the best predictor
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Revenue Recognition…
CCRC Considerations
Impact of the new revenue recognition standards on CCRC’s
• Step 2: Identifying the performance obligations and Step 5: Recognize revenue
as obligations is satisfied
o
CCRC advance fees refundable only from proceeds of reoccupancy
o
Applicability of revenue recognition guide to CCRC
o
Time value of money
o
Performance obligations and pattern of transfer
o
Obligation to provide future services
o
Contract acquisition costs
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Revenue Recognition
Resources available:
• FASB Joint Transition Resource Group
o
Will consider issues that apply to common transactions that could reasonably
create diversity in practice
• AICPA Revenue Guide Project
o
15 chapters for specific industries, including healthcare
o
Healthcare task force are already considering implementation issues such as
 Self-pay revenue recognition
 Pattern of revenue recognition that would apply to CCRC entrance fees
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Revenue Recognition…
Common Questions
For healthcare entities, who is the customer (patient or the third
party payor)?
• The healthcare entity’s customer is the patient. The healthcare entity’s contract
with the third party payor is relevant in determining the transaction price (Step 3).
What happens to bad debt expense as a result of the new ASU?
• All previous ASU will be superceeded. Therefore, entities that applied ASU 201107 will no longer present bad debts on patient revenue as a component of net
patient revenue.
What happens to charity care?
• The rules associated with the recognition and disclosure of charity care remain
the same under the new ASU.
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Revenue Recognition
Potential impact of Revenue Recognition standard:
• Comparability of historical financial results
• Long term – will have little impact
• Year to year financial results could be impacted
• Outside users (bank, bonding companies) will have to adapt how they analyze
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Revenue Recognition
Potential impact of Revenue Recognition standard:
• Administrative burden
o
Possible limitations of IT systems
o
Time involved in analyzing each contract
o
Retrospective implementation (even limited)
• Contract terms
o
Might see a change in how contracts are negotiated, designed or worded as
companies try to get to a desired accounting result
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Proposed Pronouncements
and Projects
Proposed
Proposed Pronouncements
• Financial
Statement Presentation for Not-for Profits (NFP)
and
Projects
•
•
•
•
•
Extraordinary Items
Leases
Simplification Agenda
Goodwill Accounting for NFP and Public Entities
Pushdown Accounting
Note: These are not final/issued yet and in various stages in
approval process.
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Financial Statements
of Not-for-Profit Entities
• Since 2011, the FASB has been working with the Not-for-Profit Advisory Committee
(NAC) to improve financial reporting of NFP entities.
• Objective is to reexamine existing standards for financial statement presentation of
NFP entities focusing on improving:
•
Net asset classification requirements
•
Information provided in financial statements and notes about liquidity, financial performance
and cash flows.
• Exposure draft expected in 4th quarter 2014.
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Financial Statements
of Not-for-Profit Entities
• Net Asset Classes
•
With donor-imposed restrictions
•
Without donor-imposed restrictions
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Financial Statements
of Not-for-Profit Entities
• Fundamental shift in financial statement presentation
•
Operating- Cash flows associated with “core” business assets and liabilities
•
Investing – investment of “noncore” assets
•
Financing – How the business is financed (debt, equity)
•
Would eliminate healthcare performance indicator (though one could be voluntarily
presented).
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Financial Statements
of Not-for-Profit Entities
•
Reporting of expenses for all NFP entities
•
Requiring NFPs to report expenses by function and by nature in one location
 Statement of Activities/Operations
 Separate Statement of Expenses
 In the footnotes
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Extraordinary Items
•Concept
Exposure draft released
in July 2014
of Extraordinary
Items
• Objective of this proposed ASU:
•
o
Reduce the cost and complexity of income statement presentation by
eliminating the concept of extraordinary items
o
Maintaining or improving the usefulness of the information provided to the users
of the financial statements
Transition
o
Applied prospectively
o
Effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2015,
o
Early adoption permitted.
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Lease Exposure Draft
Joint project with IASB
Current status
• Re-deliberation
• Expecting final standard next year (2015)
• Implementation probably 2018 or after
• Leases < 12 months scoped out
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Lease Exposure Draft
Current provisions
• Lessees would report virtually all leases like capital leases are reported today
• Balance sheets would be “grossed up” to reflect right of use assets and lease
obligation liabilities
• Different pattern of expense recognition for leases similar to old FAS 13 capital
leases than operating leases
• Lessor model generally mirrors lessee model
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Lease Exposure Draft
Lessee Accounting
• Balance sheet
o
Lease asset and liabilities recognized on balance sheet
• Statement of Operations
o
Type B lease – Use straight line expense model (rent expense)
o
Type A lease – Apply financing lease expense model (amortization and
interest expense)
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Lease Exposure Draft
Potential impact of Leases standard (primarily from Lessee’s
standpoint):
• Essentially all leases on will be “on the balance sheet”
• Impact on key financial ratios and metrics, such as:
o
Working capital
o
Debt to net worth
o
Debt service coverage
o
EBITDA
o
Net Operating Income
• Resulting impact on loan covenants
• May change “buy” vs. “lease” decisions
• Lessees may be motivated to favor short-term leases
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Lease Exposure Draft
Lessor Accounting
• Financing lease
o
De-recognize the underlying lease asset; replace with a lease receivable and
residual asset- relatively unchanged from existing rules
• Operating lease (unchanged from existing rules)
o
Leased asset remains on books and is depreciated
o
Recognize rental income
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Simplification Agenda
• Presentation of debt issuance costs
• Measurement date of defined benefit plan assets
• Balance sheet classification of debt
• Accounting for income taxes
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Goodwill Accounting NFP
and Public Entities
What could be changing:
• Added to agenda in November 2013
• FASB staff is performing outreach and research on four possible alternatives:
o
Private company alternative (ASU 2014-02)
o
APB 17 approach (amortize over useful life, capped at maximum)
o
Direct write-off of goodwill
o
Simplified impairment test
• Different conclusions might be reached for public business entities than for NPO’s
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Pushdown Accounting
•
Exposure draft released in April 2014
•
Should an acquiree’s standalone statements reflect historical basis of assets and
liabilities, or “new basis” resulting from acquisition date remeasurement?
•
No guidance available for private companies or NFP entities
•
Proposal would provide all entities with an unrestricted OPTION to apply pushdown
accounting
•
Final standard expected 4th quarter of 2014
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Any Questions?
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