ACCOUNTING ISSUES
Presenters:
Stephen Sommerville, Partner, PricewaterhouseCoopers LLP
Donald Heisler, Partner, Deloitte & Touche LLP
Diane M. Irvine, Director, INRIX, Inc., Rightside, XO Group, Inc., Yelp Inc.
Brent Johnson, Audit Partner, KPMG
Tracy Knox, CFO, Rightside
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
1
Agenda
 Cyber Security
 SEC Disclosure Update
 PCOAB Update
 New Accounting Standards
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
2
Cyber Security – We Are All Vulnerable
Source: Computer Weekly Data Bank
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
3
Cyber Security – The Cost of an Attack Can Be Significant
Source: HP’s 2014 Global Report on the Cost of Cyber Crime
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
4
Cyber Security –Impact For Us
Increased
Costs
New equipment, firewalls and systems
Added InfoSec FTEs
Increased use of security experts and consultants
Increased use of PR and Crisis Communication firms
Insurance Policies to cover increased risk of customer and shareholder lawsuits
Enhanced
Controls
Implement cybersecurity screening for new partners
Enhanced reporting of events and impact
Accounting policies to ensure all costs are estimated, accrued or reported
More frequent and extensive communication with the board of directors
Increased disclosures in Risk Factors in all SEC Filings
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
5
Disclosure Effectiveness
 Use of Non-GAAP Metrics
 Consistency of Adjusted EBITDA definitions
 Level of disclosure in 10-Q vs. 10-K
 Detailed disclosures re: debt covenants
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
6
Segment Reporting
During the 2014 AICPA National Conference on Current SEC and PCAOB Developments, the SEC staff
noted that they will be refreshing their approach to reviewing segment disclosures and strongly
encouraged registrants to do the same.
•
Registrants should not default to the Chief Executive Officer as the function operating in the role of the
Chief Operating Decision Maker (“CODM”) simply because that individual has ultimate decision-making
authority.
•
The SEC staff also noted that issuers often place a great deal of reliance on the CODM reporting
package when identifying operating segments. The CODM reporting package is one data point to be
used in combination with other indicators.
•
The SEC staff reminded issuers that the entity-wide disclosures are required even if a registrant has
only one reportable segment. In addition, the entity-wide disclosure of revenue by product may be
different than how revenue is reflected in segments organized by product.
•
If operating segments have characteristics so similar that they are expected to have essentially the
same future prospects, separate reporting of segment information would not add significantly to an
investor’s understanding. Therefore, aggregation of two or more operating segments is permitted.
However, the SEC staff believes that the aggregation criteria are intended to be a high hurdle
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
7
Revenue Disclosures
One common subjects of SEC staff comment revenue disclosures. The themes include:
•
No commentary on any inconsistencies between the revenue and distribution channels discussed in
the business section or MD&A and the revenue policy disclosures.
•
Greater transparency into revenue recognition, including:
•
Disclosing whether there are one or multiple units of accounting
•
Improving disclosure of arrangements with resellers or distributors;
•
Amending financial statement presentation to separate revenue and cost of revenue line items for
bundled arrangements (products vs. services);
•
Disclosing the basis of how fair value is determined for elements within a multiple element
arrangement;
•
Disclosing the basis for presenting revenue gross versus net in a sales arrangement;
•
Enhancing disclosures related to the determination of selling price between vendor specific
objective evidence, third-party evidence, and best estimate of selling price; and
•
Discussing key revenue variables (e.g., quantity and price) that are specific to and necessary for
understanding and evaluating results of operations in MD&A.
•
Identifying pricing rates as a key driver of profitability and changes in pricing rates have on profit
margin and overall profitability in MD&A.
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
8
PCAOB Matters
• Implementation Issues and Challenges
Inspections
Fees
Additional work
• Proposed Agenda Items
Auditors Report
Audit transparency
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
9
New Revenue Recognition Standard
FASB voted on April 1, 2015 to propose a one-year deferral of new revenue standard
•
•
•
Effective date delayed for public companies to fiscal years beginning after December 15,
2017 – ie 2018 for calendar year end issuers
•
Non-public companies get a further year deferral – 2019 for calendar companies
•
Early adoption is permitted though no earlier than original effective date (calendar 2017)
May 12 FASB proposed two amendments to the standard
• License transactions – symbolic vs functional
• Distinct in the context of the contract
• Proposed amendments still outstanding for:
• Practical expedients upon transition
• Collectability and non-cash consideration
• New practical expedients for shipping and handling costs and sales taxes
collected from customers
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
10
Private Company Elections: Accounting Standard Updates
ASU 2014-2 Intangibles – Goodwill and Other (Topic 350)
• Applies to all entities except for public business entities and not-for-profit entities
• Provides significant relief for non-public business entities
• Definition of a public business entity is not always an easy determination
• Is this “real” relief?
 Considerations for private business entities with plans to go public
 Considerations for private business entities acquired by a public company (or visa
versa)
 M&A due diligence
 SEC Reg. S-X Rule 3-05
ASU 2014-3 Derivatives and Hedging
• Provides for a simplified method of accounting for variable for fixed interest rate
swaps
• Can elect hedge accounting before financial statements are issued
• Can use settlement value in accounting for hedged amount
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
11
Reporting revenue gross as a principal versus net as an agent
(Topic 605-45 – Revenue – Principal Agent Considerations)
 Continues to be significant diversity in practice amongst private AND public
companies
 Frequent source of comment by the SEC, both as it relates to accounting and
disclosure
 SEC continues to focus on key considerations such as:
• Acts as principal in the transaction
• Takes title to products
• Has the “risks and rewards of ownership”, such as the risk of loss for
collection, delivery, or returns
• Acts as an agent or broker (including performing services, in substance, as an
agent or broker) with compensation on a commission or fee basis.
 Particularly challenging to apply to services companies, especially those in cloud
computing and businesses that are “solution” providers that utilize another
vendors products and/or services.
 Must “objectively” assess the substance of the transaction and what is being
delivered.
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
12
Cloud Computing Considerations
 With the proliferation of the “cloud” and “cloud-based” solutions, a reassessment
and careful examination of accounting practices is needed:
• Proposed ASU – Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement
– Software or service?
– Perform same assessment as vendors under ASC 985-605:
 If there is a software license element - the customer would account for the related
fees paid as an internal-use software intangible; if not, the customer would
account for the arrangement as a service contract.
 Cloud computing costs
• Web site development (ASC 350-50)
• Development or acquisition of software to be used by the customer (985-20 or
350-40)
• Infrastructure purchases (ASC 360)
• Maintenance or ongoing service
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
13
Cloud Computing Considerations, Cont:
 Cloud computing revenues
• Are y0u delivering a software element?
• Is this a hosted arrangement? In effect, is this a service contract?
 What if tangible product (e.g. hardware) is a part of delivering the service?
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
14
Other updates
 Pushdown accounting (ASU 2015-08)
• Now optional for all companies, regardless of the ownership change in the
acquired entity
• SEC issued conforming rules (rescinded Staff Topic 5J)
• Effective immediately (January 2105). Previously issued financial statements
can be revised to apply push down accounting but previously applied push down
accounting cannot be reversed.
 Extraordinary items (ASU 2015-01)
• Eliminates the concept of extra-ordinary items
• Effective for years beginning after December 15, 2015
• Can be applied prospectively or retrospectively
 Going Concern disclosures (ASU 2014-15)
• Management will consider relevant conditions that are known (and reasonably
knowable) at the issuance date.
• Substantial doubt exists if it is probable that the entity will be unable to meet its
obligations within one year after the issuance date.
• Effective for annual periods beginning after December 15, 2016
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | SEAT T LE, W A
15