Financial Statement Trends and
Updates
Presented by:
Aracely Rios, CPA
Sara Dempsey, CPA
Intro to Weaver
• Founded in 1950 in Fort
Worth
• Approximately 450 people in
7 offices across Texas
• Largest firm Headquartered
in Texas, a Top 40 accounting
firm nationally
• Approximately 100 personnel
working not-for-profit and
government engagements
Speaker
Aracely Rios, CPA
A manager in Weaver and Tidwell’s (dba Weaver) Assurance Services practice,
Aracely works with nonprofit institutions, higher education, privately-held
business enterprises, and local governments. She specializes in audit
engagements. Aracely has extensive experience applying nonprofit GAAP
including the application of UPMIFA and fair value measurements.
Sara Dempsey, CPA
A manager in Weaver and Tidwell’s (dba Weaver) Assurance Services practice,
Sara works with nonprofit institutions and local governments. She specializes
in audit engagements. Sara has extensive experience applying nonprofit GAAP
including the application of UPMIFA, accounting for mergers, acquisitions and
fair value measurements.
Objective
• What updates you need to know and how will
the changes impact you?
Content of Updates
• Lease accounting
–
–
–
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Timeline
Current recognition criteria
Proposed lease accounting
Current status and where will we end up
• Other relevant upcoming changes to GAAP
– Fair value measurements
– Revenue recognition
– Financial statement preparation
• Questions???
Lease Accounting
Current Recognition
• Operating or Capital
– 4 criteria for evaluation
• Lease conveys ownership to the lessee at some point
• The lessee has an option to purchase the asset at a bargain
price
• Term of the lease is 75% or more of the useful life of the
asset
• Present value of the minimum lease payments equals or
exceeds 90% of the fair value
Lease Accounting
Proposed lease accounting changes
• All leases to appear on the balance sheet.
– Right to use asset and liability for lease obligation
• Reevaluated each reporting period.
• Leverage ratios and capital ratios could be negatively
impacted.
• Favorable impact on earnings before interest, taxes and
depreciation.
Lease Accounting
• Right to use approach
• Initial Measurement
– Asset and liability recorded at commencement
– Present value methodology (lessee’s incremental
borrowing rate)
– Asset same as obligation (plus any recoverable initial
direct costs)
– Lease term defined as “longest possible term that is
more likely than not to occur”
Lease Accounting
• Lease Term
– Defined as “longest possible term that is more likely than
not to occur”.
– Will require probability analysis for assessing renewal
options.
• Lease Payments
– Expected outcome approach “the present value of the
probability-weighted average of the cash flows for a
reasonable number of outcomes.
– Includes contingent rents, termination penalties and
residual value guarantees.
Lease Accounting
• Subsequent Measurement
– Asset amortized over useful life.
– Interest expense recorded on obligation.
– Reassess for changes in facts and circumstances.
• Other items of note
– Exposure draft does not address lease incentives.
– Certain leases outside the scope: intangible assets,
mineral rights and biological assets.
– Month to month leases would be in the scope of the
lease term.
Lease Accounting
Lease Term:
Renewal Options:
Payments:
5 years
two 2-year options
1,000 per mth
2nd
2 year
Lease term
Probablility
Cumulative Probablity
PV of Future Payments
1st
2 year
9
35%
35%
No
renewal
7
45%
80%
5
20%
100%
$68,453 (Based on incremental borrowing rate of 6%)
Initial Measurement
Right-to-use asset
Lease Obligation
Subsequent Measurement
Cash
Lease Obligation
Interest Expense
Depreciation Expense
Accumulated Depreciation
$
DR
68,453
CR
$ 68,453
$
$
$
$
1,000
$
815
658
342
815
Lease Accounting
• Presentation:
– Right to use asset reported in PP&E separate from
other non-leased assets.
– Amortization of right-to-use asset and interest
expense on liability reported from other
amortization separately, either on the financial
statements or notes.
– Cash payments on lease reported as financing
activities (previously operating).
Lease Accounting
• Lessor accounting
– Either performance obligation or derecognition
approach.
– Performance obligation approach
• Right to receive lease payments asset and lease liability.
– Same as valuation of right to use asset.
– Derecognition approach
• Right to receive lease payments asset.
• Derecognize portion of asset leased and recognize income
and expense upon lease commencement.
Lease Accounting
WHAT WILL BE THE POTENTIAL AFFECTS OF THE PROPOSED CHANGES
•
Practically every organization will be affected as most organizations have real estate or
equipment/vehicle leases currently being reported as operating leases.
•
Balance sheets will inflate significantly as a result of recording the lease obligations
and corresponding right to use assets.
•
Organizations will appear more highly leveraged which could affect existing debt
covenants and cause debt covenant violations. Organizations should be cognizant of
this and consider starting discussions early with lenders to address the potential
impact on debt covenants, etc.
•
Organizations will have to deal with increased administrative burden to collect and
input substantial data and perform complex calculations to determine amounts to be
capitalized.
•
Organizations will start considering the options and benefits of buying verses leasing
since the asset and liability will be recorded on the balance sheet anyway (especially
when the financial markets recover).
Lease Accounting
Current status and where will we end up
• FASB and IASB acknowledge that all leases not created
equal.
• Agree to consider “finance” or “other-than-finance”
contracts.
• More than 780 comments on exposure draft.
• Where will we end up????
Other relevant
changes to GAAP
FASB Technical Plan and Project Update:
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=12
18220137074
Other relevant
changes to GAAP
Fair Value Measurements
• The Board tentatively decided that the amendments to Topic 820 will
require nonpublic entities to disclose the following:
– The current use when a nonfinancial asset is measured subsequently at fair value
and the highest and best use of the asset differs from its current use as well as the
reasons why the asset is being used in a manner that differs from its highest and
best use. The Boards also tentatively decided to require that disclosure only when
the asset is recognized at fair value in the statement of financial position, not
when the fair value is disclosed.
• For assets and liabilities categorized within Level 3 of the fair value
hierarchy that are measured at fair value in the statement of financial
position on a recurring basis after initial recognition:
– A quantitative disclosure of the unobservable inputs and assumptions used in the
measurement.
– A description of the valuation processes in place.
Other relevant
changes to GAAP
Fair Value Measurements
• The Board also tentatively decided that, as a result of the
amendments to Topic 820, nonpublic entities will now be
required to disclose the following:
– The level in which a fair value measurement would be categorized
within the fair value hierarchy for assets and liabilities not
recognized at fair value but for which disclosure of fair value is
required .
– Transfers between Levels 1 and 2 of the fair value hierarchy.
– A qualitative discussion about the sensitivity of a Level 3 fair value
measurement to changes in unobservable inputs and any interrelationships between those inputs that magnify or mitigate the
effect on the measurement.
Other relevant
changes to GAAP
Revenue recognition
• Single comprehensive revenue recognition criteria.
– Minimize the number of standards to reference to
• Address revenue recognition for the following:
– Goods
– Services
– Goods and services (Multiple deliverables)
• The Boards expect to issue a final revenue standard in
2011.
Other relevant
changes to GAAP
Financial statement presentation
•
•
The purpose of this joint project is to establish a standard that will guide the
organization and presentation of information in the financial statements. The results of
this project will directly affect how the management of an entity communicates
financial statement information to users of financial statements, such as present and
potential equity investors, lenders, and other creditors. The boards’ goal is to improve
the usefulness of the information provided in an entity’s financial statements to help
users make decisions in their capacity as capital providers.
In their Phase B discussions, the Boards developed two core principles for financial
statement presentation based on the objectives of financial reporting and the input
the boards received from users of financial statements and from members of their
advisory groups. Those proposed principles state that information should be presented
in the financial statements in a manner that:
– Disaggregates information so that it is useful in predicting an entity’s future cash flows.
Disaggregation means separating resources by the activity in which they are used and by their
economic characteristics.
– Portrays a cohesive financial picture of an entity’s activities. A cohesive financial picture means
that the relationship between items across financial statements is clear and that an entity’s
financial statements complement each other as much as possible.
Other relevant
changes to GAAP
Financial statement presentation
• Statement of financial position
– Assets and liabilities by major activity
• Operating, investing and financing
• Statement of comprehensive income
– Consistent with reporting of assets and liabilities
• Statement of cash flows
– Direct method (no reconciliation of the indirect method)
• Notes to Financial Statements
– Rationale for classifications
• Board expected to evaluate project in June 2011
Questions