Bp April 12 2010 Presentation Accounting Principles Under Development What Is Convergincg On You 20100324


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Overvie w of 2010 FASB and IASB Convergence Projects

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Bp April 12 2010 Presentation Accounting Principles Under Development What Is Convergincg On You 20100324

  1. 1. Barrett Peterson, CPA Illinois CPA Society Manager, Accounting Standards, North Shore Chapter Procedures, & Analysis Industry & Business TTX Forum [email_address] April 12, 2010
  2. 2. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  3. 3. <ul><li>Common Goal – Recognize the global nature of financial markets’ need for high-quality, globally comparable financial information to meet the needs of investors and other providers of capital. </li></ul><ul><li>Common base – high quality accounting standards that provide relevant, transparent, neutral and comparable financial information. </li></ul><ul><li>General Applicability Reminders: </li></ul><ul><ul><li>FASB: Applicable to nongovernmental entities, including not-for-profit entities. GASB applies to governmental entities. </li></ul></ul><ul><ul><li>IASB: Applicable to general purpose financial reporting by profit-oriented entities Other entities may find IFRS appropriate [Preface to IFRS] </li></ul></ul>
  4. 4. <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>
  5. 5. <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>
  6. 6. <ul><li>FASB Term </li></ul><ul><ul><li>Net Income </li></ul></ul><ul><ul><li>Plan, Program, Process, or Group of Activities </li></ul></ul><ul><ul><li>Amortized </li></ul></ul><ul><ul><li>Accruals </li></ul></ul><ul><ul><li>Capital Lease </li></ul></ul><ul><li>IASB Term </li></ul><ul><ul><li>Profit & Loss, or Net Income </li></ul></ul><ul><ul><li>Scheme </li></ul></ul><ul><ul><li>Amortised </li></ul></ul><ul><ul><li>Provisions </li></ul></ul><ul><ul><li>Finance Lease </li></ul></ul>
  7. 7. <ul><li>Norwalk Agreement – 2002 </li></ul><ul><li>2006 Memorandum of Understanding [MOU] – A Roadmap for Convergence: 2006-2008 </li></ul><ul><li>2008 Memorandum of Understanding [MOU] – Progress Report and Timetable for Completion </li></ul><ul><li>2009 (November 5) Update to Memorandum of Understanding and Reaffirmation of Memorandum of Understanding [MOU] </li></ul><ul><li>2010 SEC includes the status of convergence as a consideration in 2011 “roadmap” decision </li></ul>
  8. 8. <ul><li>Contract focus – the assets and liabilities have a conceptual net position </li></ul><ul><li>Assets [rights] and liabilities [performance obligations] a core focus, plus cash flows [much less emphasis on income statement] </li></ul><ul><li>Revenue reflects the increase in the net contract position, either by increases in consideration or satisfaction of performance obligations </li></ul><ul><li>FASB much more focused on fair value measurement; IASB greater use of carrying value/amortized cost </li></ul><ul><li>FASB “recycles” OCI; IASB does not in all cases </li></ul>
  9. 9. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  10. 10. <ul><li>A Conceptual Framework Project: A proposed Concept Statement regarding the Reporting Entity issued March 11, 2010 </li></ul><ul><li>Fourteen Standards Projects, three of which are inactive </li></ul><ul><li>A Research Project, on Financial Instruments: Derecognition </li></ul>
  11. 11. <ul><li>The Conceptual Framework Project, comprised of four components: </li></ul><ul><ul><li>Objective and Quality Characteristics </li></ul></ul><ul><ul><li>Reporting Entity: FASB issues a Proposed Statement of Financial Accounting Concepts on March 11, 2010 </li></ul></ul><ul><ul><li>Measurement </li></ul></ul><ul><ul><li>Elements and recognition </li></ul></ul>
  12. 12. <ul><li>Reporting Discontinued Operations, 2010 </li></ul><ul><li>Accounting for Financial Instruments, 2010 </li></ul><ul><li>Fair Value Measurement, 2010 </li></ul><ul><li>Statement of Comprehensive Income, 2010 </li></ul><ul><li>Consolidations: Policy and Procedures, 2010 </li></ul><ul><li>Emissions Trading Schemes, 2011 </li></ul><ul><li>Financial Instruments With Characteristics of Equity, 2011 </li></ul>
  13. 13. <ul><li>Financial Statement Presentation, 2011 </li></ul><ul><li>Insurance Contracts, 2011 </li></ul><ul><li>Leases, 2011 </li></ul><ul><li>Revenue Recognition, 2011 </li></ul><ul><li>Earnings per Share [not active] </li></ul><ul><li>Income Taxes [not active] </li></ul><ul><li>Postretirement Benefit Obligations including Pensions (phase 2) [not active] </li></ul>
  14. 14. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  15. 15. <ul><li>Lessee Accounting </li></ul><ul><ul><li>Capitalize a “right to use” asset </li></ul></ul><ul><ul><li>Recognize a debt, or payable for short-term leases </li></ul></ul><ul><li>Lessor Accounting </li></ul><ul><ul><li>Reflect a receivable for amounts due under the contract </li></ul></ul><ul><ul><li>Reflect “performance obligation” accounting for an initially deferred credit </li></ul></ul><ul><li>Fundamental Conceptual Change – “Operating” Lease concept no longer exists for lessees </li></ul><ul><li>A schedule M will arise, probably producing a deferred tax asset subject to valuation allowance consideration </li></ul>
  16. 16. <ul><li>Lease defined a contract to convey a right to use a specified asset, for a period of time, for consideration </li></ul><ul><li>Certain items excluded </li></ul><ul><ul><li>Leases of intangible assets </li></ul></ul><ul><ul><li>Leases to explore for natural resources </li></ul></ul><ul><ul><li>Leases of biological assets </li></ul></ul><ul><ul><li>Contracts that represent a purchase (lessee) or sale (lessor) of the underlying asset </li></ul></ul><ul><li>Leases outstanding at time of adoption recorded as an obligation and related asset [lessee], or a receivable and related performance obligation [lessor] </li></ul><ul><li>Recognition when the contract is signed, and presented net in financial statements until delivery </li></ul>
  17. 17. <ul><li>Statement of Financial Position </li></ul><ul><ul><li>Significant increase in assets </li></ul></ul><ul><ul><li>Significant increase in debt obligations </li></ul></ul><ul><li>Income Statement – timing of expense recognition </li></ul><ul><ul><li>Depreciation plus interest expense under new standard </li></ul></ul><ul><ul><li>Lease rental expense is straight line amounts as lease </li></ul></ul><ul><ul><li>Amortization life vs. similar asset’s depreciable life </li></ul></ul><ul><li>Financial ratios </li></ul><ul><ul><li>Capitalization ratios </li></ul></ul><ul><ul><li>Interest coverage calculation </li></ul></ul><ul><li>Covenant requirements – debt agreements, leases, and other financial instruments terms </li></ul>
  18. 18. <ul><li>Lessee Disclosure Requirements – the Lease Obligation “Debt” footnote </li></ul><ul><ul><li>Description of leasing activities, including disaggregated data by nature or function </li></ul></ul><ul><ul><li>Use, and amounts reflected, for simplified accounting for short-term leases </li></ul></ul><ul><ul><li>Disclosure of any sale and leaseback transactions </li></ul></ul><ul><ul><li>A maturity analysis of the gross obligation to pay rentals, with a reconciliation of the gross obligation to obligation amounts presented in the financial statements </li></ul></ul><ul><ul><li>A reconciliation between opening and closing balances for its right-of-use assets and its obligation to pay rentals </li></ul></ul><ul><ul><li>A narrative description of its assumptions and estimates on the amortization method used, options, contingent rentals, residual value guarantees, and the discount rate used </li></ul></ul><ul><li>Lessor Transitional Provisions </li></ul><ul><ul><li>Recognize and measure all outstanding leases at initial application using a simplified retrospective approach at the present value of remaining lease payments, discounted at the original rate the lessor is charging the lessee. The performance obligation should be measured on the same basis as the receivable. </li></ul></ul><ul><ul><li>IFRS users should reinstate previously derecognized lease assets at depreciated cost, adjusted for impairments and revaluations. </li></ul></ul><ul><li>Measurement and Initial Recognition – to be done at the inception of the lease </li></ul><ul><li>Lessor Accounting for Residual Value Guarantees </li></ul><ul><ul><li>Include amounts payable in the lease receivable if they can be measured reliably </li></ul></ul><ul><ul><li>Measure the lease receivable using the expected outcome technique </li></ul></ul><ul><ul><li>Reassess the carrying amount of the receivable at each reporting date for new facts or circumstances materially changing the receivable </li></ul></ul><ul><ul><li>Changes to the receivable from changes in residual value guarantees treated as an adjustment to the lessor’s receivable and related performance obligation liability </li></ul></ul>
  19. 19. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  20. 20. <ul><li>March 3, 2010: Joint Boards tentatively decide to indicate their preference for requiring an entity to adopt these changes on a full retrospective basis </li></ul><ul><li>Format designed around sections and categories which are similar – but not identical to - current cash flows statement sections </li></ul><ul><li>Focus substantially emphasizes the sections, and some categories, causing the balance sheet to not balance </li></ul><ul><li>Some emerging difference between FASB and IASB requirements </li></ul><ul><li>Not-for profit entities and Benefit Plans excluded from scope </li></ul>
  21. 21. <ul><li>Extensive changes to financial statement format, components, presentation, and related disclosures, based on three core objectives: </li></ul><ul><ul><li>Cohesive presentation of financial information </li></ul></ul><ul><ul><li>Disaggregation of information to make it useful to enable investors to assess the amount, timing, and uncertainty of future cash flows </li></ul></ul><ul><ul><li>Present information to permit users to evaluate liquidity and financial flexibility of the entity to assess its ability to meet financial commitments and invest in business opportunities </li></ul></ul>
  22. 22. <ul><li>Align financial statement categories and line items across all financial statements </li></ul><ul><li>Employ a presentation approach based on how management views and directs the business </li></ul><ul><li>Present information about discontinued operations separate from continuing business activities </li></ul><ul><li>Classify assets and liabilities to best reflect how they are used by the entity </li></ul><ul><li>Present meaningful subtotals </li></ul>
  23. 23. <ul><li>Statement of Financial Position </li></ul><ul><li>Statement of Comprehensive Income , separated into profit and loss/net income and other comprehensive income </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Statement of Changes in Equity </li></ul><ul><li>An analysis presenting a “roll-forward” of all significant asset and liability line items </li></ul>
  24. 24. <ul><li>The Statements of Financial Position, Comprehensive Income, and Cash Flows to share a common set of categories: </li></ul><ul><ul><li>Business Section </li></ul></ul><ul><ul><ul><li>Operating Category – the entity’s core purpose, including capital expenditures </li></ul></ul></ul><ul><ul><ul><li>Investing Category – not related to core business, such as available-for-sale securities held by a manufacturer </li></ul></ul></ul><ul><ul><ul><li>Financing arising from operating activities </li></ul></ul></ul><ul><ul><li>Financing Section – how the entity is funded </li></ul></ul><ul><ul><li>Income Taxes </li></ul></ul><ul><ul><li>Discontinued Operations – net of taxes </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Example: FASB Handout </li></ul></ul>
  25. 25. <ul><li>Statement of Financial Position </li></ul><ul><ul><li>Assets and Liabilities grouped by category – business [operating and investing], financing, income taxes, and discontinued operations. </li></ul></ul><ul><ul><li>Totals by category </li></ul></ul><ul><ul><li>Total Assets and Total of Liabilities and Equity reported, but does not “foot” to “balance” </li></ul></ul><ul><ul><li>Recommend sequence of presentation within section/category by liquidity if appropriate </li></ul></ul>
  26. 26. <ul><li>Present by section – operating, investing, financing, income taxes, discontinued operations </li></ul><ul><li>Disaggregate each section by function, or by nature if more informative </li></ul><ul><li>Disaggregate functional amounts by nature to the extent this will enhance usefulness in predicting the entity’s future cash flow </li></ul>
  27. 27. <ul><li>Direct method presentation required </li></ul><ul><li>Operating cash flows different – </li></ul><ul><ul><li>Current operating cash flows </li></ul></ul><ul><ul><li>Capital expenditures included </li></ul></ul><ul><ul><li>Investing activities included </li></ul></ul><ul><li>Financing section – Entity debt and equity </li></ul><ul><li>Income taxes section now a component </li></ul><ul><li>Discontinued operations now a component </li></ul>
  28. 28. <ul><li>Accounting policies should describe the entity’s classification policy </li></ul><ul><li>An entity with an operating cycle longer than a year should describe its operating cycle in the footnotes </li></ul><ul><li>Repatriation limitations and other restrictions on cash and short-term equivalents should be disclosed </li></ul><ul><li>Roll-forward of all significant asset and liability line items [not required for US nonpublic business entities] </li></ul>
  29. 29. <ul><li>A roll-forward analysis of each significant asset and liability line item is required, and must distinguish [columns]: </li></ul><ul><ul><li>Changes due to cash inflows and outflows </li></ul></ul><ul><ul><li>Changes from repetitive and routine noncash accruals </li></ul></ul><ul><ul><li>Changes from noncash transactions or events that are nonroutine or nonrepetitive [acquisition or disposition of a business, for example] </li></ul></ul><ul><ul><li>Changes resulting from accounting allocations [depreciation, for example] </li></ul></ul><ul><ul><li>Changes resulting from accounting provisions/reserves [bad debts, obsolete inventory, for example] </li></ul></ul><ul><ul><li>Changes resulting from remeasurements </li></ul></ul>
  30. 30. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  31. 31. <ul><li>Remove inconsistencies and weaknesses in existing revenue recognition standards and practices </li></ul><ul><li>Provide a more robust framework for addressing revenue recognition issues </li></ul><ul><li>Simplify financial reporting by reducing the number of standards to which companies must refer </li></ul><ul><li>Improve comparability across companies and geographical boundaries </li></ul>
  32. 32. <ul><li>Revenue recognition to reflect a contract-based recognition model. Under a contract, the company </li></ul><ul><ul><li>Obtains rights to consideration (payment) from customers </li></ul></ul><ul><ul><li>Assumes ”performance obligations” to provide goods and services to the customer </li></ul></ul><ul><li>Revenue is recognized when performance obligations are satisfied </li></ul><ul><li>Revenue amounts for each performance obligation based on an allocation of the customer’s consideration </li></ul><ul><li>Performance obligations to be remeasured if subsequently evaluated as “onerous” </li></ul>
  33. 33. <ul><li>Lease contracts </li></ul><ul><li>Insurance contracts </li></ul><ul><li>Financial instrument contracts </li></ul><ul><li>Guarantees (other than product warranties) within the scope of other standards </li></ul>
  34. 34. <ul><li>Identify the contract with the customer </li></ul><ul><li>Identify and separate performance obligations in the contract </li></ul><ul><li>Determine and, if appropriate, allocate the transaction consideration </li></ul><ul><li>Recognize revenue as performance obligations are satisfied </li></ul><ul><li>Record amortizable asset for contract fulfillment costs, subject to impairment, expensed as performance obligations are satisfied </li></ul><ul><li>Expense contract acquisition costs, costs related to satisfied performance obligations, and abnormal amounts of wasted labor, material or other fulfillment costs </li></ul>
  35. 35. <ul><li>Transaction consideration determination </li></ul><ul><ul><li>Variable consideration </li></ul></ul><ul><ul><li>Collectability </li></ul></ul><ul><ul><li>Time value of money </li></ul></ul><ul><ul><li>Noncash consideration </li></ul></ul><ul><li>Revenue recognition </li></ul><ul><ul><li>Customer control of goods and services </li></ul></ul><ul><ul><li>Continuous transfer of goods and services </li></ul></ul><ul><ul><li>Other considerations – </li></ul></ul><ul><ul><ul><li>Principal vs. agent </li></ul></ul></ul><ul><ul><ul><li>Options to acquire additional goods and services </li></ul></ul></ul><ul><ul><ul><li>Licenses and rights to use </li></ul></ul></ul><ul><ul><ul><li>Rights of return </li></ul></ul></ul><ul><ul><ul><li>Product warranties and product liabilities; quality assurance warranties vs. insurance warranties </li></ul></ul></ul>
  36. 36. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  37. 37. <ul><li>Reconsider the recognition and measurement of financial instruments </li></ul><ul><li>Address issues related to impairment of financial instruments and hedge accounting </li></ul><ul><li>Increase convergence in accounting for financial instruments </li></ul><ul><li>Simplify and resolve practice issues in accounting for hedging activities </li></ul><ul><li>Improve the financial reporting of hedging activities to make the accounting model and associated disclosures easier to understand for users of financial statements </li></ul><ul><li>Address differences in the accounting for derivative instruments and hedged items or transactions </li></ul>
  38. 38. <ul><li>Cash, evidence of an ownership interest in an entity, or a contract that both: </li></ul><ul><ul><li>Imposes on one entity a contractual obligation either: </li></ul></ul><ul><ul><ul><li>To deliver cash or another financial instrument to a second entity </li></ul></ul></ul><ul><ul><ul><li>To exchange other financial instruments on potentially unfavorable terms with the second entity </li></ul></ul></ul><ul><ul><li>Conveys to that second entity a contractual right either: </li></ul></ul><ul><ul><ul><li>To receive cash or another financial instrument from the first entity </li></ul></ul></ul><ul><ul><ul><li>To exchange other financial instruments on potentially favorable terms with the first entity </li></ul></ul></ul><ul><li>This recursive definition requires a chain of contractual obligations that ends with the delivery of cash or ownership interest in an entity </li></ul>
  39. 39. <ul><li>Financial Instruments – This Project </li></ul><ul><li>Financial Instruments with Characteristics of Equity – separate project </li></ul><ul><li>Share Based Payments – existing, separate guidance </li></ul><ul><li>Leases – separate project </li></ul><ul><li>Investments in Affiliates – existing, separate guidance </li></ul><ul><li>Benefits Liabilities – existing, separate guidance </li></ul><ul><ul><li>Pensions </li></ul></ul><ul><ul><li>Other Post-retirement </li></ul></ul><ul><ul><li>OPEB </li></ul></ul><ul><ul><li>Compensated Absences </li></ul></ul><ul><li>Insurance Contracts – separate project </li></ul><ul><li>Fair Value – Recognition, Measurement, Disclosures, to the extent applicable to financial instruments – related separate project </li></ul><ul><li>FASB [only] Project: Disclosures about Credit Quality [Finance Receivables] and Allowance for Credit Losses </li></ul>
  40. 40. <ul><li>Loans </li></ul><ul><li>Securities </li></ul><ul><ul><li>Common stock, preferred stock, debt instruments </li></ul></ul><ul><ul><li>Mutual fund shares </li></ul></ul><ul><ul><li>Investment entities other than mutual funds </li></ul></ul><ul><li>Puts, Calls, Forward Contracts, etc. </li></ul><ul><li>Derivative Contracts </li></ul><ul><li>Hedging Agreements </li></ul><ul><li>Credit Default Swaps </li></ul>
  41. 41. <ul><li>Joint Boards Documents </li></ul><ul><ul><li>Reducing Complexity Discussion Paper, and related Comment Letters and Comment Letter Summary </li></ul></ul><ul><ul><li>Comparison of FASB and IASB models (as of November 2009) </li></ul></ul><ul><li>FASB Documents </li></ul><ul><ul><li>Accounting for Hedging Activities Exposure Draft, and related Hedging Activities Comment Letters and Comment Letter Summary </li></ul></ul><ul><ul><li>Tentative decisions on March 31, regarding impairments, disclosures </li></ul></ul><ul><li>IASB Documents </li></ul><ul><ul><li>IFRS 9: Financial Instruments – dealing with classification and measurement – issued November 12, 2009 </li></ul></ul><ul><ul><li>Exposure Draft, Amortised Cost and Impairment, issued November 5, 2009 with a comment period ending June 30, 2010 </li></ul></ul>
  42. 42. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>All financial assets and financial liabilities except: </li></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Employers’ and plans’ obligations for pension, OPEB, compensated absences </li></ul></ul><ul><ul><li>Insurance contracts </li></ul></ul><ul><ul><li>Equity investments in consolidated subsidiaries </li></ul></ul><ul><ul><li>Interest in consolidated VIEs </li></ul></ul><ul><ul><li>Bifurcated, hybrid instruments </li></ul></ul><ul><li>Financial assets within the scope of IAS 39 </li></ul>
  43. 43. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Fair Value </li></ul><ul><li>Amortized Cost </li></ul><ul><li>Fair Value </li></ul><ul><li>Amortised Cost </li></ul>
  44. 44. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Fair Value through Net Income (FV-NI) </li></ul><ul><li>Fair value through other comprehensive income </li></ul><ul><li>Amortized cost </li></ul><ul><li>Default Classification </li></ul><ul><ul><li>All instruments measured at fair value with changes in fair value recognized in net income </li></ul></ul><ul><ul><li>Certain changes permitted in OCI </li></ul></ul><ul><li>Fair Value through Net Income (FV-NI) </li></ul><ul><li>Fair value through other comprehensive income (FV-OCI) (limited option) </li></ul><ul><li>Amortised cost </li></ul><ul><li>Default Classification - none </li></ul>
  45. 45. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Debt instruments with principal amounts if the entity plans to hold to collect cash flow rather than sell or settle the instrument with a third party </li></ul><ul><li>Irrevocable election at initial recognition for equity instruments that are not held for trading </li></ul>
  46. 46. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>An option for certain types of the entity’s own debt </li></ul><ul><li>Must meet the FV-OCI classification criteria and measuring the debt at fair value results in a measurement attribute mismatch </li></ul><ul><li>A financial asset must be carried at amortised cost if: </li></ul><ul><ul><li>The objective of the entity’s business model is to hold the asset to collect contractual cash flows; and </li></ul></ul><ul><ul><li>The asset’s contractual cash flows represent payment of principal and interest (“basic loan features”) </li></ul></ul>
  47. 47. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>To be determined </li></ul><ul><li>Irrevocable election at initial recognition if measuring at fair value eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) </li></ul>
  48. 48. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>For FV-OCI instruments, an entity required to determine if credit losses exist at the end of each reporting period </li></ul><ul><li>Credit impairment loss measure as the present value of management’s current estimate of cash flows not expected to be collected. Future scenarios not considered </li></ul><ul><li>Recognize current period credit impairments in net income; cumulative credit losses a separate balance sheet line </li></ul><ul><li>Amortised cost assets required to evaluate credit losses at the end of each reporting period </li></ul><ul><li>Impairment measured using an expected loss approach that incorporates expectations about future losses over the life of the financial assets </li></ul><ul><li>The effective interest rate used to estimated future cash flows is adjusted by deducting a margin for future credit losses expected on initial recognition </li></ul>
  49. 49. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Recognized in net income for all financial instruments </li></ul><ul><li>Recognized in net income for all financial instruments except FV-OCI instruments for which gains and losses are recognized in OCI with no recycling </li></ul>
  50. 50. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Recognized in net income for all financial instruments </li></ul><ul><li>Recognized in net income for all financial instruments </li></ul>
  51. 51. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Not permitted </li></ul><ul><li>Required if the entity’s business model for managing its financial assets changes </li></ul>
  52. 52. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Receivables and payables arising in the normal course of business due in customary terms not exceeding approximately one year, if held for the collection or payment of contractual cash flows should be measured at carrying value. Receivables subject to impairment model [March 3]. Not-for-profit pledge related items excluded from the scope of the proposed standard. </li></ul>
  53. 53. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Equity method required if entity has significant influence over the investee and the investment is considered related to the investor’s consolidated business. Fair value prohibited for these investments </li></ul><ul><li>Other investee securities measured at fair value with changes in earnings. </li></ul>
  54. 54. <ul><li>FASB MODEL </li></ul><ul><li>IASB MODEL </li></ul><ul><li>Initially and subsequently measured at the present value of the average core deposit liability amount discounted at the rate differential between the alternative funds rate and the all-in-cost-to-service rate over the implied maturity </li></ul><ul><li>Recognize the change in value, excluding current period interest accruals, in OCI </li></ul><ul><li>Realized gains and losses from settlements reflected in net income </li></ul><ul><li>Continue to be recorded at an amount no less than the amount payable on demand </li></ul>
  55. 55. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  56. 56. <ul><li>Interests in subsidiaries, associates, or joint ventures accounted for under other standards </li></ul><ul><li>Employers’ rights and obligations under employee benefit plans </li></ul><ul><li>Insurance contracts accounted for under other standards </li></ul><ul><li>Share based payment awards accounted for under IFRS 2 [Share-based Payment] and ASC Topic 718 [compensation – Stock Compensation] </li></ul>
  57. 57. <ul><li>Instruments classified as equity in their entirety </li></ul><ul><ul><li>Perpetual instruments – common, preferred/preference </li></ul></ul><ul><ul><li>Preferred shares required to be converted into a specified number of common shares on a specified date or on the occurrence of an event certain to occur </li></ul></ul><ul><ul><li>Mandatorily redeemable and puttable instruments that either </li></ul></ul><ul><ul><ul><li>Require , or permit the holder to require, redemption to allow an an existing group of shareholders, partners, or other participants to maintain control when one of them chooses to withdraw </li></ul></ul></ul><ul><ul><ul><li>Provide that the holder must own the instrument to engage in transactions with the entity or otherwise participate in entity activities, and the instrument’s terms require, or permit the holder or issuer to require, redemption when the holder ceases to engage in transactions or otherwise participate </li></ul></ul></ul>
  58. 58. <ul><li>Instruments classified as equity in their entirety – continued </li></ul><ul><ul><li>Contracts that require or may require an entity to issue a specified number of its own perpetual equity instrument in exchange for a specified price [call options, forward contracts to issue shares, rights issues, and purchase warrants] </li></ul></ul><ul><ul><li>Instruments that require an entity to issue a specified number of its own perpetual shares for no further compensation [prepaid forward contact] </li></ul></ul><ul><ul><li>A contract that requires an entity to issue for a specified price, or no future consideration, a specified number of mandatorily redeemable or puttable instruments that will be equity in their entirety when issued </li></ul></ul><ul><ul><li>A contract that requires an entity to issue for a specified price, or no future consideration, a specified number of derivatives that will require the entity to issue a specified number of instruments that will be equity in their entirety when issued. </li></ul></ul>
  59. 59. <ul><li>Bifurcated Instruments </li></ul><ul><ul><li>The portion of convertible debt instruments represented by the option of the holder to convert into a specified number of instruments that will be equity in their entirety when issued should be classified as equity </li></ul></ul><ul><ul><li>Puttable shares that are not classified as equity in their entirety should be separated into liability and equity </li></ul></ul><ul><li>Classified as liabilities [or assets] </li></ul><ul><ul><li>Contracts that require an entity to repurchase its own shares on a specified date or on the occurrence of an event that is certain to occur should be separated into a liability for the amount to be paid and an offsetting debit to equity </li></ul></ul><ul><ul><li>Preferred shares convertible into a variable number of common shares at the holders’ option [usually equity under current US GAAP] </li></ul></ul><ul><ul><li>A freestanding written put option should be presented net as a liability in its entirety </li></ul></ul><ul><ul><li>The portion of convertible debt not classified as equity </li></ul></ul><ul><ul><li>All other mandatorily redeemable instruments </li></ul></ul>
  60. 60. <ul><li>Multiple deliverables in Revenue Recognition </li></ul><ul><li>Allocation of (separate the) purchase price to multiple component deliverables </li></ul><ul><li>Hybrid Instruments in Financial Instruments </li></ul><ul><li>Bifurcation – separate the accounting for debt and for equity elements </li></ul>
  61. 61. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  62. 62. <ul><li>Objective </li></ul><ul><ul><li>Provide comprehensive guidance for consolidation of all entities, including entities controlled by voting or similar interests. </li></ul></ul><ul><li>Definition of control </li></ul><ul><ul><li>A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity. </li></ul></ul>
  63. 63. <ul><li>Control though voting rights </li></ul><ul><ul><li>A reporting entity that holds more than half of the voting rights in an entity meets the power element of the control definition, in the absence of other arrangements or circumstances </li></ul></ul><ul><li>Control Otherwise </li></ul><ul><ul><li>A reporting entity with less that half of the voting rights in an entity that has the legal or contractual ability to direct those activities meets the power element of the control definition </li></ul></ul><ul><li>Options and convertible instruments </li></ul><ul><ul><li>A reporting entity should assess all the facts and circumstances associated with options or convertible instruments when assessing whether it has the power through voting rights to direct the activities of an entity that significantly affect the returns </li></ul></ul><ul><li>Agency relationships (including kick-out rights) </li></ul><ul><ul><li>No decisions have yet been reached </li></ul></ul><ul><ul><li>Principal vs. agent </li></ul></ul>
  64. 64. <ul><li>The IASB Exposure Draft issued in December, 2008 introduced the concept of a “Structured Entity”, similar to a VIE discussed in US GAAP and to Special Purpose entities </li></ul>
  65. 65. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  66. 66. <ul><li>The overriding goal is to ensure that fair value has the same meaning in U.S. GAAP and IFRS </li></ul><ul><li>Establish how to calculate fair value, not when </li></ul><ul><li>Key documents </li></ul><ul><li>FASB Statement 157 [issued 2006], now ASC Topic 820 </li></ul><ul><li>ISAB Exposure Draft, issued May, 2009 which is largely consistent with U.S. GAAP, including the fair value input hierarchy [3 level] </li></ul>
  67. 67. <ul><li>Initial Measurement </li></ul><ul><ul><li>Fair value at initial recognition </li></ul></ul><ul><ul><li>Recognition of day one gains or losses </li></ul></ul><ul><li>Subsequent Measurement </li></ul><ul><ul><li>Fair value defined as an exit price </li></ul></ul><ul><ul><li>The Principal (or Most Advantageous) Market </li></ul></ul><ul><ul><li>Market Participants </li></ul></ul><ul><ul><li>Application to Assets – consider highest and best use [“in use” valuation premise] for nonfinancial assets only; not applicable to liabilities or financial assets </li></ul></ul><ul><ul><li>Financial Assets in a Market That Is Not Active </li></ul></ul><ul><ul><li>Application to Liabilities </li></ul></ul><ul><ul><li>The Asset or Liability subject to the standard </li></ul></ul><ul><ul><li>Valuation Techniques </li></ul></ul><ul><ul><li>Level 2 Inputs </li></ul></ul>
  68. 68. <ul><li>Occasions when the transaction price may not be fair value when: </li></ul><ul><ul><li>The transaction is between related parties </li></ul></ul><ul><ul><li>The transaction takes place under duress, or the seller is forced to accept the transaction price </li></ul></ul><ul><ul><li>The transaction unit of account differs from the unit of account for the asset or liability measured at fair value </li></ul></ul><ul><ul><li>The transaction occurs in a different market from the market in which the entity would sell or transfer the instrument </li></ul></ul><ul><li>Recognition of day one gains or losses will be discussed at a future meeting </li></ul>
  69. 69. <ul><li>Market bases, and reflects the assumptions market participants would use to price the instrument </li></ul><ul><li>Market participants are assumed to have a reasonable understanding about the instrument and the transaction </li></ul><ul><li>Market participants are not related parties </li></ul><ul><li>A related party transaction price may be used as an input if the transaction was at market terms </li></ul><ul><li>Unobservable inputs from the entity’s own data, adjusted for reasonably available information considered by market participants, are considered market participant assumptions and meet the objective of a fair value measurement </li></ul>
  70. 70. <ul><li>General valuation considerations </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><ul><li>Quoted price of an identical liability instrument when traded as an asset </li></ul></ul></ul><ul><ul><ul><li>Quoted price for similar liability instruments when traded as an asset </li></ul></ul></ul><ul><ul><ul><li>An income approach [present value], or market approach [an “entrance price” for a new identical instrument] </li></ul></ul></ul><ul><ul><li>Market participant transferee has the knowledge and the ability to fulfill an identical obligation </li></ul></ul><ul><li>Nonperformance risk </li></ul><ul><ul><li>Included in the determination of fair value </li></ul></ul><ul><ul><li>Will clarify what, in addition to credit risk, comprises nonperformance risk </li></ul></ul><ul><li>Restrictions on the transfer of a liability - no additional adjustment if considered in other inputs </li></ul>
  71. 71. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  72. 72. <ul><li>An entity must display total comprehensive income in a continuous statement of comprehensive income </li></ul><ul><li>A continuous display of comprehensive income must display two sections – profit and loss or net income, and comprehensive income </li></ul><ul><li>The components of each section must be reported consistently </li></ul><ul><li>Affirms the existing option to present each component net of related income taxes, or before income taxes with a section for aggregated income tax effects presented separately </li></ul>
  73. 73. <ul><li>Affirmed the income tax effect related to each component of comprehensive income may be displayed on the face of the statement, or in the notes to the financial statements </li></ul><ul><li>Decided not to change guidance regarding items required to be presented contained in other standards </li></ul><ul><li>The FASB affirmed that reclassification between OCI and net income should be reported in the same level of detail as originally reported </li></ul><ul><li>The IASB affirmed that the components of OCI that are not reclassified upon derecognition should be presented together, and the components that reclassified upon derecognition should be presented together </li></ul>
  74. 74. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  75. 75. <ul><li>Exposure drafts issued by the two boards on September 25, 2008 </li></ul><ul><ul><li>FASB: Amending the Criteria for Reporting a Discontinued Operation </li></ul></ul><ul><ul><li>IASB: Discontinued Operations </li></ul></ul><ul><li>Existing literature </li></ul><ul><ul><li>FASB ASC Topic 205-20: Presentation – Discontinued Operations </li></ul></ul><ul><ul><li>IFRS 5, Non-current Assets Held for Sale and Discontinued Operations </li></ul></ul>
  76. 76. <ul><li>Scope </li></ul><ul><ul><li>The FASB decided to eliminate the existing scope exceptions to Subtopic 205-20 [identified in 360-10-15-5] which include certain intangibles, equity method financial instruments, deferred tax assets, and others </li></ul></ul><ul><li>Definition of a discontinued operation: a component that has been disposed, or classified as held-for-sale, and </li></ul><ul><ul><li>Represents a separate major line of business or geographical area of operations </li></ul></ul><ul><ul><li>Is part of a single plan of disposal </li></ul></ul><ul><ul><li>Is a business that meets the criteria to be classified as held for sale on acquisition </li></ul></ul><ul><li>Presentation – presented in a separate section on the face of an entity’s financial statements </li></ul>
  77. 77. <ul><li>Disposal of a component of an entity that meets the definition of a discontinued operation </li></ul><ul><ul><li>Profit or loss, plus major income and expense items, including impairments, depreciation, interest, and amortization </li></ul></ul><ul><ul><li>The major classes of cash flow (operating, investing, and financing) </li></ul></ul><ul><ul><li>Reconciliation of the major classes of assets and liabilities classified as held for sale in the notes to total assets and liabilities classified as held for sale presented separately on the face of the statement of financial position </li></ul></ul><ul><ul><li>A reconciliation of the profit and loss presented in the notes to the after-tax profit or loss from discontinued operations in the statement of comprehensive income </li></ul></ul><ul><li>Disposal of a component of an entity that does not meet the definition of a discontinued operation </li></ul><ul><ul><li>A somewhat reduced version of the disclosures for disposals that meet the definition </li></ul></ul><ul><li>Disposals of long-lived assets that are not components of an entity </li></ul><ul><ul><li>Amounts not separately in the statements of financial position, or a reconciliation </li></ul></ul><ul><li>Continuing involvement and continuing cash flows </li></ul><ul><ul><li>The nature of the continuing activities; the expected period of continued involvement; the amount of the continuing cash flows; amounts in continuing operations after disposal that had previously been eliminated as intra-entity transactions </li></ul></ul>
  78. 78. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  79. 79. <ul><li>Scope - Applicable to all insurance contracts , not just insurance companies </li></ul><ul><li>Recognition </li></ul><ul><li>Measurement </li></ul><ul><ul><li>Measurement Objective </li></ul></ul><ul><ul><li>Risk Adjustment [IASB, separate; FASB, included in the composite residual margin] </li></ul></ul><ul><ul><li>Non-performance by the Insurer </li></ul></ul><ul><ul><li>Day 1 Differences </li></ul></ul><ul><ul><li>Unbundling </li></ul></ul><ul><ul><li>Deposit Floor </li></ul></ul><ul><ul><li>Policyholder Behavior </li></ul></ul><ul><ul><li>Participating Features [IASB, include in measurement; FASB recognize a liability] </li></ul></ul><ul><ul><li>Residual margin [expected premiums less expected claims and a risk adjustment] determined at inception reflected on basis of time, or expected benefits and claims if different from ratable over time </li></ul></ul><ul><li>Derecognition </li></ul><ul><li>Reinsurance </li></ul><ul><li>Acquisition Costs – Expense when incurred, unlike US GAAP </li></ul><ul><li>Presentation </li></ul>
  80. 80. <ul><li>The measurement should assess the customer contract considering the elements below to measure the combination of rights and obligations arising from an insurance contract, which should be updated each reporting period: </li></ul><ul><ul><li>The unbiased, probability-weighted average of future cash flows expected to arise as the insurer fulfills the obligation </li></ul></ul><ul><ul><li>Incorporation of the time value of money </li></ul></ul><ul><ul><li>A risk adjustment for the effects of uncertainty about the amount and timing of future cash flows, including the uncertainty that arises from having to fulfill the net obligation arising from the insurance contract </li></ul></ul><ul><ul><li>An amount that eliminates any gain at inception of the contract </li></ul></ul><ul><ul><li>A component of the contract that is not interdependent with other contract components should be unbundled </li></ul></ul><ul><ul><li>A deposit floor should not be used, although policyholder withdrawals would be including in estimating the expected contractual cash flows </li></ul></ul>
  81. 81. <ul><li>The reinsurer: </li></ul><ul><ul><li>Use the same recognition and measurement approach for the reinsurance contracts is issues as all other insurers use for the insurance contract they have issued </li></ul></ul><ul><ul><li>Should charge the income statement ceding commissions for proportional reinsurance contracts in a manner consistent with the treatment of acquisition costs </li></ul></ul><ul><li>The cedent [entity reinsuring its contract obligations]: </li></ul><ul><ul><li>Recognize and measure its reinsurance asset using the same recognition and measurement approach it uses for the reinsured portion of the underlying insurance contracts is has issued </li></ul></ul><ul><ul><li>Should not derecognize the related direct insurance liabilities unless the obligation specified in the insurance contract is (legally) discharged, cancelled, or expired </li></ul></ul><ul><ul><li>Should not offset reinsurance balances against related direct reinsurance balances (balance sheet and income statement) unless legal requirements for offsetting are met </li></ul></ul><ul><ul><li>Should credit to the income statement ceding commissions for proportional reinsurance contracts in a manner consistent with the treatment of acquisition costs </li></ul></ul>
  82. 82. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>
  83. 83. <ul><li>Diverged </li></ul><ul><ul><li>Financial Instruments </li></ul></ul><ul><li>Semi – converged </li></ul><ul><ul><li>Fair Value Measurements </li></ul></ul><ul><ul><li>OCI recycling </li></ul></ul><ul><li>Converged </li></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Revenue Recognition </li></ul></ul><ul><ul><li>Consolidation </li></ul></ul><ul><ul><li>Financial Statement Presentation </li></ul></ul><ul><ul><li>Statement of Comprehensive Income – except OCI recycling </li></ul></ul><ul><ul><li>Financial Instruments With Characteristics of Equity </li></ul></ul><ul><ul><li>Discontinued Operations </li></ul></ul><ul><ul><li>Insurance Contracts </li></ul></ul>
  84. 84. <ul><li>Contingencies – Exposure Draft, Measuring Liabilities in IAS 37 , Issued January 2010 </li></ul><ul><ul><li>Recognition threshold – existence of obligation </li></ul></ul><ul><ul><li>Measurement – probability weighted </li></ul></ul><ul><li>Post-employment Benefits </li></ul><ul><ul><li>FASB has focused on disclosures recently, IASB on recognition </li></ul></ul><ul><ul><li>Treatment of actuarial gains and losses, including “recycling” of this OCI item </li></ul></ul><ul><ul><li>IASB deliberations regarding “assumed rate of return on plan assets” </li></ul></ul>
  85. 85. <ul><li>www.fasb.org </li></ul><ul><li>www.iasb.org </li></ul><ul><li>Setting the Standard on www.cfodirect.pwc.com </li></ul><ul><li>www.iasplus.com </li></ul><ul><li>www.KPMGInstitutes.com </li></ul><ul><li>See “Issues” on www.ey.com </li></ul>