McKonly & Asbury Webinar - A&A Technical Update (February 2013)


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We discussed FASB updates (accounting standards updates and exposure drafts), AICPA updates, and talked about private company council. We then dove into what is happening with the SEC and IFRS and finished up with a FASB/IASB joint projects update.

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  • If other deficiencies are communicated orally to management, we should document the communication in our workpapers. The appropriate level of management to communicate with is the one that has the responsibility and authority to evaluate the deficiencies and take the necessary remedial action. We may be required to communicate repeating deficiencies if they could possibly rise to the level of a significant deficiency if not remedied.
  • Oral confirmations do not meet the requirement of being in written or electronic format. If we get any oral responses or verify information orally, this needs to also be received from the third party in writing to be considered an external confirmation.
  • Action point: We need to verify if our use of external confirmations continues to meet the definition of the clarified standards. If not, it may still be used as audit evidence, but not considered to be an external confirmation.If we get our login information directly through the third party, the use of the website for data meets the definition of an external confirmation. If the client is supplying us with login information, it does not.
  • Nonpublic templates are updated – make sure when you are doing planning that your reports are updated prior to submitting them for review.
  • Management is now being held responsible for the preparation and fair presentation of the f/s and that they are free from material misstatement, whether due to fraud or error. They have never been held responsible for fraud prior to the clarified standards.We are saying that we have obtained audit evidence that is sufficient and appropriate to support our opinion. This was essentially implied in our old report, but is not explicitly stated.Action Point: All independent auditor’s reports for our busy season clients with year ends on or after December 15, 2012 need to have this updated format of the report used. If makes it to principal/partner, then there are issues.
  • McKonly & Asbury Webinar - A&A Technical Update (February 2013)

    1. 1. Accounting and Auditing Technical Update Janice Snyder, CPA February 21, 2013
    2. 2. DisclaimerThe information contained in thispresentation, both that contained in theslides and that expressed by thepresenter, is not intended to be completeand comprehensive. To obtain a moredetailed understanding of technicalliterature mentioned, please consult thefull standards and interpretations.
    3. 3. Today’s Agenda• FASB Update – Accounting Standards Updates (ASUs) – Exposure Drafts (EDs)• AICPA Update• Private Company Council• SEC & IFRS• FASB / IASB Joint Projects Update
    4. 4. FASB UpdateAccounting Standard Update Transition (ASU) # Method Effective DateBalance Sheet Offsetting 2011-11 & Retrospective Period after 1/1/13 2013-01Intangible Asset Impairment 2012-02 Prospective Period after 9/15/12 Early adoption permittedComprehensive Income 2013-02 Prospective Periods beginning after 12/15/12 Potential Exposure Draft (ED) Comment Deadline Effective DateDisclosure Framework November 30, 2012 N/AForeign Currency December 10, 2012 To be determinedLiquidation Basis of Accounting October 1, 2012 To be determinedInvestment Property Entities February 15, 2012 To be determined
    5. 5. FASB UpdateBalance Sheet Offsetting – ASU 2011-11 & ASU 2013-11(Dec 2011 & Jan 2013) • Effective for annual reporting periods beginning on or after January 1, 2013. Retrospective presentation required. • Scope includes: – Derivatives – Sale and repurchase agreements – Reverse sale and repurchase agreements – Securities borrowing and securities lending arrangements • Limited to financial assets and financial liabilities • Scope excludes: Loans & customer deposits netted on statement of financial position
    6. 6. FASB UpdateBalance Sheet Offsetting – New disclosures • Recognize financial instruments and derivative instruments that are offset against one another • Recognize financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar agreement • Information to enable users to evaluate the effect or potential effect of netting arrangements on its financial position • Gross and net amounts must be disclosed with a reconciliation to the statement of financial position (table format is suggested)
    7. 7. FASB UpdateTesting Indefinite-Lived Intangible Assets forImpairment - ASU 2012-02 (July 2012) – Effective for fiscal years beginning after 9/15/12 (Early adoption permitted) – Similar guidance to goodwill impairment - Qualitative assessment of fair value to carrying value before the quantitative impairment test. – Factors to consider include: 1) cost factors, 2) financial performance, 3) legal and regulatory matters, 4) entity-specific events, 5) industry and market conditions, and 6) macroeconomic conditions.
    8. 8. FASB UpdateComprehensive Income – Reporting Amounts Reclassified Out of AOCI – ASU 2013-02 (02/2013) – Potentially effective for annual reporting periods beginning after 12/15/12 (public entity) and 12/15/13 (nonpublic entity). – Do not change the current requirements for reporting net income or other comprehensive income in financial statements. – Requires an entity to provide enhanced disclosures to present separately by component significant reclassifications out of accumulated other comprehensive income. Choice of disclosure: • On the face of the statement where net income is presented; or • As a separate disclosure in the notes to the financial statements. – Not-for-Profit entities are excluded from the scope.
    9. 9. FASB UpdateED - Disclosure Framework (7/12/12) – FASB seeks ways to improve effectiveness of disclosures in notes to financial statements of public, private, and not-for-profit organizations. – A decision process that could aid the Board in establishing disclosure requirements that address relevant information and only relevant information. – Flexible disclosure requirements that could be adapted by each reporting organization. – A judgment framework that could help each reporting organization determine which disclosures are relevant in its specific circumstances – Organization and formatting techniques that could make the information users need easier to find and understand.
    10. 10. FASB UpdateED – Foreign Currency Matters(10/11/12) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity – Affects entities that cease to hold a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity when: (1) The subsidiary or group of assets is a nonprofit activity or a business and (2) There is a cumulative translation adjustment balance associated with that consolidated foreign entity. – Requires a parent to release any cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantial liquidation of the foreign entity in which the subsidiary or group of assets had resided.
    11. 11. FASB UpdateED - Liquidation Basis of Accounting (7/2/12) – Required when liquidation is “imminent” • Approved liquidation plan • Likelihood of plan being blocked is remote – Measured on a liquidation basis, not accrual basis • Measure assets and liabilities at the amount of cash the entity expects to collect or the amount of cash that the entity expects to pay during the course of liquidation. – Two statements under liquidation basis • Statement of Net Assets in Liquidation • Statement of Changes in Net Assets in Liquidation
    12. 12. FASB UpdateED - Investment Property Entities (10/21/11) – Investment property is defined as property held by the owner or held in a finance lease to earn rentals or for capital appreciation, or both. – Measurement at fair value through net income for: • Investment properties acquired by an investment property entity would initially be measured at transaction price and subsequently measured at FVNI. • An investment property entity would measure all other investments that would otherwise qualify for the equity method of accounting at fair value with all changes in fair value recognized in net income. – The effect of adoption recorded to opening retained earnings. – Comment letters focused on a desire not to develop a separate investment property entity concept; however, they agree with the fair value concept.
    13. 13. Today’s Agenda• FASB Update• AICPA Update – Auditing Standards Board Clarity Project• Private Company Council• SEC & IFRS• FASB / IASB Joint Projects Update
    14. 14. U.S. Auditing Standards (Clarified)Auditing Standards Board Clarity Project• Began after the creation of the Public Company Accounting Oversight Board (“PCAOB”).• Issued in August 2012.• ASB aligned its projects with the International Auditing and Assurance Standards Board (“IAASB”) and also determined to minimize differences with the PCAOB.• Redraft all of the auditing standards into a standardized structure, which had been developed by the IAASB.• Effective for audits of entities with years ending on or after December 15, 2012.
    15. 15. U.S. Auditing Standards (Clarified)Consideration of laws and regulations – AU-C Section 250.12 – 250.16 .13 Auditor must understand the legal and regulatory framework applicable to the entity and the industry and how the entity complies with that framework. .14 Sufficient audit evidence of material amounts and disclosures. .15 Auditor should perform the following: (a) Inquire of management and others charged with governance. (b)Inspect correspondence with relevant licensing agencies or regulatory authorities. .16 Obtain written representation from management.
    16. 16. U.S. Auditing Standards (Clarified)Consideration of laws and regulations – Reporting Noncompliance in the Auditors Report on the Financial Statements • Opinion may need to be modified. – Reporting Noncompliance to Regulatory and Enforcement Authorities Section AU-C 250.27 • If the auditor has identified or suspects noncompliance with laws and regulations, the auditor should determine whether the auditor has a responsibility to report the identified or suspected noncompliance to parties outside the entity.
    17. 17. U.S. Auditing Standards (Clarified)Consideration of laws and regulations – Auditor external reporting requirements for violations. • To a funding agency or other specified agency in accordance with requirements for the audits of entities that receive financial assistance from a government agency. • In response to a subpoena. • To a successor auditor when the successor makes inquiries in accordance with section 315, Communications Between Predecessor and Successor Auditors. – Because potential conflicts with the auditors ethical and legal obligations for confidentiality may be complex, the auditor may wish to consult with legal counsel before discussing illegal acts with parties outside the client.
    18. 18. AICPA UpdateCommunicating internal control matters – Now must communicate with management all deficiencies noted, not just significant deficiencies or material weaknesses. • Very low threshold for “deficiency”. • Many more items will be communicated. – Must communicate the potential effects of the significant deficiencies and material weaknesses to those charged with governance. – Auditors may now include specific matters in a written communication stating that no material weaknesses were identified.
    19. 19. U.S. Auditing Standards (Clarified)Communicating internal control matters – AU-C Section 265.12b • Auditors are still required to communicate all material weaknesses and significant deficiencies to those charged with governance in writing. • Other deficiencies in internal control should be communicated to management if they are deemed to be of sufficient importance to merit management’s attention. • If the auditor has communicated deficiencies in internal control to management previously, other than significant deficiencies and material weaknesses, and management has chosen not to remedy the deficiency, the auditor does not need to repeat the communication in the current year.
    20. 20. U.S. Auditing Standards (Clarified)Going Concern – Paragraph 14 of the clarified SAS requires the auditors to obtain written representations from management if conditions or events have been identified that indicate there could be substantial doubt about the entitys ability to continue as a going concern. These representations are based on the representation required by paragraph 16(e) of ISA 570, Going Concern, and the illustrative going concern representation in appendix B, "Additional Illustrative representations," of extant AU section 333 currently requires such representations.
    21. 21. U.S. Auditing Standards (Clarified)Related Parties – Must consider risk of material misstatement, regardless of financial reporting framework. – Adds more specific requirements as to procedures and documentation. – The ASB considers this to be a high-risk, fraud risk area. – Examination of additional documents from management. – Additional representations regarding related parties. – Additional disclosures may be required (upon discovery of related party transactions).
    22. 22. U.S. Auditing Standards (Clarified)Related Parties AU-C Section 550.04, “Because related parties are not independent of each other…the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entitys failure to appropriately account for or disclose related party relationships, transactions, or balances.” AU-C Section 550.05, “In addition, an understanding of the entitys related party relationships and transactions is relevant to the auditors evaluation of whether one or more fraud risk factors are present, as required by section 240, because fraud may be more easily committed through related parties.” AU-C Section 550.06, “Related party relationships may present a greater opportunity for collusion, concealment, or manipulation by management.”
    23. 23. U.S. Auditing Standards (Clarified)Related PartiesAU-C Section 550.A22, “The auditor may inspect records or documents that indicate the existence of a related party relationships.. .Records or documents include the following: – Third party confirmations obtained by the auditor (bank, legal, other). – Income tax returns. – Information supplied by the entity to regulatory authorities. – Shareholder registers to identify the entitys principal shareholders. – Statements of conflicts of interest. – Records of the entitys investments and those of its benefit plans. – Contracts and agreements with key management or those charged with governance. – Significant contracts and agreements. – Specific invoices and correspondence from the entitys professional advisors. – Life insurance policies acquired by the entity. – Significant contracts renegotiated by the entity during the period. – Capital financing arrangements. – Economic development arrangements for capital additions.
    24. 24. U.S. Auditing Standards (Clarified)Clarifications on external confirmations – AU-C Section 505.A25 • Oral responses are not confirmations. – Access to a website may or may not be considered an external confirmation. • AU-C Section 505.A1 – External confirmation is defined as audit evidence obtained as a direct written response to the auditor from the third party (the confirming party), either in paper form or by electronic or other medium (for example, through the auditor’s direct access to information held by a third party).
    25. 25. U.S. Auditing Standards (Clarified)Clarifications on external confirmations• The auditors direct access to information held by a third party (the confirming party) may meet the definition of an external confirmation when, for example, the auditor is provided by the confirming party with the electronic access codes or information necessary to access a secure website where data that addresses the subject matter of the confirmation is held. The auditors access to information held by the confirming party may also be facilitated by a third-party service provider.• When access codes or information necessary to access the confirming partys data is provided to the auditor by management, evidence obtained by the auditor from access to such information does not meet the definition of an external confirmation.
    26. 26. U.S. Auditing Standards (Clarified)Group audits – The definition of “group” is quite broad and may scope in many more situations. – Will likely be applicable within a firm when one office is lead auditor and another office works on a component. – Will be applicable for entities that have equity method investees. – Will be applicable when using other firms for inventory observations.
    27. 27. U.S. Auditing Standards (Clarified)Group audits – Group auditor must consider their ability to be involved with the component auditors and the sufficiency of the evidence obtained through that process. • Eliminates “coverage” concept. – Materiality and performance materiality must be determined for the group, then pushed down to components, including those audited by others being referred to in the report. – Materiality levels will be communicated from the group auditor.
    28. 28. U.S. Auditing Standards (Clarified)Special Purpose Framework – The clarified SAS requires the auditors to obtain an understanding of: (a)the purpose for which the financial statements are prepared, (b)the intended users, and (c)the steps taken by management to determine that the special purpose framework is acceptable in the circumstances;
    29. 29. U.S. Auditing Standards (Clarified)Special Purpose Framework – The clarified SAS requires the auditors to obtain an understanding of: • In the case of financial statements prepared in accordance with regulatory or contractual basis of accounting, the auditors report to describe the purpose for which the financial statements are prepared or refer to a note in the special purpose financial statements that contains that information. • The auditors report to include specific elements if the auditor is required by law or regulation to use a specific layout, form, or wording of the auditors report.
    30. 30. U.S. Auditing Standards (Clarified)Opening balances on initial audits – Specifically makes clear that reviewing predecessor auditors’ workpapers is not sufficient audit evidence. – More audit procedures to be performed when changing auditors. – AU-C Section 510-08(c), “c. evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances and performing one or both of the following: i. When the prior year financial statements were audited, reviewing the predecessor auditors audit documentation to obtain evidence regarding the opening balances. ii. Performing specific audit procedures to obtain evidence regarding the opening balances.
    31. 31. U.S. Auditing Standards (Clarified) Auditor’s report • AU-C Section 700 – Improved language as to management’s responsibility. • Clarified format with specific headings: – Report on the Financial Statements – Management’s Responsibility for the Financial Statements – Auditor’s Responsibility – Opinion
    32. 32. U.S. Auditing Standards (Clarified)Report on the Financial Statements We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the financial statements.Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
    33. 33. Today’s Agenda• FASB Update• AICPA Update• Private Company Council – Background – Defining a “Nonpublic” Entity• SEC & IFRS• FASB / IASB Joint Projects Update
    34. 34. Private Company Council• For the past several years, there have been concerns over U.S. GAAP as it applies to public versus nonpublic entities.• There previously existed the AICPA’s Blue Ribbon Panel and the FASB’s Private Company Financial Reporting Committee.• The Private Company Council (PCC) is a newly-created body under the Financial Accounting Foundation (FAF)• Designed to identify issues in U.S. GAAP related to private companies.• Will vote on proposed changes to U.S. GAAP for private companies which will be subject to endorsement by the FASB.
    35. 35. Private Company Council “The 10 members of the PCC are eager to begin addressing the critical issues facing users, preparers, and auditors of private company financial statements,” said PCC chairman Billy M. Atkinson, who formerly chaired NASBA and was a member of the Blue-Ribbon Panel. “Our success will be based on collaboration and mutual respect for and between the PCC and the FASB, which I am confident we will achieve, and our ability to obtain meaningful feedback on all issues from private company stakeholders.”Initial public meetings were held in December 2012 and February 2013.
    36. 36. Private Company Council• Help identify the needs of users of private company financial statements and improve the relevance.• Is not intended to be a separate framework.• Defining a “Nonpublic Entity” – Six major factors to consider: 1. Types & number of financial statement users 2. Access to management 3. Investment strategies 4. Ownership and capital structures 5. Accounting resources 6. Learning about new financial reporting guidance
    37. 37. Private Company Council• Preliminary staff recommendations that would distinguish U.S. GAAP for private (nonpublic) companies: – Recognition and measurement guidance (allows for differences) – Disclosure requirements (focuses on relevant information) – Display requirements (financial statement presentation) – Effective date (additional year for implementation date) – Transition method (alternative approach to adoption) Exposure draft expected in June 2013.
    38. 38. Private Company CouncilKey projects identified by the PCC 1. Consolidation (Formerly FIN 46R and FAS 167) – focusing on variable interest entities. 2. Interest Rate Swaps 3. Intangible Assets – Recognizing and measuring intangible assets acquired in a business combination. 4. Income Taxes (Formerly FIN 48) – focusing on uncertain tax positions.
    39. 39. Today’s Agenda• FASB Update• AICPA Update• Private Company Council• SEC & IFRS• FASB / IASB Joint Projects Update
    40. 40. SEC & IFRS123 of 195 Countries Permit or Require the use of IFRS Copyright: PICPA from November 14, 2011 webcast
    41. 41. SEC & IFRS• Status of IFRS in the US – The long road of convergence • FASB continues to focus on its convergence efforts. • The IASB and other international entities focus on pushing the US to adopt IFRS. – July 13, 2012, the SEC issues the Final Staff Report on the Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers. Not yet approved by the Commission.
    42. 42. SEC & IFRSStatus of IFRS in the US – Key Findings of the Staff Report 1. Development of IFRS  Standards are generally perceived to be high quality.  There continues to be areas that are underdeveloped.  US constituents perceive that the underdeveloped areas in IFRS are greater than in US GAAP. 2. Interpretive Process  The IFRS Interpretations Committee should do more to address issues on a timely basis.  Changes were made to this process, but it is unknown at this point whether they will be effective.
    43. 43. SEC & IFRSStatus of IFRS in the US – Key Findings of the Staff Report 3. IASB’s Use of National Standard Setters  IASB should consider greater reliance on the use of national standard setters. 4. Global Application and Enforcement  Global application and consistency could be improved to narrow diversity.  The SEC may be a constructive influence on the consistent application and enforcement of IFRS. 5. Governance of the IASB  The US should maintain an active FASB to endorse IFRS.
    44. 44. SEC & IFRSStatus of IFRS in the US – Key Findings of the Staff Report 6.Status of Funding  Currently funded by fewer than 30 countries.  The US portion of the IASB budget is currently underfunded.  Funding approach relies upon large public accounting firms. 7. Investor Understanding  Investor education is not uniform.  Need to improve investor engagement and education. Summary: Significant progress has been made, but there is much more to be done.
    45. 45. SEC & IFRSStatus of IFRS in the US With the transition from Mary Shapiro, former SEC Chairman, to Elisse Walter in December 2012, there will be an adjustment period. Shapiro held one of the seats on the IFRS Foundation Monitoring. Elisse Walter has also taken over this position. The SEC continues to review the Staff Report and has not taken any definitive position regarding IFRS in the US. Although the staff report is constructive and an important contribution, the Work Plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically.
    46. 46. Today’s Agenda• FASB Update• AICPA Update• Private Company Council• SEC & IFRS• FASB / IASB Joint Projects Update
    47. 47. FASB / IASB Joint Projects Project Transition Expected Expected Method Final Effective Standard DateFinancial Instruments Retrospective ED’s in To be(Impairment, Measurement, Hedging) 2013 determinedRevenue Recognition Retrospective Q2 2013 2015Leases Simplified ED – Q2 To be Retrospective 2013 determinedInsurance Contracts To be ED– Q2 To be determined 2013 determinedConsolidation Prospective Q2 2013 To be determinedInvestment Companies To be Q1 2013 December determined 15, 2013
    48. 48. FASB / IASB Joint ProjectsFinancial Instruments - 3 Elements 1. Impairment • Exposure document issued on December 20, 2012. • Comment deadline on April 30, 2013. 2. Classification and Measurement • Exposure draft expected in Q1 2013. 3. Hedging • Timing is to be determined
    49. 49. FASB / IASB Joint ProjectsFinancial Instruments 1. Impairment • The Board decided to re-expose the credit impairment model. • Affects all entities with financial assets not accounted for at Fair Value Through Net Income and are exposed to potential credit risk, including: – Loans – Debt securities – Trade receivables – Lease receivables – Loan commitments – Reinsurance receivables – Any other receivables
    50. 50. FASB / IASB Joint ProjectsFinancial Instruments 1. Impairment • Current Expected Credit Loss (CECL) Model: – An entity recognizes a credit impairment allowance for its current estimate of the expected credit losses held at the reporting date. – The estimate of expected credit losses reflects the contractual cash flows that the entity does not expect to collect. – Removes the existing “probable” threshold and “most likely outcome” • Significant additional disclosures will be required.
    51. 51. FASB / IASB Joint ProjectsFinancial Instruments 2. Classification and Measurement – Includes: all financial instruments, with specific exclusions. – Excludes: derivative instruments, leases, loan commitments and letters of credit, financial guarantee contracts, all insurance items, benefit plans and various other items. – Financial assets to be measured at fair value through net income, with limited exceptions. – Financial liabilities may be measured at amortized cost unless they are short sales or subsequently transacted at fair value.
    52. 52. FASB / IASB Joint ProjectsFinancial Instruments 2. Classification and Measurement 3 Measurement Options for Financial Assets – Amortized Cost - if the assets are held within a business model whose objective is to hold the assets in order to collect contractual cash flows. – Fair Value Through OCI – if managed within a business model whose objective is both to hold the financial assets to collect contractual cash flows and to sell the financial assets. – Fair Value through Net Income – All remaining financial assets.
    53. 53. FASB / IASB Joint ProjectsFinancial Instruments 3. Hedging – Project has been ongoing since 2008. – Initial exposure draft issued in 2010. – FASB discussion paper issued in 2011. – Goal is to improve and simplify hedge accounting. – The Board has not begun redeliberations on this topic. – There is no potential date for the new exposure draft.
    54. 54. FASB / IASB Joint ProjectsRevenue Recognition• Original exposure draft issued November 14, 2011 and January 4, 2012 (revised)• Final standard expected in Q2 2013 – New revenue recognition model that could significantly change the way entities recognize revenue. – Based on a single, contract based model that would be applied to all contracts with customers (with limited exceptions). – Entities would recognize revenue upon satisfaction of performance obligations, which occurs when control of an asset transfers to the customer.
    55. 55. FASB / IASB Joint ProjectsRevenue Recognition – Under the proposal, a company would be required to retrospectively adopt the new standard. • Applies to all contracts in existence in any of the periods presented, even if those contracts were completed before the year of adoption. • An effective date of no earlier than 2015 is expected to allow companies adequate time to prepare for and implement the new standard.
    56. 56. FASB / IASB Joint ProjectsRevenue Recognition – Major concerns noted by respondents: • Concept of control and indicators of control for service contracts and work in process type contract. • Principle of distinct goods and services for identifying performance obligations. – Key decisions to date: • Adjustment to be made to input methods, such as costs incurred, for measuring progress towards completion. • Contract modification would be approved when the modification creates or changes the enforceable rights and obligations of the parties to the contract (oral, written or customary business practice).
    57. 57. FASB / IASB Joint ProjectsLeases• Original exposure draft issued August 17, 2010• New exposure draft expected in Q2 2013 – Proposing a right-of-use approach for lessee accounting. – Would require the reporting of the rights and obligations conveyed by all leases on the balance sheet. – Companies would need to record all existing operating leases upon adoption of the new standard using a simplified retrospective approach. – Transition adjustments would be recorded directly to equity.
    58. 58. FASB / IASB Joint ProjectsLeases – Balance Sheet Impact: • A new asset is recorded representing the right to use the leased item for the lease term. • A liability is recorded representing the obligation to pay rentals based on the present value of lease payments. – Income Statement Impact – Two Options: • I&A Approach - Straight-line rent expense would be replaced by amortization and interest expense for lessees with current operating lease treatment. Must reflect a systematic pattern of consumption. • SLE Approach - Single Lease Expense may be used to recognize total lease expense on a straight-line basis.
    59. 59. FASB / IASB Joint ProjectsLeases – FASB Decisions since 2010 Exposure Draft • Exclusion of short-term leases • Concept of a Single Lease Expense (SLE) or Interest & Amortization (I&A) on the income statement. • SLE would be recorded as operating cash flow. • I&A would be financing cash flow. • Must be significant economic incentive to extend the lease term to consider this in the original asset and obligation. • Lease term should only be reassessed when there is a significant change.
    60. 60. FASB / IASB Joint ProjectsInsurance contracts – Project began in 2009 - FASB and IASB currently disagree on several important technical issues. – Decisions to date: • Standard will address accounting for insurance contracts from the perspective of the insurer. • Insurance contracts create a “bundle of rights and obligations”. • Measure insurance contracts at portfolio level. • Scope includes: Financial Guarantee Contracts and Title Insurance Contracts.
    61. 61. FASB / IASB Joint ProjectsConsolidation – Principal versus Agent Analysis – Tentative decisions reached to date: • The Control Model - A reporting entity has the power to direct the activities of another entity when it has the ability to direct the activities of the entity that significantly affect the returns. • Primary Beneficiary - a decision maker that is determined to be the principal of a VIE to be automatically considered to be the primary beneficiary of the VIE. • Structured Entities - The guidance established in this project is anticipated to produce consolidation results consistent with those reached under the Variable Interest Entities Subsections of Topic 810, as amend by Statement 167.
    62. 62. FASB / IASB Joint ProjectsInvestment Companies – Effective for fiscal years beginning after December 15, 2013. – An entity regulated under the SEC’s Investment Company Act of 1940 would be an investment company for accounting purposes. – Entities not regulated under the Act would consider its purpose and design to make the assessment. – Amends the definition of an investment company in Topic 946. • Obtains funds from an investor or investors and provides the investor(s) with professional investment management services • Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation, investment income, or both.
    63. 63. FASB / IASB Joint ProjectsInvestment Companies – Requires consolidation if control exists over another investment company or an investment property entity. – Prohibits equity method accounting if there is significant influence. – Mortgage Real Estate Investment Trusts (REITs) that meet the requirements of an investment company would follow this guidance. – Retrospective application of the standard is expected.
    64. 64. Questions? Janice Snyder, CPA Principal 717-761-7910