Q4 2013 Accounting & Reporting Developments

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PwC's quarterly current accounting and reporting developments webcast series keeps you informed on hot topics and recent activities of various regulatory bodies including the Financial Accounting Standards Board and the Securities & Exchange Commission. By learning more about current issues, you can assess the implications on your accounting and financial reporting today and plan for the impact tomorrow. More information: http://www.pwc.com/us/en/audit-assurance-services/events-and-webcasts/current-accounting-and-reporting-developments-webcasts.jhtml

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Q4 2013 Accounting & Reporting Developments

  1. 1. Current Accounting and Reporting Developments Webcast Series Fourth quarter / D F th t December 17 2013 b 17,
  2. 2. Welcome Beth Paul Partner, National Professional Services Group Sara DeSmith Partner, National Professional Services Group Mila Petrova Partner, National Professional Services Group Jay Seliber Partner, National Professional Services Group Don Reed Managing Director, Advisory Services 2 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  3. 3. Before we get started Webcast tools • For better viewing experience, close all other applications • For b better sound quality, please use h d h d li l headphones • To print this presentation, click on the Green Resources tab at the bottom of your screen • If you have any questions, type them in the “Ask a Question” area on the left side of your screen, then click “Submit Question” 3 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  4. 4. Before we get started CPE & Evaluation • In order to receive CPE credit for this program, you must stay on for the entire program and respond to the polling questions • If you are viewing this webcast in a group, everyone in the group can receive CPE credit • Click the purple CPE tab at the bottom of your screen at the conclusion of the webcast. Follow the prompts to download the certificate • Please complete the evaluation that will appear at the end of the webcast • Today’s p g y program will be worth approximately 1.5 CPE credits pp y 5 4 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  5. 5. Today’s agenda Introduction Highlights f i hli h from l last week’s AICPA conference k’ f Accounting hot topics • Tender offers • Modifications to retiree health plans • Equity method accounting • Purchase consideration in a business combination • Grant date of a share-based award • Non forfeitable dividends on share based awards Non-forfeitable share-based Update on standard setting Q&A 5 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  6. 6. Polling q g question #1 Which of the following best describes your role or responsibilities within your organi ation? ithin o r organization? A. B. C. D. D E. CFO or Controller / Assistant Controller Financial Reporting Director / Manager Accounting / Finance Manager Tax Director / Manager None of the above or PwC Staff 6 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  7. 7. AICPA Conference update • Quality and transparency • Di l Disclosure overload l d • Common reporting issues and comment letter trends • Renewed enforcement focus on financial accounting fraud • FASB and IASB convergence projects • PCAOB proposals on audit reporting • Conflict minerals and 2013 COSO framework 7 pwc.com Refer to PwC Dataline 2013-27 released yesterday for more detail on the conference and other insights Current Accounting and Reporting Developments / December 17, 2013
  8. 8. Polling question #2 Did you attend the AICPA conference last week? A. Yes, in person B. Yes, B Yes virtually C. No 8 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  9. 9. Accounting hot topics Tender offers • Acceptance of a revocable tender offer by shareholders may create a written put option  accounted for as a mark to market liability mark-to-market • Offers to repurchase stock options from employees: • • 9 Equity buyout  amount paid in excess of fair value is compensation Equity to liability Equity-to-liability modification  catch-up compensation cost catch up for any increase in fair value since original grant date pwc.com Current Accounting and Reporting Developments / December 17, 2013
  10. 10. Accounting hot topics Modifications to retiree health plans • Providing retirees with cash to buy health insurance on an exchange in lieu of administering a retiree healthcare plan directly  still considered a retiree healthcare benefit plan • Reductions or elimination of benefits could create a negative plan amendment, a curtailment or both • • 10 Negative p g plan amendment  reduces the obligation and will be g recognized in income in future periods Curtailment  may require recognition of deferred costs pwc.com Current Accounting and Reporting Developments / December 17, 2013
  11. 11. Polling question #3 Which of the following elements is required to account for an investment nder in estment under the equity method? eq it A. Control B. 25% ownership interest without significant influence C. Significant influence D. Wholly owned E. None of the above 11 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  12. 12. Accounting hot topics Equity method accounting Assessment of significant influence • Assessment requires judgment based on the facts and circumstances f d i • Quantitative considerations • Qualitative considerations 12 pwc.com Quantitative and qualitative q alitative assessment is required to determine whether the ability to exercise significant influence exists. For incorporated entities, presumption is that ownership, directly or indirectly, of 20% or more of the outstanding voting interest is significant influence. For unincorporated entities, (e.g. partnerships) use of the equity method is required unless the investment is so minor that the partner has virtually no influence over the partnership. Practice generally h i ll has viewed investments of more than 3 to 5 percent to be more than minor. Current Accounting and Reporting Developments / December 17, 2013
  13. 13. Accounting hot topics Equity method accounting (continued) Key indicators of significant influence • Representation on the board of directors • Participation in policy-making processes • Material intra-entity transactions y • Interchange of managerial personnel • Technological dependency • Relative size of ownership interest 13 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  14. 14. Accounting hot topics Equity method accounting (continued) Key decisions Determine if consolidation is required, if not not… Determine if significant influence exists, if so… Measure and account for the basis differences 14 pwc.com The guidance requires that “ i th t “a difference between the cost (i.e. carrying amount) of an i investment and t t d the amount of underlying equity in net assets of an investee should be accounted for as if the investee were a consolidated subsidiary.” subsidiary ” This difference is often referred to as a basis difference. Current Accounting and Reporting Developments / December 17, 2013
  15. 15. Accounting hot topics Equity method investee financial statement requirements Key y y year end reminders • Audited financial statements required if significance thresholds exceeded • May need to re-assess prior period significance conclusions • Reperforming s g epe o g significance tests may ca ce ay cause an equity method investee to become significant 15 pwc.com Audited financial statements of an equity method investee are required if they exceed the 20% significance threshold on either the investment or income test described in Rule 1-02w. In addition to assessing the current annual period, registrants must re-assess their conclusion on prior years if there has been a change to the previously reported amounts due to events such as reporting discontinued operations or revising financial statements to reflect the retrospective adoption of a new accounting principle. f ti i i l Current Accounting and Reporting Developments / December 17, 2013
  16. 16. Accounting hot topics Equity method investment – disclosure considerations • Summarized financial information may be required under S-X 4-08(g) • Balance sheet disclosures include current assets, noncurrent assets, current liabilities, noncurrent liabilities, redeemable preferred stock and non controlling interests non-controlling • Income statement disclosures include sales, gross profit, income from continuing operations and net income 16 pwc.com Summarized financial information is required in the footnotes if any of the three significance tests under Rule 1-02(w) exceeds 1 02(w) 10 percent on an individual or on an aggregated basis. Disclosures should be included for the same periods and the same dates as th registrant (e.g. two the i t t( t years for balance sheet information and three years for income statements information). ) Current Accounting and Reporting Developments / December 17, 2013
  17. 17. Accounting hot topics Purchase consideration in a business combination Arrangements which g benefit the acquirer typically represent compensation expense. Key considerations • Determining consideration transferred • Settlement of pre-existing relationships • Payments made to selling shareholders who become employees of the combined entity b l f h bi d i 17 pwc.com The guidance requires an acquirer to identify and separately account d l for transactions that are not part of the business combination, even if the transactions f occur simultaneously. Current Accounting and Reporting Developments / December 17, 2013
  18. 18. Accounting hot topics Purchase consideration in a business combination Factors to consider in assessing contingent consideration • Whether payments are forfeited if employment ceases • The duration of continuing employment Th d i f i i l • The level of compensation • Incremental pay e ts to e p oyees vs. ot e se g s a e o de s c e e ta payments employees other selling shareholders • The relative number of shares owned by continuing employees • The linkage of the consideration to the value of the business • The formula for determining consideration • The nature of any other arrangements 18 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  19. 19. Polling question #4 Does your company currently benefit from a tax holiday in any jurisdiction in which you operate? A. Yes B. No C. What’s a tax holiday? D. I’d like a holiday y E. N/A or PwC staff 19 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  20. 20. Accounting hot topics Grant date of a share-based award • Mutual understanding of the award’s key terms and conditions is a key criteria • Discretionary p y performance condition – determining the g g grant date is often difficult - Not a one-size-fits-all determination • Performance condition must b objectively d t P f diti t be bj ti l determinable and i bl d measurable - What the condition is and how “actual” results will be evaluated against it i i • Often requires significant judgment that should be contemporaneously documented 20 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  21. 21. Accounting hot topics Grant date of a share-based award – examples Scenario Level of judgment Grant date* September 2013 – CEO granted stock options that vest Low upon achieving a budgeted U.S. GAAP revenue target for 2014. 2014 The 2014 budget is set to be approved by the Board of Directors, which the CEO is a member of, in April 2014. The entity has a proven history of achieving the budgeted revenue for the past 10 years. April 2014 February 2013 – CEO is granted stock options that vest upon achieving adjusted EBITDA of $500 million for the current fiscal year It depends Medium * Assuming other criteria to establish a grant date are met 21 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  22. 22. Accounting hot topics Non-forfeitable dividends on share-based awards • Non-forfeitable dividends – retained regardless of whether the employee g p y vests in the award • Accounting differs based on classification of the award Liability-classified Equity-classified Expected to be forfeited Compensation expense 22 pwc.com Expected to vest Reduction of retained earnings Current Accounting and Reporting Developments / December 17, 2013
  23. 23. Accounting hot topics Non-forfeitable dividends on share-based awards • Awards that give employees the right to non-forfeitable dividends are participating securities and the two-class method is used to calculate EPS • Two class method – allocates earnings away from common Two-class shareholders to participating security holders • Allocation based on the holders’ respective rights to receive dividends di id d as if all undistributed earnings f th period were ll di t ib t d i for the i d distributed 23 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  24. 24. Polling question #5 Which of the PCC’s approved accounting alternatives most interests you? A. Accounting for goodwill subsequent to a business combination B. Accounting for certain receive-variable, pay-fixed interest rate swaps C. Applying VIE guidance to Common Control Leasing Arrangements D. They all interest me! E. E None or not applicable 24 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  25. 25. Private Company Council (PCC) update Accounting and reporting alternatives The PCC has approved the following accounting and reporting alternatives: • Accounting for Goodwill Subsequent to a Business Combination • Accounting for Certain Receive-Variable, PayFixed Interest Rate Swaps - Simplified Hedge Accounting Approach • Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements 25 pwc.com The first two alternatives were endorsed by the FASB on November 25, 2013. The final Accounting Standards Updates (ASU) are expected t t d to be issued later this year or early next year. All three accounting alternatives permit early adoption and, as l d ti d such, an eligible entity could apply these alternatives to its 2013 f financial statements. Current Accounting and Reporting Developments / December 17, 2013
  26. 26. Accounting for goodwill subsequent to a business combination Overview Amortization model • Existing and new goodwill would be amortized over 10 years, or shorter if a company can justify a shorter useful life Practical expedient of 10 years is permitted Impairment assessment • Trigger-based impairment assessment (same triggers as current GAAP) either at th entity-wide t i t ith t the tit id level or at the reporting unit level (policy election upon adoption) • In the event of a trigger a single step impairment trigger, test (same as the step one test in the current model) • Impairment Charge = Difference between the fair value of the entity (or reporting unit) and the carrying amount of the entity (or reporting unit) 26 pwc.com New goodwill alternative is expected to reduce financial statement preparer’s cost by simplifying the impairment model Current Accounting and Reporting Developments / December 17, 2013
  27. 27. Polling question #6 How prepared is your organization to implement the new revenue recognition standard? A. Very prepared B. Somewhat prepared C. Not yet prepared D. Not applicable or PwC staff pp 27 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  28. 28. FASB update Joint FASB/IASB revenue recognition project Boards concluded joint meetings in October • Fi l standard expected Q 2014 Final d d d Q1 Three key decisions reached • Variable consideration: Include if ‘probable’ that changes in estimate probable will not result in a significant revenue reversal • Accounting for licenses – ‘Static’ or ‘dynamic’ • C ll t bilit th h ld (‘ Collectability threshold (‘probable’) added b bl ’) dd d Effective date and transition • Effective date: For annual periods, and interim periods therein, p , p , beginning after December 15, 2016; one year deferral for non-public entities (US GAAP) • Transition options: Full retrospective or practical expedient approach 28 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  29. 29. Intangible assets are an increasing share of business value Components of S&P 500 Market Value Today… 20% 20% 32% 68% Corporate performance goals prioritize quarterly financial results 83% Going forward… G i f d 80% 80% 2005 2005 2010 2010 68% 32% 17% 1975 1975 1985 1985 1995 1995 Intangible assets g Performance goals need to account for and align with the non-financial issues that drive long-term value Tangible assets g Source: Ocean Tomo, LLC Annual Study of Intangible Asset Market Value 29 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  30. 30. Non-financial reporting comes of age with multiple business benefits • Since the early 2000s, several countries and stock exchanges have required or encouraged integrated or sustainability reporting as standards emerged • When businesses assess what to include in an integrated report, they go through a process of strategic alignment with the executive team as to what the important performance goals are and what’s going to drive value to the business • A survey of 43 companies participating in an integrated reporting pilot revealed the following benefits: Improved internal processes I di l Connecting teams 93%: leads to better quality data 93%: breaks down silos collection Better view of strategy & business model 95%: clearer view of the business model d l Board focus 95%: increase focus on getting the right KPIs Source: Black Sun / IIRC, 2012 30 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  31. 31. Sustainability Accounting Standards Board (SASB) Vision • A world where all forms of capital are f f p accounted for and managed – creating sustainable value for current and future generations. Mission • Create and disseminate sustainability accounting standards for use by publicly-listed corporations in disclosing material sustainability issues for the benefit of investors and the public. Organization • The SASB is an independent 501(c)(3) non-profit organization and is accredited to set standards by the American National Standards Institute. 31 pwc.com Note: The SASB is recommending its metrics be reported in the Management Discussion and Analysis, therefore excluding them from the financial audit process process. Current Accounting and Reporting Developments / December 17, 2013
  32. 32. Aggressive pace for standards 32 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  33. 33. Polling question #7 Does your organization produce a corporate sustainability report? A. Yes B. No C. Don’t know 33 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  34. 34. Q&A session Download The quarter close at: http://www.pwc.com/us/qc4 34 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  35. 35. CPE certificates • Click the CPE button under the th presentation slides t ti lid For group viewing g p g • Click “Request CPE” • Select the number of coviewers then click Submit • Enter group information and check th “I attest…” b h k the tt t ” box • On the following page, click the Download Certificate link and certificate will open d f ll 35 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  36. 36. CPE credit for PwC partners and staff • PwC partners and staff do not need to submit CPE certificates as supplemental l l t l learning t Learning at P C i to L i t PwC • Credit will be automatically posted to Learning at PwC for those PwC partners and staff that met the minimum CPE requirements during h live b d i the li webcast and are eligible f CPE credit d li ibl for di • To determine CPE eligibility, you can click the “Request CPE” link under the slide area 36 pwc.com Current Accounting and Reporting Developments / December 17, 2013
  37. 37. Thank you for participating 37 pwc.com Current Accounting and Reporting Developments / December 17, 2013

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