Quarter close - 2Q 2013
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Quarter close - 2Q 2013



The quarter close gives you a snapshot of the most significant financial reporting and regulatory updates for the quarter, and provides insight into what developments are coming in the near future. ...

The quarter close gives you a snapshot of the most significant financial reporting and regulatory updates for the quarter, and provides insight into what developments are coming in the near future. This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. More: http://pwc.to/1oWO9RC



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Quarter close - 2Q 2013 Quarter close - 2Q 2013 Document Transcript

  • www.cfodirect.pwc.com . June 17, 2013 What’s inside Front and center...............1 Accounting hot topics...... 4 Hot off the press............... 8 SEC matters .................... 11 IFRS developments.........12 Audit reporter.................13 On the horizon ................14 Corporate governance ...17 Appendix .........................18 The quarter close A look at this quarter’s financial reporting issues
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 1 What you need to know—Q2–2013 Welcome to the second quarter 2013 edition of The quarter close. With new leadership at the SEC and FASB now solidified, the production line of new rules and releases rolls on. The highly anticipated leases proposal has arrived, with a revenue standard in final production. And the new SEC chairman has pledged that completing Dodd- Frank Act and JOBS Act rulemaking is at the top of her list. What else is soon to debut? Read on for the latest developments. Front and center. Along with leadership changes and the revised leases proposal, the Private Company Council is again in the spotlight this quarter. Wasting no time at its May meeting, the council is moving forward with proposals that would significantly modify existing accounting guidance for private companies. Accounting hot topics. We’ve assembled a number of hot topics including the new balance sheet offsetting disclosures, preferred stock offerings, “gross versus net” revenue presentation, and more. Hot off the press. Featured this quarter is a refresh of the widely used COSO internal controls framework and the AICPA’s updated “cheap stock” guide. Also look here for updates on the FASB’s recent releases. And more. Along with the latest regulatory and corporate governance developments, we discuss the feedback on the FASB's financial instruments proposals. Video perspectives. How will the leases proposal affect you? Our experts highlight some of the key implications. And for companies looking to access the public markets or planning a spin-off, our experts discuss important considerations and best practices. Front and center New SEC and FASB leadership takes the wheel As we head into the second half of 2013, both the SEC and FASB have new chairs steering the course forward. Mary Jo White sworn in as SEC chairman After confirmation by the Senate, Mary Jo White took over as SEC chairman in April. Since then, White has been assembling her supporting team, including tapping Keith Higgins, a partner at Ropes & Gray LLP, to head the SEC’s Division of Corporation Finance. She also appointed Acting Director George Canellos and Andrew Ceresney, formerly a partner at Debevoise & Plimpton LLP, as co-directors of the Division of Enforcement. While it is still early in her tenure, White stated during her confirmation hearings that further strengthening the SEC’s enforcement function and completing the rulemaking mandated by the Dodd-Frank Act and JOBS Act are key priorities. Meanwhile, President Obama recently announced his nominations to succeed current Commissioners Elisse Walter and Troy Paredes, whose terms end this year. The two nominees are Kara Stein, an aide to Senator Jack Reed, and Michael Piwowar, chief Republican economist for the Senate Banking Committee.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 2 This is not an easy standard—it’s not really easy to define what a lease precisely is. It is not clearly a service. It is not 100% financing. It’s somewhere in between. Source: Hans Hoogervorst, IASB Chairman, Journal of Accountancy, “IASB chair: Lease changes unpopular, but necessary,” March 16, 2013 Leslie Seidman passes the gavel to Russell Golden The Financial Accounting Foundation (FAF), which oversees the FASB, announced in April that Russell Golden, a current FASB board member, will take over as FASB chairman effective July 1. Golden spent six years on the FASB staff before he was appointed as a board member in September 2010. Golden has cited bringing the convergence projects to closure and improving financial reporting for private companies as his initial areas of focus. The FAF has not yet revealed who will fill the FASB board seat left vacant. Many are paying close attention to this decision, as the new board member could potentially influence the vote on pending standard-setting projects, including leases. A divided FASB issues revised leases model The FASB and IASB reached a major milestone this quarter by issuing their long- awaited rework of the leases proposal. But the debate is not over yet, as even the board members aren’t in agreement on the revised model. A new dividing line for leases The proposal achieves a key objective: putting substantially all leases on lessees’ balance sheets. However the details have created controversy. One area of contention is the “dual model” for determining the income statement treatment. For lessees, the proposal creates a presumption that most leases of property (for example, real estate) will have straight-line expense recognition and most leases of non- property (for example, equipment) will have front-loaded expense recognition. However, these presumptions can be overcome in certain situations. Lessors will also apply a dual model. Using the same dividing line as lessees, lessors will either recognize straight-line income (presumed for property) or apply a new “receivable and residual” approach (presumed for non-property). Board members express alternative views The boards have encountered some bumps in the road on the path to a revised model. Reflecting these challenges, three of the seven FASB members present alternative views in the proposal. Their concerns include whether the proposal meets the project’s core objectives and whether its benefits justify its costs. Board members also question whether the disclosures provide sufficiently useful information to users. Two IASB members also present alternative views including support for the application of a single lease model.  Click here to watch our experts discuss how the leases proposal could affect you and what companies are doing now to prepare. View slide
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 3 What’s next? Comments are due September 13. To learn more, see Dataline 2013-13, Leases—The Great Divide: The new leases landscape. Also, listen to the archive of PwC’s two-part webcast that provides an overview of the proposal and discusses the implications beyond financial reporting. Private Company Council produces initial proposals The Private Company Council (PCC) has only been up and running since December, but it has already identified ways to simplify financial reporting for private companies. Its initial proposals, if finalized, would significantly modify existing accounting guidance in three areas. Intangible assets and goodwill The PCC’s first proposal addresses the accounting for intangible assets acquired in a business combination. The proposal allows private companies to recognize only intangible assets supported by a legal or contractual right. This change would result in fewer recorded intangibles. For example, private companies would not recognize assets related to certain customer relationships. The offsetting impact would increase goodwill. On the topic of goodwill, the PCC proposed allowing private companies to amortize goodwill over a period no longer than ten years. Further, goodwill would only be subject to a trigger-based simplified impairment test, performed at an entity-wide level. Accounting for certain interest rate swaps The PCC also proposed changes to the accounting for “plain-vanilla” interest rate swaps used to convert variable-rate debt to fixed-rate debt. For swaps meeting certain criteria, private companies could account for the swap and the related debt as one combined instrument, eliminating any derivative accounting. Swaps meeting less stringent criteria could be accounted for using a more simplified hedge accounting method. What’s next? The PCC’s proposals represent the first test drive of the new private company standard- setting process. The FASB endorsed the proposals during a June meeting, so the next step is to expose the proposed alternatives for comment. Comments will be due on August 23, and PCC deliberations on the proposals are expected to occur during their October meeting. The FASB has indicated it will consider whether modifications to U.S. GAAP provided for private companies should also be available to public companies. For that reason, public companies may also want to track future developments, and consider providing input on any proposals exposed for comment. For more information To learn more about the proposals and next steps, read the June 2013 edition of Private company reporter. View slide
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 4 Accounting hot topics Balance sheet offsetting—the rubber hits the road The new balance sheet offsetting disclosures made their debut in first quarter financial statements. Although the FASB took action in January to limit the scope of the requirements, companies faced a number of implementation issues as they developed their disclosures. The new disclosure requirements The disclosures provide gross and net information about transactions that are: (a) offset in the balance sheet or (b) subject to an enforceable master-netting arrangement or similar agreement, regardless of whether they are actually offset in the balance sheet. The scope of the disclosures includes certain derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. One implementation challenge: determining arrangements in scope Many issuers had to perform a deep dive into their legal agreements to determine whether those agreements were considered to be a “master-netting arrangement” or “similar agreement” and determine if they were enforceable. This generally requires legal analysis and judgment. Many derivative transactions are governed by International Swaps and Derivatives Association (ISDA) agreements that typically allow for offsetting of contracts between parties. While these contracts still require legal evaluation, we understand most preparers have concluded that standard ISDA agreements are in scope. For more information Other common implementation questions related to the presentation of collateral in the disclosures, including the appropriate level of disaggregation required in the tabular disclosure format and the content of qualitative disclosures. For our views on these and other questions, see Dataline 2013-06, Balance sheet offsetting—Questions and interpretive responses about the new disclosure requirements. Preferred stock—embedded features require careful navigation Preferred stock has long served as an important vehicle for companies to obtain capital. But issuing preferred stock comes with its share of accounting complexities. Companies often expect to account for preferred stock as equity based on its legal form. However, certain embedded features, such as redemption or conversion options, can result in the preferred stock being accounted for as a liability or as mezzanine equity. In addition, the embedded features may have to be accounted for separately from the preferred stock— something that companies may not anticipate if they have not dealt with these instruments before. This quarter’s hot topics:  Balance sheet offsetting disclosures  Preferred stock: embedded features  Revenue recognition: gross versus net  Income tax accounting: tracking court cases  Accounting changes  Stock compensation: performance awards
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 5 Evaluating embedded features Determining whether the embedded features require separate accounting involves a number of subjective judgments. First among them is determining whether the nature of the host contract—the preferred stock—is more akin to debt or equity. If the embedded feature is “clearly and closely related” to the preferred stock host, the preferred stock and its embedded feature are accounted for as one instrument. If, however, the feature and the host are not “clearly and closely related,” and the feature meets the definition of a derivative, the feature may need be stripped out of its host and accounted for separately. This includes remeasuring the feature to fair value each period. For more information We’ve barely scratched the surface of the accounting considerations related to issuing preferred stock. For help navigating this topic, see Chapter 8 of our Guide to Accounting for Financing Transactions. “Gross versus net” still a challenge after all these years The guidance for assessing whether to recognize revenue on a “gross” or “net” basis is over a decade old. However, it continues to be a hot topic, especially as new business models and types of transactions emerge. Arrangements that can create accounting challenges include services and “bundled” offerings. Inventory risk—what is it and does it apply to services? As a refresher, the accounting guidance provides indicators to help identify the party that is the principal in a transaction. A principal recognizes revenue on a gross basis (the amount billed to the customer), while an agent recognizes revenue net (the amount billed to the customer less the amount paid to a supplier). One of the indicators in a gross versus net assessment is inventory risk. Inventory risk exists if the seller takes title to a product before it is ordered by the customer or can exist if the seller accepts returns. But don’t be misled by the reference to “inventory”—this indicator can also apply to the sale of a service. For example, inventory risk could exist if the seller is responsible for compensating a third-party service provider even if the customer does not accept the work performed. The illustrations in the guidance 1 are a good place to start for help applying this indicator (and others) to service offerings. Multiple deliverables require multiple assessments Arrangements that have multiple deliverables require a gross versus net assessment for each unit of account provided by a party other than the seller. Different conclusions can be reached for the different deliverables. An example is a retailer that sells an electronic product along with an extended warranty to a customer. The retailer might be the principal for the product sale. However, if another party is servicing the extended warranty, the retailer could be an agent (and therefore, recognize revenue on a “net basis”) for that portion of the arrangement. Tax court cases—are they on your radar? At any given time, there are potentially dozens of ongoing federal, state and international tax court cases. Developments in these cases aren’t just important for 1 ASC 605-45-55, Principal Agent Considerations—Implementation Guidance and Illustrations
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 6 income tax planning and compliance purposes. They could have a material effect on a company’s tax accounting position and, in some situations, have an immediate impact on the bottom line. Why tracking court case developments is important The accounting implications of a court decision can be immediate. In the period that cases are decided or other new information arises, companies should assess the effect on existing deferred taxes and uncertain tax positions. Additionally, companies should consider possible refund claims or positions to be taken in the future. Disclosures are another important consideration. As developments occur, companies should consider whether updated financial statement or MD&A disclosures are necessary. For more information For discussion of a selection of current court cases that you may want to stay on top of, refer to our WNTS Publication, Judiciary tax actions warrant closer review. Companies should also consider consulting with tax accounting specialists to assess the impact of these cases. Accounting changes—principle, estimate, or error? An accounting change is generally the result of one of three scenarios: a change in accounting principle, a change in estimate, or a correction of an error. Each scenario has its own accounting implications. Determining whether a particular fact pattern represents a change in accounting principle, a change in estimate, or an error can be difficult and requires preparer judgment. A change in accounting principle versus a change in estimate In several areas of U.S. GAAP, companies can elect from more than one acceptable accounting method. A change in accounting principle is a change from one acceptable method to another. One recent example is changing pension accounting methods for actuarial gains and losses. Other examples include inventory costing and the date of the annual goodwill impairment test. In contrast, a change in estimate results from new information or modifications to the estimating techniques affecting the carrying amount of assets or liabilities. Examples include changing inputs for estimating uncollectible receivables or the model used to determine the fair value of stock-based awards. The distinction matters because a change in accounting principle is generally applied retrospectively (by recasting prior periods), while a change in estimate affects only current and future periods. In addition, companies cannot change accounting principles unless the new method is “preferable.” When is a change the correction of an error? Distinguishing a change in estimate from an error deserves special focus. A change in estimate results from new information or developments. Conversely, an error reflects the misapplication of facts or information that was available at a previous financial statement reporting date. If the “new” information was known, or could have been known, as of the prior period, it is generally indicative of an error in the previous accounting.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 7 Accounting “conventions” are not accounting policies It’s not unusual for companies to apply accounting “conventions” to reduce the cost of applying the accounting guidance. Common examples are setting a threshold for capitalizing fixed assets, or recording a half-month of revenue for all new service contracts signed in the month. Accounting conventions are not accounting policies. Rather, they are based on the underlying premise that the effect of applying the convention is not a material departure from U.S. GAAP. Such conventions must be continuously assessed against U.S. GAAP requirements to validate that the effects are not material. Linking pay to performance—stock compensation pitfalls Executive compensation continues to be in the spotlight, whether it’s “say-on-pay” or the pending Dodd-Frank “clawback” rules. Compensation arrangements often aim to link executives’ pay to their performance and key business objectives. However, this can sometimes lead to increased accounting complexity, especially for stock-based awards. Performance metrics—are they objective? To establish a “fixed” measurement date for an award, there must be a mutual understanding between the company and the employee of the requirements to obtain the award. Said differently, performance metrics or targets need to be clearly defined and objectively determinable. An example of an award that lacks objectivity is one that vests upon achieving a defined metric, but the compensation committee has the discretion to adjust the metric or the measurement of actual results—and it’s not clear when or how these adjustments will be made. In this situation, the award’s fair value (and expense to be recorded) may not be fixed until the discretion is removed and there is a mutual understanding of the award’s terms. Until then, the award is subject to variable (or “mark-to-market”) accounting. Other conditions can lead to liability accounting The stock compensation guidance defines three types of conditions: service, performance, and market conditions. If an award is indexed to a factor that falls outside of these defined categories (an “other” condition), it must be recorded as a liability and remeasured each period until settled. At a high level, awards that are not linked directly to performance of the company, the individual, or the company’s stock could be liabilities. For example, an award would likely be liability-classified if its vesting is based, in part, on: (a) inflation rates or the consumer price index or (b) sales of stock by a non-controlling shareholder.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 8 Hot off the press This quarter, in addition to its leases proposal, the FASB is road testing proposed guidance on discontinued operations. It also put the finishing touches on final standards for investment companies and liquidation basis of accounting. We cover the highlights below. In addition, not-for-profit entities should take note of final guidance issued in April on services received from an affiliate. See our March 2013 EITF observer for more details. First up, we explore COSO’s updated internal control framework. Additionally, we discuss the AICPA’s newly updated “cheap stock” guide. The AICPA also recently released its new Financial Reporting Framework for Small- and Medium-Sized Entities. Check out the AICPA website for more on this new non-GAAP framework for the small business community. COSO refreshes its Internal Control-Integrated Framework After more than twenty years, COSO has refreshed its widely accepted internal control framework. Much has changed in the way businesses operate in the last two decades. The updated framework provides guidance to help keep controls current and has been enhanced to apply to business objectives beyond financial reporting. It is also principles- based, preserving the important role of judgment in designing and implementing internal control and assessing effectiveness. The familiar “COSO cube” with seventeen new principles COSO hasn’t done away with the five components of a system of internal control: control environment, risk assessment, control activities, information and communication, and monitoring activities. However, the update articulates seventeen principles that are fundamental concepts embedded in the original framework. It also expands beyond external financial reporting to address other important forms of reporting, including external non-financial reports such as sustainability reporting. What should companies do now? The good news is that the update is not intended to fundamentally change a company’s system of internal control over financial reporting. However, companies should consider mapping relevant principles to existing controls, considering the related points of focus to identify what is covered and what is missing. For more ways to leverage the updated framework, read 10Minutes on why the COSO Update deserves your attention. For more information COSO has announced that the update will supersede the original framework on December 15, 2014. For more details on the framework and two new companion documents, see Dataline 2013-09, COSO issues the updated Internal Control-Integrated Framework and related illustrative documents. Comment letter deadlines: Out for comment Comments due Private company framework June 21 Technical corrections: glossary terms August 5 Reporting discontinued operations August 30 Leases September 13
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 9 AICPA unveils updated “cheap stock” guide Valuing equity securities has always been a significant challenge for private companies. The changes to the stock-based compensation guidance in 2005 only heightened the focus on this topic. The AICPA recently updated its guide to valuation of privately-held- company equity securities issued as compensation. Commonly referred to as the “cheap stock” guide, the document provides valuable practical guidance and illustrations for private companies. What’s included in the guide? The guide addresses common issues such as evaluating private and secondary market transactions, applying adjustments for control and lack of marketability, and incorporating the fair value of debt for highly leveraged entities. The guide also reflects advances over the last decade in the theory and practice of valuation. And, it incorporates the accounting guidance issued during that time, including significant updates to the stock-based compensation and fair value guidance. For more information The guide is now available for purchase on the AICPA website. Also, look for an upcoming Dataline with more details and observations about the guide. Discontinued operations—FASB proposes retro model Responding to concerns that today’s definition of a discontinued operation is too broad, the FASB is proposing a new threshold. The revised definition is aimed at capturing only major strategic shifts in a company’s operations, and aligns more closely with current IFRS guidance. A revised threshold for discontinued operations Today, a discontinued operation is a component with operations and cash flows that can be clearly distinguished, and can range from an asset group to a reportable segment. Under the proposal, only components (or groups of components) that are part of a single coordinated plan to dispose of a separate major line of business or major geographical area of operation will be presented as discontinued operations. The proposal also eliminates today’s guidance that precludes presentation as discontinued operations if the company has significant continuing involvement in the operations or cash flows with the disposed component. New disclosure requirements Given the expectation that less disposals will qualify as discontinued operations, the board is proposing disclosures about individually material dispositions that don’t meet the revised threshold. The proposal also includes enhanced disclosure requirements for disposals presented as discontinued operations, including cash flows by major category. What’s next? Comments are due August 30. For more on the proposal, refer to Dataline 2013-12, A summary of the FASB’s proposal on reporting discontinued operations.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 10 FASB gives “investment company” definition a tune-up After several twists and turns, the FASB finalized its updated definition of an “investment company” in June. The revised definition is more of an enhancement to existing guidance than a complete overhaul. As a result, companies that are currently considered to be investment companies would, in most cases, continue to be investment companies under the new definition. Defining an “investment company” A company regulated under the Investment Company Act of 1940 is automatically an investment company under the revised U.S. GAAP definition. For all other entities, the revised definition is principles-based. At a high level, to qualify as an investment company, a company must obtain funds from an investor(s) and invest those funds for returns from capital appreciation, investment income, or both. In addition, the standard outlines typical characteristics of an investment company that will need to be considered in making the determination. Companies that meet the definition will report all of their investments at fair value. The definition contained in the standard is broadly converged with the IASB’s final definition, but there are some differences. For example, the accounting for investments held by an investment company and the treatment by a non-investment company parent when consolidating an investment company are not fully aligned. Still to come: disclosures of investee funds During its deliberations, the FASB considered requiring new disclosures designed to increase transparency into an investment company’s interest in an investee fund. Ultimately, the FASB decided to defer this aspect of the project and re-evaluate the proposed disclosures at a later date. However, a timetable has yet to be provided. For more information The new definition is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. For more information, see In brief 2013-30, FASB issues final standard on investment companies. Liquidation basis of accounting—final rule provides clarity Liquidation may not be an everyday occurrence, but companies now have more guidance on applying the liquidation basis of accounting. Applying the liquidation basis of accounting The liquidation basis of accounting will apply when liquidation is “imminent”—when a plan for liquidation has been approved or imposed, and it is remote that liquidation will not occur. A company applying the liquidation basis of accounting will measure its assets at the estimated amount of proceeds it expects to collect in disposing of the assets. However, a company will only adjust contractual liabilities if it is no longer contractually obligated to satisfy a liability (for example, legally released from the obligation). The final standard also provides presentation and disclosure guidance. For more information The new guidance is effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. For more on the final standard, see In brief 2013-22, FASB finalizes guidance for applying liquidation basis of accounting.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 11 SEC matters Timing slips for conflict minerals lawsuit; SEC issues FAQs The new SEC chairman has set her sights on fulfilling the remaining Dodd-Frank rulemaking mandates. However, many companies have been slow to react to one of the SEC’s Dodd-Frank rules: disclosures about conflict minerals. Recently, the legal challenge against this rule was moved to a different court, likely delaying a decision until later this year. The SEC’s rule requires new reporting by companies that use conflict minerals— tantalum, tin, gold, or tungsten—in their products. Due to the pervasive use of these minerals, we expect the rule to affect a large number of companies. The initial report is due May 31, 2014 and covers the 2013 calendar year. With time quickly running short to prepare, companies delaying their efforts due to the pending legal challenge may want to rethink their strategy. For more information For more on the practical steps companies can take now, see our recently issued 10Minutes on conflict minerals. The SEC staff also recently released a series of FAQs to address certain interpretive questions they have received. The FAQs are located on the SEC’s website. SEC gives thumbs-up to social media In an April release, the SEC clarified that social media outlets, including Facebook and Twitter, can be used to communicate with investors. However, companies must first alert investors about which social media they plan to use. Current SEC guidance (Regulation FD) requires companies to distribute material information in a non-exclusive manner so that all investors have access to it at the same time. The SEC’s announcement does not change that guidance. Instead, it clarifies that Regulation FD should be applied to social media similar to how it is applied today to information on company websites. For more information Companies planning to release information using social media outlets should carefully consider the requirements of Regulation FD and consider consulting with their legal counsel. The SEC’s announcement is available on its website.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 12 IFRS developments IASB announces next steps on disclosure effectiveness The “disclosure overload” debate has been active both in the United States and internationally. As a follow-up to its January forum on disclosures, the IASB recently announced the actions it plans to take:  Amend existing guidance 2 to address perceived obstacles to exercising judgment in preparing financial statements  Develop educational material on materiality with the help of an advisory group  Initiate a research project on the challenges associated with disclosure effectiveness What’s next for U.S. companies? The FASB currently has an active project on disclosure effectiveness, and plans to discuss project timing and expectations this month. Earlier this year, the SEC announced its plans to release a staff paper and hold a roundtable on disclosures. Stay tuned for more on this topic in the upcoming months. IASB jump-starts project on rate-regulated activities Unlike U.S. GAAP, current IFRS guidance does not address the accounting for the effects of rate regulation, a key issue for industries such as the utilities sector. In response to stakeholder feedback, the IASB has restarted its project on rate-regulated activities. So far this year, the IASB has issued two documents: (1) a request for information about rate regulation and (2) a proposal that allows first-time IFRS adopters to continue applying their previous accounting policies until the IASB’s project is complete. Many U.S. companies in rate-regulated industries are closely following the IASB’s project. Next steps include an IASB discussion paper, expected later this year. For more information, see our May edition of IFRS news. Global advisory group holds inaugural meeting April marked the first meeting of a new advisory group to the IASB, the Accounting Standards Advisory Forum (ASAF). The group was created with a goal of improving communications between the IASB and the global accounting standard-setting community. It is also intended to replace multiple bilateral relationships (such as the current memorandum of understanding between the FASB and IASB) with a single forum. Members include the FASB and other standard setters from across the world. At its inaugural meeting, the ASAF discussed the IASB’s conceptual framework and financial instruments impairment projects. The ASAF will meet multiple times a year, with upcoming meetings scheduled for September and December. 2 IAS 1, Presentation of Financial Statements
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 13 The important auditor oversight role played by audit committees in the capital markets complements the Board's mission, and we are eager to explore ways in which we can work together. Source: Jay D. Hanson, PCAOB board member, May 10, 2013 Audit reporter PCAOB explores ways to measure audit quality In May, the PCAOB provided a first look at defining and identifying measures of audit quality. Still in its early stages, the project explores indicators that could assist the PCAOB in its regulatory processes and policymaking, and potentially be shared with audit committees, investors, or the general public. Expect to hear more on these initiatives in the upcoming months. Standard-setting update Recent PCAOB activity includes a revised proposal 3 on the auditor’s evaluation of related parties, significant unusual transactions, and financial relationships and transactions with executive officers. The PCAOB views these areas as key contributing factors in a number of financial statement frauds. Much of the proposal is consistent with the PCAOB’s February 2012 release. One notable revision clarifies that the auditor’s evaluation of executive compensation arrangements is intended for risk assessment purposes, as opposed to drawing conclusions about their appropriateness. International developments Many in the U.S. are closely watching the outcomes of various new regulations overseas. Recently, the UK's Financial Reporting Council revised their audit reporting standard. It now requires auditors reporting on companies that apply the UK Governance Code to include additional information in their reports, such as an overview of the scope of the audit, and how the concept of materiality was applied. Separately, the European parliament voted to adopt a series of measures that include mandatory audit firm rotation after 14 years, with extension to 25 years if certain criteria are fulfilled. The EU Council of Ministers continued its audit reform considerations, working toward a shorter mandatory firm rotation period and further restrictions to non-audit services, and contemplating the role of European authorities to coordinate auditor oversight. These reforms are still subject to further negotiation and approvals, expected later this year. For more information For more regulatory updates, see our upcoming Regulatory and standard-setting developments publication. 3 For more information on this proposal, see In brief 2013-25, PCAOB reproposes related parties auditing standard and related amendments.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 14 On the horizon Now that the FASB and IASB have made significant progress on their joint convergence projects, the FASB is looking forward to its future agenda. The Financial Accounting Standards Advisory Council (FASAC), an advisor to the FASB, issued a survey in May seeking feedback on future standard-setting priorities. Possible contenders include hedging and distinguishing liabilities from equity. Stay tuned for news on upcoming agenda topics. Coming up next from the FASB is its “going concern” proposal, expected in the upcoming weeks. A final revenue recognition standard is also nearing the finish line. For more updates on these and other ongoing FASB projects, look for our June edition of Setting the standard. Below we highlight the upcoming insurance contracts proposal, feedback on the FASB’s recent financial instruments proposals, changes to the repurchase agreements project, and the EITF’s latest agenda items. FASB green lights insurance contracts proposal After several years of joint discussions with the IASB, the FASB decided to move forward with a draft proposal on insurance contracts. Proposals from both boards could arrive as soon as the end of June, but they will not be fully converged. Who could be affected? “Insurance contracts” are broadly defined in the proposed guidance. Unlike current U.S. GAAP, the guidance would apply to contracts as opposed to a particular class of entities, meaning it could have implications for entities writing insurance contracts that are not insurers, such as banks. Key aspects of the upcoming proposal The changes being considered to current accounting are significant. At a high level, the proposal would require the use of a “current value” discounted cash flow measurement for insurance contract liabilities. Any excess of expected premiums over expected claims and expenses would be deferred as “margin” and amortized into income over future periods. Expected losses would be recognized immediately. The proposed guidance would likely change the earnings pattern of underwriting and net investment margins, and the pattern and amount of revenue. What’s next? The boards expect to issue their proposals in the upcoming weeks, with a 120-day comment period. For more information, see Dataline 2013-11, Insurance contracts—An exposure draft is expected in Q2 2013 that would significantly change accounting for insurance contracts. Financial instruments—more work ahead? Last month, feedback poured in on the FASB’s two proposals on financial instruments. Here we provide some highlights of the proposals and observations from the comment letters.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 15 Impairment—two models Last year, the FASB and IASB parted ways on the impairment project. The FASB developed its “current expected credit loss” model, while the IASB continued to build out its credit deterioration model. Both models focus on “expected” as opposed to “incurred” losses. A key difference is that the FASB’s approach does not require a threshold to be met before recording losses expected over an asset’s lifetime. The FASB received more than 300 comment letters before the comment period closed in May. While the FASB's model has received praise for its operational simplicity, some struggle with the conceptual merits of a “day one” loss that is likely to result from the model. Classification and measurement—praise for a simplified model The FASB received over 100 comment letters on its classification and measurement proposal. Many praised the FASB and IASB’s efforts to create a single, simplified model. However, some aspects of the proposal raised concerns. These include the “cash flow characteristics test” that must be met to measure instruments at amortized cost and the level of restrictions on allowable sales for instruments measured at amortized cost. Additionally, some believe the “fair value option” should continue to be more broadly permitted. What’s next? The boards are digesting the feedback on their proposals. The summary of the comment letters on classification and measurement is on the FASB website, and the impairment comment letter summary will be posted in the near future. For more background on the proposals, see Dataline 2013-01, Credit losses on financial assets—An overview of the FASB's current expected credit loss model, and Dataline 2013-05, Financial instruments classification and measurement—FASB issues its exposure draft. FASB shifts gears on “repos-to-maturity” In January, the FASB issued a proposal that would have required, among other things, a change in the accounting for a certain type of repurchase agreement known as a “repo- to-maturity. 4 “ However, feedback on that proposal has caused the FASB to rethink its approach. The FASB tentatively decided to retain the current accounting model for this type of agreement and address the objective of the proposal through additional disclosures. What’s driving the FASB’s latest decision? Comments received on the FASB’s proposal raised a number of concerns. Many respondents observed that it lacked a clear principle and therefore would result in inconsistent accounting for economically similar transactions. In response, the FASB tentatively decided not to change the accounting for repos-to- maturity. Instead, it is exploring new disclosures for transfers of financial assets with contemporaneous agreements that result in the transferor retaining the risks associated with the transferred financial assets. The FASB believes that additional disclosures, paired with existing disclosure requirements for derivatives, will provide the desired transparency into these types of transactions. 4 A “repo-to-maturity” is a repurchase agreement in which the specified repurchase date is the maturity date of the transferred financial asset.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 16 What’s next? We expect the FASB to discuss potential disclosures at an upcoming meeting. Depending on the results of those discussions, the FASB will decide whether to issue a revised proposal. For more information, see In brief 2013-28, FASB suggests a disclosure approach for the repurchase agreement project. Final consensus on two EITF topics, three more exposed The EITF took on a full agenda at its June meeting. In addition to the topics discussed below, the Task Force revisited a final consensus reached in March related to collateralized financing entities and reached a new consensus-for-exposure. It also voted to issue proposals related to collateralized residential mortgage loans and service concession arrangements. EITF reaches final decision on presenting unrecognized tax benefits Prior to the Task Force decision, income tax accounting guidance did not explicitly address how to present unrecognized tax benefits in the balance sheet when a company also has same-jurisdiction net operating loss (NOL) or tax credit carryforwards. Some companies present these unrecognized tax benefits as a liability (gross presentation), while others net them against the NOLs or tax carryforwards. The EITF addressed this diversity in practice. It decided that companies should net their unrecognized tax benefits against all same-jurisdiction NOLs or tax credit carryforwards that would be used to settle the position with a tax authority. Gross presentation would still be required in certain circumstances, for example when same-jurisdiction unrecognized tax benefits and NOLs or tax credit carryforwards exist, but the company knows they will not be used to actually offset one another. The Task Force's decision will likely be a change from current practice for many companies. Pending FASB approval, the guidance will be effective prospectively for annual periods beginning after December 15, 2013 and interim periods therein. Nonpublic companies will have a one-year deferral. Early adoption and retrospective application will be permitted. Final consensus adds new benchmark interest rate for hedge accounting Companies applying hedge accounting can designate a benchmark interest rate as the risk being hedged. In the past, only two rates qualified as benchmark interest rates in the United States: the interest rate on direct treasury obligations of the U.S. government and the London Interbank Offered Rate (LIBOR) swap rate. The EITF decided that the Fed Funds Effective Swap Rate (also known as the Overnight Index Swap Rate) should also be an allowable benchmark interest rate. As a result, we expect derivative products that are indexed to this rate to become more prevalent. Companies can start using the Fed Funds Effective Swap Rate for new and re-designated hedges as soon as the final standard is issued by the FASB. For more information For more background on the topics discussed and other EITF matters, read our June 2013 EITF observer.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 17 Corporate governance Introducing ProxyPulse: insights into proxy voting trends This quarter, the PwC Center for Board Governance debuted ProxyPulse, for corporate directors and others interested in proxy voting trends. ProxyPulse was created in collaboration with Broadridge Financial Solutions to provide data and analysis on proxy season voting. Broadridge processes the proxy voting for over 80% of outstanding shares of U.S. publicly listed companies — over 600 billion shares. The first edition of ProxyPulse explores the differing voting behaviors of institutional and retail investors. It also summarizes the voting results for director elections, as shareholders continue to support director nominations by a significant margin. Read the first ProxyPulse report in a special edition of BoardroomDirect and visit www.proxypulse.com for more information. Nasdaq reconsiders internal audit proposal The Nasdaq is back at the drawing board on a proposed rule that would have required listed companies to establish an internal audit function by the end of the year. Numerous comments critical of the proposal cited the burden on smaller companies and the short time frame for compliance, causing the exchange to withdraw the proposal. Nasdaq plans to revise and resubmit the proposed rule in the near future. Two PwC publications help directors navigate the IPO process A company that is planning to go public has a lot on its plate. Becoming a public company is a transformational event requiring many different parts of the business to work together towards this goal. Decisions about the company’s board and its governance processes are addressed in two recent PwC publications. Governance for Companies Going Public – What Works BestTM provides insight on key governance considerations for companies contemplating a public offering. These include understanding IPOs and directors’ roles, building a board, understanding key governance influences, protecting directors, and preparing for the first year as a public company. A companion publication, Going public? Five governance factors to focus on, helps executives and directors navigate the process by grouping governance factors into five categories.  Considering accessing the public markets? Click here to watch our experts discuss best practices, from managing the process to avoiding accounting pitfalls.
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 18 Appendix Standards effective in 2013 or earlier for calendar year-end public companies Public companies Nonpublic companies ASU 2012-07 Entertainment – Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs Impairment assessments performed on or after December 15, 2012* Impairment assessments performed on or after December 15, 2013* ASU 2011-10 Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate – a Scope Clarification Fiscal years (including interim periods) beginning on or after June 15, 2012* Fiscal years ending after December 15, 2013, and interim and annual periods thereafter* ASU 2012-02 Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment Fiscal years beginning after September 15, 2012* Fiscal years beginning after September 15, 2012* ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities Fiscal years (including interim periods) beginning on or after January 1, 2013 Fiscal years (including interim periods) beginning on or after January 1, 2013 ASU 2012-01 Health Care Entities (Topic 954): Continuing Care Retirement Communities – Refundable Advance Fees Fiscal years beginning after December 15, 2012* Fiscal years beginning after December 15, 2013* ASU 2012-04 Technical Corrections and Improvements Fiscal periods beginning after December 15, 2012 (for amendments subject to transition guidance) Fiscal periods beginning after December 15, 2013 (for amendments subject to transition guidance) ASU 2012-06 Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution Fiscal years (including interim periods) beginning on or after December 15, 2012* Fiscal years (including interim periods) beginning on or after December 15, 2012* ASU 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities Fiscal years (including interim periods) beginning on or after January 1, 2013 Fiscal years (including interim periods) beginning on or after January 1, 2013 ASU 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income Reporting periods beginning after December 15, 2012* Reporting periods beginning after December 15, 2013* ASU 2013-03 Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities n/a Effective upon issuance (February 2013) *early adoption permitted
  • National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com The quarter close 19 Standards effective after 2013 for calendar year-end public companies Public companies Nonpublic companies ASU 2012-05 Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows Fiscal years (including interim periods) beginning after June 15, 2013* Fiscal years (including interim periods) beginning after June 15, 2013* ASU 2011-06 Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers Calendar years beginning after December 31, 2013 Calendar years beginning after December 31, 2013 ASU 2013-04 Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date Fiscal years (including interim periods) beginning after December 15, 2013 Fiscal years ending after December 15, 2014, and interim and annual periods thereafter ASU 2013-06 Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate n/a Fiscal years beginning after June 15, 2014, and interim and annual periods thereafter* ASU 2013-05 Foreign Currency Matters (Topic 830): 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 Fiscal years (including interim periods) beginning after December 15, 2013* Fiscal years beginning after December 15, 2014, and interim and annual periods thereafter* ASU 2013-07 Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting Entities that determine liquidation is imminent during annual reporting periods (including interim periods) beginning after December 15, 2013* Entities that determine liquidation is imminent during annual reporting periods (including interim periods) beginning after December 15, 2013* ASU 2013-08 Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements Fiscal years (including interim periods) beginning after December 15, 2013 Fiscal years (including interim periods) beginning after December 15, 2013 *early adoption permitted
  • Edited by: Elizabeth Paul Partner Phone: 1-973-236-7270 Email: elizabeth.paul@us.pwc.com Josh Paul Partner Phone: 1-408-817-1269 Email: joshua.paul@us.pwc.com Angela Fergason Director Phone: 1-408-817-1216 Email: angela.fergason@us.pwc.com Kathleen Bauman Director Phone: 1-973-236-5118 Email: kathleen.bauman@us.pwc.com Brian Wiegmann Director Phone: 1-973-236-7054 Email: brian.c.wiegmann@us.pwc.com The quarter close is prepared by the National Professional Services Group of PwC. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. To access additional content on accounting and reporting issues, register for CFOdirect Network (www.cfodirect.pwc.com), PwC’s online resource for financial executives. © 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.