FASB/IASB Joint Projects - presented by McGladrey at 2011 NYSSCPA Private Company Accounting & Auditing Conference
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FASB/IASB Joint Projects - presented by McGladrey at 2011 NYSSCPA Private Company Accounting & Auditing Conference

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McGladrey & Pullen presentation (Brian Marshall & Rich Stuart) on FASB/IASB Joint Projects at June 2011 NYSSCPA Private Company Accounting & Auditing Conference

McGladrey & Pullen presentation (Brian Marshall & Rich Stuart) on FASB/IASB Joint Projects at June 2011 NYSSCPA Private Company Accounting & Auditing Conference

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FASB/IASB Joint Projects - presented by McGladrey at 2011 NYSSCPA Private Company Accounting & Auditing Conference Presentation Transcript

  • 1. FASB/IASB Joint Projects Brian H. Marshall, Partner, McGladrey & Pullen, LLP Richard K. Stuart, Partner, McGladrey & Pullen, LLP June 16, 2011 0 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 2. Agenda FASB/IASB Progress Report – April ‘11 Joint Revenue Recognition Project Joint Financial Instruments Project Joint Leases Project Status of Other Joint Projects 1 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 3. FASB/IASB Progress Report – April ‘11 2 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 4. FASB/IASB Progress Report – April ‘11 Joint standards on Statement of Comprehensive Income & Fair Value Measurement expected (& subsequently issued) in Q2 Priority projects - Revenue Recognition - Leases - Financial Instruments Timetable extended for priority projects from 2Q to 2H 2011 Effective dates will allow sufficient time for changes 3 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 5. FASB/IASB Progress Report – April ‘11 Revenue Recognition and Leases Projects - Boards’ timetables are in sync for both projects - Final redeliberations are in progress - Consider whether re-exposure is necessary - Even without re-exposure, draft standards will be made available for review - Boards will then determine whether to proceed to finalize the standards 4 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 6. FASB/IASB Progress Report – April ‘11 Financial Instruments Project - Various Board sub-projects 1. Balance Sheet – Offsetting  Boards’ timetables are in sync 2. Classification and Measurement  FASB expects to complete in 2H 2011 and consider whether re-exposure is necessary  IASB completed in 2010 5 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 7. FASB/IASB Progress Report – April ‘11 Financial Instruments Project - Various Board sub-projects 3. Impairment  Boards’ timetables are in sync  Basic impairment approach to be determined by end of 2H 2011  Consider whether re-exposure is necessary 4. Hedge Accounting  IASB plans to finalize in 2H 2011  FASB timing unclear 6 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 8. FASB/IASB Progress Report – April ‘11 Insurance Project - Different Board timetables: • IASB expects to issue final document by end of 2011 • FASB expects to issue an ED in 2H 2011 and final standard in 2012 7 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 9. Timetable for Selected Joint ProjectsJoint Project 2Q 2011 2H 2011 2012 & BeyondRevenue Recognition FLeases FFinancial Instruments FInsurance ED FFair Value Measurements IssuedStatement of Comprehensive Income FConsolidation ED FReporting Discontinued Operations ED FEmissions Trading Schemes ED, FFinancial Instruments with ED, FCharacteristics of EquityFinancial Statement Presentation ED, F 8 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 10. Joint Revenue Recognition Project 9 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 11. Joint Revenue Recognition Project Exposure Draft issued in June 2010 Redeliberations began in January 2011 10 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 12. Joint Revenue Recognition Project Scope Steps in applying the model 1. Identify the contract with a customer 2. Identify the separate performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when each separate performance obligation is satisfied 11 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 13. 1. Identify the Contract with a Customer Contract is an enforceable agreement between parties Can be written, verbal or implied Contract combination - Required for contracts entered into at or near the same time if certain other criteria are met 12 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 14. 2. Identify the Performance Obligations Promise in a contract with a customer to transfer a good or service to that customer Account for performance obligations separately if both of the following criteria are met - The good or service has a distinct function - The good or service is transferred at a different time from other promised goods or services in the contract However, a bundle of promised goods or services is accounted for as one performance obligation if the entity provides a service of integrating those goods or services into a single item 13 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 15. 3. Determine the Transaction Price Estimated amount of consideration to which the entity will be entitled - If price is variable (e.g.; contingencies, rebates, royalties), estimate based on probability-weighted or most-likely amount - Time value of money - Fair value of noncash consideration Collectibility is not considered 14 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 16. 4. Allocate the Transaction Price Based on relative standalone selling price of goods or services Standalone selling price: - Observable price when sold separately (best) - Cost plus margin - Adjusted market assessment - Residual technique allowed if highly variable Subsequent changes to transaction price generally allocated to all performance obligations unless certain criteria are met 15 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 17. 5. Recognize Revenue Recognition limited to cumulative revenue the entity is reasonably assured of being entitled to receive Recognize revenue as goods or services are transferred Determine whether separate performance obligations are goods or services Goods – recognize revenue when customer obtains control based on following indicators: - Customer has an unconditional obligation to pay - Customer has physical possession - Customer has risks and rewards of ownership - Customer has legal title 16 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 18. 5. Recognize Revenue Services – recognize revenue as the entity provides service if performance obligation is satisfied continuously based on either of following criteria: - Entity’s performance creates or enhances an asset the customer controls as it is created or enhanced, or - Entity’s performance does not create an asset with an alternative use and one of several other criteria are met Select a method for service revenue recognition that faithfully depicts the entity’s performance - Input methods - Output methods 17 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 19. Other Issues Return rights Product warranties Licensing Onerous contracts Costs of obtaining and fulfilling a contract 18 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 20. Joint Financial Instruments Project 19 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 21. Balance Sheet Offsetting Exposure Draft issued in January 2011 An entity would be required to offset an eligible asset and an eligible liability when both of the following exist: - It has an unconditional and legally enforceable right of setoff - It intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously Would apply whether the right of setoff arises from a bilateral or multilateral arrangement Would eliminate the current exception that permits net presentation of derivatives when the right of setoff or intention of setoff is conditional 20 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 22. Classification and Measurement Exposure Draft issued in May 2010 (on impairment and hedging as well) Equity securities other than equity method investments – measure at fair value through net income - Practicability exception for nonpublic entities for nonmarketable equity securities • Measure at amortized cost less OTTI • Recognize upward adjustments to fair value when change in price is observable 21 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 23. Classification and Measurement Debt securities - Measure at fair value through net income if held for sale/transfer and/or doesn’t meet other criteria - Measure at fair value through OCI if business strategy is to invest cash to either maximize total return or manage interest rate/liquidity risk by collecting contractual cash flows or selling the instrument 22 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 24. Classification and Measurement Debt securities - Measure at amortized cost if following criteria are met • Business strategy is to manage through customer financing activities (lending or borrowing) • Holder can manage credit risk by negotiating potential adjustments with counterparty in the event of potential credit loss  Sales/settlements would be limited to circumstances to minimize losses due to deteriorating credit • Instrument is not held for sale/transfer at acquisition/issuance 23 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 25. Classification and Measurement Derivatives measured at fair value through net income unless designated as certain type of hedging instrument Hybrid financial instruments - Retain requirements for bifurcation/fair value recognition for embedded derivatives - Apply classification/measurement model separately to host contract 24 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 26. Impairment Impairment model for financial assets not carried at fair value through net income: - Separate models originally proposed by FASB and IASB - Published supplementary document on proposed common solution/model for open loan pools in January with comments due in April - Based on feedback on supplementary document, plan to develop a new model 25 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 27. Impairment Expected losses should be estimated with objective of expected value - Identify possible outcomes, estimate likelihood of each and calculate probability-weighted average Expected losses measured as all shortfalls in cash flows on a discounted basis - Unwinding of discount should be reflected in credit losses Recognize interest income based on effective rate applied to amortized cost balance that is not reduced for impairment 26 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 28. Next Steps Develop updated model / objectives on impairment Redeliberate balance sheet offsetting and hedge accounting Develop risk disclosures over involvement in financial instruments Disseminate additional exposure drafts as considered necessary Determine effective dates/transition 27 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 29. Joint Leases Project 28 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 30. Joint Leases Project Exposure Draft issued in August 2010 Redeliberations began in February 2011 Objective of the project is to propose a new approach to lease accounting to address perceived shortcomings of current model Would apply to all leases with certain limited exceptions 29 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 31. Perceived Problems with Current Model Current model is “broken” - Similar transactions can have different accounting - Structuring opportunities - Complex, rules-based - Assets and liabilities not recognized on balance sheets 30 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 32. Proposed Model: Scope Would not mention in substance purchases/sales Intangibles not required to be accounted for under this standard 31 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 33. Lease Definition Right to use a specified asset for a period of time in exchange for consideration - Fulfillment of contract depends on use of specified asset(s) - Contract conveys right to control use for a period of time - Would not include right to use incidental assets 32 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 34. General Short-term leases - Elect (by class of asset) not to apply right-of-use model - Subject to reconsideration based on May meeting All initial measurements based on information at lease commencement 33 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 35. Lease Term Noncancelable period plus optional periods with “significant economic incentive” Consider only economic factors Reassess if economic factors impacting option exercise change significantly 34 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 36. Arrangements with Lease and Non-LeaseComponents Lessees: separate unless there are no observable prices - Allocate based on relative stand-alone purchase price (if observable); - Otherwise, residual method Lessors: always separate Open issue: should private company lessees be given an option not to separate? 35 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 37. Lease Payments Variable Lease Payments - Based on index or rate—include using prevailing rates/indices at commencement - If payments represent in substance minimum lease payments, include in measurements Other Lease Payments - RVG: difference between expected RV and guaranteed RV - Term penalty: consistent with lease term - Exercise of purchase options: included in measurement if there is a significant economic incentive to exercise 36 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 38. Classification Finance or other-than-finance - Decision reversed at May meeting - Conclusion: all leases have a financing element Reversal means leases will be accounted for in manner in ED - Expense will be front loaded 37 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 39. Proposed Lessee Model Discount Rate - Rate charged by lessor (if a finance lease and the rate is readily determinable - Otherwise, incremental borrowing rate Sale-Leaseback - Are requirements for sale recognition met? • Yes: sale-leaseback accounting applies • No: financing transaction 38 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 40. Status of Other Joint Projects 39 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 41. Fair Value Measurements – ASU 2011-04 Converged guidance issued in May 2011 Blockage discounts prohibited for all fair value measurements Other discounts or premiums (for non-Level 1 measurements) may be applied if consistent with unit of account and would be considered by a market participant Concepts of “highest and best use” and “valuation premise” apply only to nonfinancial assets Exception to fair value requirements provided for financial instruments managed in a portfolio 40 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 42. Fair Value Measurements – ASU 2011-04 Principal market – determined based on market with greatest volume and level of activity the Company can access Fair value of instrument classified in equity measured from perspective of market participant that holds instrument as an asset Additional disclosures required Effective for nonpublic entities for annual periods beginning after December 15, 2011, with early application permitted 41 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 43. Other Joint Projects Statement of Comprehensive Income Consolidation Reporting Discontinued Operations Insurance Following projects are lower priority with no further discussion expected until 2012 - Emissions Trading Schemes - Financial Instruments with Characteristics of Equity - Financial Statement Presentation 42 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 44. McGladrey Thought Leadership More Accounting Changes Coming FASB Tentatively Decides to Significantly Revise Proposed Revenue Recognition Standard http://mcgladrey.com/Assurance/Accounting- Resources http://mcgladrey.com/Publications/Publication- Subscription 43 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
  • 45. QUESTIONS? 44 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.