McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects
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McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects

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FASB/IASB Convergence Projects Update ...

FASB/IASB Convergence Projects Update

Speakers: Brian H. Marshall, McGladrey LLP
Faye E. Miller, McGladrey LLP

The FASB and IASB are currently working together on a significant number of projects. This session will cover the status of these joint projects, with a particular focus on:
• Revenue Recognition
• Leasing
• Financial Instruments

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McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects Presentation Transcript

  • 1 ©2012 McGladrey LLP. All Rights Reserved. FASB/IASB convergence projects update
  • 2 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Brian Marshall Biography brian.marshall@mcgladrey.com Brian is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Brian’s responsibilities include consulting with clients and engagement teams on complex accounting issues associated with these subject matters, facilitating training events for McGladrey professionals and external participants and writing interpretive guidance for McGladrey publications. He is also responsible for monitoring standard setting by the FASB and the FASB’s EITF, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups. Prior to joining McGladrey in 2007, Brian worked as a Senior Program Manager in IBM’s Accounting Practices Group, serving as a resource on complex technical accounting matters for the Company’s global accounting community. Brian also was employed by Deloitte for over eight years in various offices in the U.S. and Europe, with his last position being a Senior Manager in the Assurance Services Group.
  • 3 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Faye Miller Biography faye.miller@mcgladrey.com Faye is a director in the National Professional Standards Group of McGladrey LLP. She serves as a firm-wide technical resource for complex accounting issues involving financial instruments, such as derivatives, hedging, alternative investments, and complex equity and debt financing arrangements. As a firm-wide technical resource, Faye conducts training, follows recent developments, assists engagement teams and advises clients on these matters. Faye is also a frequent speaker and author on topics involving financial instruments including proposed or recently issued related accounting guidance. Faye has over 20 years of experience in banking and public accounting, is a past member of the AICPA Accounting Standards Executive Committee, received a Bachelor of Science degree from Pennsylvania State University and Master’s degree from Villanova University.
  • 4 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. McGladrey overview  5th largest accounting firm in the U.S.  Provide assurance, tax and consulting services  Nearly 6,500 professionals and associates in more than 70 offices nationwide  US member of RSM International (RSMI) – 6th largest network of independent accounting, tax and consulting firms worldwide - More than 700 offices in 86 countries with over 32,000 people
  • 5 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Agenda  Status of convergence projects  Revenue Recognition  Financial Instruments  Leases
  • 6 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Status of convergence projects
  • 7 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Status of convergence projects  Joint standards on Fair Value Measurement & Comprehensive Income issued in 2011  Priority projects in progress - Revenue Recognition - Financial Instruments - Leases  Timing of completion of projects extended many times  Effective dates expected to allow sufficient time for changes
  • 8 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Timetable for active convergence projects Joint Project 2Q 2012 2H 2012 2013 & Beyond Revenue Recognition R F Financial Instruments:  Liquidity and Interest Rate Risk Disclosures ED  Impairment ED  Classification and Measurement ED  Hedging ED, F Leases ED F Insurance Contracts ED F Consolidation: Policy and Procedures F Investment Companies ED, F
  • 9 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Revenue Recognition
  • 10 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Revenue Recognition  Exposure draft issued in June 2010  Revised exposure draft issued in Nov. 2011  Final standard expected in early 2013
  • 11 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Revenue Recognition  Scope  Core principle  Steps in applying the model Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5) 11 ©2012 McGladrey LLP. All Rights Reserved.
  • 12 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 1. Identify the contract with a customer  Enforceable agreement between parties  Can be written, oral or implied  Combination - Required for contracts entered into at or near the same time if certain criteria are met  Modifications - Treat separately if separate performance obligation is added and the consideration is consistent with its standalone selling price - Otherwise combine with remaining goods or services
  • 13 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 2. Identify separate performance obligations  Promise in a contract to transfer a good or service  Account for separately if distinct because either of the following criteria are met: - Good or service is regularly sold separately by the entity; or - Customer can benefit from good or service on its own or together with other readily available resources  However, bundle of promised goods or services is accounted for as one performance obligation if both of the following criteria are met: - Highly interrelated and require significant integration service; and - Significantly modified or customized to fulfill contract
  • 14 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 3. Determine the transaction price  Amount of consideration to which an entity expects to be entitled from a customer - Variable consideration (e.g.; contingencies, rebates, royalties), estimate based on probability-weighted or most-likely amount - Time value of money - Noncash consideration - Consideration payable to a customer  Collectibility not considered in transaction price - Record uncollectible amounts adjacent to revenue
  • 15 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 4. Allocate the transaction price  Generally based on relative standalone selling prices of separate performance obligations  Standalone selling price - Observable price when sold separately (best) - Otherwise, estimate based on: • Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?  Subsequent changes in the transaction price are allocated on a relative standalone selling price basis unless certain criteria are met
  • 16 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 5. Recognize revenue  Recognize revenue as performance obligations are satisfied based on transfer of control  Determine if satisfied (and revenue recognized) over time, based on whether entity’s performance: - Creates or enhances an asset the customer controls; or - Does not create an asset with an alternative use and one of following criteria is met: • Customer receives a benefit as entity performs • Another entity would not need to reperform work completed to date • Vendor has right to payment for performance to date  Select method of progress toward completion (output or input)
  • 17 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. 5. Recognize revenue  If prior criteria not met, then satisfied at a point in time  Recognize revenue when customer obtains control based on following indicators: - Entity has right to payment - Entity has transferred physical possession - Customer has legal title and risks and rewards of ownership - Customer has accepted goods or services  Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: - Experience with similar performance obligations - Whether that experience is predictive of outcome
  • 18 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Financial Instruments
  • 19 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Summary of key actions to date  IASB issued IFRS 9 in 2009 on financial assets. Requirements for financial liabilities were added in October 2010  IASB issued ED on impairment November 2009  FASB issued comprehensive ED May 2010  IASB issued ED on hedge accounting December 2010 - FASB issues discussion paper soliciting feedback on above February 2011  Boards jointly issued Supplementary Document on impairment proposing common solution January 2011  Significant redeliberations have been ongoing
  • 20 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Current status of FASB project  Slides that follow are for the FASB project, based on tentative decisions made during redeliberations through April 18, 2012  Significant changes to: - Classification/measurement from May 2010 ED - Impairment from ED and Supplementary Document  No redeliberations on hedging thus ED represents current status
  • 21 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Classification and measurement, current status  Classify at initial recognition based on characteristics of instrument and business strategy - No subsequent reclassifications  Equity securities – measure at fair value through net income - Practicability exception for nonpublic entities for nonmarketable equity securities • Measure at amortized cost less impairment • Adjust carrying value for observable price changes - Won’t apply to equity method investments unless held for sale at initial qualification or certain redeemable securities
  • 22 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Classification and measurement, current status  Debt securities - Measure at fair value through net income if any of following are true: • Contractual terms are not limited to P&I payments • Held for sale at acquisition • Actively managed/monitored on fair value basis
  • 23 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Classification and measurement, current status  Otherwise, measure debt securities - At fair value through OCI if business strategy is to invest cash to maximize total returns or manage interest rate/liquidity risk, by collecting contractual cash flows or selling the instrument - At amortized cost if: • Business model of holding to collect contractual cash flows  Intend to provide guidance on the nature of sales activity that would prohibit amortized cost
  • 24 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Classification and measurement, current status  Financial liabilities – measure at amortized cost if: - Contractual terms are limited to P&I payments, and - Business strategy is not to transact at fair value, and - Instrument is not a short sale  Otherwise, measure at fair value through net income
  • 25 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Classification and measurement, current status  Hybrid financial instruments - Assets not solely P&I are ineligible for bifurcation. (Carried at fair value through net income in entirety) - Retain existing bifurcation requirements for financial liabilities  Fair value option for hybrids to avoid bifurcation of embedded derivative and for groups of financial assets/liabilities (including derivatives) if entity measures net exposure and provides info on that basis to management
  • 26 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Impairment, current status  Nonmarketable equity securities subject to practicability exception - Assess qualitative factors (impairment indicators) - If more likely than not fair value is less than carrying amount, recognize loss for difference between carrying amount and fair value
  • 27 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Impairment of debt instruments, current status  3 bucket approach – recognize 12 months expected losses for bucket 1 vs. lifetime losses for buckets 2 and 3  Assets start in bucket 1 unless purchased with explicit expectation of credit loss  Move to bucket 2 (if evaluated collectively) and bucket 3 (if evaluated individually) if more than insignificant deterioration in credit quality occurs such that its reasonably possible contractual cash flows may not be fully recovered
  • 28 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Impairment of debt instruments, current status  Can move back to bucket 1 (other than purchased assets with credit deterioration)  Trade receivables: - If significant financing component – can elect simplified approach with initial and subsequent classification in buckets 2 or 3 - Otherwise, apply expected loss model with practical expedient of using provision matrix
  • 29 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Hedge accounting, current status  FASB solicited feedback on IASB ED but has not begun redeliberations  Significant changes proposed in May 2010 FASB ED (in part): - Effectiveness threshold - reasonably effective rather than highly effective - Qualitative rather than quantitative analysis - No more critical terms match/short cut methods - Eliminate ability to elect to discontinue hedge accounting
  • 30 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. New disclosures, current status  Qualitative discussion of risks and how managed  Quantitative tabular liquidity disclosures - Of cash obligations by nonfinancial entities - Expected maturities of classes of assets/liabilities by financial institutions  Quantitative tabular disclosures of interest rate risk by financial institutions - Classes of assets/liabilities by repricing date - Issuance of time deposits last 4 quarters - Effect of hypothetical interest rate shifts
  • 31 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Leases
  • 32 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Leases  Exposure draft issued in August 2010  Nearly all leases to be recorded on balance sheet  Lessees: - Asset representing “right of use” - Liability for obligation to make payments  Lessors: - Performance obligation approach vs. derecognition approach - Asset for receivable under either approach - Liability under performance obligation approach - Derecognize a portion of asset under derecognition approach
  • 33 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Leases  Responses to ED - Concerns about “front loading” of expenses for lessees (compared to straight line) - Lease term - Variable lease payments - Lessor accounting
  • 34 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Leases redeliberations  Retain position that leases within scope should be reflected on balance sheet  Concerned about “front loading” of expense recognition under ED approach  Discussed 3 approaches in late February - ED approach (accelerated recognition) - Interest-based amortization approach - Underlying asset approach  Divergence in preferences  Boards plan to redeliberate - Currently performing outreach with constituents
  • 35 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. Leases, other lessee issues  Scope  Short-term leases  Lease term  Agreements with lease and non-lease components
  • 36 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. McGladrey thought leadership  FASB and IASB Issue Revised Exposure Draft on Revenue Recognition  Revised Revenue Recognition Exposure Draft – What Does It Mean For You?  http://mcgladrey.com/Assurance/Accounting- Resources
  • 37 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved. QUESTIONS?