FASB Update - presented by McGladrey at June 2011 NYSSCPA Private Company Accounting & Auditing Conference

FASB Update
Brian H. Marshall, Partner, McGladrey & Pullen, LLP
Richard K. Stuart, Partner, McGladrey & Pullen, LLP
June 16, 2011

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©2011 McGladrey & Pullen, LLP. All Rights Reserved.

Agenda

 The Big Picture
 Certain Significant ASUs issued in 2010-2011
 Selected EITF-debated ASUs issued in 2010-
2011
 Certain Other FASB-only Projects

1 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.

The Big Picture


People Matters

 FASB
- Board back to 7 members
- Leslie Seidman appointed chairman
- Two new board members
• One with private company focus


Blue Ribbon Panel (BRP) - Private
Company Financial Reporting
 In January, the BRP issued its recommendations to
the Financial Accounting Foundation (FAF)
 Significant recommendations include:
- creation of a separate private company standards board
- a new standard-setting model that follows GAAP with
exceptions for private companies
 In March, the FAF formed a Trustee Working Group
to:
- conduct outreach to stakeholders
- seek input on improvements, including BRP’s
recommendations


Certain Significant ASUs Issued in 2010-2011


ASU 2010-20 – Disclosures about the Credit Quality of
Financing Receivables and Allowance for Credit Losses

 Objective is to provide disclosure information that allows the
users of the financial statements to understand the following:
- The nature of credit risk inherent in the entity’s portfolio of financing
receivables
- How that risk is analyzed and assessed in arriving at the allowance for
loan losses
- The changes, and reasons for those changes, in the allowance for
loan losses
 Defines two levels of disaggregation:
- Portfolio segment
- Class of financing receivable
 Provides additional implementation guidance to determine
the appropriate level of disaggregation of information


ASU 2010-20 - Existing Disclosures - Amended

 Rollforward schedule of the allowance for loan
losses (ALL) on a portfolio segment basis, with
the ending balance further disaggregated based on
impairment method
- For each disaggregated ending balance, the related
recorded investment in financing receivables
 The nonaccrual status of financing receivables by
class of financing receivables
 Impaired financing receivables by class of
financing receivables


ASU 2010-20 - Additional Disclosures

 Credit quality indicators by class of financing
receivable
 Aging of past due by class of financing receivable
 Troubled debt restructurings (TDRs) that occurred
during the period and effect on the ALL
 TDRs that re-defaulted during the period
 Significant purchases and sales of financing
receivables during the period, by portfolio segment


ASU 2010-20

 For nonpublic entities, the disclosures are
effective for annual reporting periods ending on
or after December 15, 2011


ASU 2011-02 – Creditor’s Determination of
Whether a Restructuring Is a TDR
 Provides additional guidance to assist creditors in
determining whether a restructuring of a receivable
meets the criteria to be considered a TDR
 TDR has occurred if both of the following exist:
- Debtor is experiencing financial difficulties
- Restructuring constitutes a concession
 Clarifies the guidance on a creditor's evaluation
of whether a debtor is experiencing financial
difficulties
- A borrower that is not currently in default may still be
considered to be experiencing financial difficulty if
default is probable in the foreseeable future without
the modification

ASU 2011-02

 Clarifies the guidance on a creditor’s evaluation of
whether it has granted a concession:
- If a debtor does not otherwise have access to funds
at a market interest rate, the restructuring would be
considered to be at a below-market rate, which may
indicate the creditor has granted a concession
- A restructuring that results in a temporary or
permanent increase in the contractual interest rate
does not preclude the restructuring from being
considered a concession
- A restructuring that results in a delay in payment that
is insignificant is not a concession


ASU 2011-02

 A creditor is precluded from using the
borrower’s effective interest rate test in its
evaluation of whether a restructuring constitutes
a TDR
 Effective date
- For nonpublic entities, annual periods ending on or
after December 15, 2012, including interim periods
within those annual periods


ASU 2011-03 – Reconsideration of Effective
Control for Repurchase Agreements (Repos)

 Repos are agreements whereby a transferor
transfers financial assets (e.g.; securities) to a
transferee in exchange for cash collateral
 Concurrently, the transferor agrees to repurchase
the financial assets (or equivalent assets) in the
future for a fixed price
 Transfers and related repurchases typically occur in
a very short time frame
 Accounted for as sales of financial assets when
transferor no longer maintains effective control over
the transferred asset


ASU 2011-03

 ASU removes one of the conditions required to be
met for transferor to be considered to have
maintained effective control:
- No longer need to have the ability to repurchase or
redeem financial assets on substantially the agreed
terms, even if transferee defaults
- With removal of this condition, level of cash collateral
received by the transferor is irrelevant when determining
whether sale accounting is appropriate
 Effective prospectively in first interim or annual
period beginning on or after December 15, 2011 for
new or modified transactions


Selected EITF-debated ASUs Issued in
2010-2011


ASU 2010-23 – Measuring Charity Care

 Affects health care entities that provide charity care
 Currently diversity in practice regarding the measure of
charity care used for disclosure purposes:
- Cost measurement
- Revenue measurement
 Requires that cost be used as the measurement basis
for charity care disclosure purposes and that cost be
identified as the direct and indirect costs of providing the
charity care
 Requires disclosure of the method used to identify or
determine such costs
 Effective for fiscal years beginning after December 15,
2010


ASU 2010-24 – Insurance Claims and
Recoveries
 Affects health care entities
 Currently diversity in accounting for medical
malpractice liabilities and the related anticipated
recoveries
- Most health care entities net insurance recoveries against
the liability
- Some present the anticipated insurance recovery and the
liability on a gross basis
 Clarifies that a health care entity should not net
insurance recoveries against a related claim liability
- Also, the amount of the claim liability should be
determined without consideration of insurance recoveries


ASU 2010-24

 Eliminates industry exception
- Amendments are consistent with existing guidance
in ASC 210-20 on determining whether assets and
liabilities can be offset and presented on a net basis
 Effective for fiscal years, and interim periods
within those years, beginning after December
15, 2010


ASU 2010-25 – Participant Loans

 Affects any defined contribution pension plan that allows
participant loans
 Clarifies how loans to participants should be classified
and measured by defined contribution pension benefit
plans.
- Participant loans are currently classified as investments in
accordance with the defined contribution pension plan guidance
- ASC 962-325 requires most investments held by a plan,
including participant loans, to be presented at fair value
- In practice, most participant loans are carried at their unpaid
principal balance plus any accrued but unpaid interest, which
was considered a good faith approximation of fair value
• May not conform to ASC 820


ASU 2010-25

 ASU requires participant loans be classified as
notes receivable from participants
- Segregated from plan investments
- Measured at their unpaid principal balance plus any
accrued but unpaid interest
 More meaningful classification and measure of
participant loans as:
- A participant taking out such a loan essentially borrows
against its own individual vested benefit balance
- Participant loans cannot be sold by the plan
- In default, there would be no effect on the plan’s
investment returns or any other participant’s account
balance


ASU 2010-25

 Amendments should be applied retrospectively
to all prior periods presented, effective for fiscal
years ending after December 15, 2010
 Early adoption is permitted


ASU 2010-26 – Accounting for Costs Associated
with Acquiring or Renewing Insurance Contracts

 Affects entities under ASC 944, Financial
Services - Insurance, that incur costs in the
acquisition of new and renewal insurance
contracts
 Addresses diversity in practice regarding the
interpretation of which costs relating to the
acquisition of new or renewal insurance
contracts qualify for deferral


ASU 2010-26

 The following costs incurred in the acquisition of
new and renewal contracts should be
capitalized:
- Incremental direct costs of contract acquisition
- Certain costs related directly to the following
acquisition activities performed by the insurer for the
contract:
• Underwriting
• Policy issuance and processing
• Medical and inspection
• Sales force contract selling


ASU 2010-26

 Direct-response advertising costs should be included in
deferred acquisition costs only if the capitalization criteria in
the direct-response advertising guidance in ASC 340-20 are
met
 All other acquisition-related costs should be charged to
expense as incurred, including costs incurred by the insurer
for:
- soliciting potential customers, market research, training,
administration, unsuccessful acquisition or renewal efforts, and
product development
 If the initial application of this ASU results in the capitalization
of acquisition costs that had not been capitalized previously,
the entity may elect not to capitalize those types of costs


ASU 2010-26

 Effective for fiscal years, and interim periods
within those fiscal years, beginning after
December 15, 2011
 The amendments in this ASU should be applied
prospectively upon adoption
- Retrospective application to all prior periods
presented upon the date of adoption also is
permitted, but not required
- Early adoption is permitted, but only at the beginning
of an entity’s annual reporting period


ASU 2010-27 – Fees Paid to the Federal
Government by Pharmaceutical Manufacturers
 Affects entities that are subject to the pharmaceutical
fees mandated by the Patient Protection and Affordable
Care Act as amended by the Health Care and Education
Reconciliation Act (the Acts) and how they should
recognize and classify these fees
- The Acts impose an annual fee on the pharmaceutical
manufacturing industry for each calendar year beginning on or
after January 1, 2011
- An entity’s portion of the annual fee becomes payable to the
U.S. Treasury once the entity has a gross receipt from branded
prescription drug sales to any specified government program or
in accordance with coverage under any government program
for each calendar year beginning on or after January 1, 2011


ASU 2010-27

 The liability for the fee should be estimated and
recorded in full upon the first qualifying sale
- Record corresponding deferred cost that is
amortized to expense using a straight-line method of
allocation unless another method better allocates the
fee over the calendar year that it is payable
 Effective for calendar years beginning after
December 31, 2010, when the fee initially
becomes effective


ASU 2010-28 – When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts

 Affects entities that have recognized goodwill in
a reporting unit (RU) whose carrying amount is
zero or negative
 Testing for goodwill impairment is a two-step
test
- Step 1 - An entity must assess whether the carrying
amount of a RU exceeds its fair value
- Step 2 - If it does, an entity must determine whether
goodwill has been impaired and calculate the
amount of that impairment


ASU 2010-28

 Some entities with RUs that have zero or
negative carrying amounts historically
concluded that Step 1 of the test is
automatically satisfied because the fair value of
the RU will generally be greater than zero
- As a result, Step 2 of the test was not performed
despite factors indicating that goodwill may be
impaired


ASU 2010-28

 The ASU modifies Step 1 of the goodwill
impairment test for RUs with zero or negative
carrying amounts
- Would be required to perform Step 2 of the goodwill
impairment test if adverse qualitative factors indicate
that goodwill impairment is more likely than not
 For nonpublic entities, the amendments are
effective for fiscal years, and interim periods
within those years, beginning after December
15, 2011


ASU 2010-28

 Upon adoption of the amendments, an entity
with a RU whose carrying amount is zero or
negative is required to assess whether it is more
likely than not that the goodwill of the RU is
impaired
- If determined that it is more likely than not that the
goodwill is impaired, the entity should perform Step 2
of the goodwill impairment test
- Any resulting goodwill impairment should be
recorded as a cumulative-effect adjustment to
beginning retained earnings in the period of adoption


Certain Other FASB-only Projects


Proposed ASU – Testing Goodwill for
Impairment

 Issued in April with comments due in early June
 Specifically addresses private company
concerns regarding cost/complexity of goodwill
impairment testing
 ASU allows an entity to qualitatively evaluate
whether it is more likely than not that the fair
value of a RU is less than its carrying amount
prior to performing step one


Impairment

 Qualitative factors (examples of events or
circumstances) to consider are included in ASU and
replace existing guidance
 Carryforward of RU’s prior year fair value would no
longer be allowed
 If not more likely than not that the fair value of a RU
is less than its carrying amount, then goodwill is not
considered impaired
 If it is more likely than not that the fair value of a RU
is less than its carrying amount, then must
complete step one of the impairment test

Impairment

 Effective for annual and interim impairment
tests performed for fiscal years beginning after
December 15, 2011
 Earlier adoption permitted


Certain Other FASB-only Projects

 Investment properties
 Disclosures about an employer’s participation in
a multiemployer pension plan
 Presentation of the provision for bad debts and
disclosures of net revenue and the allowance
for doubtful accounts for health care entities
 Fees paid to the federal government by health
insurers
 Accounting for deconsolidation of a subsidiary
that is in-substance real estate

QUESTIONS?


FASB Update - presented by McGladrey at June 2011 NYSSCPA Private Company Accounting & Auditing Conference

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