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EY Q1 2013 Financial Reporting Update

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This slide deck was designed to accompany a video webcast that included an interactive discussion by a moderator and three panelists. To view that webcast, please go to: http://bit.ly/UfYNnq …

This slide deck was designed to accompany a video webcast that included an interactive discussion by a moderator and three panelists. To view that webcast, please go to: http://bit.ly/UfYNnq

The Ernst & Young Q1 2013 financial reporting update
Co-sponsored by Financial Executives International (FEI)

Origination date: Wednesday, 20 March 2013

Are you up-to-date with current accounting and regulatory developments? Can you identify the implications for your company’s financial accounting and reporting?

An understanding of the latest issues is critical to positioning your company for success in the year ahead. Be sure to start your year off right by staying abreast of recent and pending rules and regulations.

Each quarter thousands of professionals gain critical knowledge by participating in the Ernst & Young LLP financial reporting webcasts.

During the next event, we’ll discuss frequently asked questions and practical matters on the following topics:
• Current accounting and regulatory developments
• Convergence projects, including Revenue and Financial Instruments
• Other future considerations

You are welcome to join the on-demand version of this interactive discussion and learn about first quarter developments in the world of financial accounting and reporting by going to: http://bit.ly/UfYNnq

This financial update is an ongoing, quarterly series. Register for any webcast and you will be asked if you want to receive invitations to future webcasts.

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  • 1. The Ernst & Young Q1 2013financial reporting updateCo-sponsored with FinancialExecutives International20 March 2013
  • 2. Disclaimer► This presentation is ©2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party.► The views expressed by panelists in this webcast are not necessarily those of Ernst & Young LLP.► These materials contain summary information for general guidance only. Neither Ernst & Young LLP nor any other member firm of the global Ernst & Young organization accepts any responsibility for loss suffered by any person acting or refraining from action as a result of any information contained herein. On any specific matter, appropriate advisors should be consulted. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a member firm serving clients in the US.© 2013 Ernst & Young LLP Page 2 Ernst & Young Q1 2013 financial reporting update
  • 3. Circular 230 disclaimer► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.© 2013 Ernst & Young LLP Page 3 Ernst & Young Q1 2013 financial reporting update
  • 4. Today’s moderator Danita Ostling Ernst & Young LLP Partner, Professional Practice Director Ernst & Young organization Americas IFRS Leader Join todays Twitter discussion: #EY_Q1Update© 2013 Ernst & Young LLP Page 4 Ernst & Young Q1 2013 financial reporting update
  • 5. Today’s agenda ► Q1 matters to consider ► Convergence projects update ► Future considerations Join todays Twitter discussion: #EY_Q1Update© 2013 Ernst & Young LLP Page 5 Ernst & Young Q1 2013 financial reporting update
  • 6. Today’s presenters Rachel Eckstein Lisa Kennedy Robert Wadley Ernst & Young LLP Ernst & Young LLP Ernst & Young LLP Partner Partner Partner Professional Practice Professional Practice Professional Practice The information in this presentation is a summary. Viewers should consult their own professional advisors to address their individual circumstances and concerns.© 2013 Ernst & Young LLP Page 6 Ernst & Young Q1 2013 financial reporting update
  • 7. Today’s agenda ► Q1 matters to consider ► Convergence projects update ► Future considerations Join todays Twitter discussion: #EY_Q1Update© 2013 Ernst & Young LLP Page 7 Ernst & Young Q1 2013 financial reporting update
  • 8. Reporting amounts reclassified out ofaccumulated other comprehensive income► ASU 2013-02 issued in February 2013 Effective dates for calendar year-ends Transition method Public Private Early adoption? Prospective 1Q 2013 YE 2014 Yes► Requires more disclosures about changes in accumulated other comprehensive income (AOCI) ► Reclassifications from AOCI ► Other current period other comprehensive income► Requires reporting significant items reclassified out of AOCI by component in one place► Components include currency translation and unrealized gains on available-for-sale securities, etc.© 2013 Ernst & Young LLP Page 8 Ernst & Young Q1 2013 financial reporting update
  • 9. Reporting amounts reclassified out ofaccumulated other comprehensive income Items reclassified out of AOCI Significant items that are not Significant items reclassified reclassified directly to net to net income in their entirety income in their entiretyIdentify the effect of Cross reference to otherreclassifications on disclosures that providerespective line items in the additional informationstatement where net income about the effect of theis presented by component reclassification► On the face of the financial statements (if criteria are met) OR► In the notes© 2013 Ernst & Young LLP Page 9 Ernst & Young Q1 2013 financial reporting update
  • 10. Reporting amounts reclassified out ofaccumulated other comprehensive income Details about AOCI Amount reclassified Affected line item in the statement where components from AOCI1 net income is presentedUnrealized gains and losses on available-for-sale securities $ 126,000 Realized gain on sale of securities Insignificant items (1,000) 125,000 Total before tax (43,750) Tax expense $ 81,250 Net of tax3Amortization of defined benefit pension items Prior service costs $ (10,000) 2 Transition obligation (25,000) 2 Actuarial (losses) (15,000) 2 (50,000) Total before tax 17,500 Tax benefit $ (33,500) Net of tax31 Amounts in parentheses indicate debits in profit/loss2 These AOCI components are included in the computation of net periodic pension cost. (See Note X)3 Amount agrees with amount reported as reclassifications from AOCI in the disclosure about changes in AOCI balances© 2013 Ernst & Young LLP Page 10 Ernst & Young Q1 2013 financial reporting update
  • 11. Opinion check Where do you plan to present significant amounts reclassified out of accumulated other comprehensive income when adopting ASU 2013-02: A. On the face of the income statement B. In the notes C. Undecided D. Does not apply (Ernst & Young, faculty, alumni, other)© 2013 Ernst & Young LLP Page 11 Ernst & Young Q1 2013 financial reporting update
  • 12. Accounting standards effective for 2013 For calendar year-end companies Public Private Accounting standards update companies companiesASU 2013-03 — Clarifying the Scope andApplicability of a Particular Disclosure to Not applicable 4Nonpublic EntitiesASU 2013-02 — Reporting of AmountsReclassified out of Accumulated Other 4 2014Comprehensive IncomeASU 2013-01 — Clarifying the Scope ofDisclosures about Offsetting Assets and 4 4Liabilities and ASU 2011-11— Disclosures aboutOffsetting Assets and LiabilitiesASU 2012-07 — Accounting for Fair ValueInformation That Arises after the Measurement 2012 4Date and Its Inclusion in the Impairment Analysisof Unamortized Film Costs 4= Effective for 2013 © 2013 Ernst & Young LLP Page 12 Ernst & Young Q1 2013 financial reporting update
  • 13. Accounting standards effective for 2013 For calendar year-end companies (continued) Public Private Accounting standards update companies companiesASU 2012-06 — Subsequent Accounting for anIndemnification Asset Recognized at the Acquisition 2014Date as a Result of a Government-Assisted 4Acquisition of a Financial InstitutionASU 2012-04 — Technical Corrections and 4 2014ImprovementsASU 2012-02 — Testing Indefinite-Lived IntangibleAssets for Impairment 4 4ASU 2012-01 — Continuing Care Retirement 4 2014Communities — Refundable Advance FeesASU 2011-10 — Derecognition of in SubstanceReal Estate — a Scope Clarification 4 4 4= Effective for 2013 © 2013 Ernst & Young LLP Page 13 Ernst & Young Q1 2013 financial reporting update
  • 14. Proxy updateReminders for this proxy season► Disclose whether use of compensation consultants raised conflicts of interest ► Describe conflict and explain how it is being addressed ► Applies to compensation consultants engaged by management or the compensation committee ► No definition of ―conflict of interest‖► Smaller reporting companies now required to hold ―say- on-pay‖ shareholder votes on executive compensation ► Report shareholder vote results on Form 8-K within four days ► Disclose how frequently say-on-pay votes will occur in an amendment to the initial Form 8-K within 150 days© 2013 Ernst & Young LLP Page 14 Ernst & Young Q1 2013 financial reporting update
  • 15. Proxy updateTrends in shareholder proposals % put to % Topics of shareholder proposals in 2013 vote voter (through 15 March 2013) in proxy support (% from 2012 votes per SEC filings) Environmental/social ► Disclose political spending and 57% 22% lobbying activities ► Enhance sustainability reporting 33% 29% Board of directors ► Hold annual elections of all directors 48% 81% ► Appoint independent director as chair 73% 37% Compensation-related ► Eliminate accelerated vesting of equity 43% 36% awards, payments grossed-up for taxes© 2013 Ernst & Young LLP Page 15 Ernst & Young Q1 2013 financial reporting update
  • 16. Estimated annual effective tax rate (EAETR)General reminders► Make the best estimate of the annual effective tax rate for the full fiscal year at the end of each interim period► Use estimated annual effective tax rate to record tax on a current year-to-date basis► Project year-end temporary differences and valuation allowance► Changes in enacted tax legislation can affect EAETR ► 2 January 2013 – Retroactive reinstatement of the tax extenders (they’re set to expire again on 31 December 2013) ► Recognized in the interim period of enactment (Q1 2013 for companies with calendar year-ends)© 2013 Ernst & Young LLP Page 16 Ernst & Young Q1 2013 financial reporting update
  • 17. Estimated annual effective tax rateInterim period events► Changes to indefinite reinvestment assertion ► Record in the interim period the change in assertion occurs ► Record tax effects related to undistributed earnings of prior years – discrete ► Record tax effects related to current year undistributed earnings – adjust EAETR► Discontinued operations ► Revise EAETR applied to income from continuing operations in current and subsequent interim periods of current fiscal year ► Recast income taxes related to prior interim periods (as applicable) between continuing and discontinued operations© 2013 Ernst & Young LLP Page 17 Ernst & Young Q1 2013 financial reporting update
  • 18. Opinion check Which of the following events is likely to most significantly affect your EAETR for 2013? A. American Taxpayer Relief Act of 2012 B. Acquisitions (e.g., change in indefinite reinvestment assertion) C. Divestitures (e.g., discontinued operations) D. Other or not sure E. Does not apply (Ernst & Young, faculty, alumni, other)© 2013 Ernst & Young LLP Page 18 Ernst & Young Q1 2013 financial reporting update
  • 19. Today’s agenda ► Q1 matters to consider ► Convergence projects update ► Future considerations Join todays Twitter discussion: #EY_Q1Update© 2013 Ernst & Young LLP Page 19 Ernst & Young Q1 2013 financial reporting update
  • 20. Convergence projects update Current stage Q2 2013Financial Instruments FASB Exposure Draft Comment letter deadline Classification and measurement Exposure Draft IASB Deliberate comments (limited amendments) FASB Exposure Draft Comment letter deadline Impairment IASB Exposure Draft Comment letter period FASB On hold Hedging Final Standard Review draft IASB (except macro hedging to be (except macro hedging) included in discussion paper) FASB Drafting Exposure Draft Exposure DraftLeases IASB Drafting Exposure Draft Exposure Draft FASB Drafting Final Standard Final StandardRevenue recognition IASB Drafting Final Standard Final Standard© 2013 Ernst & Young LLP Page 20 Ernst & Young Q1 2013 financial reporting update
  • 21. Financial instruments projectClassification and measurement► Financial assets classified and Proposed classification and measured in one of three categories measurement based on: model ► Instrument’s cash flow characteristics Amortized cost ► Entity’s business model for Solely principal and interest managing the instrument Hold to collect► Equity instruments measured at fair value through net income (NI) Fair value – OCI Solely principal ► Exception: nonmarketable and interest equity securities measured at Hold to collect and sell ―modified‖ cost► Reclassifications permitted only Fair value – NI upon a change in business model Residual category© 2013 Ernst & Young LLP Page 21 Ernst & Young Q1 2013 financial reporting update
  • 22. Financial instruments projectClassification and measurement► Financial liabilities would generally be classified and subsequently measured at amortized cost► Limit on the use of the fair value option► Changes in instrument-specific credit risk (i.e., own credit) for financial liabilities measured at FV-NI would be presented separately in OCI► Public companies would parenthetically present fair value for most instruments at amortized cost► Comments on the proposal are due 15 May 2013Thought Center Webcast on 21 March 2013 at 1 p.m. Eastern© 2013 Ernst & Young LLP Page 22 Ernst & Young Q1 2013 financial reporting update
  • 23. Financial instruments projectCredit losses (impairment)► Applies to all financial assets that are debt instruments measured at amortized cost or fair value through other comprehensive income ► Examples: loans, debt securities, trade receivables► Expected credit losses would be defined as the contractual cash flows an entity does not expect to collect► An estimate of expected credit losses includes: Time value of money Reasonable Information Information and about past about current supportable events conditions forecasts At least two possible outcomes, one of which reflects a credit loss© 2013 Ernst & Young LLP Page 23 Ernst & Young Q1 2013 financial reporting update
  • 24. Financial instruments projectCredit losses (impairment)► Receivables ► Historical loss rates for aging buckets may need to be adjusted for economic forecasts ► Allowances would be required for all receivables, including those (1) classified as current and (2) from significant customers that have always paid► Debt securities ► ―Most likely‖ approach prohibited for estimating credit losses ► Record allowance instead of adjusting cost basis ► Stop accruing interest when collection of substantially all of principal and interest is no longer probable Comments are due 30 April 2013© 2013 Ernst & Young LLP Page 24 Ernst & Young Q1 2013 financial reporting update
  • 25. Revenue recognition projectStatus► All major topics have been redeliberated as of February meeting; open items include: ► Sweep issues ► Consequential amendments ► Analysis of cost versus benefit► Final drafting to begin► Plan to issue final standard in summer 2013© 2013 Ernst & Young LLP Page 25 Ernst & Young Q1 2013 financial reporting update
  • 26. Revenue recognition projectRecent decisions Variable Contract Nonfinancial Licenses consideration costs assets Eliminated Reaffirmed Reaffirmed Decided to specific decision to decision to treat licenses guidance for require apply control as either sales-based capitalization and ―rights‖ royalties on of direct, measurement transferred at licensed incremental, requirements a point in time intellectual recoverable to transfers of or promises to property costs to nonfinancial provide acquire a assets ―access‖ over long-term time contract© 2013 Ernst & Young LLP Page 26 Ernst & Young Q1 2013 financial reporting update
  • 27. Revenue recognition projectDisclosures► Disaggregation of revenue► Contract assets, liabilities and costs ► Narrative disclosures rather than tabular reconciliations as previously proposed► Key judgments related to variable consideration► Remaining performance obligations (backlog)► Interim financial statements – many of the annual disclosures also will be required ► IASB plans to specifically require only disaggregated revenue at interim periods© 2013 Ernst & Young LLP Page 27 Ernst & Young Q1 2013 financial reporting update
  • 28. Revenue recognition projectTransition and effective date► Transition choice ► Full retrospective ► Modified retrospective approach► Modified retrospective approach ► Prior year amounts not restated ► New guidance applied to new and existing contracts as of effective date with a cumulative catch-up adjustment ► Disclose current-year amounts as if they were prepared under previous revenue guidance Tentatively effective for annual periods beginning on or after 1 January 2017© 2013 Ernst & Young LLP Page 28 Ernst & Young Q1 2013 financial reporting update
  • 29. Opinion check Which transition approach is your company most likely to use: A. Fully retrospective B. Modified retrospective C. Undecided D. Does not apply (Ernst & Young, faculty, alumni, other)© 2013 Ernst & Young LLP Page 29 Ernst & Young Q1 2013 financial reporting update
  • 30. Today’s agenda ► Q1 matters to consider ► Convergence projects update ► Future considerations Join todays Twitter discussion: #EY_Q1Update© 2013 Ernst & Young LLP Page 30 Ernst & Young Q1 2013 financial reporting update
  • 31. Private Company Council activitiesPrivate company decision-making framework Changes to Staff recommendations Next steps ► Removed presumption ► Exposure draft expected that industry-specific soon, framework to be guidance is relevant finalized later this year ► Clarified that ―all or ► Consider exceptions nothing approach‖ and modifications to would not be required US GAAP for exceptions or ► Continue work on a modifications single definition of a ► Clarified ―red flag‖ nonpublic entity approach for disclosures (private company)© 2013 Ernst & Young LLP Page 31 Ernst & Young Q1 2013 financial reporting update
  • 32. Private Company Council activitiesTopics of focus Initial agenda Research initiatives ► Recognizing and ► Stock-based compensation measuring identifiable ► Development-stage intangible assets acquired enterprises in business combinations ► Accounting for interest-rate at fair value swaps with multiple ► Consolidation of variable counterparties interest entities ► Accounting for ―plain The PCC decided not to vanilla‖ interest-rate swaps pursue accounting for with single counterparties uncertain tax positions FASB Exposure Final FASB Changes to Deliberations Redeliberations endorsement draft endorsement US GAAP© 2013 Ernst & Young LLP Page 32 Ernst & Young Q1 2013 financial reporting update
  • 33. Other standard-setting activities Active projects Current stage Investment companies ► Final standard expected Q1 Consolidation ► Final standard expected Q2 Liquidation basis of ► Final standard expected Q1 accounting Repurchase agreements ► Exposure draft issued Q1 and similar transactions Discontinued operations ► Exposure draft expected Q1 Going concern ► Exposure draft expected Q2 Disclosure framework ► FASB is evaluating next steps© 2013 Ernst & Young LLP Page 33 Ernst & Young Q1 2013 financial reporting update
  • 34. EITF updateNo. Issue addressed Status11-A Release of cumulative translation adjustment when a parent no longer Final ASU controls a consolidated foreign entity 2013-0512-B Personnel services received from an affiliate of a not-for-profit entity Final for which the affiliate does not seek compensation consensus12-D Recognition, measurement, and disclosure of obligations resulting Final ASU from joint and several liability arrangements 2013-0412-F Application of pushdown accounting in certain circumstances Discussions12-G Accounting for the excess in the fair value of assets over liabilities of a Final consolidated collateralized financing entity consensus12-H Accounting for service concession arrangements Discussions13-A Inclusion of the federal funds effective swap rate as a benchmark Proposed interest rate for hedge accounting purposes ASU13-B Accounting for investments in affordable housing tax credits Consensus- for-exposure13-C Presentation of a liability for an unrecognized tax benefit when a net Proposed operating loss or tax credit carryforward exists ASU© 2013 Ernst & Young LLP Page 34 Ernst & Young Q1 2013 financial reporting update
  • 35. EITF update – Accounting for cumulativetranslation adjustments (CTA)Transactions involving an investment in a foreign entitySale of an ownership interest in a consolidated foreign entity Loss of control Release all of CTA Retained control Do not release CTA (treat as equity transaction)Sale of an ownership interest in a foreign entity Release pro-rata portion ofthat is an equity method investment CTAStep acquisition (gaining control) Release all of CTATransactions within a foreign entity Substantial liquidation?Sale of a subsidiary that is a nonprofit No Do not release CTAactivity or a business Yes Release all of CTASale of a group of assets that is a No Do not release CTAnonprofit activity or a business Yes Release all of CTA© 2013 Ernst & Young LLP Page 35 Ernst & Young Q1 2013 financial reporting update
  • 36. EITF update – Inclusion of the fed funds effective swaprate as a benchmark interest rate for hedge accounting Allowed benchmark interest rates in the US for hedge accountingFederal funds effective swap rate ► Would apply ► Interest rates on direct prospectively to Treasury obligations of the qualifying new or US government redesignated hedging ► London Interbank Offered relationships entered Rates (LIBOR) into on or after adoption ► Would not alleviate ineffectiveness for existing hedges Comments due 22 April 2013 © 2013 Ernst & Young LLP Page 36 Ernst & Young Q1 2013 financial reporting update
  • 37. SEC updateCurrent activities► SEC Advisory Committee on Small and Emerging Companies recommendations to the SEC: ► Increase smaller reporting companies (SRC) definition to increase to $250M float from $75M ► Expand reporting relief for SRCs ► Permit increased ―tick size‖ for smaller listed companies ► Encourage creation of new equity market ► Statement to Congress to exempt SRCs from conflict minerals disclosure requirements► NASDAQ proposed rule requiring listed companies to have internal audit function© 2013 Ernst & Young LLP Page 37 Ernst & Young Q1 2013 financial reporting update
  • 38. SEC updateOther SEC rulemaking Topic Current status ► Final rule issued August 2012 Conflict minerals ► Effective 2013 – First Form SD (Dodd-Frank) due 2 June 2014 ► Current legal challenge General solicitation and ► Proposed rule – August 2012 advertising rule (JOBS Act) ► Awaiting final rule ―Bad actor‖ rule ► Proposed rule – May 2011 (Dodd-Frank) ► Awaiting final rule Review of Regulation S-K disclosures for emerging ► Report to Congress pending growth companies (JOBS Act)© 2013 Ernst & Young LLP Page 38 Ernst & Young Q1 2013 financial reporting update
  • 39. Register free at:www.ey.com/us/accountinglink AccountingLink What you need to know. When you need to know it. Because change is constant in the financial reporting world, you need the latest information, analysis and insight, first.
  • 40. Thanks for participating! The Ernst & Young Q1 2013 financial reporting update Co-sponsored with Financial Executives International