GAAP UPDATE: What next? Where do we go from here?

317 views

Published on

Agenda: FASB Developments; Proposed Financial Reporting Framework for Small and MEdium-Sized Entities; Common SEC Review Comments; AICPA Clarified and Converged Standards for Auditing and Quality Control

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
317
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

GAAP UPDATE: What next? Where do we go from here?

  1. 1. GAAP UPDATEWhat Next? Where Do We Go From Here?Jake VossenJanuary 29, 2013
  2. 2. Agenda• FASB Developments – Selected Projects and Initiatives – Revenue Recognition – Leases – Impairment of Intangible Assets Other than Goodwill – Other• Proposed Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SME’s)• Common SEC Review Comments/ PCAOB tone at the Top• AICPA Clarified and Converged Standards for Auditing and Quality Control © 2013 Hein & Associates, LLP. All rights reserved.
  3. 3. Revenue Recognition
  4. 4. Revenue Recognition• Joint project between FASB and IASB• Objective: To develop a single, principle-based revenue standard for US GAAP & IFRSs• Revenue standard aims to improve accounting for contracts with customers by: – Providing a more robust framework for addressing revenue issues as they arise – Increasing comparability across industries & capital markets – Requiring better disclosure © 2013 Hein & Associates LLP. All rights reserved.
  5. 5. Revenue Recognition cont’d• US GAAP – Many standards (over 100) – Significant industry specific guidance• IFRS – Two key standards: IAS 18, Revenue, and IAS 11, Construction Contracts – Little industry guidance © 2013 Hein & Associates, LLP. All rights reserved.
  6. 6. Revenue Recognition cont’d• Applies to: – Contracts with customers – Gain/loss recognition on sale of some nonfinancial assets (intangibles and PP&E) – Certain nonmonetary exchanges – Many industry-specific transactions such as real estate sales © 2013 Hein & Associates, LLP. All rights reserved.
  7. 7. Revenue Recognition cont’d• Core principle of revised proposals: Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Identify Identify separate Determine contract(s) with performance transaction price the customer obligations Recognize revenue Allocate transaction when performance price obligation is satisfied © 2013 Hein & Associates, LLP. All rights reserved.
  8. 8. Revenue Recognition – Differences fromExisting Standards• Collectability: – Revenue is still recognized “gross” but probability of collection is no longer a revenue recognition criterion – Entity should present any initial and subsequent impairment of customer receivables, to the extent material, as an operating expense – Original proposal required expected losses to be netted against revenues © 2013 Hein & Associates, LLP. All rights reserved.
  9. 9. Revenue Recognition – Differences fromExisting Standards cont’d• Allocation of transaction price: – If stand-alone selling price not available, an estimate may be made – New guidance is less restrictive than current guidance applicable to software revenue recognition (VSOE considerations), and may result in earlier recognition of revenue in some cases – Time value of money should be incorporated into amount of consideration, if it is significant and exceeds one year © 2013 Hein & Associates, LLP. All rights reserved.
  10. 10. Revenue Recognition – Differences fromExisting Standards cont’d• “Constraint” on recognizing revenue on variable consideration (fixed and determinable – N/A): – An entity should recognize revenue as performance obligations are satisfied only up to the amount that the entity is confident will not be subject to significant reversal in the future – Adjusted in transaction price © 2013 Hein & Associates, LLP. All rights reserved.
  11. 11. Revenue Recognition – Differences fromExisting Standards cont’d• Bill and Hold Transactions: – Not previously discussed in GAAP, but part of SEC guidance – New guidance is very similar to SEC guidance – May impact private companies that were aggressive in recording certain bill and hold transactions as revenue © 2013 Hein & Associates, LLP. All rights reserved.
  12. 12. Implications of Revenue Changes• Any contract tied to GAAP revenue will be impacted – Earn-outs on purchase agreements – Compensation agreements – Buy/sell arrangements, etc.• Debt covenants may be impacted – Some debt agreements are being drafted currently to require “good faith” renegotiation of covenants based on any new accounting pronouncements © 2013 Hein & Associates, LLP. All rights reserved.
  13. 13. Revenue Recognition – Redeliberations &Next StepsKey Decisions• Constraining the amount of revenue recognized• Collectability of the sales price• Accounting for licenses• Onerous contracts• Other mattersStill To Be Discussed• Disclosures• Transition and effective date © 2013 Hein & Associates, LLP. All rights reserved.
  14. 14. Leases
  15. 15. Lease Exposure DraftWhy a Leases Project?• Existing lease accounting does not meet users’ needs – Accounting depends upon classification – Contractual rights and obligations (assets and liabilities) are off- balance sheet – Many users adjust financial statements• Structuring opportunities – Current lease classification often based on bright lines – Significant difference in accounting on either side of operating/finance lease line © 2013 Hein & Associates, LLP. All rights reserved.
  16. 16. Lease Exposure Draft cont’dWho does this apply to?• All leases (with limited exceptions of leases of intangibles)• Includes capital and operating leases © 2013 Hein & Associates, LLP. All rights reserved.
  17. 17. Lease Exposure Draft cont’dWhat are the major provisions?• Proposed Right-of-Use Model: A lease contract is one in which the right to control the use of an asset (for a period of time) is transferred to the lessee• All leases (except certain short-term leases) would be presented on the balance sheet Dr. Right of Use Asset Cr. Liability• Short-term leases would be defined as a lease with a potential maximum period of 12 months or less © 2013 Hein & Associates, LLP. All rights reserved.
  18. 18. Lease Exposure Draft cont’dTwo Types of Leases:• Accelerated Leases – Lessee consumes more than insignificant portion of leased asset – Lease term is major part of economic life of asset – PV of lease payments is substantially all of FV of asset – Examples: Airplane with a 10-year lease; vehicle lease, equipment, etc.• Straight-Line Leases – Lessee does not consume more than insignificant portion of leased asset – Lease term is insignificant relative to economic life of asset – PV of lease payments is insignificant relative to FV of asset – Examples: Land or building © 2013 Hein & Associates, LLP. All rights reserved.
  19. 19. Lease Exposure Draft – Lessee Model Balance Income Sheet Statement Lessee consumes Amortization expense more than insignificant portion of leased asset Interest expense Dr. ROU asset 2 Cr. Lease liability 1 Lessee does not consume more than insignificant portion of Lease expense leased asset1 Measured at present value of lease payments2 Initially measured at same amount as liability, plus prepayments and initial direct costs © 2013 Hein & Associates, LLP. All rights reserved.
  20. 20. Lease Exposure Draft – Initial Exposure DraftExpense Recognition is Front Loaded9.008.007.00 Original ED Front-6.00 Loads Expense Recognition5.00 Existing GAAP4.00 Expense Recognition is SL3.00 Actual Cash Rent Payments2.001.00 - 1 2 3 4 5 6 7 8 9 10 © 2013 Hein & Associates, LLP. All rights reserved.
  21. 21. Lease Exposure Draft – Initial Exposure DraftExpense Recognition is Front Loaded• The boards discussed various ways to resolve the expense recognition issue – FASB and IASB had divergent preferences for how to resolve• Compromise was reached on recognition pattern• Dual model approach – A pragmatic solution… a compromise between conceptual purity and practical application – Preserves the primary objective of requiring lessees to recognize lease assets and liabilities on balance sheet – Allows for a distinction in expense recognition pattern • Straight-line for certain leases • Front-loaded pattern for other leases © 2013 Hein & Associates, LLP. All rights reserved.
  22. 22. Lease Exposure Draft – Disclosures• Additional quantitative and qualitative disclosures will be required to understand the timing and amount of cash flows on leases• Maturity schedule of all lease payments• Disclose a maturity analysis of future contractual commitments associated with services and other non- lease components that are separated from a lease contract © 2013 Hein & Associates, LLP. All rights reserved.
  23. 23. Lease Exposure Draft – Potential Impacts• Balance sheet will be grossed up with ROU assets and liabilities• Operating leases will either be charged to amortization expense or lease expense• EBITDA and other financial statement ratios could be impacted © 2013 Hein & Associates, LLP. All rights reserved.
  24. 24. Lease Exposure Draft –Where Are We Now 2010 2013 2013 TBDAugust 2010 Q1 2013 Consultation TBDExposure Draft 2nd Exposure Draft Final StandardLeases Leases LeasesComment period: Re-expose proposals Outreach Effective date: TBD4 months (likely 2015 or 2016 at earliest)786 comment letters Comment period: Working group Will contain guidancereceived 120 days meetings for both lessees and lessorsContained proposals for Focus on revisions to Redeliberationsboth lessees and 2010 proposalslessors Will contain proposals for both lessees & lessors © 2013 Hein & Associates, LLP. All rights reserved.
  25. 25. Impairment of Intangible Assets OtherThan Goodwill
  26. 26. Impairment of Intangible Assets Other ThanGoodwill• Impairment of indefinite-lived assets other than goodwill – Simplifies the impairment testing for indefinite-lived intangible assets other than goodwill – Applies to indefinite-lived assets such as: • Customer lists, trademarks, licenses, distribution agreements, etc. © 2013 Hein & Associates, LLP. All rights reserved.
  27. 27. Impairment of Intangible Assets Other ThanGoodwill cont’d• Previous Guidance – Required intangible assets to be tested for impairment at least annually – Compare the book value or carrying value to the fair value – Impairment = loss in realizable value• Preparer feedback was to allow for a qualitative approach for testing impairment – Reduce testing costs• New Guidance – Allows for a qualitative evaluation of the likelihood of impairment © 2013 Hein & Associates, LLP. All rights reserved.
  28. 28. Impairment of Intangible Assets Other ThanGoodwill cont’d• STEP 1 – Assess qualitative factors (e.g., industry trends, revenues, cash flows, etc.)• STEP 2 – – Not more likely there is an impairment – STOP – Is more likely there is an impairment • Calculate the fair value of the asset and compare to book value• New guidance does not change how an impairment loss is recognized © 2013 Hein & Associates, LLP. All rights reserved.
  29. 29. Impairment of Intangible Assets Other ThanGoodwill cont’d• When is this guidance effective? – Fiscal years beginning on or after September 15, 2012. Early adoption is permitted. © 2013 Hein & Associates, LLP. All rights reserved.
  30. 30. Other FASB Developments
  31. 31. Other Selected FASB Projects• Financial Instruments: Classification and Measurement, Impairment, and Hedging• Insurance Contracts• Disclosure Framework• Accounting for Repurchase Agreements• Liquidity & Interest Rate Risk Disclosure• Balance Sheet Offsetting• Going Concern• Comprehensive Income• Investment Companies © 2013 Hein & Associates, LLP. All rights reserved.
  32. 32. Other FASB Initiatives• Private Company Council• Private Company Decision Making Framework• Implementation Initiatives• Pre-agenda Research• Complexity Initiatives © 2013 Hein & Associates, LLP. All rights reserved.
  33. 33. Proposed Financial Reporting Frameworkfor Small and Medium-Sized Entities(FRF for SME’s)
  34. 34. Proposed Financial Reporting Framework forSmall and Medium-Sized Entities (FRF for SME’s)• Major Problems With Big GAAP: – Maintaining two sets of books – GAAP & Tax – Costly appraisals to mark assets to market – Self-reporting of tax uncertainties – Consolidations (VIE’s, etc.) © 2013 Hein & Associates, LLP. All rights reserved.
  35. 35. Proposed FRF for SME’s cont’d• What is FRF for SME’s? – Reporting system developed by the AICPA – Expected to be released in mid-2013 – Available for use in every industry – Available to incorporated and unincorporated entities – Not a required framework – Blends traditional accounting method with tax methods © 2013 Hein & Associates, LLP. All rights reserved.
  36. 36. Proposed FRF for SME’s cont’d• Key Features of New Framework: – Use taxes payable method for income tax reporting – no deferred taxes – Use historical costs, as opposed to FMV, for valuing assets – No “mark-to-market” for derivatives – No “comprehensive income” – All leases treated as operating leases – No VIEs – Departure from GAAP on Goodwill and Intangibles • Goodwill – Follow tax amortization of 10 years • Intangibles – Best estimate of amortization period or 10 years• FASB is working on its own framework © 2013 Hein & Associates, LLP. All rights reserved.
  37. 37. Common SEC Review Comments andPCAOB Tone at the Top
  38. 38. PCAOB Tone at the TopAttitude Towards Consulting (James Doty, Chairman): – Consulting fees are growing rapidly at large firms. – Audit revenues are stagnant. – Threat to strength of audit practices.Attitudes Toward Audit Firms (Chief Auditor): – Audit staff hear too often the importance of “client service”. – Focus should be on “audit quality” not “client service”. – The term “Relationship Partner” is problematic. – Regulators conduct examinations without a focus on “relationship”. – “Trust but verify” approach is unacceptable. © 2013 Hein & Associates, LLP. All rights reserved.
  39. 39. PCAOB Tone and the TopAudit Quality (James Doty): – Consistent finding of auditing deficiencies – Explicit finding of audits priced below cost to establish long-term relationships. – Insufficient “professional skepticism” most common finding. – Audit firms should compete on quality not price. – Want firms to hire and retain top graduates committed to public service. © 2013 Hein & Associates, LLP. All rights reserved.
  40. 40. Common SEC Review Comments• Management’s Discussion and Analysis (MD&A) – Results of operations – Deficiencies: • Boiler plate language • Over simplifications • Causes and effects omitted • Performance metrics omitted (e.g., same store sales) • Offsetting changes not disclosed – Liquidity – Deficiencies: • Inaccurate or incomplete descriptions • Contractual obligations table is incomplete • Obligations subject to uncertainty not included or disclosure is incomplete (e.g., uncertain tax positions, variable interest payments, OPEB plans) © 2013 Hein & Associates, LLP. All rights reserved.
  41. 41. Common SEC Review Comments cont’d• Segment Information – Deficiencies: – Segment information inappropriately aggregated – Lack of on-going analysis – Suggestions from staff: • Registrants should provide a comprehensive response to staff’s comments, including how CODM makes resource allocations and assesses performance, in aberrations • Continually monitor facts and circumstances © 2013 Hein & Associates, LLP. All rights reserved.
  42. 42. Common SEC Review Comments cont’d• Income Taxes – Deficiencies: – Reversals of valuation allowances: • Consider all evidence, both positive and negative • Degree to which positive evidence is verifiable • Current state of economy • Consistency of assumptions (e.g., DTA reversal with a goodwill impairment) – Deferred tax assets in loss years: • Economic slowdown is not an aberration • Magnitude and duration of losses • Drivers of losses • Registrant’s ability to make accurate forecasts • Consistency of assumptions © 2013 Hein & Associates, LLP. All rights reserved.
  43. 43. Common SEC Review Comments cont’d• Goodwill Impairment – Deficiencies: – Reporting units at risk of failing Step 1: • Staff recommends disclosure • Disclosure should include changes in circumstances and assumptions that could affect potential impairment • Interim impairment tests should be disclosed – Goodwill Impairment Charges: • Disclose changes in circumstances that led to change • Why now? © 2013 Hein & Associates, LLP. All rights reserved.
  44. 44. Common SEC Review Comments cont’d• Revenue Recognition – Deficiencies: – Collectability reasonably assured • Customer’s credit worthiness • Payment terms • Collection practices, including history of modifying terms, or making other concessions • Write-off history• Non-GAAP Disclosures: – Do not present a full non-GAAP income statement for purposes of reconciling non-GAAP financial measures to U.S. GAAP measures © 2013 Hein & Associates, LLP. All rights reserved.
  45. 45. AICPA Clarified and ConvergedStandards for Auditing and QualityControl
  46. 46. Key Changes Impacting Audits• Explicitly requires determination whether applicable reporting framework is acceptable• Explicitly requires management acknowledgement of their responsibilities at onset of audit engagement• Changes to wording of the auditor’s report, including the use of paragraph headings and expansion of the description of management’s responsibilities• Requires more specific procedures to detect illegal acts• Additional requirements related to opening balances in initial audits © 2013 Hein & Associates, LLP. All rights reserved.
  47. 47. Questions © 2013 Hein & Associates, LLP. All rights reserved.

×