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GAAP Accounting Update


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Decosimo Assurance Manager Derek Daniel presented "GAAP Accounting Update" at the 2013 Decosimo Accounting Forum hosted by the University of North Alabama on July 19.

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GAAP Accounting Update

  2. 2.  Subtopic 954-430, Health Care Entities – Deferred Revenue, requires a continuing care retirement community to defer revenue when a portion of the advance fee is refundable if the contract holder’s unit is reoccupied by a subsequent resident.  This Update clarifies that if payment of the refundable fee upon reoccupancy is limited to the proceeds of reoccupancy, then classify as deferred revenue.  If, however, the refundable advance fees that are contingent upon reoccupancy are not limited to the proceeds of reoccupancy, classify as a liability. 2 FASB ASC Update No. 2012-01 (Topic 954) Continuing Care Retirement Communities – Refundable Advance Fees
  3. 3.  This clarification should eliminate diversity in practice  The Update is effective for public entities in periods beginning after 12/15/12  The effective date for nonpublic entities is 12/15/13  Update may be adopted early  The transition should be accounted for as a cumulative-effect adjustment of retained earnings in the earliest period shown for comparative purposes 3
  4. 4.  An objective of this Update is to reduce cost and complexity of impairment tests for indefinite-lived intangible assets  This also improves consistency for impairment testing among the various long-lived assets  Update 2011-08 is similar to this update but for goodwill only  Examples of indefinite-lived intangible assets include indefinite-lived trademarks, licenses and distribution rights  This Update applies to all organizations – public, private and not-for-profit 4 FASB ASC Update 2012-02 (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment
  5. 5.  This update allows an entity the option of first assessing qualitative factors such as events and circumstances to determine whether it is more likely than not that an indefinite-lived intangible is impaired.  If, after the qualitative assessment of factors, the entity determines that it is not more likely than not that the asset is impaired, the entity is not required to perform the quantitative test for impairment.  If, however, after the qualitative assessment, it is more likely than not the asset is impaired, the quantitative test of comparing fair value and carrying value of the long-lived asset musts be performed. 5
  6. 6.  The entity has the option of going directly to the quantitative test for impairment. This does not preclude using the qualitative test on this asset for the next period  Events and circumstances since the last period must be considered in the qualitative assessment as well as any changes during the period in the carrying amount of the asset  Both positive and mitigating factors must be considered  This Update is effective for impairment tests used for interims and annual statements beginning after 9/15/12 6
  7. 7.  IAS 36, Impairment of Assets, requires and entity to test an indefinite-lived intangible asset for impairment by comparing its carrying value with its recoverable amount.  Impairment test must be performed annually regardless of qualitative events/factors. 7
  8. 8.  Cash receipts from the sale of donated financial assets that upon receipt were directed without any NFP-imposed limitations for sale and were converted immediately into cash – should be classified as operating activities  If, however, the donor restricted the use of the assets to long-term purposes, these cash inflows would be financing activities  Otherwise, cash receipts of this nature should be classified as cash inflows from investing activities 8 FASB ASC Update 2012-05 (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the SCF
  9. 9.  This Update addresses the diversity in practice  Amendments effective prospectively for fiscal years (and interims) beginning after June 15, 2013  Upon adoption, retrospective application is permitted  Early adoption is also permitted 9
  10. 10.  This topic is the relevant guidance for assessing impairment of unamortized film costs.  Topic 820 is the relevant guidance for fair value accounting and Topic 855 is relevant for subsequent events accounting.  This Update eliminates the rebuttable presumption that conditions arising after the balance sheet leading to write-off of film costs existed at the balance sheet date.  It also eliminates the requirement that fair value measurements used in balance sheet impairment tests should include considerations of subsequent information.  This Update effective for impairment assessments on or after 12/15/12 for public companies and 12/15/13 for nonpublic. 10 FASB ASC Update 2012-07 (Topic 926) - Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs
  11. 11.  Clarifies the scope of FASB ASC 2011-11 to indicate that it applies to:  derivatives including bifurcated embedded derivatives  repurchase agreements and reverse repurchase agreements  securities borrowing and securities lending transactions  Main provision of 2011-11 requires an entity to disclose information about offsetting and related arraignments to enable users of its financial statement to understand the effect of those arrangements on its financial position.  There was concern that the scope was much wider because of this wording – items included above “that are either offset per sections of GAAP or subject to a master netting arrangement or similar agreement.” This wording could include ordinary trade receivables and payables in some cases which was not the FASB’s intent.  Effective for fiscal years beginning on or after 1/1/13 (same effective date of ASC 2011-11). 11 FASB ASC 2013-01 (Topic 210) - Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities
  12. 12.  Requires additional information about reclassification adjustments from Accumulated Other Comprehensive Income (AOCI)  Discloses in one note the effects of these AOCI component adjustments on the line items in net income  If reclassification does not affect net income, the entity should cross-reference other required disclosures  This is a marked change from the Comprehensive Income Update, issued in mid-2011, requiring this information to be shown on the face of the financial statements. (requirement deferred in December, 2011)  The effective date is prospectively for periods beginning after 12/15/12, with nonpublic effective 12/15/13. 12 FASB ASC 2013-02 (Topic 220) - Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income
  13. 13.  Objective is to provide guidance for recognition, measurement, and disclosure of obligations resulting from joint and several arrangements for which the total amount is fixed at the reporting date.  GAAP guidance did not exist before this update  Examples of items within the scope of this proposal include debt arrangements, other contractual obligations, and settled judicial and litigation rulings.  These type obligations are to be measured as the total of  The amount the entity agreed to pay based on arrangements with co-obligors  Any additional amount the entity expects to pay in place of its co-obligors 13 FASB ASC 2013-04 (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date
  14. 14.  Entity must disclose nature and amount and other information about the obligations  The amendments are effective for periods beginning after 12/15/13. The effective date for nonpublics is 12/15/14.  Amendments should be applied retrospectively to all prior periods for all liability arrangements that exist at the date of adoption. 14
  15. 15.  Update addresses the release of the cumulate translation adjustment into net income when a parent sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest  Subtopic 810-10 (Consolidation) supports releasing cumulative translation adjustment into net income upon loss of a controlling interest  Subtopic 830-30 (Foreign Currency Matters) provides for the release of cumulative translation adjustment into net income only when a sale is complete or substantially complete liquidation of an investment in a foreign entity 15 FASB ASC 2013-05 (Topic 830) - Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or an Investment in a Foreign Entity
  16. 16.  When parent ceases to have controlling financial interest within a foreign entity, parent is required to follow 830-30 (cumulative translation adjustment should be released into net income only if sale is complete or substantially complete liquidation of foreign entity).  For equity method foreign investments, partial sale guidance in 830-30-40 still applies (pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of equity investment).  If not foreign entity, cumulative translation adjustment is released into net income only if sale is complete or substantially complete  Effective years begging after December 15, 2013 (2014 for nonpublic entities). Applied prospectively. Early adoption is permitted. 16
  17. 17.  A “contribution” is defined in the Master Glossary of the FASB Accounting Standards Codification as “an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.”  An “affiliate” is defined in the Master Glossary of the FASB Accounting Standards Codification as “a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.”  So do we recognize revenue as a result of contributed services from an affiliate and if so, how do we measure? 17 FASB ASC 2013-06 (Topic 958) Services Received from Personnel of an Affiliate
  18. 18.  A not-for-profit entity should recognize all services provided by an affiliate’s personnel that directly benefit the not-for-profit entity.  The services are measured at the cost the affiliate recognizes for the personnel providing the services.  However, if using the above measurement, the value of the service would be over or understated, the not-for- profit entity may choose to use either  The cost the affiliate recognized or  The fair value of the service Update effective for periods beginning at 6/15/14. 18
  19. 19.  Before this Update, very minimal guidance in US GAAP that address when it is appropriate to apply, or how to apply the liquidation basis of accounting  An entity should prepare statements on a going concern basis unless liquidation is imminent  Liquidation occurs when an entity converts its assets to cash and settles its obligations with creditors in anticipation of ceasing activity  Liquidation is imminent when likelihood is remote that the entity will exit the liquidation and either: (a) A liquidation plan has been approved by one with authority and it is remote that liquidation will not occur (b) A liquidation plan is imposed by others (involuntary bankruptcy)  If liquidation plan is part of governing documents, liquidation basis of accounting is only applied if approved liquidation plan is different than original plan since entity’s inception. 19 FASB ASC 2013-07 (Topic 205) Liquidation Basis of Accounting
  20. 20.  Assets and liabilities should be shown at the amount of cash expected to be received or paid  Also includes assets not recognized under GAAP but expected to sell in liquidation (example, trademarks).  Costs expected to accrue or income to be earned during liquidation are included, as well as disposal costs  Financial statements in this situation should have titles such as “Statement of Net Assets in Liquidation” and “Statement of Changes in Net Assets in Liquidation”  Disclosure should include liquidation plan and significant assumptions used in measurement of accounts  Disclose expected duration of the liquidation  Effective for periods beginning after 12/15/13. Apply prospectively from date liquidation is imminent. 20
  21. 21. Selected FASB Exposure Drafts 21
  22. 22.  Stakeholders claim that too many disposals of assets qualify for discontinued operations presentation under current definition.  Only disposals representing a significant strategic shift in operations should be presented in discontinued operations.  Currently, continuing involvement criterion is difficult to apply and does not result in consistent application.  Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations presentation (not decision useful for users and higher costs for preparers). 22 Proposed Accounting Standards Update (Topic 205) – Reporting Discontinued Operations (Issued April, 2013)
  23. 23.  Under the new update, a discontinued operation would be either of the following: 1) A component of an entity or a group of components that represents a separate major line of business or major geographical area of operations that either has been disposed or is part of a plan to be classified as held for sale (in accordance with criteria in paragraph 360-10-45-9) 2) A business that, on acquisition, meets the criteria to be classified as held for sale (in accordance with criteria in paragraph 360-10-45-9) 23
  24. 24. ASC 360-10-45-9 A long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which all of the following criteria are met: a. Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group). b. The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups). c. An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated. d. The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph 360-10-45-11 . e. The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset (disposal group) is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group). A market price that is reasonable in relation to fair value indicates that the asset (disposal group) is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) is not available for immediate sale. f. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. 24
  25. 25.  Update requires expanded disclosures for discontinued operations and for disposals of individually material components of an entity that do not qualify for discontinued operations presentation.  Some additional disclosures include 1) Major income and expenses of pretax profit (loss) from a discontinued operations 2) Major classes of cash flow from discontinued operations 3) If the discontinued operation includes a noncontrolling interest, the pretax profit (loss) attributable to the parent 4) A reconciliation of major classes of assets and liabilities from discontinued operations 25
  26. 26. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods and services. 26 FASB Exposure Draft (Topic 605) Revenue from Contracts with Customers (Revised November, 2011 but expected revisions reflected)
  27. 27.  To apply the core principle, an entity must: a) identify the contract(s) with a customer b) identify the separate performance obligations in the contract c) determine the transaction price d) allocate the transaction price to the separate performance obligations e) recognize revenue when (or as) the entity satisfies each performance obligation 27
  28. 28.  Identify the contract(s) with a customer  An agreement between two or more parties that creates enforceable rights and obligations  Contracts can be written, oral or implied by customary business practices  Guidance is included, however, to specify when an entity would combine two or more contracts 28
  29. 29.  A performance obligation is an enforceable promise in a contract with a customer to transfer a good or service to the customer  If more than one good or service is provided, account for each distinct good or service as a separate performance obligation  A good or service is distinct if:  the entity or another entity sells an identical or similar good or service separately or  The customer can benefit from the good or service either on its own or with other readily available sources 29 Identify the separate performance obligations in the contract
  30. 30. Goods or services in a bundle are not distinct if both the following are met:  The goods or services are highly interrelated and the entity (the seller) must provide significant service to integrate the goods or services into the contracted item  The bundle of goods or services is significantly modified to fulfill the contract (you’re not done) The entity must determine whether its performance obligation requires acting as a principal or as an agent 30
  31. 31.  The transaction price is the amount of consideration that an entity receives, or expects to receive, from a customer in exchange for transferring goods and services promised in the contract. In many instances this price is readily determinable because it is a fixed amount (this has really not been an issue)  If the amount is variable, an entity would recognize revenue from satisfying an obligation if the transaction price can be reasonably estimated. (continued) 31 Determine the transaction price
  32. 32. A transaction price can be reasonably estimated only if:  the entity has experience with similar types of contracts (or access to information) and  the entity’s experience is relevant to the contract because the entity does not expect significant changes in circumstances 32
  33. 33. When considering the transaction price, an entity would consider:  variable consideration – expected value or most likely amount  time value of money – significant financing?  noncash consideration – fair value  consideration payable to the customer Do not consider customer credit risk when determining the transaction price (this time a year ago the ED said you did consider customer credit risk). Bad debt expense will be prominently displayed in operating expense. 33
  34. 34.  Allocate the transaction price to all separate performance obligations in proportion to the standalone selling prices of the goods and services. If standalone price not observable, it should be estimated  If circumstances change, the entity would update the transaction price and allocate the changes to the separate obligations 34 Allocate the transaction price to the separate performance obligations
  35. 35.  Recognize revenue when performance obligation is settled by transferring the promised goods or services. A good or service is considered settled when the customer has control of that good or service  Entity must determine whether performance obligation settled over time or at a point in time (continued) 35 Recognize revenue when a performance obligation is satisfied
  36. 36.  A performance obligation is settled over time if:  The entity’s performance creates or enhances an asset that customer controls during creation or enhancement  The entity’s performance does not create an asset with an alternative use to the entity and the customer does not have control over the asset created, and the entity has the right to payment for performance completed to date and it expects to fulfill the contract 36
  37. 37.  When the entity satisfies the performance obligation, it would recognize revenue in the amount of the transaction price that was allocated to the settled obligation  When the performance obligation is satisfied over time, progress is measured using either output methods or input methods  An entity should select a method that shows the transfer of control of the goods or services to the customer  This might be during production or upon the delivery of the goods or services 37
  38. 38. If not settled over time, the performance obligation is settled at a point in time. This determination should be made by considering the following indicators of control:  Entity has present right to payment  Customer has legal title  Entity has transferred physical possession  Customer has significant risks and rewards of ownership  Customer has accepted the asset 38
  39. 39.  This proposal also specifies the accounting for some costs.  An entity would recognize as an asset the incremental costs of obtaining a contract if the entity expects to recover those costs.  If no other standard covers a cost incurred in fulfilling a contract (example Topic 330 on inventory), the cost would have to be expensed unless it relates 1) rectly to a contract, 2) generates resources that will be used to satisfy future obligations or 3) is expected to be recovered 39
  40. 40.  This proposed standard applies to all entities that have contracts with customers – public, private and not-for- profit  Certain contracts with customers would be excluded. For example, those covered by the lease guidance, investments in debt and equity securities, receivables, debt, insurance contracts, financial instruments, derivatives and guarantees 40
  41. 41. Disclosures include quantitative and qualitative information:  Reconciliation of contracts with customers  Significant judgments and changes  Any assets recognized from contracts Nonpublic entities can omit reconciliations For public entities, the effective date would be for periods beginning after 12/15/16. Private companies would have an additional year. Final pronouncement expected by mid- 2013. The Board no longer plans to require full retrospective application. 41
  42. 42. DEREK DANIEL, CPA Assurance Manager | Derek Daniel is an assurance manager with ten years of experience in public accounting. Derek leads Decosimo’s Huntsville office. Derek manages audit engagements for clients in various industries including manufacturing, government contractors, and healthcare. He has experience in assisting clients to achieve compliance with the requirements of the Sarbanes- Oxley Act. He also performs due diligence and agreed-upon procedures.
  43. 43. Questions