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2015 Audit & Accounting Update

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Whether you represent a large corporation, a small business, or a not-for-profit organization, it can be difficult to stay up to date on current accounting topics. Join Timothy McLaughlin, Vincent Leo, and Michael Giess for an overview of changes that may affect your organization and how to apply the most recent standards and guidance.

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2015 Audit & Accounting Update

  1. 1. 2015 Audit & Accounting Update presented by Vince Leo, CPA Tim McLaughlin, CPA Mike Giess, CPA November 17, 2015 Insero & Company’s 2015 Accounting & Finance Education Series
  2. 2. Vince Leo, CPA Vince is a Partner in our Audit and Business Advisory Services Group. He has more than 25 years’ experience serving some of the area’s largest companies. He joined Insero & Company as a Partner during 2002 from Arthur Andersen where he was a Partner in their Rochester office. He has advised his clients on technical accounting matters, private placements, public offerings, and numerous acquisitions, mergers, and divestitures.
  3. 3. Tim McLaughlin, CPA Tim has 30 years of audit and accounting experience and is the head of our Audit and Business Advisory Services Group. Tim is the lead partner on a wide variety of engagements. Tim provides consulting services to manufacturing, real estate, service, and high tech clients. Tim also serves as our Quality Control/Auditing and Accounting Director and consults with our partners and managers as well as the senior management of our clients regarding technical audit and accounting issues. Tim also provides litigation support and expert witness services on a variety of accounting and auditing engagements.
  4. 4. Mike Giess, CPA Mike is a Partner in the Audit and Business Advisory Services Group. He has more than 20 years of experience servicing private and public companies in the manufacturing, service, retail, and wholesale/distribution sectors. Mike frequently consults with companies on technical accounting matters including business combinations, implementation of new accounting pronouncements, equity and debt transactions, pension accounting, and revenue recognition.
  5. 5. Agenda • Overview • FASB Update • FASB Pipeline • Cyber Security • Economic Outlook • Questions
  6. 6. FASB Update
  7. 7. Accounting Standards Updates
  8. 8. SUMMARY ASU 2014-17—Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force) ASU 2014-18—Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council) ASU 2015-01—Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ASU 2015-02—Consolidation (Topic 810): Amendments to the Consolidation Analysis ASU 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
  9. 9. SUMMARY (continued) ASU 2015-04—Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement ASU 2015-06—Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (a consensus of the FASB Emerging Issues Task Force) ASU 2015-07—Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force) ASU 2015-08—Business Combinations (Topic 805): Pushdown Accounting— Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)
  10. 10. SUMMARY (continued) ASU 2015-09—Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts ASU 2015-10—Technical Corrections and Improvements ASU 2015-11—Inventory (Topic 330): Simplifying the Measurement of Inventory ASU 2015-12—Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force) ASU 2015-13—Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets (a consensus of the FASB Emerging Issues Task Force)
  11. 11. SUMMARY (continued) ASU 2015-14—Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ASU 2015-15—Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of- Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update) ASU 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
  12. 12. ASU 2014-17 Business Combinations (Topic 805): Pushdown Accounting • Pushdown accounting refers to establishing a new basis for reporting assets and liabilities in an acquired company’s separate financial statements based on a push down of the buyer’s basis. • Generally results in a step up in basis of assets and liabilities to fair value and recording goodwill in the acquired entity’s financial statements. • Provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. • Disclose information to enable users to evaluate the effect of pushdown accounting. • Effective upon issuance.
  13. 13. ASU 2014-18 Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council) • Intended to simplify private company accounting for identifiable intangible assets acquired in a business combination. • Private company can elect to no longer recognize the following separate from goodwill: (a) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and (b) noncompetition agreements. • Must also adopt the private company goodwill accounting alternative.
  14. 14. ASU 2015-01 Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items • Eliminates from U.S. GAAP the concept of extraordinary items. • Event or transaction that is considered to be unusual or infrequent (or both):  Report as a separate component of income from continuing operations  Disclose nature and financial effects of each event • Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
  15. 15. ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis • Issued in response to concerns by stakeholders  Legacy consolidation guidance provided information that was not useful  Users sometimes had to request supplemental deconsolidating financial statements • Targeted to address concerns in the asset management industry but new guidance will affect all companies. • Intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships and limited liability corporations • May lead to consolidating entities that previously were not and deconsolidating others.
  16. 16. ASU 2015-02 (continued) • While the overall approach to consolidation under U.S. GAAP is not affected (retained both the voting interest and variable interest models), certain aspects of applying that approach were changed. • Situations involving contractual arrangements, related parties, and limited partnerships could trigger additional analysis or different consolidation conclusions. • Effective for periods beginning after December 15, 2015 (for public companies) and periods beginning after December 15, 2016 (for private companies and not-for-profits).
  17. 17. ASU 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs • Requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. • Better aligns GAAP with IFRS. • Does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements (addressed in ASU 2015-15). • Effective for fiscal years beginning after December 15, 2015 and should be applied retrospectively.
  18. 18. ASU 2015-04 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets • Applicable to an entity with a fiscal year-end that does not coincide with a month-end (e.g., 52/53 week fiscal year). • Provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. • Must be applied consistently from year to year and should be applied consistently to all plans if an entity has more than one plan.
  19. 19. ASU 2015-04 • If the practical expedient is elected, a company needs to consider contributions or significant events (e.g., plan amendment, curtailment) occurring between the valuation date and the period end. Example: A company, sponsoring a defined benefit pension plan, with a February 2nd year end elects the practical expedient and uses January 31st as the plan measurement date. On February 1st, the company makes a contribution to the plan. This contribution will need to be reflected in the valuation to report an updated pension liability. Note: Changes in economic conditions and interest rates do not need to be reflected. • Should disclose accounting policy election and the date used to measure plan assets and liabilities.
  20. 20. ASU 2015-05 Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement • Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements. • Previous GAAP did not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. • If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses (record asset and depreciate). • If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract (record prepaid/operating expense).
  21. 21. ASU 2015-05 (continued) Financial Statement Effect Balance Sheet Treatment of up-front fee • Capitalized or not • If capitalized, classified as prepaid asset, intangible or other Income Statement Costs could be expensed immediately or depreciated/amortized Cash Flow Operating (prepaid asset) or investing (intangible) Other Effect on EBITDA
  22. 22. ASU 2015-06 Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions
  23. 23. ASU 2015-07 Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) • Applies to reporting entities that elect to measure the fair value of an investment using the net asset value (NAV) per share (or its equivalent) practical expedient. • Eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV practical expedient. • Change is being made to eliminate inconsistencies in presentation of these investments.
  24. 24. ASU 2015-07 (continued) • Eliminates certain disclosure requirements, primarily the roll forward for level 3 investments valued using NAV as a practical expedient. • Does not affect all other investments and a roll forward is still required for level 3 investments not valued using NAV. • Effective for fiscal years beginning after December 15, 2015 for public business entities, with a one year deferral for all others. Early adoption permitted. Apply retrospectively.
  25. 25. ASU 2015-07 (continued) Assets at Fair Value as of December 31, 2016 Level 1 Level 2 Level 3 Total Cash & Cash Equivalents 250,000 - - 250,000 Equity Securities 1,500,000 - - 1,500,000 US Government Securities - 5,000,000 - 5,000,000 Corporate Bonds - 6,000,000 50,000 6,050,000 Real Estate - - 3,000,000 3,000,000 Derivatives - - 500,000 500,000 Total assets in FV Hierarchy 1,750,000 11,000,000 3,550,000 16,300,000 Investments Measured at Net Asset Value (a) - - - 2,225,000 Investments at Fair Value $1,750,000 $11,000,000 $3,550,000 $18,525,000 (a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
  26. 26. ASU 2015-08 Business Combinations (Topic 805): Pushdown Accounting— Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update) • Amends various SEC paragraphs of the FASB Accounting Standards Codification.
  27. 27. ASU 2015-09 Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts • Applies to insurance entities that issue short-duration contracts. • Requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses. • Effective for annual periods beginning after December 15, 2015 (for public business entities) with a one year deferral for all others.
  28. 28. ASU 2015-10 Technical Corrections and Improvements • Amendments cover a wide range of topics. • Clarify and simplify existing guidance.
  29. 29. ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory • Current accounting requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less a normal profit margin. • ASU requires measurement of inventory at the lower of cost and net realizable value. • Net realizable value = estimated selling price less reasonably predictable costs of completion, disposal and transportation • Does not apply to inventory measured using LIFO or the retail inventory method.
  30. 30. ASU 2015-12 Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit- Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient • Part of the simplification initiative. • Applies to benefit plan financial statements. • Update is divided into three sections.
  31. 31. ASU 2015-12 (continued) Part I—Designates contract value as the only required measurement for fully benefit-responsive investment contracts. Part II—Eliminates certain employee benefit plan disclosures • Investments representing 5% or more of net assets • Net appreciation/depreciation by investment type • Disaggregated investment information Part III—Provides practical expedient to permit plans to measure investments and investment-related accounts as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end.
  32. 32. ASU 2015-13 Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets • Applies to entities that enter into contracts for the purchase or sale of electricity on a forward basis and arrange for transmission through, or delivery to a location within, a nodal energy market whereby one of the contracting parties incurs charges (or credits) for the transmission of that electricity based in part on locational marginal pricing differences payable to (or receivable from) an independent system operator. • Clarifies certain criteria for meeting the normal purchase and sales scope exception. • Effective upon issuance (August 2015) and applied prospectively.
  33. 33. ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date • In May 2014, the FASB issued new guidance for revenue recognition. • Effective date for the new guidance has been deferred by one year. • Public business entities annual reporting periods beginning after December 15, 2017. • All other entities annual reporting periods beginning after December 15, 2018.
  34. 34. ASU 2015-15 Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements • In April 2015, the FASB issued updated guidance requiring the presentation of debt issuance costs as a direct deduction from the carrying amount of the related debt liability. • That update does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. • It would be acceptable for an entity to record debt issuance costs as an asset and amortize that asset ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
  35. 35. ASU 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments • GAAP requires an acquirer in a business combination to report provisional amounts when measurements are incomplete (e.g., when the valuation of intangibles is incomplete). • Adjustments occur when new information is obtained (during the measurement period) about facts and circumstances that existed at the acquisition date that would have affected the original accounting. • Simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirements to retrospectively account for those adjustments.
  36. 36. ASU 2015-16 (continued) Current GAAP • Adjustments to provisional amounts recognized at the acquisition date are made retrospectively with a corresponding adjustment to goodwill. • Revise comparative information for prior periods presented , including depreciation, amortization, or other income effects. New GAAP • Adjustments to provisional amounts are made in the period in which the adjustments are determined. • Effect on earnings of changes in depreciation, amortization, or other income effects are recorded in the period the adjustments are determined, calculated as if the accounting had been completed at the acquisition date (i.e., catch-up adjustment).
  37. 37. ASU 2015-16 (continued) • Material adjustments may result in earnings volatility in the adjustment period and may reduce income statement comparability. Presentation and Disclosures • Present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current period earnings by line item that would have been recorded in previous periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.
  38. 38. Questions ?
  39. 39. FASB Pipeline
  40. 40. FASB Pipeline Project Status Timing Financial Instruments • Classification & Measurement Drafting final standard Q4 2015 • Hedging Drafting exposure draft Q1 2016 • Impairment Drafting final standard Q1 2016 Leases Drafting final standard Q4 2015 Income Taxes • Balance sheet classification of deferred taxes Drafting final standard Q4 2015 • Intra-entity asset transfers ED redeliberations
  41. 41. FASB Pipeline Project Status Timing Revenue Recognition • Identifying performance obligations and licenses Drafting final standard Q4 2015 • Narrow scope improvements and practical expedient Exposure draft Comment period ends Nov. 16, 2015 • Principal vs. agent ED redeliberations Contingent put and call options in debt instruments ED redeliberations Liabilities & equity Drafting ED Q4 2015 Equity method accounting ED redeliberations
  42. 42. FASB Pipeline Project Status Timing Disclosures • Defined benefit plans Drafting ED Q4 2015 • Fair value measurement Drafting ED Q4 2015 • Income taxes Initial deliberations • Inventory Initial deliberations • Interim reporting Initial deliberations • Entity’s decision process EDs out for public comment Comment period ends Dec. 8, 2015 • Financial statements for NFP ED redeliberations • Classification of debt Drafting ED Q4 2015
  43. 43. Lease Accounting
  44. 44. CurrentAccounting • Most lease assets and liabilities are off- balance sheet • Limited information about operating leases Lessee • Lack of transparency about residual values • Consistency with leases and revenue recognition guidance Lessor
  45. 45. Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Right-of-use asset Lease payments Lessor Lessee
  46. 46. Scope Reliefs Short-Term Lease Exemption for Lessees Recognition and measurement exemption for leases with a term of 12 months or less
  47. 47. Lessee Model All leases are recognized on the lessee’s balance sheet Current U.S. GAAP New GAAP Capital Leases Finance Leases Operating Leases Operating Leases Classification is based on existing U.S. GAAP
  48. 48. LesseeAccounting Overview Right-of-use asset and Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Right-of-use asset and Lease liability Single lease expense on a straight-line basis Cash paid for lease payments Finance Leases Operating Leases Balance Sheet Income Statement Cash Flow Statement
  49. 49. LessorAccounting Overview Net investment in the lease Interest income and any selling profit on the lease1 Cash received for lease payments Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments Direct Financing & Sales-Type Operating Balance Sheet Income Statement Cash Flow Statement 1 Selling profit recognized at lease commencement for sales-type leases, over the lease term for direct financing leases (note: selling profit is rare for direct financing leases).
  50. 50. Variable Lease Payments Initial Measurement Only include variable lease payments that are linked to an index or a rate or are “in-substance fixed” Subsequent Measurement Lessee Reassess only when the lessee re- measures the lease liability for other reasons (e.g., change in lease term) Lessor Not required to reassess
  51. 51. Subleases Intermediate lessor should account for as separate contracts, unless they meet the contract combination guidance Head Lease Sublease Determine classification of the sublease with reference to the underlying asset
  52. 52. Sale and Leaseback Transactions Determine if a sale occurred • Apply Topic 606 • If there is a sale, apply Topic 842 to account for leaseback • Finance leasebacks preclude a sale • Guidance on repurchase options: sale not precluded if option exercisable at the then-prevailing fair value, provided the asset is nonspecialized and readily available Accounting for the sale/purchase • Gain on sale is recognized same as for the sale of any other nonfinancial asset • Loss on the sale is recognized by seller-lessee • Buyer-lessor accounts for purchase consistent with that of other nonfinancial assets
  53. 53. Reducing Cost and Complexity • Lessor Model • Maintaining current model with only minor updates • Lessee Model • Classification line is the same as current accounting • Short-term leases • Aligned definition with the definition of lease term • Reassessment • No reassessment for lessor • Limited reassessment for lessees
  54. 54. Revenue Recognition
  55. 55. Revenue Recognition Background • In May 2014, the FASB issued its new revenue recognition guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). • The new guidance is a move towards more principles based accounting. • Converges GAAP with IFRS. • FASB established a transition resources group to aide transition to the new guidance. • Replaces virtually all US GAAP guidance on revenue recognition with a single model applied to revenue from contracts with customers. Does not apply to lease contracts or insurance contracts.
  56. 56. Revenue Recognition (continued) Background • Accounting for most revenue transactions (e.g., retail sales to consumers) will likely remain the same. • Certain industry specific guidance has been eliminated. • Certain industries (e.g., software, telecommunications, real estate) may be significantly affected and are likely to recognize revenue earlier. • Other industries (e.g., asset management) are likely to recognize revenue later. • Should improve comparability across industries.
  57. 57. Five steps to apply Standard Recognize revenue to depict the transfer of goods or services in an amount that reflects the consideration to which the entity expects to be entitled Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the entity satisfies a performance obligation 1 2 3 4 5
  58. 58. Step 1: Identify the contract(s) Existence of a contract Combine contracts Contract modifications Objective: To identify the bundle of contractual rights and obligations to which an entity would apply the revenue model
  59. 59. Step 1: Identify the contract(s) • Must meet specified criteria to apply the model • Key criterion: Collectibility threshold – to apply model must be probable of collecting consideration to which the entity will be entitled; otherwise, recognize revenue when performance obligation is satisfied and cash is collected Existence of a contract • Negotiated as a package • Consideration in contracts is linked • Goods or services from one performance obligation Combine contracts • Separate contract if add distinct goods/services at standalone selling price • If do not treat as separate contract, prospective treatment if remaining goods/services distinct; otherwise, cumulative catch-up Contract modifications
  60. 60. Step 2: Identify the performance obligation(s) Objective: To identify the promised goods or services that are distinct and should be accounted for separately • On its own • Together with other readily available goods or services (including goods/services previously acquired from entity) Customer can benefit from good or service • No significant service of integrating the good/service • Good/service does not significantly modify or customize another good or service in the contract • Good/service is not highly dependent on or interrelated with other goods or services promised in the contract Promised good or service is separable from other promises Promise to transfer a distinct good or service
  61. 61. Step 3: Determine transaction price Objective: To determine amount of consideration to which an entity expects to be entitled in exchange for promised goods or services Estimate using: •Expected value •Most likely amount but ‘constrained’ Adjust consideration if timing provides customer or entity with significant benefit of financing Measure at fair value unless that can’t be reasonably estimated Reduction of the transaction price unless in exchange for a distinct good or service Variable consideration Significant financing Non-cash consideration Consideration payable to customer
  62. 62. Step 3: Determine transaction price Include estimate of variable consideration in the transaction price only if it is probable that a significant revenue reversal will not occur when the uncertainty is resolved For licenses of intellectual property, include sales or usage- based royalties in the transaction price when the sales or usage occurs Update the transaction price at each reporting date
  63. 63. Step 4:Allocate the transaction price • Estimate selling prices if not observable • Residual estimation techniques may be appropriate in certain situations Relative standalone selling price basis Discounts & contingent amounts allocated entirely to specific performance obligation if specified criteria met Objective: To allocate to each performance obligation the amount to which the entity expects to be entitled
  64. 64. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation • An entity satisfies a performance obligation over time if one of the following criteria is met: • The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced • The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date
  65. 65. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation • If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which control transfers, consider the following indicators: • Present right to payment • Legal title • Physical possession • Risks and rewards of ownership • Customer acceptance
  66. 66. Contract costs – if no other guidance applies Incremental costs of obtaining a contract Costs to fulfill a contract Recognize as an asset if: • Incremental • Expect to recover For example: Selling commissions Practical expedient: May recognize as an expense when incurred if the amortization period is one year or less Recognize as an asset if: • Relate directly to a contact • Generate or enhance resources of the entity that will be used to satisfy performance obligations in the future • Expect to recover For example: Pre-contract or setup costs
  67. 67. Implementation guidance • Performance obligations satisfied over time • Methods for measuring progress • Sale with a right of return • Warranties • Principal versus agent considerations • Customer options for additional goods or services • Customer’s unexercised rights • Nonrefundable upfront fees • Licensing • Repurchase agreements • Consignment arrangements • Bill-and-hold arrangements • Customer acceptance • Disclosure of disaggregated revenue
  68. 68. Implementation guidance: Licenses No Yes Step 2: Identify the performance obligation(s) Account for bundle of goods and services Is the license distinct? Apply criteria to determine whether nature of entity’s promise in granting license is to provide: • A right to access the entity’s intellectual property as it exists throughout the license period (i.e. a performance obligation satisfied over time); or • A right to use the entity’s intellectual property as it exists at the point at which the license is granted (i.e. a performance obligation satisfied at a point time)
  69. 69. Revenue Recognition (continued) 2015 Activity: • In April 2015, the FASB deferred the effective date by one year (ASU 2015-14). • In May 2015, the FASB issued a proposed update that would affect identifying performance obligations and licensing implementation guidance. • In August 2015, the FASB issued a proposed update intended to clarify implementation guidance on principal versus agent considerations . • In September 2015, the FASB issued a proposed update intended to improve the guidance on collectibility, noncash consideration, and completed contracts at transition.
  70. 70. Revenue Recognition (continued) May 2015 Proposed Update: Identifying performance obligations and licensing implementation guidance Identifying Performance Obligations • Proposed amendments clarify the guidance on determining if the promises in a contract are “distinct” goods or services and therefore, should be accounted for separately • Specifically addresses whether the good or service is “separately identifiable” from other promises in the contract.
  71. 71. Revenue Recognition (continued) Licensing • Proposal would amend the licensing guidance by categorizing all licenses into two categories—“symbolic” and “functional”—that will determine whether revenue is recognized at a point in time or over time. • Functional—does not include supporting or maintaining the IP during the license period. • Symbolic—includes supporting or maintaining the IP during the license period. • A license would be classified as “functional,” and recognized at a point in time, if the license has significant standalone functionality (e.g., software, television shows, music). Otherwise, a license would be classified as “symbolic,” and recognized over time (e.g., trade names, logos, franchise rights).
  72. 72. Revenue Recognition (continued) Licensing Example An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a fixed fee of $1 million, as well as a sales- based royalty of 5 percent of the customer’s monthly sales for the term of the license. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.
  73. 73. Revenue Recognition (continued) • License is for symbolic IP (has limited stand-alone functionality) • Apply five step revenue model • Identify performance obligations—a) promise to grant a license; b) promise to transfer equipment. Each are distinct because the customer can benefit from each good on its own. • Determine transaction price—a) fixed consideration of $1,150,000; b) variable consideration for 5% royalty on sales • Allocate transaction price–a) allocate $150,000 to the equipment; b) allocate sales based royalty and $1 million fee to the license • Recognize revenue as performance obligations are met—a) recognize sale of equipment when delivered; b) recognize license fee ratably over the term; c) recognize royalty as sales occur
  74. 74. Revenue Recognition (continued) August 2015 Proposed Update: Principal versus agent considerations • Principal  Controls a good or service before it is transferred to a customer  Provides goods or services to the customer  Reports revenue based on the gross amount received from the customer • Agent  Arranges for another party to provide goods or services  Reports only its fee or commission (that is, net of amounts it remits to the other party) • Gross versus net revenue reporting
  75. 75. Revenue Recognition (continued) • Proposed update clarifies and simplifies the principal vs. agent guidance in two specific areas: 1. Determining the unit of account (i.e., specified good or service being provided to the customer) 2. Determining control
  76. 76. Revenue Recognition (continued) Principal vs. Agent Example Entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, the entity is entitled to a commission that is equal to 10 percent of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity has no further obligations to the customer after arranging for the products to be provided to the customer. • What is the unit of account?—goods to be provided by suppliers • Does the entity have control?—No.  No ability to direct the use of the goods  No control over suppliers’ inventory/no inventory risk  No discretion in establishing price • Conclusion?—Entity is an agent. Recognize revenue in the amount of the commission when goods are purchased.
  77. 77. Revenue Recognition (continued) September 2015 Proposed Update: Collectibility, noncash consideration, and completed contracts at transition • Proposed update addresses the following aspects of the new revenue recognition guidance:  Assessing collectibility  Accounting when collectibility is not probable  Noncash consideration—clarifies that noncash consideration should be measured at its fair value at contract inception  Sales taxes collected from customers  Contract modification in transition
  78. 78. Balance sheet classification of deferred taxes • Will require all deferred tax assets and liabilities to be presented as noncurrent. • Why is FASB making this change?  Presenting as current and noncurrent provides limited benefit to users of the financial statements because the classification does not always align with how the deferred tax amounts will be recovered or settled. • Effective date:  Public entities—annual reporting periods beginning after December 15, 2016.  All other entities—annual reporting periods beginning after December 15, 2017. • May be applied either prospectively or retrospectively.
  79. 79. Liabilities & Equity • Addresses the accounting for equity-linked financial instruments, such as a warrant or convertible instrument, containing “down round” features. • GAAP requires an equity-linked instrument to be reviewed to determine if it qualifies for equity classification or liability classification. • Under current GAAP, a down round feature generally results in liability classification of the financial instrument, requiring fair value measurement and changes in the value reflected in the income statement.  Exercise price used for settlement is not fixed due to the down round feature
  80. 80. Liabilities & Equity (continued) • Tentative guidance would exclude the down round feature from the assessment. • Should result in fewer equity-linked instruments requiring liability classification, particularly for private companies where down round provisions are more common. • Recognize the effect of the down round feature when it is triggered.
  81. 81. Not-for-Profit Financial Statements • Current reporting guidance was established in 1993 (SFAS No. 117). • In November 2011, FASB added Not-for-Profit (NFP) financial statement project to Agenda. • In April 2015, FASB issued an exposure draft. • Open for comments until August 20, 2015 • Focus on improving: 1. Net asset classification requirements 2. Information provided in financial statements about liquidity, financial performance, and cash flows • Significant changes to the NFP financial reporting model.
  82. 82. Not-for-Profit Financial Statements Net Asset Classification Current GAAP Proposed Changes • Requires NFPs to present three classes of net assets based on the presence of donor restrictions: 1. Unrestricted 2. Temporarily restricted 3. Permanently restricted • Present two classes of net assets: 1. Net assets with donor restrictions 2. Net assets without donor restrictions
  83. 83. Not-for-Profit Financial Statements Statement of Activities Current GAAP Proposed Changes • Present the amounts of the net change in three classes of net assets and total net assets • Present the amounts of the net change in two classes of net assets and total net assets • Present two measures of operating activities (before and after internal transfers) both of which are within changes in net assets without donor restrictions • Present information about expense by function, nature, or both with enhanced disclosure in notes • Present investment return net of related investment expenses
  84. 84. Not-for-Profit Financial Statements Reporting of Expenses - Statement of Activities Current GAAP Proposed Changes • Present revenues and expenses segregated in the three classes of net assets • Health and welfare organizations required to provide information about expenses by function or nature • Present revenues and expenses for two classes of net assets • All NFPs present information about expenses by function, nature, or both • Present certain operating measures • Present investment return net of related investment expenses
  85. 85. Cash Flows Not-for-Profit Financial Statements Current GAAP Proposed Changes • Present operating cash flows using indirect method with additional presentation of direct method permitted • Present operating cash flows using the direct method with additional presentation of the indirect method permitted but not required • Certain items reclassified among cash flow categories to better align with statement of activities
  86. 86. Not-for-Profit Financial Statements Status • Received over 250 comment letters (many comments focused on components of the revised guidance that is not specific to NFPs, such as measures of operations and cash flow reporting) • Currently in redeliberation • Project has been broken into two phases: • Net Asset Classification, Liquidity, Expense Reporting, Direct Method of Cash Flows • Operating Measurements and Cash Flow Statement realignment.
  87. 87. Cyber Security Issues • Virtual Environment Encourages: • Connectivity • Productivity • Efficiency • But Virtual Environment Breeds: • Cyber crime • Identity theft • Information/data breaches • AICPA Report October, 2013 • Available on www.aicpa.org
  88. 88. Cyber Security Issues • Top 5 Cyber Crimes 1. Tax Refund Fraud 2. Corporate Account Takeover 3. Identity Theft 4. Theft of Sensitive Data 5. Theft of Intellectual Property (IP)
  89. 89. Cyber Security Issues • McAfee/Center for Strategic and International Studies (CSIS) estimated in 2014 that global cost of cyber crime is $445 Billion • 1% of Global Income • $200 Billion in U.S., Germany and China alone • Credit Card fraud in U.S. was $30+ Billion up 40% since 2013.
  90. 90. Tax Refund Fraud Steps • Obtain name and social security number • Make up wage, withholding and deduction info • File return electronically • Refund direct deposit or deposit to “safe” bank • By the time IRS matches data refund is PAID! In 2013, $30 billion of fraudulent refunds were filed and $6 billion were paid.
  91. 91. CorporateAccount Takeover • Electronic Funds Transfer Fraud • Illicitly acquire login credentials • Email • Malware • Access account • Transfer assets (offshore) • Small to medium sized businesses are targets • Less controls • More vulnerable • Targets – CFO, CEO, Controller
  92. 92. Identity Theft • Focus on name, address, social security number and birth date • Opening credit cards or lines of credit • Unauthorized purchases • Rental/home mortgage fraud • Victims spend 200 hours regaining credit • Businesses and employers must protect data
  93. 93. Theft of Sensitive Data • Targets businesses • Retailers • Online orders • Any business with personally identifiable information • Credit card data • Personally identifiable information • Need to focus on security and controls • Added costs • Cost to remediate very large
  94. 94. Theft of Intellectual Property • Targets businesses and higher education • Trade secrets • Copyrighted material • Patents/R&D
  95. 95. Other Items • Security controls • Security audits • Insurance • Response plan
  96. 96. Excerpts from the AICPA Business and Industry Economic Outlook Survey 2015
  97. 97. Bonus Payments What is your current projection for your incentive compensation and bonus payments for 2015?
  98. 98. Employee Turnover What has the experience of your company been with employee turnover in 2015?
  99. 99. Compensation/Benefits What has the experience of your company in 2014 been in terms of compensation and benefit costs for hiring? What has the experience of your company in 2015 been in terms of compensation and benefit costs for hiring?
  100. 100. Recruiting Competition In your recruiting efforts during the past several months, what level of competition are you seeing for candidates as compared to the end of 2014?
  101. 101. Industry, Region and Business-size Outlook • Optimism mixed across sectors • Retail trade optimism fell to 65% in Q3, consistent with 2014 levels, after topping the charts at 85% optimistic in Q2. Retail hiring also fell, but continues to be relatively strong at 2.6%, ranking 3rd among key sectors • Wholesale trade also declined in Q3 from 65% optimistic in Q2, returning to the Q1 level of 54% • Manufacturing eased another 2 points in Q3 from 55% optimistic in Q2 to 53% in Q3 • Construction maintained the same level of optimism as Q2 at 64% optimistic. However, the expected in crease in headcount in construction for the coming 12 months fell back to only 1.2% in Q3 after rebounding to 3.2% in Q2, 2105 • Technology hiring also fell to only 1.1% in Q3, after improving to 2.6% in Q2, in spite of a recovery in optimism from 60% to 67% in Q3 • Banking is also projecting a headcount decrease of .9%, a decline from a 1.5% increase projected in Q2, 2015
  102. 102. Industry, Region and Business-size Outlook (continued) • Other sectors • Professional Services optimism improved from 64% to 68%. However, the expected headcount eased from 1.9% in Q2 to 1.5% in Q3. • Mining and Natural Resources respondents are now projecting a .9% increase in headcount for the coming 12 months after projecting a decrease in headcount of 2.7% in Q2. • Optimism in West recovers; South continues to decline • West recovers from 57% to 63%, now leading national optimism • Midwest and Northeast follow closely at 61% and 62%, respectively • The south remains soft, declining 2 points from 56% in Q2 to 54% in Q3
  103. 103. Industry, Region and Business-size Outlook (continued) • Expansion plans recover strongly for smallest of companies • The number of companies with revenues < $10 million having expansion plans increased from 47% in Q2 to 61% in Q3 • The percentage of companies with revenues > $1 billion recovered 3 points in Q3, improving from 53% to 56% • The $10-$100 million range of companies eased from 66% to 62%, and the $100 million to $1 billion range of companies also eased from 65% to 60% in Q3 • Consistent with Q2, only 3% of companies overall expect to “contract a lot”, compared to 19% in Q1
  104. 104. Top Challenges Facing Organizations • Regulatory requirements/changes and employee and benefits costs • Availability of skilled personnel • Domestic economic conditions • Domestic competition maintained • Domestic political leadership • Stagnant/declining markets, developing new products/services/markets and changing customer preferences
  105. 105. Key Performance Indicators • Outlooks for revenue and profit recover slightly in Q3 • Headcount plans ease slightly, salary and benefit, and healthcare costs remained essentially constant • Key spending plans mixed • Increased spending for IT continues to be the strongest category • Other capital spending plans increased • Expected increase in training spending fell • R&D spending increased to a new post-recession high
  106. 106. Outlook for the U.S. and Organizations • Optimism for the U.S. Economy falls • Construction, employment and lower oil prices were cited as reasons for optimism • Lingering concerns about regulation/leadership/political gridlock and about global economic turmoil were cited as the primary reasons for those with pessimistic views • Inflation concerns remain low
  107. 107. Questions ?
  108. 108. Thank You Thank you for your attendance at today’s program. For more information regarding the topics discussed today, please feel free to contact: Vincent Leo, CPA Mike Giess, CPA vincent.leo@inserocpa.com michael.giess@inserocpa.com 585.697.9683 585.697.9639 Tim McLaughlin, CPA timothy.mclaughlin@inserocpa.com 585.697.9680 Insero & Company CPAs, P.C. www.inserocpa.com
  109. 109. Insero & Company CPAs, P.C. Certified Public Accountants Business & Financial Advisors Rochester >> 585.454.6996 Corning >> 607.973.2075 Disclaimer These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that Insero & Company CPAs, P.C. and its employees are not engaged in rendering legal, accounting, or other professional service as part of this CPE presentation. If advice or other expert assistance is required, the services of a competent professional person should be sought. Please contact an Insero & Company team member with any questions. The information contained herein is general in nature and based on authorities that are subject to change. Insero & Company CPAs, P.C. guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained by others as a result of reliance upon such information. Insero & Company CPAs, P.C. assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situation. Circular 230 Disclosure: Any information contained herein, or on any website or email link associated with this document is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. Insero & Company CPAs, P.C. is an integral part of McGladrey Alliance, a premier affiliation of independent accounting and consulting firms. McGladrey Alliance provides its members with access to resources of RSM US LLP (formerly known as McGladrey LLP). McGladrey Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. McGladrey®, the McGladrey Alliance logo and the McGladrey Alliance signatures are proprietary to RSM US LLP, while RSM™ is used under license by RSM US LLP.

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