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2016 Audit & Accounting Update

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It can be difficult to stay up to date on current accounting rules and regulations for businesses and not-for-profit organizations. This presentation discusses changes that may affect your organization and how to apply the most recent FASB standards and guidance.

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2016 Audit & Accounting Update

  1. 1. 2016 Audit & Accounting Update November 15, 2016 | Vince Leo, CPA and Mike Giess, CPA
  2. 2. Vince Leo, CPA Vince is a Partner in our Audit and Business Advisory Services Group. He has more than 30 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. www.inserocpa.com | 2Insero & Co. CPAs, LLP
  3. 3. Mike Giess, CPA Mike is a Partner in the Audit and Business Advisory Services Group. He has more than 25 years’ 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. www.inserocpa.com | 3Insero & Co. CPAs, LLP
  4. 4. Agenda – Overview – FASB Update – FASB Flashback – FASB Pipeline – Economic Outlook – Questions Insero & Co. CPAs, LLP www.inserocpa.com | 4
  5. 5. FASB UPDATE Insero & Co. CPAs, LLP www.inserocpa.com | 5
  6. 6. ACCOUNTING STANDARDS UPDATES Insero & Co. CPAs, LLP www.inserocpa.com | 6
  7. 7. SUMMARY ASU 2015-17 —Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ASU 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ASU 2016-02—Leases (Topic 842) – Section A—Leases: Amendments to the FASB Accounting Standards Codification® – Section B—Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification® – Section C—Background Information and Basis for Conclusions ASU 2016-03—Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council) Insero & Co. CPAs, LLP www.inserocpa.com | 7
  8. 8. SUMMARY (continued) ASU 2016-04—Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) ASU 2016-05—Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force) ASU 2016-06 —Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) ASU 2016-07 —Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting ASU 2016-08—Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Insero & Co. CPAs, LLP www.inserocpa.com | 8
  9. 9. SUMMARY (continued) ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ASU 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU 2016-11 —Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) ASU 2016-12—Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients ASU 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Insero & Co. CPAs, LLP www.inserocpa.com | 9
  10. 10. SUMMARY (continued) ASU 2016-14—Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ASU 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ASU 2016-17—Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control Insero & Co. CPAs, LLP www.inserocpa.com | 10
  11. 11. ASU 2015-17 • Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes • Part of the FASB Simplification Initiative • Current accounting: deferred taxes are presented as a net current asset or liability and net noncurrent asset or liability (for each tax jurisdiction). • New accounting: classify deferred taxes, and any related valuation allowance, as noncurrent – May effect financial ratios used in bank covenants • Effective date: – Public entity—for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods – All others—for financial statements issued for annual periods beginning after December 15, 2017 Insero & Co. CPAs, LLP www.inserocpa.com | 11
  12. 12. ASU 2016-01 Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities Affects the accounting for the following: 1. Equity investments 2. Financial liabilities under the fair value option 3. Presentation and disclosure requirements for financial instruments Note: will have biggest impact on certain financial institutions and companies with large equity investment portfolios not currently measured at fair value through net income Insero & Co. CPAs, LLP www.inserocpa.com | 12
  13. 13. ASU 2016-01 (continued) Equity Investments – Applicable to equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) A. Readily determinable fair values – Will generally be measured at fair value with changes in fair value recognized in net income – No longer have an available-for-sale classification for equity securities with readily determinable fair values (i.e., changes in fair value reported in other comprehensive income) Insero & Co. CPAs, LLP www.inserocpa.com | 13
  14. 14. ASU 2016-01 (continued) B. Equity investments without readily determinable fair values – Can elect to measure at cost less impairment, if any, plus or minus subsequent adjustments for observable price changes – Election only applies to equity investments that do not qualify for NAV practical expedient – Election can be made on an investment by investment basis – Changes in carrying value go through net income Insero & Co. CPAs, LLP www.inserocpa.com | 14
  15. 15. ASU 2016-01 (continued) Financial liabilities under the fair value option: • Changes in fair value of a liability resulting from a change in the instrument-specific credit risk are required to be recognized separately in other comprehensive income Presentation and disclosure requirements for financial instruments: • Non public entities—eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost • Public entities—continue to disclose fair value of financial instruments measured at amortized cost but no longer need to disclose the methods and significant assumptions used to estimate the fair value Insero & Co. CPAs, LLP www.inserocpa.com | 15
  16. 16. ASU 2016-01 (continued) Effective Date • Public entities—For fiscal years beginning after December 15, 2017 • All other entities– For fiscal years beginning after December 15, 2018 Insero & Co. CPAs, LLP www.inserocpa.com | 16
  17. 17. ASU 2016-02: Lease Accounting A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Insero & Co. CPAs, LLP www.inserocpa.com | 17 Right-of-use asset Lease payments Lessor Lessee
  18. 18. Lease Accounting: Scope Relief Insero & Co. CPAs, LLP www.inserocpa.com | 18 Short-Term Lease Exemption for Lessees Recognition and measurement exemption for leases with a term of 12 months or less
  19. 19. Lease Accounting: Lessee Model All leases are recognized on the lessee’s balance sheet Insero & Co. CPAs, LLP www.inserocpa.com | 19 Current U.S. GAAP New GAAP Capital Leases Finance Leases Operating Leases Operating Leases Classification is based on existing U.S. GAAP
  20. 20. Lessee Accounting Right-of-use asset and Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Insero & Co. CPAs, LLP www.inserocpa.com | 20 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
  21. 21. Lessee Accounting Lessee Accounting – Operating leases: • Expensed on a straight-line basis • Straight-line expense to reflect the interest on the liability and amortization of asset • Amortization = straight line expense less interest expense (amortization will grow as interest declines) • Lease expense will be presented as a single line item • Cash payments presented as operating activities on cash flow statement Insero & Co. CPAs, LLP www.inserocpa.com | 21
  22. 22. Lessee Accounting Lessee Accounting – Finance leases: • Declining expense pattern • Lease expense will equal interest on liability plus amortization of asset (generally straight-line) • Present interest expense and amortization of asset separately • No change in cash flow statement presentation Insero & Co. CPAs, LLP www.inserocpa.com | 22
  23. 23. Lessee Accounting Example • Mfg. Corp enters into a lease of non-specialized equipment with Lessor Corp. Insero & Co. CPAs, LLP www.inserocpa.com | 23 Lease term 3 years (no renewal option) Economic life 5 years Purchase option None Rent payments $5,000 monthly, escalating 3% annually Interest rate 7% Fair value of asset $300,000 Residual value guarantee None
  24. 24. Lessee Accounting Lease classification - example Insero & Co. CPAs, LLP www.inserocpa.com | 24 Transfer of ownership No – ownership of the asset does not transfer Option to purchase is reasonably certain No – the lease does not contain a purchase option Lease term is a major part of the economic life No – Mfg. Corp is utilizing the asset for only 60% of its economic life (3 year lease/5 year economic life) Present value of lease payments is substantially all of the fair value No – present value of the lease payments is $168,000, which is only 56% of the fair value of the leased asset ($168,000/$300,000) Specialized nature No – asset is non-specialized Conclusion Operating Lease
  25. 25. Lessee Accounting Operating lease accounting – lessee Initial recognition entry Year 1 entry to record the lease payment and expense Insero & Co. CPAs, LLP www.inserocpa.com | 25 Expense Liability Asset Payment Interest Principal Amortization Year A B C D A-C 1 61,820 60,000 9,110 50,890 52,710 2 61,820 61,800 6,414 55,385 55,406 3 61,820 63,660 2,350 61,311 59,470 185,460 185,460 17,874 167,586 167,586 Dr. Right-of-use asset 167,586 Cr. Lease liability 167,586 Dr. Lease expense 61,820 A Dr. Lease liability 50,890 D Cr. Cash 60,000 B Cr. Accumulated amortization 52,710 A-C
  26. 26. Lessee Accounting Finance lease accounting - lease Assume the same facts as the lease classification example except lease contains a bargain purchase option Initial recognition entry Year 1 Entry to record the lease payment and expense Insero & Co. CPAs, LLP www.inserocpa.com | 26 Asset Liability Expense Payment Interest Principal Amortization Year A B C D A+C 1 55,862 60,000 9,110 50,890 64,972 2 55,862 61,800 6,414 55,385 62,276 3 55,862 63,660 2,350 61,311 58,212 167,586 185,460 17,874 167,586 185,460 Dr. Interest expense 9,110 C Dr. Amortization expense 55,862 A Dr. Lease liability 50,890 D Cr. Cash 60,000 B Cr. Accumulated amortization 55,862 A Dr. Right-of-use asset 167,586 Cr. Lease liability 167,586
  27. 27. Lessee Accounting Financial statement impact - lessee Insero & Co. CPAs, LLP www.inserocpa.com | 27 Balance sheet, beginning of year Operating lease Finance lease Right-of-use asset 167,586 167,586 Lease liability (167,586) (167,586) Income Statement Lease expense 61,820 Amortization 55,862 Interest expense 9,110 Cash flow Statement Operating activities (60,000) (9,110) Investing activities Finance activities (50,890) Balance sheet, end of year Right-of-use asset 114,876 111,724 Lease liability (116,696) (116,696)
  28. 28. ASU 2016-03 Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council) • The amendments in this Update make the guidance in Updates 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. • The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this Update. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. Insero & Co. CPAs, LLP www.inserocpa.com | 28
  29. 29. ASU 2016-04 Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force) • Eliminates diversity in practice • Applies to entities that offer certain prepaid stored value products that can be redeemed for goods, services or cash (for example, prepaid gift cards, prepaid telecommunication cards, and traveler’s checks). • The issuers frequently experience breakage whereby consumers do not redeem the entire balance of their prepaid stored value cards. • New guidance requires issuers to recognize the expected breakage amount (derecognize the liability) either 1) proportionately in earnings as redemptions occur, or 2) when redemption is remote, if issuers are not entitled to breakage. Insero & Co. CPAs, LLP www.inserocpa.com | 29
  30. 30. ASU 2016-05 Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the EITF) • The term novation, as it relates to derivative instruments, refers to replacing one of the parties to a derivative instrument with a new party. • Issue: whether a change in the counterparty to a derivative instrument that has been designated as a hedging instrument, in and of itself, results in a requirement to de-designate that hedging relationship and therefore discontinue the application of hedge accounting. • Answer: No Insero & Co. CPAs, LLP www.inserocpa.com | 30
  31. 31. ASU 2016-06 Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) • Intended to eliminate current diversity in practice • Simplifies the embedded derivative analysis for debt instruments containing contingent call or put options • Clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts Insero & Co. CPAs, LLP www.inserocpa.com | 31
  32. 32. ASU 2016-07 Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting • Part of the Simplification Initiative • Eliminates the requirement to retrospectively apply the equity method of accounting when an investment qualifies for equity method accounting as a result of an increase in the level of ownership interest or degree of influence. • No longer required to adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods. Insero & Co. CPAs, LLP www.inserocpa.com | 32
  33. 33. ASU 2016-07 (continued) Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting • New accounting requires the cost of acquiring the additional interest in the investee to be added to the current basis and adopt the equity method as of the date the investment becomes qualified for equity method accounting. • Effective for all entities for fiscal years beginning after December 15, 2016. Insero & Co. CPAs, LLP www.inserocpa.com | 33
  34. 34. ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) • Amendment to new revenue recognition guidance issued in 2014 • Clarifies implementation guidance on principal versus agent consideration when another party is involved in providing goods or services to a customer • An entity is a principal if it controls the good or service prior to it being transferred to a customer Insero & Co. CPAs, LLP www.inserocpa.com | 34
  35. 35. ASU 2016-08 (continued) Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) • Indicators that an entity controls the good or service: – Entity is primarily responsible for providing the good or service – Entity has inventory risk before transfer of good or service – Entity has discretion in establishing price Insero & Co. CPAs, LLP www.inserocpa.com | 35
  36. 36. ASU 2016-08 (continued) Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Principal • Nature of an entity’s promise is to provide a specified good or service itself • Recognize revenue in the gross amount of consideration Agent • Nature of an entity’s promise is to arrange for a good or service to be provided by another party • Recognize revenue in the amount of any fee or commission Insero & Co. CPAs, LLP www.inserocpa.com | 36
  37. 37. ASU 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting • Includes provisions intended to simplify various aspects of how share-based payments are accounted for and presented in the financial statements • Key provisions include: – Income tax effects – Forfeitures – Minimum statutory tax withholding requirements • Some provisions apply only to nonpublic entities Insero & Co. CPAs, LLP www.inserocpa.com | 37
  38. 38. ASU 2016-09 (continued) Compensation—Stock Compensation (Topic 718): Improvements to Employee Share- Based Payment Accounting Income tax effects Insero & Co. CPAs, LLP www.inserocpa.com | 38 Current GAAP Simplification Excess tax benefits are recognized in APIC; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits are not recognized until the deduction reduces taxes payable. All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement (eliminates need to track a windfall pool). The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
  39. 39. ASU 2016-09 (continued) Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Forfeitures Insero & Co. CPAs, LLP www.inserocpa.com | 39 Current GAAP Simplification Accruals of compensation cost are based on the number of awards that are expected to vest. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or recognize forfeitures when they occur.
  40. 40. ASU 2016-09 (continued) Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Nonpublic entity only provisions Insero & Co. CPAs, LLP www.inserocpa.com | 40 Current GAAP Simplification Practical Expedient—Expected Term: Entities are required to estimate the period of time that an option will be outstanding. Can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions. Intrinsic Value: At initial adoption of Topic 718, Compensation—Stock Compensation, nonpublic entities were provided an option to measure all liability-classified awards at intrinsic value. Some entities were not aware of that option. Can make a one-time accounting policy election to switch from measuring all liability- classified awards at fair value to intrinsic value.
  41. 41. ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing • Amendment to new revenue recognition guidance issued in 2014 Identifying Performance Obligations • Clarifies how to determine whether a good or service is “separately identifiable” from other promises in the contract and, therefore, should be accounted for separately • Not required to identify promised goods or services that are immaterial in the context of the contract • May elect to account for shipping and handling activities after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service Insero & Co. CPAs, LLP www.inserocpa.com | 41
  42. 42. ASU 2016-10 (continued) Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Licensing • Categorizes IP into “functional” or “symbolic.” – Functional IP has significant standalone functionality (e.g., software, completed media content, drug formulas)—revenue generally recognized at a point in time – All other IP is considered symbolic IP (e.g., trade names, logos, franchise rights)—revenue recognized over time. Insero & Co. CPAs, LLP www.inserocpa.com | 42
  43. 43. ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) Insero & Co. CPAs, LLP www.inserocpa.com | 43
  44. 44. ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients • Amendment to new revenue recognition guidance issued in 2014 • Amendments cover the following: – Collectibility – Presentation of sales tax – Noncash consideration Insero & Co. CPAs, LLP www.inserocpa.com | 44
  45. 45. ASU 2016-12 (continued) Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients • Collectibility – When assessing collectibility, entities should consider their ability to cease providing goods or services in the event of nonpayment – Also clarifies when revenue would be recognized for non-refundable consideration received for a contract that fails to meet the collectibility threshold Insero & Co. CPAs, LLP www.inserocpa.com | 45
  46. 46. ASU 2016-12 (continued) Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients • Presentation of sales tax – Can elect to present sales taxes collected from customers on a net basis – Entities not making the election need to evaluate each type of tax to determine which amounts to present as revenue on a gross basis and which amounts to exclude from revenue as amounts collected on behalf of third parties Insero & Co. CPAs, LLP www.inserocpa.com | 46
  47. 47. ASU 2016-12 (continued) Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients • Noncash consideration – Amendments specify that the measurement date for determining the fair value of noncash consideration is contract inception – Also clarifies that the variable consideration guidance applies only to variability from reasons other than the form of the consideration Insero & Co. CPAs, LLP www.inserocpa.com | 47
  48. 48. ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Credit Losses: • Current US GAAP—companies generally recognize credit losses when it is probable that a loss has been incurred • New guidance—recognize an allowance for credit losses for the difference between amortized cost basis and the amount expected to be collected (aka Current Expected Credit Losses or CECL) • Estimate should consider historical and current information, and supportable forecasts Insero & Co. CPAs, LLP www.inserocpa.com | 48
  49. 49. ASU 2016-13 (continued) Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Available for sale debt securities: • Credit losses should be measured similar to current GAAP • Credit losses should be presented as a allowance rather than as a write-down • Change will allow for recording of reversals of credit losses in current period net income (current GAAP prohibits reflecting reversals in current earnings) Insero & Co. CPAs, LLP www.inserocpa.com | 49
  50. 50. ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities Net Asset Classification • Replaces the current presentation of three classes of net assets with two classes—net assets with donor restrictions and net assets without donor restrictions • Net asset classification of underwater amounts of donor restricted endowment funds will be classified as part of net assets with donor restrictions Insero & Co. CPAs, LLP www.inserocpa.com | 50
  51. 51. ASU 2016-14 (continued) Statement of Activities • Present the amount of the change in each of the two classes of net assets • Present investment return net of external investment expenses and direct internal investment expenses (narrower than what is permitted today)—requirement to disclose the amount of the netted expenses is eliminated • Present expenses by nature and function—can be presented on face of the statement of activities, as a separate statement, or in the notes Insero & Co. CPAs, LLP www.inserocpa.com | 51
  52. 52. ASU 2016-14 (continued) Cash Flows • Retains option to present cash flows using either the direct method or indirect method • If direct method is used—no longer need indirect method reconciliation Insero & Co. CPAs, LLP www.inserocpa.com | 52
  53. 53. ASU 2016-14 (continued) Enhanced Disclosures • Information about donor restricted net assets • Qualitative and quantitative information about liquidity resources • Methods used to allocate costs among program and support functions Insero & Co. CPAs, LLP www.inserocpa.com | 53
  54. 54. ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments • Intended to reduce diversity in practice in how certain items are classified in the cash flow statement • Main provisions: 1. Debt prepayment or debt extinguishment costs • Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities 2. Settlement of zero-coupon debt instruments • Classify as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal Insero & Co. CPAs, LLP www.inserocpa.com | 54
  55. 55. ASU 2016-15 (continued) 3. Contingent consideration payments made after a business combination • Cash payments made soon after the acquisition date (generally 3 months or less) should be classified as cash outflows for investing activities • Beyond that, payments made up to the amount of the contingent consideration liability should be classified as financing activities; any excess should be operating activities 4. Proceeds from the settlement of insurance claims • Classify based on the nature of the loss 5. Proceeds from settlement of corporate owned life insurance policies • Classify as investing activities Insero & Co. CPAs, LLP www.inserocpa.com | 55
  56. 56. ASU 2016-15 (continued) 6. Distributions received from equity method investees • Provides an accounting policy election to classify distributions received using either the cumulative earnings approach or nature of the distribution approach • Cumulative earnings approach: – Compare the distributions received to cumulative equity-method earnings since inception – Distributions received up to the amount of cumulative equity earnings are considered a return on investment and classified in operating activities – Any excess distributions would be considered a return of investment and classified in investing activities Insero & Co. CPAs, LLP www.inserocpa.com | 56
  57. 57. ASU 2016-15 (continued) • Nature of distribution approach: – Classify on the basis of the nature of activities of the investee that generated the distribution – Either a return on investment (operating activity) or return of investment (investing activity) 7. Beneficial interests in securitization transactions • A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity • Cash receipts from a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities Insero & Co. CPAs, LLP www.inserocpa.com | 57
  58. 58. ASU 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory • Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to an outside party. • The new guidance eliminates this exception for all intra-entity sales of assets other than inventory. • A reporting entity should recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. • Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. Insero & Co. CPAs, LLP www.inserocpa.com | 58
  59. 59. ASU 2016-17 Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control • Amendment to the consolidation guidance that was issued in 2015 (ASU-2015-12) • Under ASU 2015-12, a single decision maker of a variable interest entity (VIE) is required to consider indirect interests in the VIE held through related parties on a proportionate basis when assessing whether it is the primary beneficiary of that VIE, unless the single decision maker and its related parties are under common control. For common control situations, the single decision maker was required to consider indirect interests in an entity held through a common control related party to be equivalent of direct interests. Insero & Co. CPAs, LLP www.inserocpa.com | 59
  60. 60. ASU 2016-17 (continued) Example: No common control Single decision maker owns a 20% interest in a related party and that related party owns a 40% interest in the VIE being evaluated. The decision maker’s indirect interest in the VIE would be considered equivalent to an 8% direct interest (20% x 40%) in that VIE. Common control Assume the same facts as above except the related party is under common control. The interest in the VIE would be 40%, instead of 8%. Insero & Co. CPAs, LLP www.inserocpa.com | 60
  61. 61. ASU 2016-17 (continued) • ASU 2016-17 changes how an entity considers indirect interests in a variable interest entity held through an entity under common control by applying the proportionate basis approach to all situations • May make it less likely that an entity, in its standalone financial statements, will consolidate a VIE when it holds only a minor indirect interest in the VIE through a non-consolidated common control affiliate Insero & Co. CPAs, LLP www.inserocpa.com | 61
  62. 62. FASB FLASHBACK
  63. 63. FASB Flashback Insero & Co. CPAs, LLP www.inserocpa.com | 63 ASU Effective Date ASU 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments Public entities: Years beginning after December 15, 2015 All others: Years beginning after December 15, 2016 ASU 2015-11—Inventory (Topic 330): Simplifying the Measurement of Inventory Effective for years beginning after December 15, 2016
  64. 64. FASB Flashback Insero & Co. CPAs, LLP www.inserocpa.com | 64 ASU Effective Date 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) Public entities: Years beginning after December 15, 2015 All others: Years beginning after December 15, 2016 ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement Effective for years beginning after December 15, 2015
  65. 65. FASB Flashback Insero & Co. CPAs, LLP www.inserocpa.com | 65 ASU Effective Date ASU 2015-04—Compensation— Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets Public entities: Years beginning after December 15, 2015 All others: Years beginning after December 15, 2016 ASU 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs Effective for years beginning after December 15, 2015
  66. 66. FASB Flashback Insero & Co. CPAs, LLP www.inserocpa.com | 66 ASU Effective Date ASU 2015-01—Income Statement— Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items Effective for years beginning after December 15, 2015 ASU 2014-15—Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern Effective for years beginning after December 15, 2016
  67. 67. 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. Insero & Co. CPAs, LLP www.inserocpa.com | 67
  68. 68. 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. Insero & Co. CPAs, LLP www.inserocpa.com | 68
  69. 69. ASU 2015-07 (continued) Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) • 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. Insero & Co. CPAs, LLP www.inserocpa.com | 69
  70. 70. 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. Insero & Co. CPAs, LLP www.inserocpa.com | 70
  71. 71. 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. Insero & Co. CPAs, LLP www.inserocpa.com | 71
  72. 72. 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 Insero & Co. CPAs, LLP www.inserocpa.com | 72
  73. 73. FASB PIPELINE Insero & Co. CPAs, LLP www.inserocpa.com | 73
  74. 74. FASB Pipeline Insero & Co. CPAs, LLP www.inserocpa.com | 74 Project Status Timing Financial Instruments: Hedging Exposure draft Comment period ends November 22, 2016 Improvements to accounting for long-duration insurance contracts Exposure draft Comment period ends December 15, 2016 Accounting for goodwill impairment Drafting final standard Q4 2016 Accounting for interest income associated with the purchase of callable debt securities Exposure draft Comment period ends November 28, 2016 Clarifying the definition of a business Drafting final standard Q4 2016
  75. 75. FASB Pipeline Insero & Co. CPAs, LLP www.inserocpa.com | 75 Project Status Timing Liabilities & equity— targeted improvements Drafting ED Q4 2016 Non-profit general partner consolidation of a for-profit limited partnership ED redeliberations Nonemployee share-based payment accounting Initial deliberations Revenue recognition of grants and contracts by NFP entities Initial redeliberations
  76. 76. FASB Pipeline Insero & Co. CPAs, LLP www.inserocpa.com | 76 Project Status Timing Presentation and Disclosures • Pension and post retirement benefit cost Final standard Q1 2017 • Restricted cash Final standard Q4 2016 • Debt classification Exposure draft Q4 2016 • Inventory Exposure draft Q4 2016 • Defined benefit plans ED redeliberations • Fair value measurement ED redeliberations • Income taxes ED redeliberations • Interim reporting Initial deliberations • Entity’s decision process ED redeliberations • Financial statements for NFP (phase 2) ED redeliberations
  77. 77. FASB Pipeline Simplifying the accounting for goodwill impairment • Simplifies subsequent measurement of goodwill • Eliminates step 2 of the impairment test, which requires a hypothetical purchase price allocation to measure impairment loss • Impairment loss would instead be measured as the excess of the reporting unit’s carrying value over its fair value • Will apply to all entities except non-public entities that adopted the private company goodwill accounting alternative Insero & Co. CPAs, LLP www.inserocpa.com | 77
  78. 78. FASB Pipeline Improving the presentation of net periodic pension cost and postretirement benefit cost • ASU as proposed: – Would require an employer to report the service cost component in the same line item(s) on the income statement as other compensation costs – Other components pension/benefit cost would be presented in the income statement separately from the service cost component and outside of income from operations Insero & Co. CPAs, LLP www.inserocpa.com | 78
  79. 79. Q3 2016 ECONOMIC OUTLOOK - AICPA Insero & Co. CPAs, LLP www.inserocpa.com | 79 Source: https://www.aicpa.org/InterestAreas/BusinessIndustryAndGovernment/NewsAn dPublications/DownloadableDocuments/3Q_2016_EOS_ES.pdf
  80. 80. Insero & Co. CPAs, LLP www.inserocpa.com | 80
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  87. 87. Questions ? Insero & Co. CPAs, LLP www.inserocpa.com | 87
  88. 88. Thank you Thank you for your attendance at today’s program. For more information regarding the topics discussed today, please feel free to contact: Vince Leo, CPA vincent.leo@inserocpa.com (585) 697-9683 Mike Giess, CPA Michael.giess@inserocpa.com (585) 697-9639 Insero & Co. CPAs, LLP www.inserocpa.com www.inserocpa.com | 88Insero & Co. CPAs, LLP
  89. 89. Insero & Co. CPAs, LLP www.inserocpa.com | 89 Disclaimer These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that Insero & Co. CPAs, LLP 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 & Co. CPAs, LLP 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 & Co. CPAs, LLP 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. 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. RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US 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. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM™ logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

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