Insights 2015 - Accounting Update for Everybody - Chris Rouse

Accounting Update 2015
Chris Rouse

#WBInsights15
For Windham Brannon Clients and Friends
Presented by
Chris Rouse
Windham Brannon, PC
rouse@windhambrannon.com

#WBInsights15
• Current status of GAAP, IFRS, OCBOA,
AICPA, PCAOB, SEC, etc.
• Recent FASB Standards
• Some FASB Exposure Drafts

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Who are the Players in the Financial Reporting Arena
• Financial Accounting Standards Board (FASB)
• International Accounting Standards Board (IASB)
• American Institute of Certified Public Accountants
(AICPA)
• International Auditing and Assurance Services Board
(IAASB)
• U.S. Congress
• State Boards of Accountancy
• Public Company Accounting Oversight Board (PCAOB)
• Securities and Exchange Commission (SEC)

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• Financial Accounting Standards Board
– In recognition of world-wide need for
consistent accounting, in 2002 FASB and
IASB entered into the Norwalk Agreement,
followed in 2006 by a Memorandum of
Understanding
• Established a dozen or so key areas (“Projects”) for
accounting principles to be “converged”
• The SEC became involved with its “Roadmap” to
permitting US public companies to prepare their
financials using IFRS

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• Current status of financial reporting
• FASB and IASB Convergence Project
– Since 2006 MoU, approximately 9 of 12 projects
have been completed
• Projects remaining include leases, financial instruments
and insurance
– There are differences in measurement matters on all 3
projects
– Current situation – When current projects
completed, no more will be undertaken (IASB
Chair, Spring 2014)

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Current status of financial reporting
• SEC Roadmap to use of IFRS by US public companies
– 2008 Roadmap is suspended
• Provided for allowing certain US public companies to use IFRS
in 2014 – Indefinitely delayed
– SEC Staff Study in 2012
• Looking for IFRS improvements in consistency, education,
funding of the IASB and some other areas
– Current situation
• Stress between IASB and SEC
• SEC Chief Accountant says “US will need to have a strong
voice” in IASB standard setting
• SEC is funding IASB $5million annually

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Current status of financial reporting
• SEC Roadmap to use of IFRS
– December 2014 – SEC Chief Accountant says SEC will
seek input from interested parties as to whether
filers should be permitted to include as supplemental
info financial statements and/or disclosures prepared
using International Financial Reporting Standards
• To become effective, would be subject to Rule-making
process
• There could be some implementation in December 31,
2015 10k filings, but ….

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FASB Accounting Standards Updates
• 2015 – 16 ASUs issued thru November
19, 2015
• 2014 – 18 ASU’s issued
• Check out FASB web site for ASUs at
http://www.fasb.org/home, click on
“Standards” tab

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• Update No. 2015 – 16 – Business Combinations (Topic 805):
Simplifying the Accounting for Measurement-Period
Adjustments
– Applies to business acquisitions where there are provisional
amounts where fair values could not be determined as of the
financial statement date
– Changes current retrospective recognition of provisional
amounts to recognize when determined
– Effective for public entities for fiscal years beginning after
December 15, 2015 and interim periods within those years
– For non-publics effective for fiscal years beginning after 12-15-
2016 and interim periods after 12-15-2017

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• Update No. 2015 – 15 — Interest – Imputation of
Interest (Topic 835): Debt issuance costs
associated with line-of-credit (Amendments to
SEC paragraphs)
– Conforms SEC accounting to FASB (see ASU 2015-03)
• Update No. 2015-14 — Revenue from Contracts
with Customers (Topic 606): Deferral of the
effective date
– Delays by one year the effective date of ASU 2014-
09, Revenue from Contracts with customers

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• Update No. 2015 – 13 — Derivatives and
Hedging (Topic 815): Accounting for
certain electricity contracts
– Narrow topic to clarify hedge accounting
issues for traders in electricity contracts
– Simplifies determination of qualification as a
hedge

#WBInsights15
• Update No. 2015 – 12 — Employee Benefit Plan
Accounting
– Significant changes in accounting and disclosures for
employee benefit plans
– Part I – Fully Benefit-Responsive Investment Contracts
– Part II – Plan Investment Disclosures
– Part III – Measurement Date Practical Expedient
– Effective fiscal years beginning after 12-15-2015; early
application permitted
• Applied retrospectively

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• Update No. 2015 – 12 — Employee
Benefit Plan Accounting
– Part I – Fully Benefit-Responsive Investment
Contracts
• Removes current requirement to account for
guaranteed investment contracts at fair value,
requiring contract value be used for all reporting
• Also removes fair value disclosures for Contracts

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• Update No. 2015 – 12 — Employee Benefit
Plan Accounting
– Part II – Plan Investment Disclosures
• No longer required to disclose 5% investments,
appreciation by type investment, and investments by
class
– FASB said “does not provide decision useful information
(emphasis added)
• Will continue to present information by type investment

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• FASB Accounting Standards Updates
• Update No. 2015 – 12 — Employee
Benefit Plan Accounting
– Part III – Measurement Date Practical
Expedient
• Rarely applicable provision that defined benefit
plans with non-month end financial statement
dates can use month-end date to determine
investments and investment-related amounts
• ASU 2015-04 provides same provision for
sponsors

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• Update No. 2015 – 11 — Inventory (Topic 330):
Simplifying the Measurement of Inventory
– Changes “market” in LCM to Lower or cost or net realizable
value
• NRV is estimated selling price less cost to complete, dispose and
transport
• Does not apply to inventory valued using LIFO or Retail Method
– Required to write down “when evidence exists” that NRV is
lower than cost
– Effective for fiscal years beginning after 12-15-16
including interim periods for publics

#WBInsights15
• Update No. 2015-10 — Technical Corrections
and Improvements
– Clarifies some differences in Original Guidance and
the Codification – no GAAP changes
• Update No. 2015 – 09 — Financial Services—
Insurance (Topic 944): Disclosures about Short-
Duration Contracts
– New disclosures for insurance entities
– No effect on policy holders

#WBInsights15
• Update No. 2015-08 —Business
Combinations (Topic 805): Pushdown
Accounting—Amendments to SEC Paragraphs
Pursuant to Staff Accounting Bulletin No. 115
(SEC Update)
– Deletes SEC materials in Codification related to
push-down accounting, which is replaced by
ASU 2014-17

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• Update No. 2015-07 – Fair Value Measurement: Disclosures
for Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent) – (Course Manual p. 37)
– Applies to investments in private investment funds that do
not frequently or timely measure net asset value
– Removes requirement to categorize within the fair value
hierarchy assets measured using practical expedient
– Requires disclosures for assets measured using practical
expedient
– Effective years beginning after 12-15-15 for publics, and
after 12-15-16 for non-publics

#WBInsights15
• Update No. 2015 – 06 —Earnings Per Share
(Topic 260): Effects on Historical Earnings per
Unit of Master Limited Partnership Dropdown
Transactions (a consensus of the Emerging
Issues Task Force)
– Narrow application to Master Limited
Partnerships
– Effective date for years beginning after
December 15, 2015 and interim periods within
those years

#WBInsights15
• Update No. 2015-05 —Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud
Computing Arrangement (Course Manual p. 41)
– Provides for customers of cloud computing
arrangements to account for the arrangement as a
contract or a license, depending on its provisions
– Effective years beginning after 12-15-15

#WBInsights15
• FASB Accounting Standards Updates
• Update No. 2015-04 – Compensation—
Retirement Benefits (Topic 715): Practical
Expedient for the Measurement Date of an
Employer’s Defined Benefit Obligation and
Plan Assets
– Provides that an entity with a year-end that is
not a month end may use the month-end
valuation of a defined benefit plan for
measurement and disclosure purposes

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• Update No. 2015 – 03 —Interest—Imputation
of Interest (Subtopic 835-30): Simplifying he
Presentation of Debt Issuance Costs
– Simplifies presentation of debt premiums,
discounts and issuance costs by netting issuance
costs against the debt
– Effective years beginning after 12-15-15 for
publics, and 12-15-16 for non-publics. Early
adoption permitted

#WBInsights15
• Update No. 2015-02—Amendments to the
Consolidation Process
– Eliminates presumption that a General Partner
should consolidate a limited partnership
• To qualify for exemption, must have substantive kick-
out rights or participating rights
• To qualify for exemption, the general partner cannot
have a controlling financial interest (eg, through limited
partner interest)

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• Update No. 2015-02—Amendments to the Consolidation Process
(continued)
– Changes VIE considerations for partnerships, LLCs
• Fee arrangements that are customary and commensurate with
level of service are excluded when considering primary
beneficiary
• Reduces the application of related party interests to reporting
entity
– Effective for publics fiscal years beginning after 12-15-15, and
for non-publics years ending 12-31-17
– Changes would not impact private companies that have adopted
ASU 2014-07 (discussed earlier)

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• Update No. 2015-01—Elimination of the
concept of extraordinary items
– Just what it says
– Retains disclosure requirements for unusual
and infrequent items
– Effective fiscal years beginning after 12-15-
15, early adoption permitted

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• Update No. 2014-18—Business Combinations;
Accounting for identifiable intangible assets acquired
(consensus of Private Company Council) – Covered
earlier
– Permits private companies to include in goodwill-
• Customer related intangibles not capable of being sold or
licensed independently from other assets of the business (eg,
customer lists, mortgage servicing rights)
• Non-compete agreements
– To use this accounting, the entity must amortize goodwill
under ASU 2014-02
– Effective after 12-15-15, early adoption permitted

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• Update No. 2014-17—Business
Combinations: Pushdown Accounting (a
consensus of the FASB Emerging Issues Task
Force)
– Follows current practices closely
– Applies upon change of control
– Use amounts determined when applying
acquisition accounting
– Effective upon issuance

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• Update No. 2014-16—Derivatives and Hedging: Determining
Whether the Host Contract in a Hybrid Financial Instrument
Issued in the Form of a Share Is More Akin to Debt or to
Equity (a consensus of the FASB Emerging Issues Task Force)
– FASB may know what a liability is, but they are still trying
to figure out what an equity is
– Requires very detailed understanding of the contract
– Effective for publics fiscal years beginning after 12-15-15,
for non-publics for fiscal years ending after 12-15-16 .
Early adoption permitted

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• Update No. 2014-15; Going Concern
– Prior to this, going concern accounting was in audit and
SSARS Standards
– FASB started out with a “Business Risks” approach to going
concern
– FASB later moved to a 12 month – 24 month model
– FASB ended with a Standard very similar to current
GAAS/SSARS Standard
– Requires management to assess going concern for a period of
12 months from date financial statements are available to be
issued

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• Update No. 2014-15; Going Concern (continued)
– List of factors to consider included in Standard
• Negative financial trends
• Possible financial difficulties, e.g. loan defaults or need to
restructure loans, denial of trade credit
• Internal matters, e.g. labor issues, dependence on particular
projects, uneconomic long-term commitments, need to revise
operations
• External matters, e.g. legal matters, new legislation, loss of
key customer or supplier etc.
• Create a checklist of factors and complete checklist when
preparing financial statements

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(continued)
– When conditions identified that raise substantial
doubt, management should consider whether it’s
plans to mitigate those conditions will alleviate
the substantial doubt
• Mitigating effect considered only to extent …
– It is probable that plans will be effectively implemented,
and if so …
– It is probable that the plans will mitigate the conditions

#WBInsights15
(continued)
– If substantial doubt alleviated, disclose …
• Conditions and events giving rise to going concern, and
their possible effect(s) on the entity
• Management’s evaluation of those conditions and
events in relation to ability to meet obligations
• Mitigating conditions and events, and …
• Management’s plans to address the conditions and
events

#WBInsights15
(continued)
– If substantial doubt not alleviated, disclose
that there is substantial doubt about etc, and
the above disclosures of conditions,
obligations and plans
– Effective for the annual period ending after
December 15, 2016

#WBInsights15
• Update No. 2014-14; Classification of Government
Guaranteed Mortgage Loans Upon Foreclosure
– Applies to entities that own government guaranteed
mortgage loans
– Requires loans with guarantee to remain classified as loans
until title is passed to government
– Requires government guarantee amounts to be classified
as receivable
– Effective for publics 12-15-14, for non-publics ending
after 12-15-15

#WBInsights15
FASB Accounting Standards Update
The following updates were covered in last years Insights
and are repeated here as newly effective
• Update No. 2014-13; Measuring assets and liabilities of
consolidated financing entity
– Applies to special purpose entities of financial institutions
– Fine tunes the fair value accounting differences required
for VIEs and for financing entities that carry loans at fair
value
– Effective for publics beginning after 12-15-15, for non-
publics ending after 12-15-16

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• Update No. 2014-10; Development Stage Entities
– Including VIEs
– Removes definition of DSE from glossary
– Simplifies accounting for DSEs by removing all
“incremental financial reporting requirements”
• e.g., inception to date info
• e.g., disclosures re activities
• e.g., eliminates “sufficiency of equity at risk” criterion for
determining VIE status of DSEs
– Instead are subject to “regular” VIE considerations

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• Update No. 2014-10; Development
Stage Entities – Including VIEs
(continued)
– Required to apply “Risk and Uncertainties”
guidance
– Staged effective dates for elements, FY
beginning after 12-15-14

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• Update No. 2014-8; Discontinued operations
and disposal of a segment
– Narrows application of discontinued ops and
disposal of segment
• “strategic shift” that has “major effect” on operations
– Major geographical area
– Major line of business
– Major equity method investment
– Other examples in ASU

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• Update No. 2014-8; Discontinued operations and disposal of
a segment (continued)
– Additional disclosures required
• Major assets and liabilities
• Major revenues and expenses
• Cash flow information
• Non-controlling interest information
– Continuing involvement disclosures required
– If disposal does not qualify for discontinued/disposal
accounting, disclosures of income, etc required
– Effective FY beginning after 12-15-14; early application
permitted

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The New Revenue Recognition Standard Accounting
Standards Update 2014-09 Issued May 2014, now
effective for publics beginning 2018 and for non-
publics ending 2019
• Eliminates all industry and transaction guidance for
revenues in current standards
• Largest impact on service business, but potentially
will impact all businesses
• Prior periods presented may be either recast or
disclose the effect on prior financials

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The New Revenue Recognition Standard
• Overarching principle for recognizing revenue
– Core principle – Recognize revenue to depict the
transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods and
services
• In effect, revenue is recognized as changes in assets
and liabilities are recognized

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• Overarching principle for recognizing revenue
– Compare to Concept Statement #5 – “Revenues are
considered to have been earned when the entity has
substantially accomplished what it must do to be
entitled to the benefits represented by the revenues”
– Compare to current recognition principles
(1) persuasive evidence of transaction, (2) delivery
has occurred, (3) fee is fixed or determinable and
(4) collectability is assured

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• The following steps are used to apply the core principle
– Identify the contract with a customer
– Identify the separate performance obligations in the
contract
– Determine the transaction price
– Allocate the transaction price to the separate performance
obligations
– Recognize revenue when performance obligations satisfied

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• Getting ready for the new standard
– Study the parts of the new standard that
apply to you, and review the implementation
guidance on the FASB and AICPA websites
– Evaluate current contracts with customers
• Identify performance obligations and information
systems
• Identify transaction prices

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– Evaluate current revenue recognition
practices and compare to requirements of
new standard
• Communication of completion of performance
obligations
– Consider necessary changes in contract to
achieve desired revenue recognition timing
• Transfer of risks and rewards of ownership

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– Consider effect on compensation arrangements,
income taxes, etc.
• May effect timing of compensation based on revenue or
net income
• Some tax revenues are determined by GAAP
– Consider changes to information system to capture
necessary info
• Much of the information necessary to implement the new
standard does not exist in the accounting department

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– Point: This is a complicated standard
– the first time
– after that it’s a snap

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Some important accounting exposure drafts
• Leases
– Core principle – All leases will be capitalized based on the
present value of future lease payments
• Payments based on contract and contingent payments that
are likely to occur
• Indexed changes recognized as they occur
• Lease term includes non-cancellable period plus renewal
periods when “significant economic incentive” to renew is
present
• Discount rate is rate charged by lessor or lessee’s
incremental borrowing rate
• Non-publics could use risk-free discount rate option
• No specific guidance for measuring related party leases

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• Leases (continued)
– Financial statements
• Balance sheet, income statement and cash flow geography
changes
• Classify leases as Type A or Type B
– Type A leases are personal property and Type B leases are land
and buildings (or part of building)
– Type A leases …
» Separately recognize interest and amortization
– Type B leases …
» Recognize single lease cost

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– Disclosure
• Reconcile opening and closing asset and obligation, by
class
– Still considering non-public exemption
• Undiscounted maturities for 5 years and thereafter, less
interest portion
• Have added disclosures (vs. measurement) for service
elements of leases

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– Disclosure
• Lease expense in tabular format, including –
– Amortization
– Interest
– Variable payments not in amortization
– Expenses for any non-capitalized leases
• Future commitment for services or non-asset
component of leases

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• Financial instruments
– FASB and IASB cannot get together on certain
measurement matters
• Bad debt reserves
• Fair value
• Hedge accounting in limbo
– IASB has issued IFRS #9 on Financial Instruments
• Departs from FASB ED in the above 3 areas

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• Not-for-Profit Financial Reporting
– Numerous changes to format
• Combines restricted net assets into one line
• New approach to defining “operating activity” vs investing or
financing
• Adds a measure of operating excess(deficit) before and after
transfers
• Combines changes in restricted net assets
• Requires direct method for cash flows
• Requires expenses to be displayed “nature-by-function
• Displays “underwater” endowments

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• Not-for-Profit Financial Reporting (continued)
– Various additional disclosures
• Enhanced endowment disclosures
• New disclosures re board designations, liquidity
– Reporting of investment returns
• Netting limited to direct investment expenses
– Disclose any internal investment expenses
– Reporting of liquidity and financial availability
• Classified balance sheet
• Display limited use assets
• More disclosures re liquidity

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• Stock-Based Compensation (Simplification)
– No separate accounting for related income taxes
– Forfeitures could be estimated or recognized as they
occur
– Non-publics can elect practical expedient to estimate
expected term
– Non-publics can elect to switch from fair value to
intrinsic value
– Disclosures would not change significantly

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• Equity Method and Joint Ventures
(Simplification)
– Accounting for basis difference of equity method
investments is costly and complex and not
useful
– Proposal would recognize investment at cost
(current is to recognize at fair value)
– Continue to recognize equity in income of equity
method investees

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In Conclusion …..
Bon Auditpetite!
Contact Chris Rouse
Windham Brannon, PC
crouse@windhambrannon.com

Insights 2015 - Accounting Update for Everybody - Chris Rouse

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Insights 2015 - Accounting Update for Everybody - Chris Rouse