McGladrey/AICPA presentation at September 2014 Global Manufacturing Conference

Accounting and Financial
Reporting Update for 2014
An update on selected recent accounting and
reporting developments over the past year
#AICPAmanuf

Session Objectives
Gain an understanding of the recently issued
revenue recognition standard and its potential
impact on your organization
Understand and apply the new accounting
alternatives available to private companies
Comprehend certain other recently issued or newly-proposed
standards and their impacts
American Institute of CPAs #AICPAmanuf

Agenda
Summary of the new ASU on revenue recognition
FASB’s recently issued accounting alternatives for
private companies
AICPA’s financial reporting framework for small-and-medium
entities
Overview of selected other, new or proposed ASUs

Brian Marshall, CPA
brian.marshall@mcgladrey.com
Brian is a partner in the National Accounting Standards Group
of McGladrey LLP. His primary areas of expertise include
general revenue recognition, software revenue recognition,
asset impairments, and business combinations accounting.
Brian’s responsibilities include consulting with clients and
engagement teams on complex accounting issues associated
with these subject matters, facilitating training events for
McGladrey professionals and external participants and writing
interpretive guidance for McGladrey publications. He is also
responsible for monitoring standard setting by the FASB and
the FASB’s EITF and PCC, writing Firm comment letters on
proposed standards to the FASB and has been a member of
EITF working groups.
Brian is a certified public accountant in the states of
Connecticut and New York, and is a member of the AICPA.

Michael Hoffman, CPA
michael.hoffman@mcgladrey.com
Michael is a director with McGladrey. He is a member of
McGladrey’s National Accounting Standards Group in the
Firm’s Minneapolis MN office.
Michael provides McGladrey audit teams with technical
accounting guidance on a variety of topics. He also
provides accounting consultation advice to other CPA
firms that are part of the independent McGladrey
Alliance.
Michael’s formal education includes an MBA degree and
a BA degree (accounting) from the University of St.
Thomas (St. Paul, MN).

Fred Gill, CPA
fgill@aicpa.org
Fred Gill, CPA, is a senior technical manager with the
Accounting Standards Team at the American Institute of
Certified Public Accountants (AICPA). During 30 years
with the AICPA, he participated in the development of
numerous accounting pronouncements.
Fred was a member of the United States delegation to the
International Accounting Standards Committee (the
predecessor of the International Accounting Standards
Board) and developed the AICPA IFRS for SMEs – U.S.
GAAP Comparison Wiki.

New revenue recognition standard

Background
Scope
Core principle and five-step revenue model
Other selected changes
Effective date and transition

Background

Background
Final standard issued by FASB in May 2014
• ASU 2014-09, Revenue from Contracts with Customers (Topic
606)
Highlights
• Substantial convergence achieved with IASB’s newly issued
IFRS 15
• Single revenue recognition model for contracts with customers
that will affect almost all entities
- Elimination of the vast majority of industry-specific U.S.
GAAP on revenue recognition

Scope

Scope
Applies to all contracts with customers, except the
following:
• Lease contracts
• Guarantees other than warranties
• Insurance contracts
• Certain nonmonetary exchanges
• Various contractual rights or obligations related to financial
instruments
Who is the customer?
• The party that has contracted to obtain goods or services that
are an output of an entity’s ordinary activities
• Most of the time, shouldn’t require much analysis

Scope
Sales of nonfinancial assets that are not an output
of the entity’s ordinary activities
• With limited exceptions, guidance in ASC 606 on recognition,
measurement and whether a contract exists applies to these
sales
• Nonfinancial assets include tangible or intangible assets and in-substance
nonfinancial assets
• Example:
- Gain on manufacturer’s sale of equipment it used in the
manufacturing process

Core principle and five-step
revenue model

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 or services

Five-step revenue model

1. Identify the contract with a customer
Does a customer contract exist?
• Defined as an agreement between two or more parties that
creates enforceable rights and obligations
• Can be written, oral or implied based on the entity’s usual
business practices
Does the customer contract provide the unilateral,
enforceable right to each party to terminate the
contract with no compensation to the other party if
the contract is wholly unperformed?
• If so, no accounting consequences related to the contract

1. Identify the contract with a customer
Does the customer contract meet the following
criteria to be accounted for in accordance with
ASC 606’s revenue model?
• Commercial substance exists
• Approvals have been obtained and a
commitment to perform exists on the
part of both parties
• Rights of both parties are identifiable
• Payment terms are identifiable
• Collection of the amount to which the
entity will be entitled is probable
(i.e., likely to occur)
Reassessment of
these criteria
once met is only
required if there
is a significant
change in
circumstances

2. Identify the performance obligations
Identifying the unit of accounting
Two key steps:
• Identify all of the promises to provide/transfer goods or services
in the contract
• Determine whether the promises to provide/transfer goods or
services are performance obligations
- Performance obligations are accounted for separately

Identify all of the promises to provide/transfer goods
or services in the contract
• Consider both explicit and implicit promises
• Some are obvious, others may not be so obvious
• Every activity performed by the entity does not necessarily
represent the transfer of a good or service in and of itself

Determine whether the promises to provide/ transfer
goods or services are performance obligations
• Is the promised good or service distinct?
A promised good or service is distinct if it is both:
• Capable of being distinct
- When a customer can benefit from the promised good or
service on its own or by combining it with other readily
available resources
• Distinct within the context of the contract
- When the promised good or service is separately identifiable
from the contract’s other promised goods or services

3. Determine the transaction price
Transaction price is the amount of consideration to
which an entity expects to be entitled
• “Entitled” notion is what results in no consideration being given
to the customer’s credit risk
• Estimate is reassessed each reporting period until all
performance obligations have been satisfied
Components of transaction price could include:
• Fixed cash consideration
• Variable consideration
• Financing component
• Consideration payable to the customer
• Noncash consideration

Variable consideration
• Examples: Bonuses, penalties and price concessions
- Could be explicit or implicit
- Could affect whether consideration is paid at all or the
amount of consideration paid
• Accounting model:
- Estimate the amount of consideration the entity expects to
be entitled to
- Include the estimate in the transaction price only to the
extent that it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur (the
variable consideration constraint)

Variable consideration
• Exception to accounting model: Sales and usage-based
royalties on licenses of intellectual property (IP) are not included
in the transaction price until the later of:
- Resolution of the related uncertainty (i.e., sales or usage
occurs)
- Satisfaction of the related performance obligation in whole or
in part
• Cannot apply this exception to other fact patterns by analogy

4. Allocate the transaction price
Overall approach is to allocate transaction price
using a relative standalone selling price model
Steps in allocating the transaction price
• Estimate the standalone selling prices of each performance
obligation
• Determine whether any discounts or variable consideration
should be allocated to one or more, but less than all,
performance obligations
• Allocate the transaction price

4. Allocate the transaction price
Standalone selling prices
• The amount the entity charges (or would charge) when the
goods or services are sold on their own to a customer
• Determined only at contract inception
• Best evidence is the observable price charged by the entity
when they sell the goods or services separately in similar
circumstances to similar customers
• If observable price does not exist, must estimate a standalone
selling price
- Maximize observable inputs
- Consider all reasonably available and relevant information

5. Recognize revenue
Recognize transaction price allocated to a
performance obligation when (or as) it is satisfied
• Performance obligation is satisfied when (or as) control of the
underlying distinct good or service transfers to the customer
- Control has transferred when the customer has the ability to
direct the use of the good or service and receive
substantially all of the related remaining benefits

Indicators that control has transferred include:
• The entity has a present right to payment for the distinct good or
service
• One or more of the following have transferred/passed to the
customer
- Legal title to the distinct good or service
- Physical possession of the distinct good or service
- Significant risks and rewards of ownership
• The customer has accepted the distinct good or service
Key question:
• Is a performance obligation satisfied (and control of the
underlying good or service transferred) over time or at a point in
time?

A performance obligation is considered satisfied
over time if any one of these criteria are met:
• The customer simultaneously receives and consumes
benefits as the entity performs
• The entity’s performance creates or enhances an asset
that the customer controls as it is created or enhanced
• The entity’s performance does not create an asset with an
alternative use to the entity and there is an enforceable
right to payment for performance completed to date

Performance obligations satisfied over time
• Identify a single method by which to measure progress toward
complete satisfaction of the performance obligation, which is:
- A reasonable and reliable method
- If one cannot be identified, recognize revenue to extent
of costs incurred only if costs are expected to be
recovered and only until one can be identified
- Consistent with how control of the underlying goods or
services are transferred to the customer
• Input method or output method may be appropriate depending
on the facts and circumstances

Performance obligations satisfied at a point in time
• Recognize revenue when the customer obtains control over the
underlying good or service

Other selected changes

Warranties
Customer has option to purchase separately or
warranty provides an additional service
• Treat as a performance obligation
Customer does not have an option to purchase
separately and warranty does not provide an
additional service
• No revenue impact but must accrue expected costs
• Consider the following in determining whether warranty
provides an additional service:
- Whether warranty is required by law
- Length of warranty period
- Nature of tasks to be performed under warranty

Balance sheet presentation
Entity recognizes a contract asset or contract
liability by comparing its performance under the
contract to the customer’s performance
• Contract asset
- Entity’s performance > Customer’s performance
• Contract liability
- Entity’s performance < Customer’s performance
Receivables are only recognized for the
unconditional right to receive consideration
• Recognized separate from other assets

Disclosures
Objective is help financial statement users
understand the nature, amount, timing and
uncertainty of the related revenue and cash flows
Annual and interim disclosures required of public
entities
• Less on an interim basis, but mostly quantitative in nature
More disclosures required of public business
entities and certain nonprofit entities and employee
benefit plans
• However, disclosures for all others are still significant

Effective date and transition

Effective date
For public business entities and certain nonprofit
entities and employee benefit plans:
• Annual reporting periods beginning after December 15, 2016,
including related interim periods
• Early application is prohibited
For all other entities:
• Annual reporting periods beginning after December 15, 2017
and interim periods thereafter
• Early application is allowed; however, cannot adopt earlier than
the effective date for public business entities would otherwise
provide for

Transition
Choice between:
• Full retrospective application of the new guidance to all periods
presented
- May elect one or more of three practical expedients
• Recognition of a cumulative effect adjustment as of the date of
initial application of the new guidance
- Date of initial application is the first day in the period of
adoption
- New guidance only applied to customer contracts not
completed at the date of initial application
- Prior periods are not adjusted
- Disclose the effects on each line item in the financial
statements of applying the new guidance in the period of
adoption

FASB’s Recently Issued
Accounting Alternatives for
Private Companies

Private company goodwill alternative
Goodwill accounting alternative for private
companies provided by ASU 2014-02
What are the effects on a private company’s
financial statements if it elects the alternative?
• Amortize goodwill over a period not to exceed 10 years
• Choose to test goodwill for impairment at either the entity
level or reporting unit (RU) level
• Test goodwill for impairment only upon triggering event
• Test and measure goodwill for impairment by comparing
the fair value of the entity (or RU) to its carrying amount

Private company goodwill alternative
When is ASU 2014-02 effective?
• Annual periods beginning after December 15, 2014
• Early adoption is permitted if financial statements have not yet
been made available for issuance
• Amortization period for existing goodwill cannot exceed 10 years
What happens if a private company elects a private
company alternative, but then goes public or its
financial statements are included in an SEC filing?
• Must retroactively undo alternative

Private company interest rate swap
alternative
ASU 2014-03 provides a simplified hedge accounting
approach for receive-variable, pay-fixed interest rate
swaps used to convert variable rate borrowings to
fixed-rate borrowings if certain conditions are met
• Alternative not available to financial institutions
• Early adoption is permitted if financial statements have not yet
been made available for issuance

Private company interest rate swap
alternative
Benefits of electing alternative for qualified swaps
and borrowings:
• May elect on a swap-by-swap basis and assume no
ineffectiveness with the hedge relationship
- Although, should be confident criteria will be met through the
entire term of the swap; otherwise, could be negative
consequences
• May elect to measure the swap at settlement value instead of
fair value
• Date for which all documentation for the election is required to
be in place is the date the annual financial statements are
available to be issued
- Although, waiting could have negative consequences

Private company recognition of intangible
assets in a business combination
Private company accounting alternative proposed
by PCC in July 2013
• Separate recognition of only those intangible assets that arise
from the following, regardless of whether they are transferable
or separable:
- Contractual rights with noncancelable contractual terms,
which would be measured at fair value except would only
consider remaining noncancelable term
- Other legal rights, which would be measured at fair value
• Comments on proposal were not favorable
PCC’s subsequent redeliberations have taken them
in many different directions

PCC reached tentative decisions in July 2014 and
will revisit issue in September 2014
Tentative decisions would create an alternative that
would allow private companies to choose to:
• Not separately recognize intangible assets for
noncompete agreements
• Only recognize customer-related intangible assets if they
are capable of being sold or licensed independently from
other assets of the business
- Expectation is that not many would meet this hurdle
- Examples that may meet this hurdle include mortgage
servicing rights and commodity supply contracts

PCC also tentatively decided to:
• Add some qualitative disclosures about the types of intangible
assets that would not be separately recognized from goodwill
under the alternative
• Provide prospective transition
• Allow election of this alternative only if the goodwill alternative
has also been elected
Issues to be discussed in September 2014
• When are noncompetes part of a business combination and
covered by the alternative
• Scope of customer-related intangibles covered by the alternative

Would proposed new guidance be available for
companies to apply in calendar year end 2014
financial statements?
• Depends on a lot of factors, including:
- Will the PCC reach final decisions in September 2014?
- If they do, will they re-expose?
- Will the FASB endorse any proposed or final decisions?

Private company common control lease
alternative
ASU 2014-07 provides a private company
accounting alternative applicable to common control
leases
• If elected, an entity does not have to apply the VIE
accounting model to a common control lease if certain
criteria are met
• Early adoption is permitted if financial statements have not
yet been made available for issuance

alternative
Caution – If a private company elects the common
control accounting alternative, other applicable
guidance in the Codification would still need to be
applied
Capital lease analysis must still be performed
• Could have similar results as if had consolidated the VIE
Guarantees – the guarantor of another company’s
loan may need to record a liability for the fair value
of its obligation
• aka FIN 45 liability (now codified as ASC 460)
• Related-party guarantors are not scoped out of FIN 45’s
measurement requirement unless under common control

alternative
Four criteria must be met for a private company
lessee to elect the accounting alternative:
A.Lessee and lessor are under common control
B.Lessee has a lease arrangement with the lessor
C.Substantially all activities between the two entities are
related to the leasing activity between the two entities
D.If lessee explicitly guarantees (or provides collateral for)
any obligation of the lessor related to the leased asset,
then the principal amount of the obligation at inception
of the guarantee (or collateral arrangement) is not more
than the value of the leased asset

Definition of common control for purposes
of private company accounting alternative
Definition of common control not provided
Use approach to evaluate whether common control
exists in other contexts in U.S. GAAP
• However, it was anticipated that what qualifies as common
control for purposes of the private company accounting
alternative would be broader
- Expanded beyond traditional definition of “a married couple
and their children”

Common control vs. common ownership
Caution - simply having some level of common
ownership does not constitute common control
• For example, assume the following ownership interests and that
the owners are not family members:
Owner 1 Owner 2 Owner 3
Reporting Entity (Lessee) 40% 40% 20%
VIE (Lessor) 100% - -
• Although Owner #1 has ownership in both the Reporting Entity
(40%) and the VIE (100%), the two entities are not under
common control
- Owner #1 does not control Reporting Entity/Lessee
- Reporting Entity (Lessee) would not qualify for the PCC
accounting alternative

Other PCC projects
Agenda project: Definition of a public business
entity
• Syncing up related definitions to the extent practicable
Pre-agenda research being conducted on:
• Stock-based compensation
• Accounting for certain partnership transactions

AICPA’s
Financial Reporting Framework
for
Small- and Medium-Sized
Entities

AICPA’s FRF for SMEs
AICPA issued their Financial Reporting Framework
for Small- and Medium-Sized Entities in June 2013
Special-purpose framework
• Other comprehensive basis of accounting (OCBOA)
• Application is purely optional
Designed for use by small- and medium-sized
entities that are not required to provide financial
statements prepared in accordance with U.S. GAAP
• However, small- and medium-sized is not defined
• NASBA and AICPA have jointly developed a decision-making
tool and illustrative examples related to when the FRF for SMEs
is a suitable framework to apply
- Decision tool is available on the AICPA’s website

Principles-based framework
Measurement basis
• Primarily uses historical cost
• Some use of market value (which is not necessarily the same as
ASC 820 fair value)
Includes principles and guidance comparable to
guidance in:
• CICA Handbook published by The Canadian Institute of
Chartered Accountants
• U.S. GAAP
• IFRS for SMEs
• Income tax basis of accounting
• Cash basis of accounting

Examples of significant differences between FRF for
SMEs and U.S. GAAP
FRF for SMEs U.S. GAAP
Intangible assets All have finite useful lives
and are amortized
Some are indefinite-lived
and not amortized
Internally-generated
intangible assets
Choose between
expensing or capitalizing
costs incurred during
development phase if
certain criteria are met
Expense costs
associated with
internally-generated
intangible assets
Intangible assets
acquired in a
business
combination
Choose to either
separately recognize
intangible assets or
subsume into goodwill
Identifiable intangible
assets must be
recognized separate
Related PCC standard issufreodm o gr oporodpwoilslal pending

SMEs and U.S. GAAP
Goodwill If amortized for tax, use
tax life, otherwise
amortize over 15 years
Not amortized
Impairment of long-lived
assets
Long-lived assets are
depreciated or amortized
and are not tested for
impairment
Comprehensive
impairment models
provided for various
types of long-lived
assets
Derivatives Cash basis and no
hedge accounting
Provides
comprehensive
accounting model

SMEs and U.S. GAAP
FRF FRF for for SMEs SMEs U.U.S. S. GAAP
GAAP
Goodwill If amortized for tax, use tax
Choose between the equity
method and proportionate
consolidation
life, otherwise amortize over
15 years
Not amortized
Investments in
joint ventures
Impairment of long-lived
NCI in business
assets
combination
Long-lived assets are
depreciated or amortized
and are not tested for
impairment
Account for using equity
method if significant
influence exists
Comprehensive impairment
models provided for various
types of long-lived assets
Measure at proportionate
share of acquiree’s
identifiable net assets as of
the acquisition date
Derivatives Cash basis and no hedge
Consolidation Choose to consolidate
accounting
Measure at FV
Provides comprehensive
accounting model
based on control or use
equity method
Consolidation model
based primarily on
control
Variable interest
entities
Does not incorporate
concept
Provides
comprehensive
consolidation guidance

SMEs and U.S. GAAP
Income taxes Choose between a taxes
payable method and
deferred income taxes
method
Comprehensive
deferred income tax
accounting model is
provided
Uncertain tax
positions
concept
Provides specific
accounting model
Comprehensive
income
concept
Incorporates concept

SMEs and U.S. GAAP
Stock-based
compensation
Disclosure only Provides
comprehensive
accounting model
Defined benefit
plans
Choose between current
contribution payable
method or one of two
accrued benefit obligation
methods
Requires use of a
projected benefit
obligation method

Transition: Apply the FRF for SMEs to the opening
balance sheet
• Retrospective application
• Exemptions related to the following are provided:
- Business combinations
- Financial assets and liabilities
- Asset retirement obligations
• Prohibited from retrospective application of certain principles
related to the following:
- Derecognition of financial assets and financial liabilities
- Estimates
- Noncontrolling interests

If considering FRF for SMEs
• Understand the needs/requirements of the users of the financial
statements
• If FRF for SMEs is a viable option
- Understand why considering an alternative basis of
accounting
- Consider whether issues with current basis of accounting
can be addressed in other ways
- Discuss costs of transition

Other Recent Accounting
Developments

Other Recent Accounting Developments
Agenda
Recent FASB Developments:
• Selected Final Standards
• Selected Exposure Drafts
FASB/IASB Joint Projects
Other Standards and Projects

Selected Final Standards
• Going Concern
• Development Stage Entities
• Discontinued Operations
• Definition of a Public Business Entity

Going Concern
Final Standard
ASU 2014-15

Going concern
Prior to effective date of ASU 2014-15
• Auditor is required to assess going concern uncertainties
• GAAP does not require management to disclose any going
concern uncertainties
Acknowledgement that GAAP should address
going concern uncertainties
• FASB undertook a project to incorporate assessment and
disclosure of going concern uncertainties into GAAP
• Lots of twists and turns along the way, including two exposure
drafts
• The newly-issued ASU will require that management evaluate
whether there are conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern
- And make certain disclosures

Going concern
Management’s assessment and disclosures
• Disclosures required when there is substantial doubt about an
entity’s ability to continue as a going concern
• When does substantial doubt exist?
- When it is probable that the entity will not be able to meet its
obligations during the assessment period
- Evaluated in annual and interim reporting periods
What is the assessment period?
• Public entity: One year from the date the financial statements
are issued
• Nonpublic entity: One year from the date the financial
statements are available to be issued

Going concern
What disclosures would be required?
• Must state that there is substantial doubt about an entity’s ability
to continue as a going concern
• Principal conditions and events causing substantial doubt
• Management’s evaluation of the significance of those conditions
and events
• Any mitigating conditions and events, including management’s
plans
Effective date
• Effective for the annual period ending after December 15, 2016
and for annual periods and interim periods thereafter
• Early application is permitted

Development Stage Entities
Final Standard
ASU 2014-10

Development stage entities
A development stage entity (DSE) is one that devotes
substantially all of its efforts to establishing a new
business and for which:
a) planned principal operations have not commenced, or
b) those operations have commenced but have produced no
significant revenue
Existing GAAP requires a DSE to present:
• Same basic financial statements as established companies, plus
• Inception-to-date information about income statement line items,
cash flows, and equity transactions

ASU eliminates development stage entity guidance
• Removes all incremental financial reporting for DSEs
• Will reduce overall cost and complexity associated with financial
reporting for development stage entities (DSEs)
• Without reducing availability of relevant information
Key points
• Eliminates the formerly required “inception-to-date” information
• Entities that have not started planned operations will now be
required to disclose:
- The risks and uncertainties about their current development
activities
- How those activities will lead to revenue-generating
operations

Key points (continued)
• Removes an exception provided development stage entities for
determining whether an entity is a variable interest entity (VIE)
Effective date
• Public business entities:
1. Presentation and disclosure requirements:
- Annual periods beginning after December 15, 2014
2. VIE consolidation standards
- Annual periods beginning after December 15, 2015
• Private companies – have an additional year from the above
• Early adoption permitted

Discontinued Operations
Final Standard
ASU 2014-08

Discontinued operations
ASU is expected to result in fewer disposals being
classified as discontinued operations (disc ops)
Comparison of key changes from existing GAAP on
following slides ….

Current GAAP ASU 2014-08
Unit of accounting Component of an entity
A component of an
entity, a business or
nonprofit activity
Component of an
entity
No significant changes
Criteria for disc ops
treatment
Before a component is classified as disc ops, it
must either:
• Have been disposed of, or
• Be classified as held for sale
Held-for-sale
criteria

Current GAAP ASU 2014-08
Additional criteria
for disc ops
treatment
Both of the following will
be true about the
component after its
disposal:
• Its operations and cash
flows will be eliminated
from the ongoing
operations of the entity
• The entity will not have
any significant continuing
involvement in its
operations
Disposal of the
component represents
a strategic shift that
will have a major effect
on an entity’s
operations and
financial results

Current U.S. GAAP ASU 2014-08
Business meets
the held-for-sale
criteria upon its
acquisition
Similar provision does not
exist
Classified as disc ops
Equity method
investments
Similar provision does not
exist
Can qualify for disc
ops treatment if
applicable criteria are
otherwise met

Current U.S. GAAP ASU 2014-08
Income statement
presentation
Balance sheet
presentation
Limited changes, but makes it clear that assets
and liabilities of a disposal group classified as held
for sale should be reclassified for all prior periods
Cash flow
statement
presentation
Similar provision
does not exist
Disclose or present one of
the following for the disc op:
• Operating and investing
cash flows
• Depreciation,
amortization, capital
expenditures and
significant operating and
investing noncash items

ASU 2014-08
Disclosures
ASU includes a 3-page flowchart to help determine
which disclosures apply in a particular set of facts and
circumstances.
ASU expands disclosure requirements, including
information about:
• An individually significant component that has been
disposed of (or meets the held-for-sale criteria) but
does not rise to the level of a disc op
• Equity method investments reflected as disc ops
• Nature of the entity’s continuing involvement with a
disc op

Effective date
• Public business entities (and certain nonprofit entities) -
annual periods beginning on or after December 15, 2014
and interim periods in those annual periods
• Private companies - annual periods beginning on or after
December 15, 2014 and interim periods within annual
periods beginning on or after December 15, 2015
• Early adoption permitted in certain circumstances

Definition of a
Public Business Entity
Final Standard
ASU 2013-12

Definition of a public business entity
Provides a single definition of a public business
entity (PBE)
- Applicable to new guidance only
PBEs may not elect private company alternatives
A PBE is a business entity meeting any of the
following conditions:
- Required by SEC to file or furnish financial statements (or does
file or furnish financial statements) with the SEC, (including
other entities whose financial statements or information are
included in a filing)
- Required by the Securities Exchange Act of 1934 to file or
furnish financial statements with a regulatory agency other than
the SEC

A PBE is a business entity meeting any of the
following conditions (continued):
• Required to file or furnish financial statements with a foreign
or domestic regulatory agency to sell or issue securities that
are not subject to contractual restrictions on transfer
• Has issued, or is a conduit bond obligor for, securities that
are traded, listed, or quoted on an exchange or an over-the-counter
market
• Has securities that are not subject to contractual restrictions
on transfer, and it is required by law, contract or regulation
to prepare U.S. GAAP financial statements (including
footnotes) and make them publicly available on a periodic
basis

Is the company considered a PBE?
Facts Is it a PBE?
A private company that is a
consolidated subsidiary of a
public company
• Yes, for consolidated financial
statements of public company.
• No, for its own standalone
financial statements
A private company that controls a
public subsidiary that meets the
definition of a PBE
No
The Company’s financial
information is included in a filing
with the SEC pursuant to
Regulation S-X, Rule 3-05,
Financial Statements of
Businesses Acquired or to Be
Acquired
Yes

Facts Is it a PBE?
A bank with over $500 million in
assets required to file annual
audited financial statements with
the FDIC
Yes, if such a bank has one or
more securities not subject to
contractual restrictions on
transfer
A bank covenant requires the
Company to provide the bank
with quarterly U.S. GAAP
financial statements
No. Financial statements
provided to a lender or limited
number of lenders are not
considered publicly available

Is the company considered a PBE?
Facts Is it a PBE?
An LLC places its financial
statements on its website for its
members and a login and
password is required to access
these financial statements
No. Financial statements that can be
accessed on an entity’s website only
by members would not be
considered publicly available.
Furthermore, an entity must be
required (by law, contract or
regulation) to prepare and make
those financial statements publicly
available on a periodic basis, and
must also have one or more
securities not subject to contractual
restrictions on transfer.

Selected Exposure Drafts:
• Pushdown Accounting
• Measurement of Inventory
• Extraordinary Items

Exposure Draft
Pushdown Accounting

Push-down accounting
Exposure Draft issued April 2014
What is push-down accounting?
• Under pushdown accounting, the Acquirer’s accounting for the
business combination is pushed down to the Target’s separate
standalone financial statements
- A “new basis” is established for Target’s assets & liabilities
- Push-down accounting is only relevant if Target prepares
and issues separate standalone financial statements
• Under current U.S. GAAP, there is limited guidance for
determining when pushdown accounting should be applied
Existing guidance only applies to SEC registrants
• However, non-SEC registrants often apply SEC guidance
• Practice issues have arisen

Push-down accounting
Current guidance does not permit push-down
accounting unless Acquirer obtains has obtained
substantially all of the Target
• Substantially all is defined as at least 80% ownership of the
Target
Under proposed guidance, pushdown would be
optional upon acquisition by a new controlling
parent
• For example, pushdown would be allowed (but not required)
upon Acquirer obtaining 51% ownership of the Target
Next steps
• FASB considering comment letters (were due July 31)

Exposure Draft
Simplified Measurement
of Inventory

Simplified measurement of inventory
Exposure draft related to subsequent measurement
of inventory issued in July 2014
Part of FASB’s simplification initiatives
Inventory would be measured at the lower of cost
and net realizable value (NRV)
• Would no longer need to consider replacement cost or
NRV less an approximately normal profit margin
Effective date
• Change would be applied prospectively starting in annual
periods beginning after December 15, 2014 and interim
periods within those annual periods
• Early adoption would be permitted

Exposure Draft
Extraordinary Items

Extraordinary items
Exposure Draft issued July 2014
Exposure draft would eliminate the concept of
extraordinary items
• Part of FASB’s simplification initiative
• Reduce costs and complexity in financial reporting while
improving or maintaining the usefulness of information
Extraordinary item:
• An event or transaction that is both unusual in nature and
infrequent in occurrence
• In practice, few items meet the criteria

Extraordinary items
Current guidance requires an entity to separately
classify and present extraordinary items (net of
income tax) after continuing operations
• It’s often unclear when an item should be considered both
unusual and infrequent
The proposal would not result in loss of information
• Because presentation and disclosure guidance for items that are
unusual in nature or infrequently occurring would be retained
Proposal would be applied prospectively in annual
periods beginning after December 15, 2015
• Early adoption permitted

FASB/IASB Joint Projects:
• Leases
• Financial Instruments

FASB/IASB Joint Project
Leases

Leases
Most recent exposure draft (ED) issued in May 2013
• Many of the proposals in the ED have been reconsidered
during redeliberations and different decisions reached
Key decisions reached in redeliberations
• Lease classification
• Lessee accounting model
• Lessor accounting model
• Other

Leases
Lease classification
• FASB decided leases would be classified (as either Type
A or Type B leases) by both lessees and lessors
• Classification criteria (Type A or Type B) would be based
on those in IFRS, which are more principles based and do
not include any bright lines
Lessee accounting model
• Lessees would recognize assets and liabilities for leases
- Exception for short-term leases

Leases
Lessee accounting model - FASB
• Dual-approach for lessee accounting
- Leases classified as in-substance purchases
(similar to capital leases today) would be accounted for
as the purchase of a right-of-use asset
- Amortization would be recognized separately from
the interest on the lease liability
- All other leases (similar to operating leases today)
would be accounted for by generally recognizing total
lease expense on a straight-line basis
Lessee accounting model – IFRS
• In contrast to FASB’s decision, IFRS has decided to only
have one class of lease for lessees (Type A lease)

Leases
Lessor accounting model
• Limited changes to existing U.S. GAAP
• For leases that are in-substance purchases, recognition of
selling profit and revenue at lease commencement would
be tied to the transfer of control guidance in the new
revenue recognition standard

Leases
Other topics redeliberated:
Definition of a lease Definition of a short-term lease
Lease term Initial direct costs
Lease modifications and
contract combinations
Separating lease and nonlease
components
Variable lease payments Discount rates
Subleases Balance sheet presentation
Cash flow presentation
What’s next?
• Continued redeliberations
• Final ASU not anticipated until late 2015

FASB / IASB Joint Project
Financial Instruments

Financial instruments
Two parts to financial instruments project:
1. Classification and measurement
2. Impairment
Most recent exposure drafts (ED) proposed many
significant changes
• Classification and measurement ED issued in February 2013
• Impairment ED issued in December 2012
Redeliberations are ongoing
• Many of the proposals in both EDs have been reconsidered
during redeliberations and different decisions reached
• No current indication on FASB’s website regarding when final
ASUs will be issued

Financial instruments – classification
and measurement
Key decisions reached in redeliberations
• Most equity securities would be required to be classified
as trading, with changes in fair value recognized in net
income (FV-NI)
• Equity method of accounting would be retained
• Practicability exception for equity securities without a readily
determinable FV that do not qualify for net asset value practical
expedient in ASC 820-10-35-39
- Measure at cost minus impairment plus or minus changes
resulting from observable price changes in orderly
transactions for the identical investment or a similar
investment of the same issuer
- Not available to investment companies or broker dealers

and measurement
Key decisions reached in redeliberations (cont.)
• Existing guidance on how to recognize and measure the
following will be retained:
- Loans
- Debt securities
- Hybrid financial instruments and embedded derivatives
- Loan commitments
- Revolving lines of credit
- Commercial letters of credit
- Foreign currency gains and losses on debt securities
classified as available for sale (AFS)
• Existing guidance on fair value option also retained

and measurement
• Assessment of a valuation allowance for a deferred tax asset
(DTA) related to an AFS debt security would be made in
combination with the entity’s other DTAs rather than discretely
• If an entity uses FV option to measure a financial liability at FV,
the change in FV caused by instrument-specific credit risk would
be reflected separately in other comprehensive income (FV-OCI)
- Except for derivative liabilities, for which changes in FV
caused by entity’s credit risk would be FV-NI

and measurement
Fair value disclosures for financial assets and
liabilities measured at amortized cost
• Only public business entities would be required to make
disclosure
- Receivables and payables due in less than a year and
demand deposit liabilities would be excluded
• Other entities would not be required to provide the disclosures
Many other existing disclosures retained and new
disclosures added
What’s next?
• Continued redeliberations on several topics, including
disclosures and effective date

Financial instruments – impairment
• Current expected credit loss (CECL) model
- Will be used to measure impairment losses for financial
assets measured at amortized cost (AC), which will
significantly accelerate recognition of expected credit
losses (ECL)
- CECL model used for debt securities classified as AFS only
if FV is less than AC and the ECL recognized would be
limited to the difference between FV and AC
- For a debt security subsequently identified for sale,
impairment allowance would be adjusted to equal difference
between FV and AC basis

Financial instruments – impairment
• Clarifying guidance will be provided on how to estimate lifetime
ECL
What’s next?
• FASB will continued redeliberations of the CECL model
• Unit of account guidance related to expected losses on financial
assets measured at FV-OCI
• Disclosures
• Effective date and transition
No convergence of U.S. GAAP with IFRS
• IASB has already issued their new standard on financial
instruments

Other Standards and Projects
Summary List

Other standards and projects (non-PCC)
Standard or project Status
ASU 2014-14 Troubled Debt Restructurings
by Creditors: Classification of Certain
Government-Guaranteed Mortgage Loans
upon Foreclosure
Issued August 2014
ASU 2014-13 Measuring the Financial
Liabilities of a Consolidated Collateralized
Financing Entity
Issued August 2014
ASU 2014-12 Accounting for Share-Based
Payments When the Terms of an Award
Provide That a Performance Target Could Be
Achieved after the Requisite Service Period)
Issued in June 2014
ASU 2014-11 Repurchase-to-Maturity
Transactions, Repurchase Financings and
Disclosures
Issued in June 2014

ASU 2014-06 Technical Corrections and
Improvements Related to Glossary Terms
Issued March 2014
ASU 2014-05 Service Concession
Arrangements
Issued January 2014
ASU 2014-04 Troubled Debt Restructurings
by Creditors: Reclassification of Residential
Real Estate Collateralized Consumer
Mortgage Loans upon Foreclosure
Issued January 2014
ASU 2014-01 Accounting for Investments in
Qualified Affordable Housing Projects
Issued January 2014
Accounting for the Effect of a Federal Housing
Administration Guarantee
Final ASU forthcoming
Insurance: Disclosures about Short-Duration
Contracts
ED issued in June 2013,
Redeliberations ongoing

Determining Whether the Host Contract in a
Hybrid Financial Instrument Is More Akin to
Debt or to Equity
ED issued in Oct 2013
Redeliberations ongoing
Customer’s Accounting for Fees in a Cloud
Computing Arrangement
ED issued in August 2014
Disclosure Framework (Board’s Decision
Process)
ED issued in Mar 2014
Disclosure Framework: Disclosure Review –
• Defined benefit plans
• Fair value
• Income taxes
• Inventory
• Interim reporting
Initial deliberations

Government Assistance Disclosures Initial deliberations
Clarifying the Definition of a Business Initial deliberations
Investment Companies: Disclosures about
Investments in Another Investment Company
Financial Statements of Not-for-Profit
Entities
Clarifying Certain Existing Principles on
Statement of Cash Flows
Simplify presentation of debt issuance costs Newly added project
Simplify the measurement date for defined
Newly added project
benefit plans

Simplify the balance sheet classification of
debt
Newly added project
Accounting for income taxes Newly added project
Fair value hierarchy levels for certain
investments measured at NAV
Newly added EITF project
Effects on historical earnings per unit of
master limited partnership dropdown
transactions
Newly added EITF project

McGladrey thought leadership
Financial Reporting Resource Center
www.McGladrey.com/FRRC

McGladrey thought leadership
Publications subscription site
www.mcgladrey.com/subscribe

McGladrey Contact Information
Michael Hoffman
* michael.hoffman@mcgladrey.com
( 612.455.9442
Brian Marshall
* brian.marshall@mcgladrey.com
( 203.312.9329

Thank you!

McGladrey/AICPA presentation at September 2014 Global Manufacturing Conference

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McGladrey/AICPA presentation at September 2014 Global Manufacturing Conference

Editor's Notes