© Grant Thornton LLP. All rights reserved. FASB Update John Hepp Partner Accounting Principles June 18, 2014 The ITLC/NAFC 2014 Annual Conference & Exhibition.

© Grant Thornton LLP. All rights reserved.

FASB Update

John HeppPartnerAccounting Principles

June 18, 2014

The ITLC/NAFC 2014 Annual Conference & Exhibition

© Grant Thornton LLP. All rights reserved. 22

Disclaimer

This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered.

For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser.

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• Recently issued guidance

• FASB projects

• Private Company Council projects

• EITF issues

• Convergence projects

Update on FASB standard-settingAgenda


A surge of activity in 2014

Including the first major convergence standard since 2008


Recently issued guidanceFinal ASUs – 1st Half 2014

ASU Title Effective date – public business entities

Effective date – other entities

2014-01 Accounting for Investments in Qualified Affordable Housing Projects *

Annual periods and interim periods within those annual periods, beginning after December 15, 2014

Annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015

2014-02 Accounting for Goodwill ** Not applicable Annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015

2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps - Simplified Hedge Accounting Approach **

Not applicable Annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015

*A consensus of the FASB Emerging Issues Task Force**A consensus of the Private Company Council



ASU TitleEffective date – public business entities


2014-04 Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure *

Annual periods, and interim periods within those annual periods, beginning after December 15, 2014

Annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015

2014-05 Service concession arrangements *

Annual periods, and interim periods within those annual periods, beginning after December 15, 2014

Annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015

2014-06 Technical Corrections and Improvements Related to Glossary Terms

Upon issuance – March 14, 2014

Upon issuance – March 14, 2014

2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements**

Not applicable Annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015

*A consensus of the FASB Emerging Issues Task Force**A consensus of the Private Company Council



ASU TitleEffective date – public business entities


2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

Annual periods and interim periods beginning after December 15, 2014

Annual periods beginning on or after December 15, 2014 and interim periods beginning after December 15, 2015

2014-09 Revenue from Contracts with Customers

Annual periods and interim periods beginning after December 15, 2016

Annual periods beginning after December 15, 2017 and interim periods beginning after December 15, 2018

2014-10 Development Stage Entities (Topic 915)

Annual periods beginning after December 15, 2014, and interim periods therein.

Annual periods beginning after December 15, 2014, interim periods beginning after December 15, 2015

2014-11 Transfers and Servicing (Topic 860)

The first interim or annual period beginning after December 15, 2014

Annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015


ASU 2014-01Accounting for Investments in Qualified Affordable Housing Projects

• Option to apply a proportional amortization method that recognizes the cost of the investment as a part of income tax expense, if certain conditions are met

• Significantly loosens criteria that must be met

• Applies only to Low Income Housing Tax Credits and should not be analogized for other tax credits

• Effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted

• One-year delay for interim reporting for all other entities


ASU 2014-04Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

• Derecognize the loan receivable and recognize real estate property when in-substance repossession or foreclosure

• Occurs when either:– Lender obtains legal title to the residential property upon

completion of a foreclosure– Borrower conveys all interest in the residential property

to the lender to satisfy the loan through a deed in lieu of foreclosure or a similar legal document

• Effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted

• One-year delay for interim reporting for all other entities


ASU 2014-05Service Concession Arrangements

Public sector entity Private sector

entity

Infrastructure

operate


ASU 2014-05Service Concession Arrangements, continued

Scope

Service concession arrangements between private-sector operating entity and public-sector grantor when arrangement meets both of the following:

1. Grantor controls, or has ability to modify/approve, the services by operating entity, who provides the services, and at what price

2. Grantor controls, through ownership, beneficial entitlement or residual interest in infrastructure at end of arrangement


ASU 2014-05Service Concession Arrangements, continued

Operating entity cannot apply:

• ASC 840, Leases, accounting guidance to the service concession arrangement

• ASC 360, Property, Plant and Equipment, guidance to the infrastructure in a service concession arrangement

Apply other guidance such as ASC 605, Revenue Recognition, to account for revenue and costs related to construction, upgrade, or operation of services


ASU 2014-08Discontinued operations

Scope applies to either:

• Component of an entity, or a group of components, that is either disposed or classified as held for sale

• Significant equity method investments

• Business or nonprofit activity classified as held for sale upon acquisition

New guidance does not apply to oil and gas properties accounted for under the full-cost method.


ASU 2014-08Discontinued operations

Definition:

Discontinued operation

Component of an entity, a group of components of an entity, a business, or a nonprofit activity whose disposal marks a strategic shift that has or will have a major effect on an entity's operations and financial results

Continuing involvement/cash flows no longer a factor in classification

But information still needs to be disclosed


Discontinued operationsExamples

Example Strategic shift Major effect on operations

Major effect on financial results

Cleaning products manufacturer disposes discount product line

Management shifts strategy to focus on premium cleaning product line

Discount cleaning product line is one of five major product lines

Discount cleaning product line represents 15% of total revenue

Retailer disposes of mall store operations

Net income has declined at mall stores compared to supercenter stores due to reduction in mall traffic. Management shifts strategy to focus solely on supercenter stores

Mall stores represent 1/5th of the entity's total stores

Mall stores represent 15% of total net income


ASU 2014-08Discontinued operations - presentation

Balance sheet:

• Present separately the assets and liabilities of the discontinued operation in all periods (including prior periods when not yet classified as held for sale)

Income statement:

• Separately report discontinued operation's results as a separate component of income before extraordinary items

• Present or disclose the gain or loss on disposal separately


New disclosures about continuing involvement

• A description of the nature of activities giving rise to the continuing involvement

• The expected duration of continuing involvement

• The amount of cash inflows and outflows from and to, respectively, the discontinued operation after its disposal

• Revenues and expenses presented in continuing operations after the disposal that were previously eliminated in the consolidation process


ASU 2014-08Discontinued operations – effective date and transition

• Public business entities, NFP's that have issued or are conduit bond obligors for market securities, and acquisitions classified as held for sale: Effective for annual periods beginning on or after December 15, 2014 and for interim periods within those years.

• All other entities: Effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015.

• Prospective application

• Early adoption permitted for disposals or held for sale classifications not previously reported



• FASB projects


• EITF issues


Update on FASB standard-setting activitiesAgenda


FASB project updateSummary

Project Status

Going concern Final 2Q 2014

Development stage entities Issued June 10

Transfers and servicing: Repurchase agreements and similar transactions

Final 2Q 2014

Investment companies – Disclosures about investments in another investment company

ED 2Q 2014

Financial statements of not-for-profit entities ED 2H 2014

Technical corrections and improvements ED 2H 2014

Disclosure framework – Board's process Comment period ends July 14


FASB project updateSummary, continued

Project Status

Consolidation: Principal versus agent analysis Deliberations

Accounting for goodwill for public business entities and not-for-profits

Deferred

Government assistance disclosures Deliberations

Clarifying the definition of a business Deliberations

Disclosure framework – Entity's decision process

Deliberations

Insurance – Disclosures about short-duration contracts; Targeted improvements to the accounting for long-duration contracts

Deliberations


FASB project updateSummary, continued

Project Status

Clarifying certain existing principles on statement of cash flows

Deliberations

Customer's accounting for fees in a cloud computing arrangement

Deliberations

Simplifying the subsequent measurement of inventory

Deliberations

Simplifying income statement presentation by eliminating extraordinary items

Deliberations


FASB project updateGoing Concern – recent developments

• Early-warning disclosure requirement removed • Modified SEC-filer requirement to assess for 24 months

after balance sheet date• All entities to assess for substantial doubt for one year from

financial statement issuance (available for issuance) date• Substantial doubt definition to incorporate "probable"

likelihood• Management to consider mitigating plans if probable to

alleviate adverse conditions and be effectively implemented• Disclosures when substantial doubt exists and when it has

been alleviated


Proposed Concepts StatementConceptual Framework for Financial Reporting

• Board's decision process part of disclosure framework project

• Help the Board identify relevant information for disclosure• Address interim reporting disclosure requirements

– Differences in measurement, recognition, and presentation between interim and annual statements

– How interim results relate to entire year• Expectations about the future would not be disclosed

unless supports a measurement in the financial statements• Comments due July 14



• FASB projects


• EITF issues




Private Company CouncilProject update

Project Status

Accounting for Identifiable Intangible Assets in a Business Combination

Redeliberations

Definition of a public business entity Deliberations


ASU 2014-02Accounting for Goodwill

Scope:

• Goodwill arising from a business combination

• Goodwill resulting from equity method accounting or fresh-start reporting

• If elected, alternative must be applied to all goodwill


Example:Acquisition of Entity A where Entity A's major asset is a license with a life of eight years.Entity A concludes that amortizing goodwill over the life of the license is more appropriate than over 10 years.

ASU 2014-02Accounting for Goodwill, continued

Amortization (change from ED):

• Straight-line basis over 10 years

• Shorter life may be used if more appropriate



Impairment:

• Elect to test for impairment at either:

– Entity level

– Reporting unit level

• Test for impairment only when triggeringevent occurs

• Option to first perform qualitative assessment to determine if quantitative test is needed

• No impairment review of equity method goodwill



Derecognition:

• Allocate goodwill to business being disposed of in determining gain/loss on disposal

• Allocate using a "reasonable and rational approach"

Presentation requirements:

• Separate line item in balance sheet

• Split amortization and impairment between continuing and discontinued operations (if any) in the income statement


ASU 2014-02Effective date and transition

• Effective prospectively for new goodwill in annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015.

• Goodwill existing at the beginning of the period of adoption is amortized prospectively over ten years(or less if more appropriate)

• Early adoption permitted including forannual or interim period for which financial statements have not beenmade available


ASU 2014-03Simplified hedge accounting approach

Scope:• Private companies, other than financial institutions• Receive-variable, pay-fixed interest rate swapsAll the following criteria must be met:• Variable rate on swap and borrowing is based on same index

and reset period• Swap is "plain-vanilla" interest rate swap• Re-pricing and settlement dates match• Swap's fair value at inception is at or near zero• Swap's notional amount matches debt's hedged principal

amount• Interest payments are designated as hedged


ASU 2014-03Simplified hedge accounting approach, continued

ASU 2014-03 provides flexibility in application:

1. May apply on a swap-by-swap basis

2. May apply to arrangements where variable interest is based on an index not identified as a benchmark in existing ASC 815, Derivatives and Hedging

3. Any cap or floor in debt must have comparable cap or floor in the swap

4. Re-pricing and settlement dates do not need to match exactly; can be within "a few days"

5. Swap's fair value at inception does not have to be zero; can be "near zero"



Relief from existing guidance:• May assume no ineffectiveness• May measure at settlement value rather than fair value

– Difference is that settlement value does not reflect nonperformance risk

• May defer completion of hedge documentation until the date when the first annual financial statements are available for issuance after hedge inception

Note: At the point the hedge no longer satisfies the alternative criteria, then must prospectively account for using ASC 815



NO RELIEF FROM:1. Compliance with existing cash flow hedge

documentation requirements:• Entity must document methods they intend to use to

assess effectiveness and measure ineffectiveness– May use "critical terms match" approach to

documentation• Quarterly re-assessment

• Assess counterparty credit risk

2. Disclosure requirements under ASC 815 and ASC 820



• Effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015.

• Early adoption permitted

• Must elect, on a swap-by-swap basis:

– Modified retrospective approach

– Full retrospective approach


ASU 2014-07VIE exemption for common control leases

Scope:

• Lease arrangement between the two entities

• Private company lessee and the lessor must be under common control

• Leasing activity with the lessor must be substantially all of the activity between the two entities

• If lessee explicitly guarantees/provides collateral for any obligation of the lessor, the principal amount of the obligation at inception cannot exceed the value of the asset leased


ASU 2014-07VIE exemption for common control leases, continued

Accounting:• Allows private companies an exemption from the requirement to

consolidate the lessor under common control in existing variable interest entity (VIE) guidance

• Alternative must be applied to all leasing arrangements with current and future lessors under common control

Disclosure:• Key terms of arrangement• Amount and description of lessee's exposure to lessor's

liabilities• Qualitative description of circumstances where lessee may

need to provide financial support to lessor• VIE disclosures not required


VIE exemption for common control leasesSale and leaseback to/from a VIE

• The proposal does not provide relief from sale and leaseback accounting, including continuing involvement.

• A "failed sale" will continue to be reflected on the balance sheet.



• Effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015.

• Retrospective application

• Early adoption permitted


Reception for the PCC standards

N = 1,028 CFOs responding


Goodwill the most common relief

N = 771 Private Company CFOs responding


Public companies would if they could

N = 232 Public Company CFOs responding



• FASB projects


• EITF issues




EITF updateProject Roster

Issue Title Status

13-D Accounting for Share-Based Payments When the Terms of an Award Allow a Performance Target to Be Achieved after the Requisite Service Period*

Final 2Q 2014

12-F Recognition of New Accounting Basis (Pushdown) in Certain Circumstances*

Comment period ends July 31

12-G Measuring the Financial Assets of a Consolidated Collateralized Financing Entity*

Final 2H 2014

13-G Determining Whether the Host Contract in a Hybrid Financial Instrument Is More Akin to Debt or to Equity*

Final 2H 2014

13-F Accounting for the Effect of a Federal Housing Administration Guarantee

Deliberations

*Discussed in March 2014 meeting




• FASB projects


• EITF issues



Status updateFASB/IASB convergence projects

Project Status

Financial instruments:

Classification and measurement Final 2H 2014

Impairment Final 2H 2014

Revenue recognition Issued May 2014

Leases Redeliberations


Revenue recognition modelA matter of control (even for services)

• Control – the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, an asset (also includes preventing others from directing the use of, or obtaining the benefits from)

• Revenue recognized upon satisfaction of a performance obligation (promised goods or services are transferred)

• Transfer occurs when the customer obtains control

In the original proposal, no provision for partial performance


Revenue recognition modelThe compromise

• Control transfers either over time or at a point in time – Must first evaluate if over time– If not, then point in time


Revenue recognition modelTransfer models

Over time

Meet at least one of the following:• Customer receives and consumes benefits as

vendor performs OR• Customer controls asset as created OR• No asset with alternative use to vendor AND

vendor has a right to payment for work to date and expects to fulfill the contract

At a point in time

Indicators of control transfer to customer:• Right to receive payment for asset• Legal title to the asset• Physical possession of the asset• Significant risks and rewards of ownership• Acceptance


Revenue recognition modelRecognition over time

Right to payment for performance completed to-date:• Must be entitled to an amount that compensates for

performance to-date, including a profit margin• Must be enforceable

Asset with no alternative use:• Assessment includes effects of contractual restrictions and

practical limitations– Contractual restriction: entity expects customer would

enforce rights if entity tried to direct asset to another use– Practical limitation: incur significant economic losses to

direct asset to another use


Revenue recognition modelThe new "percentage of completion"

• Recognize revenue by measuring progress toward completion

• Objective is to faithfully depict the entity's performance– Output methods – direct measurements of customer

value such as milestones reached or units produced– Input methods – based on vendor's efforts such as

costs incurred, labor hours, or time lapsed• Recognize revenue to the extent of costs incurred if unable

to reasonably measure progress, but expect to recover costs

• Update progress each reporting period


Revenue recognition model Effective date

• For a public entity: effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period

– Early application is not permitted

• For other entities: effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018

– May elect to apply this guidance earlier 2018


Revenue recognition model Transition Option 1

Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

• For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

• For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed.

• No need to provide disclosures about transaction price allocated to remaining performance obligations or an explanation of when the entity expects to recognize that amount as revenue for periods presented before the date of initial application.


Revenue recognition model Transition Option 2

Retrospectively with the cumulative effect recognized at the date of initial application.

If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

• The amount by which each financial statement line item is affected in the current reporting period compared to the guidance that was in effect before the change

• An explanation of the reasons for significant changes.


Leases A mad dash to finalize a standard in 2014


Type A and Type B Leases

Type A Type B

Interest and amortization recognized similar to a financing arrangement (potential front-loading)

Single Lease Expense (SLE): recognize interest the same way but recognize amortization on an increasing basis to achieve straight-line expense


Commentary

• Type B accounting for lessees achieves straight-line expense recognition but does so in a complicated way.

• Both Type A and Type B lease accounting may require more monitoring and reassessment than current lease accounting models.

• The FASB appears to be more sensitive to the reassessment issue than the IASB


March 18-19, 2014 UpdateBoards consider four lessee accounting models

• Approach 1 – A single approach for all leases, accounting for all leases as the purchase of a ROU asset and a loan

• Approach 1A – A dual approach that would permit (but not require) lessees to account for most real estate leases as Type B leases (that is, recognizing a single lease expense (the average rent) rather than amortization and imputed interest separately).

• Approach 2 – A dual approach, with lease classification similar to that proposed in the 2013 ED with virtually all equipment leases being Type A leases, while most real estate (including integral equipment) leases would be Type B leases.

• Approach 3 – A dual approach, with lease classification determined in accordance with the risks and rewards principle in existing GAAP.


Lessee Accounting ModelA split decision

Approach 1 – A single approach for all leases, accounting for all leases as the purchase of a ROU asset and a loan

Approach 3 – A dual approach, with lease classification determined in accordance with the risks and rewards principle in existing GAAP.

There is a conceptual difference between the IASB and the FASB as to the unit of account: the real asset or the right of use asset.


Commentary:Reading the tea leaves

• Higher probability that the FASB will conform to the IASB than the opposite

• BUT less urgency around convergence than there was ten years ago


Lessor modelsA radical change…or none at all

A piece of cake Type B lease:

• Apply an approach similar to existing operating lease accounting

• Continue to recognize the underlying asset

• Recognize lease income over the lease term


March 18-19, 2014 meeting updateA choice of models

• Approach 1 –Determine lessor classification (Type A vs. Type B) based on whether the lease is effectively a financing/sale using IAS 17 like classification tests

• Approach 2 – Determine lessor classification as Type A or Type B in the same manner as Approach 1. However, in order to recognizing selling profit at lease commencement, the lease would have to transfer control to the lessee using sale criteria per the Revenue Recognition standard.

• Approach 3 – An approach that would determine lessor lease classification (Type A vs. Type B) based on the lessor’s business model.


March 18-19, 2014 meeting updateA choice of models

Approach 1 –Determine lessor classification (Type A vs. Type B) based on whether the lease is effectively a financing/sale using IAS 17 like classification tests

Approach 2 – Determine lessor classification as Type A or Type B in the same manner as Approach 1. However, in order to recognizing selling profit at lease commencement, the lease would have to transfer control of the asset using sale criteria per the Revenue Recognition standard.


Short term leasesthe original proposal

• An exception is provided for leases of up to one year with NO POSSIBILITY of renewal

• Those leases are accounted for as a service contract: no asset or liability on the balance sheet


Short term leasesMarch 18-19, 2014 Update

• Should the definition of short term lease be lengthened beyond 12 months?

• Should the definition of short term exclude all leases with an option to renew or only renewal options where the lessee has a significant economic incentive to exercise?

• What should be the required disclosure?


Short term leasesMarch 18-19, 2014 Update

• The Boards decided not to extend the term to longer than 12 months for determining if a lease is exempt due to its short term nature

• The Boards voted to amend the definition of lease term so that a one year lease with renewal options could qualify for the short term lease exemption if there is no economic incentive to exercise the options

• The Boards decided to disclose rent expense as well as explanatory information about commitments arising from short term leases


Commentary

• Far more leases will qualify for the short term exception

– Investment by the lessee in leasehold improvements will preclude use of the exception

– So will termination penalties

• The FASB was less amenable to excepting small ticket items like copiers, computers, even cars – no specific materiality exception. The IASB may go this route.

• The Boards also lost enthusiasm for a portfolio approach for small items (no change in practice)


Next steps

• Bound and determined to get out a standard

• Bound and determined that lessees will put leases on the balance sheet

• Little appetite for changing lessor accounting

• No appetite for re-exposure

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© Grant Thornton LLP. All rights reserved. FASB Update John Hepp Partner Accounting Principles June 18, 2014 The ITLC/NAFC 2014 Annual Conference & Exhibition.

Documents

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annual periods

interim periods

agenda slide

private company council

guidance final asus

fasb standard

proposed guidance