DECOSIMO ACCOUNTING SEMINAR GAAP Update May 13, 2014 Richard L. Townsend, Ph.D, CPA Associate Professor Emeritus of Accounting University of Tennessee.

DECOSIMO ACCOUNTING SEMINAR

GAAP UpdateMay 13, 2014

Richard L. Townsend, Ph.D, CPAAssociate Professor Emeritus of Accounting

University of Tennessee

• Overview

• Selected FASB ASC Updates

• Selected FASB and FASB/IASB Exposure Drafts

• FASB Private Company Council

• Selected FASB ASC Updates – Private Company

• Other

FASB ASC 2013-04 (Topic 405)Obligations Resulting from Joint and Several Liability

Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date

• Objective is to provide guidance for recognition, measurement, and disclosure of obligations resulting from joint and several arrangements for which the total amount is fixed at the reporting date.

• Examples of items within the scope of this proposal include debt arrangements, other contractual obligations, and settled judicial and litigation rulings.

• These type obligations are to be measured as the total of– The amount the entity agreed to pay based on

arrangements with co-obligors– Any additional amount the entity expects to pay in

place of its co-obligors

• Entity must disclose nature and amount and other information about the obligations

• The amendments are effective for periods beginning after 12/15/13. The effective date for nonpublics is periods beginning after 12/15/14.

• Amendments should be applied retrospectively to all prior periods for all liability arrangements that exist at the date of adoption.

• Entities may elect to use hindsight for comparative periods

FASB ASC 2013-07 (Topic 205)Liquidation Basis of Accounting

• An entity should prepare statements on a going concern basis unless liquidation is imminent

• Liquidation occurs when an entity converts its assets to cash and settles its obligations with creditors in anticipation of ceasing activity

• Liquidation is imminent when likelihood is remote that the entity will exit the liquidation and either:

• (a) A liquidation plan has been approved by one with authority and it is remote that liquidation will not occur

• (b) A liquidation plan is imposed by others

• Assets and liabilities should be shown at the amount of cash expected to be received or paid

• Also include any assets not recognized under GAAP• Costs expected to accrue or income to be earned during

liquidation are included, as well as disposal costs• Financial statements in this situation should have titles

such as “Statement of Net Assets in Liquidation” and “Statement of Changes in Net Assets in Liquidation”

• Disclosure should include liquidation plan and significant assumptions used in measurement of accounts

• Disclose expected duration of the liquidation• Effective for periods beginning after 12/15/13

FASB ASC 2013-12 Definition of Public Business Entity

An amendment to the Master Glossary

• This provides a single definition of a public business entity for GAAP

A business entity (this excludes Not-For-Profit and employee benefit plans) that meets any of the following criteria is a public business entity:

• Required by the SEC to file or furnish financial statements with SEC• Required by SEC 1934 Act to file or furnish statements with a

regulatory agency• Required to file with regulatory agency in order to issue securities• It has (or is a conduit bond obligor for) securities to be traded on an

exchange or over-the-counter• Its securities are not subject to restrictions on transfer and it is

required to prepare US GAAP financial statements pursuant to a legal, contractual or regulatory requirement

FASB ASC 2014-08 (Topic 205)Reporting Discontinued Operations and Disclosures …

• A discontinued operation is a component or group of components that has been disposed of and is a shift that will have a major effect on the entity’s operations

• This shift could be a disposal of a major geographical operating area or a major line of business

• Examples are given of such a disposal but the term “major” is not defined

• It also could be a business that, when acquired, meets certain criteria to be classified as held for sale.

• A component comprises operations and cash flows that are clearly distinguishable operationally and for financial reporting purposes from the other part of the entity

• Included among new disclosures for discontinued operations would be the major sources of income and expense for the discontinued operation

• Additional disclosures would be operating and investing cash flow activities for the discontinued operations

• Reconciliations are required for major classes of assets and liabilities for the discontinued operation as well as other reconciliations

• There are also disclosures required for disposals of material components that do not qualify as discontinued operations, including profit or loss for the current period

• In addition to this proposal making it more difficult for a disposal of a component to be considered a discontinued operation, there are other changes in that– An entity can now have continuing involvement with

the discontinued operation after the disposal transaction

– An entity can now continue to have operations and cash flows with the discontinued operation but disclosure must include cash flows with this operation

• This guidance will be effective for public companies for annual periods and interims beginning on or after 12/15/14

• The effective date for private companies is annual periods beginning on or after 12/15/14 and interims after 12/15/15

• All entities may adopt early• For comparative periods, the entity must reclassify

assets and liabilities of the discontinued operation• Guidance to be applied prospectively after effective date

FASB Exposure Draft (Topic 810)Principal versus Agent Analysis

(issued November, 2011)

• This proposal concerns asset manager of funds and whether the manager is a principal or is an agent representing the fund’s investors

• A decision-making arrangement must be assessed to determine if it represents a variable interest

• If the other entity is a variable interest entity and the reporting entity has the controlling financial interest, the other entity must be consolidated

• For voting interest entities, the principal versus agent analysis would include determining whether the limited partners or noncontrolling shareholders are involved in the activities that most affect the entity’s activities

• This amendment would require a separate qualitative analysis to determine whether the decision maker is acting as a principal or an agent

• The evaluation to determine whether the decision maker is a principal or an agent considers:– Rights held by other parties– Decision maker’s compensation– Decision maker’s exposure to variability of returns from other

interests that it holds in an entity– Related parties– Voting interest entities

• This proposal would change the evaluation of whether a general partner controls a limited partnership – it’s no longer assumed that a general partner controls but may be a principal or an agent

FASB Exposure Draft (Topic 860)Effective Control for Transfers with Forward Agreements to

Repurchase Assets and Accounting for Repurchase Financing

• Background – A sale or a secured financing?• A transfer of a financial asset with an agreement entitling

and obligating the transferor to repurchase the asset from the transferee is considered to maintain the transferee’s effective control if all of the following exists:– The financial asset to be repurchased at settlement is identical

to or substantially the same as the asset transferred at inception– A fixed or readily determinable repurchase price– The agreement to repurchase is entered at the same time with,

or in contemplation of, the initial transfer

If effective control does exist, the transaction must be accounted for as a secured borrowing

• “Substantially the same” is when the transferor is in an economically equivalent position with the return of the asset as compared with the identical asset

• The transferor would account for the initial transfer apart from the related repurchase financing

• If transfer accounted for as a borrowing, the transferor would disclose the total amount of borrowing separated into the class of assets pledged as collateral

• If assets are derecognized only because they are not “substantially the same”, transferor must disclose the carrying amount of any asset derecognized

• In May, 2013 the FASB decided not to change the accounting for financial asset transfers as proposed in this Exposure Draft but instead only require more disclosure

• In October the FASB tentatively decided that repo-to-maturity transactions were secured borrowings (as the ED stated originally)

• Also, as in the original ED, the Board decided that repurchase agreements should be accounted for separately from the initial transfer

• In December the Board affirmed the October decision

FASB Exposure Draft (Topic 205)Disclosure of Uncertainties about an Entity’s Going

Concern Presumptions(Issued June, 2013)

• Financial statements are prepared with a presumption of going concern unless liquidation is imminent

• When liquidation is imminent, a liquidation basis is required under FASB ASC 2013-07

• There is no GAAP guidance for preparing financing statements when liquidation is not imminent but where there are uncertainties about the entity’s continuation as a going concern.

• This proposal provides GAAP guidance for preparers on management’s responsibilities for evaluating and disclosing going concern uncertainties

• At each reporting period the entity would evaluate going concern uncertainties and would provide disclosure when it is either:– (a) More likely than not that the entity will be unable to meet its

obligations within 12 months of the financial statement date without taking actions outside the normal business activity or

– (b )Known or probable that the entity will be unable to meet its obligations within 24 months of the financial statement date without taking actions outside the normal business activity

• In making this determination, management must consider all information existing at the date of the financial statements

• Also to be considered are any mitigating factors that are within normal business activity

• If either of the time thresholds are met, disclosure must include in the footnotes a description of:

• Principal conditions and events giving rise to this situation

• Possible effects these would have on the entity• Management’s assessment of these conditions and

events• Any mitigating conditions or events• Management’s plans to address the potential inability of

the entity to meet its obligations

• An SEC filer must evaluate whether there is substantial doubt as to a going concern presumption

• If there is substantial doubt, this must be disclosed – including the words “substantial doubt” and “ability to continue as a going concern” or similar wording

• Substantial doubt would exist if after assessing all the factors just described – including actions outside the ordinary business activity by management – the conclusion is that it is known or probable that the entity will be unable to meet its obligations within 24 months of the financial statement date

• Non SEC filers would have to apply all of the disclosure requirements of this guidance but would not be required to evaluate or disclose whether there is substantial doubt about the entity being a going concern

Revenue Recognition

• Background• Current GAAP

– Recognize Revenue when realized or realizable and when earned – FASB Concept Statement No. 5

– Recognize Revenue when:• Persuasive evidence of an arrangement exists• Delivery has occurred• The vendor’s fee is fixed or determinable• Collectability is probable

SEC Staff Accounting Bulletin 101

FASB Exposure Draft (Topic 605)Revenue from Contracts with Customers

(Revised November, 2011 but later revisions included and expected in Update to be issued by end of June)

• The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled in exchange for those goods and services.

• To apply the core principle, an entity must:• a) identify the contract(s) with a customer• b) identify the separate performance obligations in the

contract• c) determine the transaction price• d) allocate the transaction price to the separate

performance obligations• e) recognize revenue when (or as) the entity satisfies

each performance obligation

• Identify the contract(s) with a customer• An agreement between two or more parties that creates

enforceable rights and obligations • Contracts can be written, oral or implied by customary

business practices• Guidance is included, however, to specify when an entity

would combine two or more contracts

Identify the separate performance obligations in the contract

• A performance obligation is an enforceable promise in a contract with a customer to transfer a good or service to the customer

• If more than one good or service is provided, account for each distinct good or service as a separate performance obligation

• A good or service is distinct if:– the entity or another entity sells an identical or similar

good or service separately or– The customer can benefit from the good or service

either on its own or with other readily available sources

• Goods or services in a bundle are not distinct if both the following are met:

• The goods or services are highly interrelated and the entity must provide significant service to integrate the goods or services into the contracted item

• The bundle of goods or services is significantly modified to fulfill the contract

• The entity must determine whether its performance obligation requires acting as a principal or as an agent

Determine the transaction price

• The transaction price is the amount of consideration that an entity receives, or expects to receive, from a customer in exchange for transferring goods and services promised in the contract. In many instances this price is readily determinable because it is a fixed amount

• If the amount is variable (discounts, incentives, performance rewards, etc.), an entity would recognize revenue from satisfying an obligation if the transaction price can be reasonably estimated. (continued)

• A transaction price can be reasonably estimated only if:– the entity has experience with similar types of

contracts (or access to information) and– the entity’s experience is relevant to the contract

because the entity does not expect significant changes in circumstances

The amount recognized as revenue would be constrained to the amount that management believes is probable would not be subject to significant reversal

• When considering the transaction price, an entity would consider:

– time value of money – significant financing?– noncash consideration – fair value– consideration payable to the customer

Customer Credit Risk

• Should this be a reduction in revenue or an expense?• Management needs to consider facts and circumstances• If, at the beginning of the contract, is it likely that entity

will have to make a price concession?• If so, this is a reduction in revenue • If, instead, this receivable becomes impaired over time, it

is bad debt expense

Allocate the transaction price to the separate performance obligations

• Allocate the transaction price to all separate performance obligations in proportion to the standalone selling prices of the goods and services. If standalone price not observable, it should be estimated

• If circumstances change, the entity would update the transaction price and allocate the changes to the separate obligations

Recognize revenue when a performance obligation is satisfied

• Recognize revenue when performance obligation is settled by transferring the promised goods or services. A good or service is considered settled when the customer has control of that good or service

• Entity must determine whether performance obligation settled over time or at a point in time

(continued)

• A performance obligation is settled over time if:• The entity’s performance creates or enhances an asset

that customer controls during creation or enhancement• The entity’s performance does not create an asset with

an alternative use to the entity and the customer does not have control over the asset created, and the entity has the right to payment for performance completed to date and it expects to fulfill the contract

• When the entity satisfies the performance obligation, it would recognize revenue in the amount of the transaction price that was allocated to the settled obligation

• When the performance obligation is satisfied over time, progress is measured using either output methods or input methods

• An entity should select a method that shows the transfer of control of the goods or services to the customer

• This might be during production or upon the delivery of the goods or services

Licenses of Intellectual Property (IP)

• A license providing a right to use IP is recognized as revenue when control has been transferred and the period of the license begins

• A license allowing access to the entity’s existing IP results in recognizing revenue over time

• If not settled over time, the performance obligation is settled at a point in time. This determination should be made by considering the following indicators of control:

• Entity has present right to payment• Customer has legal title• Entity has transferred physical possession• Customer has significant risks and rewards

of ownership• Customer has accepted the asset

• This proposal also specifies the accounting for some costs. Often the cost of obtaining a contract is expensed when incurred.

• If no other standard covers a cost incurred in fulfilling a contract, the cost would have to be expensed unless it relates directly to a contract, generates resources that will be used to satisfy future obligations or is expected to be recovered

• This proposed standard applies to all entities that have contracts with customers – public, private and not-for-profit

• Certain contracts with customers would be excluded. For example, those covered by the lease guidance, investments in debt and equity securities, receivables, debt, insurance contracts, financial instruments, derivatives and guarantees

• Disclosures include quantitative and qualitative information:

• Reconciliation of contracts with customers• Significant judgments and changes• Any assets recognized from contracts • Revenue by primary categories • Analysis of remaining performance obligations (Nonpublic entities can omit reconciliations)

• For public entities, the effective date would be for periods beginning after 12/15/16. Private companies would have an additional year. Early adoption not permitted

Transition

• Retrospectively apply to all period periods or• Apply to all new contracts and apply to current contracts

with cumulative effect taken in retained earnings• Some practical expedients are included in guidance

FASB Exposure Draft (Topic 840) Leases (revision issued in May, 2013)

• A single, “right-of-use”, method for lessees• Guidance for both lessees and lessors• Most leases will be on the balance sheet• Simplified accounting for short leases – those with a

maximum possible lease term of 12 months or less• Short leases are accounted for in a similar way to current

operating leases - no effect on Balance Sheet.• Final pronouncement now scheduled for 2014 but still

much controversy surrounding this proposal

Draft applies to all leases except for:

• Intangible assets (software, patents, licenses)• Exploration for or use of minerals, oil, natural gas, and

other similar resources• Biological assets• Must distinguish between a lease and a service

A lease is defined in this draft as “a contract in which the right to use a specified asset is conveyed, for a period of

time, in exchange for consideration”

• A contract would contain a lease if the substance of the contract includes the following:

• The fulfillment of the contract depends on the use of a specified asset and

• The contract conveys the right to control the use of the asset for a period of time in exchange for consideration

• A contract would include control if the lessee has the ability to direct and benefit from use of a specified asset the entire term

• A specified asset is one that is explicitly or implicitly identifiable

• The exclusive use by a customer of a physically distinct portion of a larger asset is a specified asset

• If lease contains more than one asset, must identify and account for each component as a separate lease

• If lease contains both land and building, do not allocate lease payments

Lessee

• Must recognize an asset representing the right to use the leased item for the lease term - measured at the present value of the lease payments plus any initial direct costs

• Must recognize a liability for its obligation to pay the rentals for the lease term - measured at the total of the present values of the lease payments

• Discount rate is lessor’s implicit rate of return, if known – if unknown, use lessee’s incremental borrowing rate (nonpublic entities may choose to use a risk-free discount rate for this measurement)

When the lessee consumes more than an insignificant portion of the asset

• Use amortized cost approach to subsequently measure the right to use the asset

• The obligation is reduced using the effective interest method

• This method is called the Amortization and Interest Method (A & I)

• The combination of depreciation and interest on a declining balance will give a decreasing charge to income – “front loaded”

• This does have a positive effect on EBITDA • Interest portion of cash payment is operating activity and

principal portion is financing for SCF

When Lessee consumes an insignificant portion of the asset

• Generally, leases of property – land, buildings• The asset and liability are both recognized on the

balance sheet• Expense is recognized, however, in a straight-line,

similar to operating leases under current GAAP• This is called the Straight-Line Expense Method (SLE)• It is an operating expense• The entire payment is an operating cash outflow for the

SCF

Lease Term

• The noncancellable period • Also any period for which there is an economic incentive

for the lessee to exercise an option to renew or not to exercise an option to terminate

• The term is reassessed only if there is a significant change in factors relating to the economic incentives

Lease Payments

• Fixed payments minus any incentives received• Variable lease payments based on an index or rate• If rate or index changes, amounts are reassessed• If purchase option expected to be exercised, include

amount expected to be paid• Also, if expected, penalty payments to terminate lease • Contingent rents based on sales, etc., not included

What is meant by “more than insignificant”?

• Much judgment is required• Is the lease term a major part of the asset’s economic

life?• Is the present value of the fixed lease payments

substantially all of the fair value of the asset?• Boards did not define “more than insignificant” using

numbers but included application guidance and examples

Disclosures by Lessee

• A reconciliation of opening and closing balances of lease liabilities under both A & I and SLE approaches (nonpublic are exempt from this requirement)

• A maturity analysis showing undiscounted cash flows for each of the first 5 years and the total thereafter. This analysis should reconcile to the recorded lease liability

• Separately present in the balance sheet or disclose in notes the right-of-use assets and liabilities

Lessor

• The Board wants symmetry between accounting for the lessee and lessor

• “More than insignificant” judgment is key• If more than insignificant portion of an underlying asset,

lessor recognizes an asset representing its right to receive payments

• If insignificant, then account for as under current operating lease guidance – do not derecognize the asset and recognize lease income over the term

If more than insignificant portion of the asset is consumed, use the “receivable and residual” approach

• Initially measure the right to receive payments at the present value of the lease payments using effective interest method

• Initially measure the residual asset as an allocation of the underlying asset. Divide into two parts – – a) gross residual value measured at present value of

estimated residual at the end of the term– b) deferred profit – the difference between the gross

residual value and the allocation of the carrying amount of the underlying asset

• Subsequently measure the gross residual asset by accreting to the estimated residual value at the end of the term

• Recognize the unwinding of the discount on both receivable and residual asset as income over the term of the lease

• None of the deferred profit would be recognized until the end of the term

• As with a lessee, the lessor must disclose quantitative and qualitative information that identifies and explains the amounts recognized in the financial statements

• This would include the current requirement of undiscounted payments for each of the next 5 years and in the aggregate.

• Must include carrying amount of lease receivable and residual asset as lease assets, either identified separately on face or in notes

• Also must include a table with all lease related income items disaggregated – profit at beginning, interest income on receivable, interest income on residual asset

Transition

• May use either a full retrospective presentation or a modified retrospective presentation

• With modified retrospective, lessee and lessor recognize previous capital leases and sales or financing leases at the current carrying amounts

• For leases previously accounted for as operating leases, assets and liabilities would be recognized using information available at the transition date

• For public entities, the effective date would be for periods beginning after 12/15/16. Private companies would have an additional year. Early adoption not permitted.

FASB Exposure Draft (Topic 825 and 815)Accounting for Financial Instruments and Revisions to Accounting for Derivatives and Hedging (initially issued

May, 2010)• Main objective of this proposal was to provide financial

statement users with a more timely and representative picture of an entity’s involvement in financial instruments – while reducing the complexity of accounting for them

• Existing US GAAP allows different accounting treatments for similar financial instruments

• For US GAAP, hedge changes not yet considered• There is a difference in the views of the IASB and the

FASB on measuring financial instrument impairment (as seen in a FASB revised Exposure Draft)

Impairment of Financial Assets(now only proposed by the IASB)

• Impairment of financial assets recognizes the general pattern of deterioration in credit quality.

• In this “three bucket approach”, all assets are in the first category, regardless of credit quality. Transfers would be to the next categories as credit quality deteriorates or improves. This requires an estimate of “12 months of expected losses” in the first category while in subsequent categories the measurement objective is “lifetime expected credit losses”

• This approach was advocated by the IASB and the FASB agreed in mid – 2012.. However, the FASB almost immediately took another approach- resulting in:

FASB Exposure Draft (Subtopic 825-15)Financial Instruments – Credit Losses

(issued December 20, 2012)

• This approach is called the “Current Expected Credit Loss” model and replaces the “incurred loss” model.

• An entity at each reporting date would determine for financial assets an allowance for credit impairment for its current estimate of expected credit losses

• This allowance is management’s estimate of cash flows that are not expected to be collected

• Provides current estimate of expected lifetime credit losses on balance sheet

• Current deterioration reflected on income statement

• The scope of this guidance includes financial assets not accounted for at fair value with changes reported in net income

• Includes loans, debt securities, trade receivables, etc. that represent contractual rights to receive cash

• Estimate of expected credit losses would be based on relevant information about past events, current conditions, and reasonable and supportable forecasts

• Board believes this improves timely recognition of losses

FASB Exposure Draft (Topic 825)Recognition and Measurement of Financial Assets and

Financial Liabilities (issued February, 2013)

• Financial assets would be classified and measured by the instrument type and entity’s business strategy:

• Amortized cost – debt investments related to customer financing where the strategy is to collect contractual cash flows

• Debt investments at fair value with changes in fair value recognized in OCI. Objective is to collect contractual cash flow but also sell if change in fair value

• Fair value with changes reflected in net income. This is for assets not included above and includes all equity investments not accounted for by the equity method.

• A practicability exception is available for equity investments without readily available fair values

• Financial liabilities would be measured at amortized cost unless the strategy is to subsequently transact at fair value or the liability resulted from a short sale

• A public entity would present parenthetically on the statement’s face the fair value of financial assets and financial liabilities that are carried at amortized cost

• A nonpublic entity would not have this requirement• If a financial liability is carried at fair value, any change in

fair value because of a change in credit risk would be reported in other comprehensive income

FASB Private Company Council (PCC)(formed in Summer, 2012)

• The purpose of the Council is to:– Determine whether exceptions or modifications to

GAAP are needed to meet the needs of private company financial statements users

– Reduce the cost and complexity of statements while retaining the quality of the information

– Identify, consider, and vote of any proposed changes, which will then be considered for endorsement by the FASB

• Another purpose of the PCC is to act as an advisory group to the FASB relating to the needs of private company users – managers, lenders, venture capitalists, sureties and others

Process

• As with any other proposal of the FASB, there is due process, including public comment

• Determination by PCC of which elements of GAAP to reconsider for exceptions or modifications is by a two-thirds vote

• A majority vote of the FASB members is needed to expose these exceptions or modifications for public comment

• At then end of the exposure period, the PCC determines if these changes should be sent to the FASB for endorsement

• Endorsement is considered by the FASB members• If endorsed, these exceptions or modifications become

GAAP• If not endorsed, the FASB must provide the PCC with a

written explanation, including possible changes that might lead to endorsement

• Explanation to be provided in no more than 60 days• The exceptions or modifications that do become

GAAP for private companies will also be considered later by the FASB as being appropriate for public companies

Private Company Decision-Making Framework

• In July, 2013 the PCC voted to finalize the Private Company Decision-Making Framework, outlining criteria to use for determining whether and under what circumstances it is appropriate to differentiate reporting requirements for private companies

• FASB had issued Invitation to Comment on this Framework in July, 2012 and again in April, 2013

• Input from users, preparers and auditors was considered in preparing the Framework

• Framework was released in late December and includes the following factors (cont’d)

Significant Factors Differentiating Financial Reporting for Public and Private Entities

• Types and numbers of users• Access to management• Investment strategies• Ownership and capital structures• Accounting resources• Learning about new financial guidance

Possible Areas of Different Guidance for Private and Public Entities

• Recognition and Measurement• Disclosures• Display• Effective Dates• Transition Method

FASB ASC Update No. 2014-02 (Topic 350)Accounting for Goodwill

• Entities electing this alternative would amortize goodwill on a straight-line basis over 10 years (or less if that is reasonable)

• There can be revisions in useful life but the cumulative life can not exceed 10 years

• Impairment would not be tested annually as is now required, but only if there is a triggering event that might indicate that fair value is less than carrying value

• The testing for impairment may be conducted at the component level or at the entity-wide level

• Net goodwill will be separate line item on Balance Sheet• Amortization and impairment will be separate line item

on Income Statement – within continuing operations

• The more-likely-than-not impaired qualitative test for impairment is still available under this alternative

• If impaired, the amount recognized would be the excess of the carrying value over fair value

• The Update has an effective date of annual periods beginning after 12/15/14 (and interims 12/15/15) with early adoption permitted

• No additional disclosure requirements• Goodwill amortization would be prospectively from

effective date, including existing and new goodwill

FASB ASC Update No. 2014-03 (Topic 815)Accounting for Certain Receive-Variable, Pay-Fixed Interest

Rate Swaps - Simplified Hedge Accounting

• In these situations, nonfinancial private entities may choose the simplified hedge accounting approach

• The interest expense on the income statement would be similar to the amount reported if there had been a fixed rate initially

• Swap term must approximate the term of the debt• Swap must become effective at approximately the same

time as the debt

• Under the simplified hedge accounting approach, the swap and related borrowing would continue to be accounted for separately

• No ineffectiveness would be assumed for qualifying hedges

• The swap may be accounted for at settlement value rather than fair value

• Effective for annual periods beginning after 12/15/14 (and interims 12/15/15) with early adoption permitted

FASB ASC Update No. 2014-07 (Topic 810)Applying Variable Interest Entities Guidance to Common

Control Leasing Arrangements

• Provides a private entity an option to not apply Variable Interest Entity guidance when:– The private entity and the lessor are under common

control– The private entity has a leasing arrangement with

lessor– Substantially all activity between the two entities

relates to the leasing activity– At the beginning of the lease, any guaranteed

obligation of the lessor by the entity could be collateralized by the asset leased to the entity

• Effective for first annual period beginning after 12/15/14 (and interims after 12/15/15) but early adoption permitted

• This guidance includes full retrospective application for all periods shown

• While Variable Interest Entity guidance will no longer be used, disclosures will include– Amount and terms of significant liabilities of the lessor that might

impact the lessee’s future obligations– Qualitative description of any unrecognized arrangements of the

lessor that might impact the lessee’s future obligations

FASB Exposure Draft (Topic 805)Accounting for Identifiable Intangible Assets in a Business

Combination

• Private companies may elect, in business combinations, to recognize only intangible assets arising because of noncancellable contract terms or other legal rights

• All other intangible assets would be included in goodwill• Entity must qualitatively disclose any identifiable

intangible assets acquired in a business combination that are included in goodwill

• Those intangible assets that are recognized would be accounted for initially at fair value

• The PCC is reviewing this and is considering changes after receiving input from the ED

• Will consider separating from Goodwill only those intangible assets that have separate cash flow

FASB Exposure Draft (Topic 915)Development Stage Enterprises (DSE) – Elimination of

Certain Financial Reporting Requirements

• A Development Stage Enterprise devotes most of its efforts in establishing a new business and either planned principal operations have not begun or have commenced and there is no significant revenue

• This proposal removes the definition of a DSE from Topic 915 so that there is no longer a distinction between a DSE and other entities

• This proposal removes a paragraph stating that a DSE is not a variable interest entity if it can show that the equity invested in it is enough to finance its current activities

• This proposal eliminates the following disclosures currently required by a DSE:– Inception to date information on income statement, cash flows

and equity– A statement that these are financial statements of a DSE– A description of the activities in which the DSE is engaged– A note to the effect that in the first year after the development

stage that the entity is no longer a DSE

While this proposal originated with the PCC, it went directly to the FASB for consideration as guidance for all business entities

FASB Disclosure Framework Project

• Invitation to Comment on the Project was released in July 2012

• Input received will help in the FASB establish a framework of use in setting requirements for note disclosure in financial statements

• Many concerns from stakeholders about the amount and relevance of footnote disclosure

• The Invitation to Comment included options that could be considered in having more effective disclosure

• Project subsequently divided into the FASB’s decision process and the entity’s decision process

Areas Addressed in Invitation to Comment

• Guidance that will provide relevant information for users of financial statements

• Flexible requirements that could be used by reporting entities and applied only to information that is relevant for users of that entity’s financial statements

• Establishing a framework for helping entities determine which disclosures are relevant

• Techniques for organizing and formatting the appropriate information so that the notes are less complex

• Interim disclosure guidance

Priorities for the FASB

• The Financial Accounting Standards Council (FASAC) surveyed 105 stakeholders concerning their thoughts on what should be the priorities of the FASB for the next 3 -5 years. (Excluding almost completed active projects)

• The top six, in order of importance were:– Disclosure Framework– Hedging– Conceptual Framework– Financial Instruments with Characteristics of Equity– Pensions– Financial Statement Presentation