FASB Update

FASB Update

Rahul GuptaProject ManagerFinancial Accounting Standards BoardAugust 14, 2013

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The views expressed in this presentation are those of the presenter. Official positions of the FASB and IASB are reached only after extensive due process & deliberations.

FASB projects–Recent Standards–Going Concern–Definition of a Public Business Entity

EITF Issues Private Company Council

Topics

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Joint projects with the IASB–Financial Instruments

»Classification & Measurement »Impairment

–Revenue Recognition–Leases–Insurance

Topics

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Recent StandardsAccounting Standards Update Effective Dates

Update No. 2013-11—Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)

Fiscal years and interim periods within those years beginning after December 15, 2013. Nonpublic entities: after December 15, 2014.

Update No 2013-10—Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)

Qualifying new or redesignatedhedging relationships entered into on or after July 17, 2013

Update No. 2013-09—Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04

Effective July 2013

Update No. 2013-08—Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements

Interim and annual reporting periods in fiscal years beginning after December 15, 2013

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Recent StandardsAccounting Standards Update Effective Dates

Update No 2013-07—Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting

Annual reporting periods beginning after December 15, 2013, and interim reporting periods therein

Update No. 2013-06—Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate (a consensus of the FASB Emerging Issues Task Force)

Fiscal years beginning after June 15, 2014, and interim and annual periods thereafter

Update No 2013-05—Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)

Fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. Nonpublic entities: annual period beginning after December 15, 2014, and interim and annual periods thereafter

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Recent StandardsAccounting Standards Update Effective Dates

Update No. 2013-04—Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)

Fiscal years, and interim periods within those years, beginning after December 15, 2013. Nonpublic entities: fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter.

Update No 2013-03—Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities

February 2013

Update No. 2013-02—Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Reporting periods beginning after December 15, 2012; Nonpublic entities: December 15, 2013

Update No 2013-01—Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities

Fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods

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Going Concern

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Going Concern (GC) presumption is critical to financial reporting

Today, auditors are responsible for assessing uncertainties about the GC presumption

U.S. GAAP has no guidance on management’s disclosures of GC uncertainties

Proposal intended to reduce diversity, standardize disclosure timing & content

ED issued in June 2013; comment period concludes September 24, 2013

Going Concern - Background

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Proposed model: Management at each reporting period would assess an

entity’s potential inability to meet its obligations

Start disclosures if it is more-likely-than-not that an entity will not meet obligations in 12 months, or known/probable that it will not meet obligations in 24 months

Do not consider mitigating impact of plans outside the normal course of business

If likelihood reaches probable (considering all plans), declare substantial doubt (SEC filers only)

Management’s Assessment of GC Uncertainties

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Definition of a Public Business Entity

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Definition of a Public Business Entity

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Issue: Multiple definitions of Nonpublic Entity and Public Entity in U.S. GAAPObjectives Clarify organizations within the scope of

private company decision making framework for potential modifications to U.S. GAAP

Simplify & increase comparability 

Public Business Entity Definition

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It is required by the U.S. SEC to file/furnish financial statements, or does file or furnish financial statements, with the U.S. SEC (including entities whose financial statements or financial information are required to be or are included in a filing).

It is required by the Securities Exchange Act of 1934, as amended, or rules and regulations promulgated thereunder, to file/furnish financial statements with a regulatory agency.

It is required to file/furnish financial statements with a regulatory agency for purposes of issuing securities to be traded in a public market.

A business entity that meets any one of the following criteria:

Public Business Entity Definition

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It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.

Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.

This excludes a not-for-profit entity or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.

A business entity that meets any one of the following criteria:

Definition of a Private Company

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Next steps Issuance of an Accounting

Standards Update  in August 2013 Would not affect existing

requirements.

Comment period ending September 2013

Financial Accounting Standards Board

EITF

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EITF Consensuses Out for Comment

Consensus Comment DeadlineProposed Accounting Standards Update—Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Collateralized Mortgage Loans upon a Troubled Debt Restructuring

September 17, 2013

Proposed Accounting Standards Update—Service Concession Arrangements (Topic 853)

September 17, 2013

Proposed Accounting Standards Update—Consolidation (Topic 810): Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity

September 17, 2013

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EITF―Open Issues

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

13-B: Accounting for Investments in Tax Credits

13-D: Determining Whether a Performance Target That Is Allowed to Be Met after the Requisite Service Period Is a Performance Condition or a Condition That Affects the Grant-Date Fair Value of the Awards

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

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Private Company Council

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Accounting for identifiable intangible assets in a business combination (Issue 13-01A)

Accounting for goodwill subsequent to a business combination (Issue 13-01B)

Applying variable interest entity guidance to common control leasing arrangements (Issue 13-02)

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (Issue 13-03)

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Private Company Council: Projects

Next Meeting: September 2013

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Modifies requirement for private companies to separately recognize fewer intangible assets acquired in a business combination

Enables private companies to recognize only those intangible assets arising from noncancelable contractual terms or assets from other legal rights

Other intangible assets would not be recognized separately from goodwill even if separable

PCC Issue 13-01A Proposed Changes

Accounting for Identifiable Intangible Assets in a Business Combination

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Goodwill amortized for a period not to exceed 10 years, and tested for impairment only when a triggering event occurs

Goodwill tested for impairment at the company-wide level as compared to the current requirement to test at the reporting unit level

Impairment testing would also involve a one step approach as opposed to two-step approach

PCC Issue 13-01B Proposed Changes

Accounting for Goodwill Subsequent to a Business Combination

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Step two of the current impairment test, which requires the application of a hypothetical purchase price allocation to calculate the goodwill impairment amount, would be eliminated

Instead, the goodwill impairment amount would represent the excess of the company’s carrying amount over its fair value

PCC Issue 13-01B Proposed Changes

Accounting for Goodwill Subsequent to a Business Combination

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Exempts private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements

– If substantially all activities between private company and lessor are involved with leasing activities of the lessor

When the arrangement between a private company lessee and a lessor entity meets certain conditions, the private company lessee can elect the alternative

PCC Issue 13-02 Proposed Changes

Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (FIN 46(R)/FAS 167)

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Conditions to qualify for alternativea) Lessor entity and the private company lessee are

under common control

b) Company lessee has a leasing arrangement with the lessor entity

c) Substantially all of the activity between the two entities is related to the leasing activity of the lessor entity

– Ex: guarantee on the lessor entity’s mortgage on a leased asset

PCC Issue 13-02 Proposed Changes

Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (FIN 46(R)/FAS 167)

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Gives private companies the option to use two simpler approaches to accounting for certain types of interest rate swaps that are entered into the purposes of economically converting its variable-rate borrowing to a fixed-rate borrowing

1. Combined instruments approach

2. Simplified hedge accounting approach

PCC Issue 13-03 Proposed Changes

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

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An accounting alternative to account for a swap and a variable-rate borrowing as one combined financial instrument. I

Swap would not be recorded in the company’s financial statements (except for the period-end accrual relating to the next swap settlement)

PCC Issue 13-03 Combined Instruments

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

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Applied provided certain criteria are met:– Swap term approximates the term of the borrowing and

the swap becomes effective at the same time as the borrowing.

– Approach would be applicable to all of its swaps, whether entered into on or after the date of adoption or existing at that date, provided that the requirements of applying this approach otherwise are met.

Under this approach the settlement value of the swap would be disclosed in the notes to the financial statements.

PCC Issue 13-03 Combined Instruments

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

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Practical expedient to qualify for hedge accounting

Criteria to qualify for simplified hedge accounting similar to combined instruments approach criteria

– However, term of the swap could be shorter than the term of the borrowing and the swap does not have to become effective at the same time as the borrowing

PCC Issue 13-03 Simple Hedge Accounting

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

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Under approach, swap and the related borrowing would continue to be accounted for as two separate financial instruments

– However, no ineffectiveness would be assumed for qualifying swaps designated in a hedging relationship

Designated swap may be recorded at settlement value in the company’s financial statements instead of at fair value

PCC Issue 13-03 Simple Hedge Accounting

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

Joint FASB/IASB Projects

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Financial Instruments

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Improve decision usefulness Reduce complexity Convergence Three phases:

‒ Classification & Measurement‒ Impairment‒ Hedge Accounting

Financial Instruments: Overview

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FASBExposure Draft on Classification

and Measurement issued in February 2013

Exposure Draft on Impairment issued in December 2012

Hedging likely to begin in 2013

IASBAmendments to IFRS 9 on

Classification & Measurement exposed November 2012

Exposure Draft on Impairment issued March 2013

Review Draft on Hedging posted until December 2012

Financial Instruments: Status

Financial Instruments: Classification & Measurement

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Classification & Measurement: Timeline

May 2010Exposure

Draft

June – Sept 2010

Outreach

Fall 2010 – December 2012

Re-deliberations & Outreach

Feb 2013 Exposure

Draft

1H 2013Outreach

June 2013Begin

Re-deliberations

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Classification & Measurement: Background

Fair value model Feedback:

Key aspects opposed Lack of convergence

FASB Exposure Draft (May 2010)

FASB’s tentative model Guidance in IFRS 9

Converged in principle

Joint Redeliberations (Jan 2012)

Classification & Measurement: FASB Proposal

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Classification & Measurement: Financial Assets

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Amortized cost—financial assets with solely payments of principal and interest that are held for the collection of contractual cash flows

Fair value through other comprehensive income (OCI)—financial assets with solely payments of principal and interest that are both held for the collection of contractual cash flows and for sale

Fair value through net income—financial assets that do not qualify for measurement at either amortized cost or fair value through other comprehensive income. (residual category)

Classified in one of three categories:

Classification & Measurement: Financial Assets

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Equity investments measured at fair value through net income Practicability exception – No readily determinable fair value

• Observable price changes in orderly transactions for the identical or similar assets of the same issuer

• One-step impairment model

Equity investments

Hybrid Financial Assets No bifurcation Apply solely principal & interest test to entire instrument

Classification & Measurement:Financial Liabilities

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Generally amortized cost, unless:

Business strategy is to transact at fair value

Short sale

Nonrecourse debt

Hybrid Financial Liabilities

Bifurcation and separate accounting of embedded derivatives based on existing U.S. GAAP

Classification & Measurement:Fair Value Disclosure

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Public Companies

Financial assets & financial liabilities measured at amortized cost

Parenthetical presentation of fair value on the face of the balance sheet

• Except for receivables/payables due in less than a year and demand deposit liabilities

Private Companies

NOT required to disclose fair value information either parenthetically or in the notes to the financial statements.

Financial Instruments: Impairment

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Impairment: Timeline

May 2010Exposure

Draft

January 2011Supplementary

Document

Feb 2011 – October 2012

Re-deliberations & Outreach

December 2012

Exposure Document

1H 2013Outreach

2H 2013Re-deliberations

Impairment: Project Objectives

Timely Recognition of Credit Losses- Address concerns about delayed

recognition of losses under incurred loss approach

- Present value of cash flows an entity expects to collect consistent with classification & measurement objective for assets held for collection

- Single model for loans and debt securities

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Impairment: Project Objectives Separate Presentation of Interest Income & Credit Losses- Rate of return includes lender

compensation for credit risk inherent in debt instrument

- Investors want separate presentation of credit losses from interest income (“decoupled” approach)

- Effective rate as discount rate (in a DCF approach) isolates credit loss & does not introduce noise related to market changes

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Impairment: Basics of FASB Model Every reporting period, expected credit losses would be

re-estimated- Favorable and unfavorable changes reported in earnings

Current estimate of expected credit losses based on:- current risk ratings of the assets- historical loss experience for assets with similar risk

ratings and remaining lives adjusted for changes in current circumstances

- reasonable & supportable expectations about the future

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Impairment: Basics of FASB Model

Expected losses are inherent in groups of similar assets; inability to identify which asset will deteriorate should not interfere with timely recognition of losses that are expected in the individual assets held

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Impairment: Basics of FASB Model

FASB used term “full” rather than “lifetime” to avoid suggesting that projections through the remaining life are necessary.

Rather, we expect estimates will start with historical information, and be adjusted using available information that indicates that current expectations differ from past experience

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Impairment: Debt Securities and FV-OCI Assets Same approach as loans

As a practical expedient, entity may elect not to recognize expected credit losses for financial assets classified at FV-OCI when both of the following conditions are met:- FV of financial asset is greater than amortized cost basis- Expected credit losses on financial asset are insignificant

For high-quality assets; cost-benefit consideration

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Impairment: Purchased Credit Impaired (PCI) Assets

Common issue for business combinations & portfolio transfers; current U.S. GAAP is complex & confusing

Same approach to estimating expected credit losses as originated and non-PCI assets

Initial estimate of expected credit losses is recognized as an adjustment to the cost basis of the asset (an allowance) and would not be recognized as interest income

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Impairment: Summary

A model that leverages existing internal credit risk management tools and systems (inputs will change)

A consistent measurement approach throughout the portfolio with no barriers or thresholds for recognition

An approach for PCI assets that is less complex and costly to implement easier to explain to investors

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Revenue Recognition

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Revenue Recognition: Project status

2010 20132011

November 2011

Revised exposure draftRe-exposure of Revenue from Contracts with Customers

358 comment letters

March 2012

Comment letter deadline

April 2012

Roundtables

May 2012 onwards

Redeliberations and drafting

June 2010

Exposure draftRevenue from Contracts with Customers

974 comment letters

Q2 2013

Final ASU for US GAAP and final standard for IFRS

2011

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Current U.S. GAAP- 200+ pieces of literature- Broad concepts- Many industry-specific

requirements- Inconsistency

Objective- Create single, joint

standard- Consistent across

industries/markets- More robust framework

Revenue Recognition: Background

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Revenue Recognition: Scope

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Excluded IncludedCONTRACTS WIT

H CUSTOMERS

Lease contracts

All other contracts with customers

including unbundled services from lease & insurance contracts

Insurance contracts

Financial instrumentsincluding financial services fees that are integral part of effective

interest rate

Revenue Recognition: 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

Core Principle

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Identify contract(s) with the customer

Identify separate performance obligations

Determine transaction price

Allocate transaction price

Recognize revenue when performance

obligation is satisfied

Revenue Recognition: Steps to Apply the Core Principle

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Revenue Recognition:Onerous performance obligations

The revenue standard will not include an onerous test Instead, an entity will apply the onerous tests in existing

IFRS or US GAAP

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IFRS Requirements in IAS 37 for onerous contracts would apply to all contracts with customers

US GAAP

Existing guidance for recognition of losses will be retained, including guidance in Subtopic 605-35 for

losses on construction and production contracts

Revenue Recognition:Implementation Guidance

Warranties Licenses Right of return Customer options for additional goods or services Breakage (customers’ unexercised rights) Principal versus agent Bill and hold arrangements Repurchase agreements Nonrefundable upfront fees Customer acceptance

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Leases

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Leases: Where We Are Now

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2010 2013 TBD

August 2010Exposure DraftLeases

1H 2013Second Exposure DraftLeases

TBDFinal StandardLeases

Comment period: 4 months

786 comment letters received

Contained proposals for both lessees and lessors

Re-expose proposals

Comment period 120 days

Focus on revisions to 2010 proposals

Will contain proposals for both lessees & lessors

Effective date: TBDWill contain guidance for both lessees & lessors

2013

Consultation

Outreach

Working group meetings

Redeliberations

Insurance Contracts

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Sept 2010FASB issues

Discussion Paper

Dec 2010 – Mar 2013

Outreach and Joint Redeliberations

June 2013Exposure Draft

2H 2013Outreach

Insurance: Timeline

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Questions & Answers

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