-
BDO USA, LLP, a Delaware limited liability partnership, is the
U.S. member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms.
Tax Executives Institute, Inc. Detroit Chapter
All Day Seminar
June 14, 2017
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2
AGENDATime Topic Presenters
8:00 2017 Mid-Year A&A Update Cathy McNamara, Bill Putz, and
Jason Wurz
8:50 Tax Automation and ASC 740 Update Bill Connolly and Barbara
Torzewski
9:40 BREAK
10:00 Recent International Tax Developments and Tax Provision
Impact Joseph Calianno and Brad Rode
10:50 M&A Trends and Topics Jerry Dentinger and Steve
McCullough
11:40 LUNCH
12:50 Sub C Update and More Bob Haran and Kevin Ainsworth
1:40 Unclaimed Property and FAS 5 (ASC 450-20) Joseph Carr and
Angela Gebert
2:30 BREAK
2:50 Rate Rec Items: Meals & Entertainment Expenses, DPAD
Deduction, and R&D CreditsAndy Zaleski, Brendan Sullivan, and
Randy Emmons
3:40 State and Local Tax Accounting Updates Andrea Collins and
Paul Lukasik
-
BDO USA, LLP, a Delaware limited liability partnership, is the
U.S. member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms.
2017 MID-YEARA&A UPDATE
June 14, 2017
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4
AgendaAccounting Update FASB Accounting Standards
Updates EITF and PCC matters Revenue StandardSEC Update
SEC and Staffing Developments Rulemaking Disclosure
Effectiveness SEC Hot Topics and Comment
Letter Trends Financial Choice Act 2.0 Chief Accountant Speech
on
Audit Committee Effectiveness
PCAOB Update
Auditor Reporting Model Audit Quality Indicators On The
Horizon
Other Governance Matters
Boards Strategy: Cybersecurity Diversity on Boards Audit Quality
Reports
Resources
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5
Accounting
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6
Accounting Update Discussion Outline
FASB Accounting Standards Updates
EITF and PCC matters
Revenue (ASC 606) Update
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7
FASB Update
http://www.fasb.org/homehttp://www.fasb.org/home
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8
Final ASUS Issued Through May 2017ASU 2017- Title
01 Clarifying the Definition of a Business
02 Clarifying When a Not-for-Profit Entity That Is a General
Partner or a Limited Partner Should Consolidate a For-Profit
Limited Partnership or Similar Entity
03 Amendments to SEC Paragraphs Pursuant to Staff Announcements
at the September 22, 2016 and November 17, 2016 EITF Meetings
04 Simplifying the Test for Goodwill Impairment
05 Clarifying the Scope of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial Assets
06 Employee Benefit Plan Master Trust Reporting
07 Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost
08 Premium Amortization on Purchased Callable Debt
Securities
09 Scope of Modification Accounting (Stock Compensation)
10 Determining the Customer of the Operation Services
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ASU 2017-01, Clarifying Definition of a Business
Narrows the definition of a business; key concepts in revised
definition include:1. A business is an integrated set of activities
and assets that is capable of being
conducted and managed for the purpose of providing a return in
the form of dividends, lower costs, or other economic benefits
directly to investors or other owners, members, or participants
2. Two essential elementsinputs and substantive process applied
to those inputs
Includes practical screen if substantially all of the fair value
of the gross assets acquired is concentrated in a single
identifiable asset or group of similar identifiable assets, the set
is not considered a business
Industry examples provided Effective dates
Public entities annual & interim periods beginning after
12/15/17 Nonpublic entities annual periods beginning after
12/15/18; interim periods
beginning after 12/15/19
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017
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ASU 2017-02, Non-Profit Consolidation
Addresses an unintended outcome of ASU 2015-02* which would have
required fewer for-profit LPs to be consolidated by NFP general
partners
Reinstates the Subtopic 810-20 consolidation guidance for NFPs
(moved to Subtopic 958-810): NFPs, as general partners still
presumed to have control of a for-profit LP, regardless
ownership interest %, unless that presumption is overcome by
certain rights of the limited partners
Additional guidance for when NFPs, as limited partners, should
consolidate LP Effective date
Annual periods beginning after 12/15/16; interim periods
beginning after 12/15/17 Apply concurrently with ASU 2015-02, or
retrospectively to all periods impacted by
adoption of 2015-02
*Amendments to the Consolidation Analysis
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017
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ASU 2017-04, Simplifying Goodwill Impairment
Eliminates Step 2 from the goodwill (GW) impairment test New one
step test comparing the fair value of a reporting unit (RU) with
its
carrying amount Recognize impairment charge for amount by which
carrying amount exceeds
RUs fair value (up to amount of GW attributed to that RU)
Retains optional qualitative impairment test (Step 0) Eliminates
requirement to perform Step 0 for RU with zero or negative
carrying
amount, but requires additional disclosure Does not eliminate
private company alternative in ASU 2014-02*
If previously elected 2014-02, can voluntarily adopt 2017-04 (no
preferability assessment)
If previously elected ASU 2014-18** must demonstrate
preferability to adopt 2017-04
*Accounting for Goodwill (a consensus of the Private Company
Council)**Accounting for Identifiable Intangible Assets in a
Business Combination (a consensus of the Private Company
Council)
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ASU 2017-04, Simplifying Goodwill Impairment
(continued) Effective dates
Public entities (SEC filers) fiscal periods beginning after
12/15/19 Public entities (non-SEC filers) fiscal periods beginning
after 12/15/20 Nonpublic entities annual periods beginning after
12/15/21
Early adoption permitted for interim or annual GW impairment
tests performed after 1/1/17
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)
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ASU 2017-04, Simplifying Goodwill Impairment
(continued early adoption)
BC64: an entity should apply the same guidance to an interim
impairment test as the guidance it plans to use for its annual test
in the year of adoption.
Example: Company A with a calendar year-end, performs its annual
goodwill impairment test on the first day of Q4. During Q2 2017,
Company A disposes of a subsidiary, and this transaction is a
triggering event for goodwill impairment testing. In order to early
adopt ASU 2017-04 for its annual 2017 impairment testing, Company A
must adopt this guidance for its interim test during Q2 2017.
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ASU 2017-04, Simplifying Goodwill Impairment
(continued early adoption)
BC66: an entity may have an indicator of impairment at the
beginning of the annual period in which the amendments are
adopted.
Example: if a reporting units carrying amount exceeded its fair
value during the most recent impairment test before adoption (Q4
2016) but the implied fair value of goodwill exceeded its carrying
amount when applying Step 2 and no impairment was recognized, the
entity likely would have an indicator of impairment for that
reporting unit as of the beginning of the period of adoption (Q1
2017) based on the change in how goodwill impairment is
measured.
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ASU 2017-05, Nonfinancial Asset Derecognition
Clarifies scope of ASC 610-20* Defines in substance nonfinancial
asset - if substantially all fair value of assets
(recognized and unrecognized) promised to a counterparty is
concentrated in nonfinancial assets, a financial asset in the same
arrangement would still be considered part of an in substance
nonfinancial asset
Nonfinancial assets may include nonfinancial assets contained
within a legal entity that is transferred to a counterparty (e.g.,
through transfer of ownership interest)
Derecognition of businesses not in scope of ASC 610-20 (governed
by ASC 810) Clarifies treatment of distinct nonfinancial assets
Derecognize when counterparty obtains control Apply guidance in
ASC 606 on allocating consideration to each distinct asset
*Other IncomeGains and Losses from the Derecognition of
Nonfinancial Assets
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ASU 2017-05, Nonfinancial Asset Derecognition
(continued) Adds guidance on accounting for partial sales of
nonfinancial assets
Derecognize a distinct nonfinancial asset or distinct in
substance nonfinancial asset in a partial sale transaction when
both:1. The entity does not have (or ceases to have) a controlling
financial interest in the legal entity
that holds the asset in accordance with Topic 810, and 2. The
entity transfers control of the asset in accordance with Topic
606
Effective Dates (concurrent with ASC 606) Public entities annual
and interim periods beginning after 12/15/17 Nonpublic entities
annual periods beginning after 12/15/18; interim
periods beginning after 12/15/19
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)
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ASU 2017-06, EBP Master Trust Reporting
Employee benefit plans must present interest in a master trust
and the change in interest in that master trust as single line
items in the statement of net assets available for benefits and the
statement of changes in net assets available for benefits
Updated disclosure requirements for interest in a master trust:
Undivided (proportionate) interest - continue to disclose % Divided
interest - disclose dollar amount of interest in specific
investments of the
trust Disclose a master trusts other asset and liability
balances and the dollar amount of
the plans interest in each of those balances Eliminates health
and welfare plans investment disclosures for 401(h) account
assets;
instead, the plan financials will disclose the name of the
defined benefit pension plan which includes such investment
disclosures
Effective for fiscal years beginning after 12/15/18
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017
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ASU 2017-07, Net Benefit Cost Presentation
An employer that sponsors a defined benefit plan must
disaggregate components of net benefit cost Service cost
Present within same line item(s) as other employee compensation
costs Generally included within income from continuing operations,
but in some cases may be
eligible for capitalization
All other components of net benefit cost Present in income
statement separately from service cost component and outside a
subtotal of
income from operations, if one is presented E.g., interest cost,
actual return on plan assets, amortization of prior service cost
included in
AOCI, and gains or losses from changes in the value of the
projected benefit obligation or plan assets
These costs may not be capitalized
Effective dates Public entities annual and interim periods
beginning after 12/15/17 Nonpublic entities annual periods
beginning after 12/15/18; interim periods
beginning after 12/15/19BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)
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ASU 2017-08, Premium Amortization
Historically entities generally have amortized the premium on
these instruments as a yield adjustment (reduction of interest
income) over the securitys contractual life (i.e. to maturity),
even if they are certain the issuer will exercise the option at the
earliest call date.
The Standard shortens the amortization period for purchased
callable debt securities held at a premium to the earliest issuer
call date, rather than amortizing over the full contractual
term.
Securities held at a discount continue to be amortized to
maturity
Effective dates Public entities annual and interim periods
beginning after 12/15/18 Nonpublic entities annual periods
beginning after 12/15/19; interim
periods beginning after 12/15/20
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017
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ASU 2017-09, Scope of Modification Accounting
Clarifies that modification accounting applies to changes in the
terms or conditions of a share-based payment award unless all of
the following criteria are met:
Fair value (or calculated value or intrinsic value) is the same
before and after modification Practical expedient - if the
modification does not affect any valuation inputs, no
requirement to value award immediately before and after
modification
Vesting conditions are the same before and after modification
Classification as an equity or liability instrument is the same
before and after
modification
Effective date annual and interim periods beginning after
12/15/17 (all entities)
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017
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ASU 2017-10, Determining the Customer of the Operation
Services
Clarifies service concession arrangements guidance in Topic 853
When applying ASC 606, operating entity should consider the grantor
the
customer of both construction and operation services it provides
The effective date of ASU 2017-10 depend on whether an entity has
already
adopted Topic 606:- If Topic 606 not adopted previously, the
effective date and transition requirements
generally the same as those of Topic 606. Early adoption
permitted, including within an interim period, even though the
entity has not yet adopted Topic 606, but specific transition
requirements apply.
- If Topic 606 previously adopted, effective dates of ASU
2017-10:1. Public business entities - fiscal years and interim
periods beginning after
12/15/172. All others - fiscal years beginning after 12/15/18,
and interim periods within
fiscal years beginning after 12/15/19
BDO Alert:
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)
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EITF and PCC Update
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EITF Update
EITF meeting March 2017 Finalized Issue 16-C, Determining the
Customer of the Operation
Services in a Service Concession Arrangement see ASU 2017-10 No
current issues on EITF agenda for possible meetings in May or
June
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PCC Update
April 4, 2017 meeting: Disclosure framework Accounting for
financial instruments, hedging Consolidations Liabilities and
equity: down rounds Cloud computing Invitation to comment on Agenda
Consultation
Meeting recap:
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176168947553
Next meeting July 11, 2017
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB/Document_C/DocumentPage&cid=1176168947553
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ASC 606, Revenue from Contracts with Customers
ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
as amended, becomes effective on January 1, 2019 for calendar-year
nonpublic entities, but early adoption is permitted as of January
1, 2017
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ASC 606, Revenue from Contracts with Customers
Impact will vary by industry. No more industry-specific rules.
Key concepts:
Transfer of control Identification of performance obligations in
a contract Allocating the transaction price to performance
obligations based on relative
standalone selling prices Measurement of revenue point in time
or over time
Disclosures Other technical aspects
Contract costs Warranties Licenses Principal vs. agent
Internal controls
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27
ASC 606, Revenue from Contracts with Customers
Things To Consider What steps has the company taken to
familiarize itself with the new standard? Has the company
determined which method of adoption it will use (full
retrospective or modified retrospective)? Has the company
trained relevant personnel, including accounting, finance,
legal, sales, contract management, human resources, and others?
Has the company documented its preliminary assessment about the
impact of
adoption, including the impact on accounting for income taxes?*
*Standard setters and regulators have emphasized the importance of
beginning
implementation ASAP Has the company updated its SAB 74
disclosures to reflect the above
assessment?
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ASC 606, Revenue from Contracts with Customers
Things To Consider For key financial systems used to process
customer orders and/or record
transactions, has consideration been given to any needed
changes**?
**System implementations and upgrades can often take 12+ months
to complete
Has the company communicated with any existing or potential
third party processing agents and other service providers about
changes needed for transaction processing?
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ASC 606, Revenue from Contracts with Customers
BDO Resources BDO Revenue Recognition Resource Center and
Corporate Governance Center
BDO Knows: FASBTopic 606, Revenue from Contracts with Customers
BDO Practice Aid: ASC Topic 606 BDO industry publications and flash
reports
Audit tools Revenue Audit Workbook Industry guidance
Accounting advisory services BDO Revenue Recognition Advisory
Team
External Resources FASB Transition Resource Group for Revenue
Recognition AICPA Industry Task Forces / Revenue Recognition Guide
FASB technical inquiry process SEC pre-clearance process
https://www.bdo.com/services/assurance/revenue-recognition/overviewhttps://www.bdo.com/services/assurance/revenue-recognition/overview
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Revenue BDO Resources
Updated
Newsletterhttps://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017
Upcoming/Recent WebinarsASC 606, Revenue from Contracts with
Customers (self-study available)
https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-witApplying
the New Revenue Standard, Part 1 (6/8/17, followed be
self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1Applying
the New Revenue Standard, Part 2 (6/15/17, followed by
self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2
BDO Revenue Resource
Centerhttps://www.bdo.com/services/assurance/revenue-recognition/overview
https://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-withttps://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2https://www.bdo.com/services/assurance/revenue-recognition/overview
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SEC Update
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SEC & Staff Developments
Commission Changes- Jay Clayton named new Chairman- 2
Commissioner seats remain open
Staff Changes- William Hinman named Director of the Division of
Corporation
Finance- Sagar Teotia named Deputy Chief Accountant, OCA- Other
changes in senior staff positions
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33
SEC Developments
Statements by Commissioner Piwowar* - Pay Ratio Rule- Conflict
Minerals Rule
Portions of Conflict Minerals rule not enforced following U.S.
District Court Ruling- Staff guidance - Commissioner Piwowar
statement
Resource Extraction Issuers rule nullified
*Acting Chairman from late January early May
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SEC Rulemaking
Final rule and technical amendments related to the JOBS Act-
Conforms rules and forms to securities law amendments in JOBS Act-
Inflation-adjusted EGC revenue threshold - $1,070,000,000
Proposal to require Inline XBRL - Would require issuers to embed
XBRL data within the financial statements
instead of an exhibit- Follows the voluntary program from June
2016
Release regarding availability of IFRS Taxonomy
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35
Disclosure Effectiveness
What is it?
- Providing better information to investors more understandable,
more useful and eliminating excessive disclosure
- Disclosure effectiveness less disclosure
What has the SEC staff done lately?
- Request for commentReg S-X (other entity financial
statements)comment period closed November 30, 2015
- S-K concept releasecomment period closed July 21, 2016
- Subpart 400 of Reg S-K comment period closed October 31,
2016
- Disclosure Update and Simplification closed Nov 2, 2016
Report on Modernization and Simplification of Reg S-K released
on November 23, 2016
35
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Disclosure Effectiveness
Disclosure Effectiveness Initiative Final rule requiring the use
of hyperlinks to exhibits
- Effective for filings submitted on or after September 1, 2017
(or September 1, 2018 for certain filers)
Request for comment on Industry Guide 3 (Statistical Disclosure
by Bank Holding Companies)
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SEC Hot Topics
ICFR New Accounting Standards & SEC Reporting Implications
Non-GAAP Financial Measures Income Taxes Segments Goodwill
Impairment Other Comment Areas
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SEC Hot Topics
NEW ACCOUNTING STANDARDS SAB Topic 11M (SAB 74) Disclosures
- Expect comment letters on deficient disclosure in 2017 ICFR
Considerations SEC Reporting Implications in Year of Adoption
- Selected financial data- S-3 considerations
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SEC Hot TopicsNON-GAAP FINANCIAL MEASURES Non-GAAP measures
should supplement, not supplant GAAP
presentation Reminder on Non-GAAP C&DIs issued in May
2016
- Provide:- Guidance on adjustments and measures that may be
misleading- Examples of placing undue prominence on non-GAAP
measures- Guidance on computing income taxes in non-GAAP
measures
- Communicate that: - Presenting non-GAAP that tailors GAAP
(e.g., revenue) is generally not permitted- Presenting non-GAAP
liquidity measures on a per share basis is prohibited
KEY OPERATING METRICS Recent topic in staff speeches Similar
concerns as non-GAAP companies should focus on disclosure
controls and procedures over metrics
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SEC Hot Topics
INCOME TAXES Realizability of Deferred Tax Assets Effective Tax
Rate Separate disclosure for U.S. operations versus foreign
jurisdictions- Pre-tax earnings - Income tax provision or
benefit
Assertions related to indefinite reinvestment of foreign
earnings
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SEC Hot Topics
SEGMENTS Identification of operating segments
- Factors used, including basis of organization- Clearly
defining who is the CODM
Aggregation of operating segments Changes in business and
organizational structure Disclosures
- Revenues by product category- Geographic information
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SEC Hot Topics
GOODWILL IMPAIRMENT Impairment analysis disclosures in
MD&A
- Reporting units at risk of failing Step 1 of the goodwill
impairment test (see FRM Topic 9510)
- Material uncertainties associated with methods and assumptions
Interim impairment test
- Events occurring since impairment test that may be impairment
indicators
- Sustained decline in market capitalization- Why an impairment
charge/test was not necessary prior to Q4
Reporting units- Aggregation of components- Changes
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SEC Hot Topics
OTHER FREQUENT COMMENT AREAS MD&A Loss Contingencies Revenue
Recognition (ASC 605 & SAB 74 Disclosures) Business
Combinations & Related Issues
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Financial Choice Act 2.0Background
Main provisions would eliminate or modify - many banking
provisions of Dodd-Frank Act- several Dodd-Frank Acts disclosure
and corporate
governance requirements- SEC enforcement and rulemaking
authority- securities laws governing capital raising and
ongoing
reporting requirements
44
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Financial Choice Act 2.0Impact on Reporting Requirements
Executive Compensation- Requires say-on-pay vote each year in
which there has been a
material change to executive compensation- Limits clawbacks to
those current or former executives who had
control or authority over the companys financial reporting that
resulted in the restatement
- Repeals the following Dodd- Frank Act disclosure requirements:
Pay ratio Conflict minerals, coal or other mine safety, payments by
resource extraction
issuers
45
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Financial Choice Act 2.0Impact on Reporting Requirements
Sarbanes Oxley 404(b) extends exemption from auditor attestation
requirement- to any issuer with total market cap of less than $500M
- for an additional 5 years for any issuer that ceased to be an EGC
on
the last day of the FY after the 5th anniversary of its IPO,
provided its average annual gross revenues are less than $50M and
its not a large accelerated filer
Select capital formation/raising- Extend certain of the IPO
on-ramp provisions of the JOBS Act,
currently available only to EGCs, to all issuers
46
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Advancing the Role and Effectiveness of Audit Committees SEC
Chief Accountant Wes Brickers March 2017 speech
addressing the audit committees (AC) critical role in
contributing to financial statement credibility through their
oversight and resulting impact on the integrity of a companys
culture and ICFR, the quality of financial reporting, and the
quality of audits performed on behalf of investors
References: Speech:
https://www.sec.gov/news/speech/bricker-university-tennessee-032417BDO
Alert:
https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an
https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an
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PCAOB Update
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PCAOB Current Projects Standard Setting
Refer to:
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
Project Current Stage Timing
Auditors Reporting Model Final standard issued - AS 3101 June
2017
Auditing Accounting Estimates, Including Fair Value
Measurements
Proposed for public comment on June 1, 2017
Q2 2017
The Auditors Use of the Work of Specialists
Drafting proposal Q2 2017
Supervision of Audits Involving Other Auditors
Determining next action
Going Concern Outreach, monitoring, and research
Refer to:
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdfhttps://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
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50
PCAOB Current Projects Research
Refer to:
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
Project
Quality Control Standards, Including Assignment and
Documentation of Firm Supervisory Responsibilities
Changes in the Use of Data and Technology in the Conduct of
Audits
The Auditor's Role Regarding Other Information and Company
Performance Measures, Including Non-GAAP Measures
Auditor's Consideration of Noncompliance with Laws and
Regulations
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
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Auditor Report - AS 3101 The new standard and related amendments
retain the pass/fail opinion in the existing
auditors report, but significantly changes the existing auditors
report through the following requirements: The new standard
requires the auditor to communicate in the auditors report any
critical audit matters (CAMs) arising from the audit, or state
that the auditor determined that there were no CAMs. CAMs are
matters that were communicated or required to be communicated to
the audit committee, and that (1) relate to accounts or disclosures
that are material to the financial statements, and (2) involve
especially challenging, subjective, or complex auditor
judgment.
The auditors report will include disclosure of the auditors
tenure, i.e., the year in which the auditor began serving
consecutively as the companys auditor.
The auditors report will also include a statement that the
auditor is required to be independent.
The phrase, whether due to error or fraud, will be included in
the auditors report in describing the auditors responsibility under
PCAOB standards to plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatements.
The opinion will appear in the first section of the auditors
report, and section titles will be added to the report.
The auditors report will be addressed to the companys
shareholders and board of directors or equivalents (additional
addressees are also permitted).
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Auditor Report - AS 3101
The PCAOB adopted a phased approach to the effective date for
the new standard and amendments, to provide accounting firms,
companies, and audit committees more time to prepare for
implementation of the critical audit matter requirements, which are
expected to require more effort to implement than the other
improvements to the auditors report. Subject to approval by the
Securities and Exchange Commission, the final standard and
amendments will take effect as follows:
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Audit Quality Indicators
PCAOB 2015 Concept Release on Audit Quality Indicators -
identified 28 potential quantitative audit quality indicators
(AQIs) at both the firm and engagement level intended to provide
additional information about whether audit work being performed is
being conducted by the appropriate individuals with the requisite
experience, skills, resources, and tools. The potential AQIs
related to the following areas:
Audit Professionals measures dealing with the availability,
competence, and focus of those performing the audit.Audit Process
measures concerning an audit firm's tone at the top and
leadership, incentives, independence, investment in
infrastructure needed to support quality auditing, and monitoring
and remediation activities.Audit Results measures relating to
financial statements (such as the
number and impact of restatements, and measures of financial
reporting quality), internal control over financial reporting,
going concern reporting, communications between auditors and Audit
Committees, and enforcement and litigation.
http://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdf
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Audit Quality IndicatorsCAQ had developed its own approach to
AQI and performed extensive outreach, including a pilot program and
several public forums. Early in 2016, the CAQ released Audit
Quality Indicators: Journey and Path Ahead describing its work and
a suggested path forward to continue to identify more effective
ways to determine and assess audit quality.
Both the PCAOB and the CAQ continue to monitor audit quality and
how indicators about audit quality can best be identified,
collected, and used to inform capital markets both in the U.S. and
globally.
Recommended Resources Release DateCAQ Approach to Audit Quality
Indicators April 2014
CAQ Audit Quality Indicators: Journey and Path Ahead
January2016PCAOB Concept Release on Audit Quality Indicators July
2015
BDO Approach to Audit Quality August2016
http://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdfhttps://www.bdo.com/insights/assurance/corporate-governance/bdo-audit-quality-report
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PCAOB Enforcement Transparency Act
In March 2017, Senators Jack Reed and Charles Grassley
reintroduced the PCAOB Enforcement Transparency Act of 2017 (Bill
S. 610)
Intent of the bill is to make PCAOB disciplinary proceedings
public to bring auditing deficiencies at the firms or the companies
they audit to light in a timely manner and help deter
violations.
Similar attempts were made in previous years to get such
legislation through congress.
https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDE3MjQyJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIyMTQyODM/index.html&data=02|01|[email protected]|41844fc2840e49afc63408d4711812c9|6e57fc1a413e405091da7d2dc8543e3c|0|0|636257795601675062&sdata=lenp50Jh1EWS/QUTL0Ei%2BFbgqV9EOFH4H/f6X4vPyQ8%3D&reserved=0
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Other Governance Matters
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The Boards Role in CybersecurityAICPA Cybersecurity Risk
Management Framework to assist boards, management, and other
pertinent stakeholders. The subject matter of such a cybersecurity
examination engagement will be composed of three key elements:
1. Managements narrative description of the entitys
cybersecurity risk management program
2. Managements written assertion that the controls implemented
as part of the program were effective to achieve the entitys
cybersecurity objectives
3. Practitioners examination report expressing an opinion about
whether managements description of the entitys cybersecurity risk
management program and the effectiveness of controls within that
program achieve the entitys cybersecurity objectives.
AICPA Cybersecurity Resource
Center:https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx
https://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/Pages/AICPACybersecurityInitiative.aspxhttps://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx
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Cybersecurity Resources
Here are recent archived webinars for use by Audit Committees in
this area:
Recommended Resources Release Date
AICPAs New Examination Engagement: SOC for Cybersecurity May
2017
BDO Archived Webinar: A New Normal: The NY FDS Cybersecurity
Regulationand the Financial Services Industry April 2017
BDO Archived Webinar: What Boards Need to Know About
Cybersecurity (ButMay Be Afraid to Ask) March 2017
BDO Archived Webinar: Navigating the Rising Tide of
CybersecurityRegulation How is Your Board Preparing? July 2016
BDO Archived Webinar: Management Risk Elevation of Cybersecurity
to theBoardroom
February2016
http://www.aicpastore.com/InformationManagementTechnologyAssurance/aicpa-s-new-examination-engagement--soc-for-cybers/PRDOVR%7EPC-WC1415638/PC-WC1415638.jsp?_ga=2.190548527.564792482.1495194188-1081748325.1487865943https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.bdo.com/events/what-boards-need-to-know-about-cybersecurity-(buthttps://www.bdo.com/events/navigating-the-rising-tide-of-cybersecurity-regulahttps://www.bdo.com/events/managing-risk-elevation-of-cybersecurity
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Cybersecurity Resources
Recommended Resources Release Date
NACD and ISA Cyber Risk Oversight Directors Handbook Series
2017
CAQ Comment Letter: Enhanced Cyber Risk Management Standards
JointAdvance Notice of Proposed Rulemaking
January2017
Directors & Boards Article: Cyber Responsibility Officially
Reaches theBoard
January2017
CAQ Cybersecurity: How CPAs Are Addressing a Dynamic and Complex
Risk October2016
BDO Knows Cybersecurity Alert August 2016
BDO Article: Cyber for the C-Suite 3 Tips for Closing the
Information gap June 2016
BDO Practice Aid: Elevating Cybersecurity to the Board Questions
BoardsShould Be Asking March 2016
CAQ Understanding Cybersecurity and the External Audit
February2016
https://www.nacdonline.org/Cyberhttp://www.thecaq.org/federal-reserve-occ-fdic-enhanced-cyber-risk-management-standards-joint-advance-notice-proposedhttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-boardhttp://thecaq.org/cybersecurity-how-cpas-are-addressing-dynamic-and-complex-riskhttps://www.bdo.com/insights/consulting/bdo-knows-cybersecurity-alert-august-2016https://www.bdo.com/insights/consulting/cyber-for-the-c-suite-3-tips-for-closing-the-infohttps://www.bdo.com/insights/assurance/corporate-governance/elevating-cybersecurity-to-the-boardhttp://thecaq.org/understanding-cybersecurity-and-external-audit
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NY DFS Cyber Regulation Countrys first cybersecurity
regulation went into effect March 1, 2017.
Regulators put responsibility for cybersecurity squarely on the
Board.
Board must approve the companys written cybersecurity
policy.
The Chief Information Security Officer must report to the Board
at least annually.
Certification of compliance. Questions can be directed to
BDOs Judy Selby: [email protected]
Resources to learn more: Webinar - A New Normal: The NY FDS
Cybersecrity Regulation and the Financial Services Industry
https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fs
D&B Article - Cyber Responsibility Officially Reaches the
Board
https://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board
mailto:[email protected]://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board
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Cyber Board Certification
Certification of Compliance with New York State Department of
Financial Services Cybersecurity Regulations
The Board of Directors or a Senior Officer(s) of the Covered
Entity certifies: (1) The Board of Directors (or name of Senior
Officer(s)) has reviewed documents, reports, certifications and
opinions of such officers, employees, representatives, outside
vendors and other individuals or entities as necessary; (2) To the
best of the (Board of Directors) or (name of Senior Officer(s))
knowledge, the Cybersecurity Program of (name of Covered Entity as
of (date of the Board Resolution or Senior Officer(s) Compliance
Finding) for the year ended (year for which Board Resolution or
Compliance Finding is provided) complies with Part ___.
Signed by the Chairperson of the Board of Directors or Senior
Officer(s) (Name) Date: ___________________
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Diversity on Boards
In March 2017, Representative Carolyn Maloney introduced H.R.
1611, which would require the SEC to establish a Gender Diversity
Advisory Group to study and make recommendations on strategies to
increase gender diversity among members of boards of issuers
The bill would also amend the SEC 34 Act to require issues to
make disclosures to shareholders with respect to gender
diversity
In its most recent quarterly report, the Gender Diversity Index
(GDI), Equilar reports that only 15.1% of board seats at the
Russell 3000 companies are occupied by women At this pace, boards
will reach gender parity in 2055!
Refer to:
https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/
Refer to BDO June 2017 webinar that takes diversity a step
further from the perspective of diversity in thought within the
boardroom
https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDA4ODEzJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIxMzkwMDI/index.html&data=02|01|[email protected]|3b5d7885887c4ae8660908d46f84d884|6e57fc1a413e405091da7d2dc8543e3c|0|0|636256063748587572&sdata=9cL56u7Ug1BLaimw2bzFtOHCR8Xf86rDg8OZvi6pHdM%3D&reserved=0https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/
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Resources
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The BDO Center for Corporate Governance and Financial
Reporting
AN INCREDIBLE RESOURCE AT YOUR FINGERTIPSThe BDO Center for
Corporate Governance and Financial Reporting was born from the need
to have a comprehensive, online, and easy-to-use resource for
topics relevant to boards of directors and financial executives. We
encourage you to visit the Center often for up-to-date information
and insights you can rely on. What you will find includes:
Thought leadership, practice aids, tools, and newsletters
Technical updates and insights on emerging business issues
Three-pronged evolving curriculum consisting of upcoming
webinars and archived self-study content
Opportunities to engage with BDO thought leaders
External governance community resources
For more information about BDOs Center for Corporate Governance,
please go to www.bdo.com/resource-centers/governance
To begin receiving email notifications regarding BDO
publications and event invitations (live and web-based), visit
www.bdo.com/member/registration and create a user profile.
If you already have an account on BDOs website, visit the My
Profile page to login and manage your account preferences
www.bdo.com/member/my-profile.
Finally, a resource center with the continual education needs of
those charged with governance and financial reporting in mind!
A dynamic and searchable on-line resource for board of directors
and financial executives
http://www.bdo.com/resource-centers/governancehttp://www.bdo.com/member/registrationhttp://www.bdo.com/member/my-profile
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CAQ Audit Committee ToolsPreparing for the New Revenue
Recognition Standard: Understanding the new revenue recognition
standard
what is it? Evaluating the companys impact assessment how
will
revenue change? Evaluating the implementation project plan how
do we
need to prepare? Other implementation considerations what else
do we
need to consider?
CAQ Non-GAAP Financial Measures: Continuing the Conversation The
CAQ intends to use the questions in this tool in
roundtables and panels in which management, investors,
investment analysts, members of the legal community, AC, internal
and external auditors, regulators, and academics can come together
to share perspectives on non-GAAP financial measures
http://thecaq.org/preparing-new-revenue-recognition-standard-tool-audit-committeeshttp://www.thecaq.org/non-gaap-financial-measures-continuing-conversation
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CAQ Audit Committee Tools
https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-au
http://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf
CAQ tool to help audit committees determine the meaningfulness
of non-GAAP measures and whether:(1) management is complying
with SEC rules and related interpretations to non-GAAP measures
and
(2) non-GAAP measures are aiding analysts and investors in
understanding the business and its performance
https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-auhttp://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf
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BDO Audit Committee Alert: Emphasis and Focus on Controls and
Non-GAAP
Regulators are in agreement on continued need for company
vigilance around internal controls particularly: Audit areas where
deficiencies have been
identified in previous PCAOB inspections Management review
controls Non-GAAP measures New FASB standards on revenue
recognition, leases, financial instruments, and credit
losses
Reference: BDOs practice aid available in your handouts
https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-
alert-emphasis-and-focus-on-contr
https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-alert-emphasis-and-focus-on-contr
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BDO Practice Aid: Audit Committee Requirements
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Questions?
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BDO USA, LLP, a Delaware limited liability partnership, is the
U.S. member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms.
TAX AUTOMATION&
ASC 740 UPDATE
June 14, 2017
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WITH YOU TODAY
Bill ConnollyTax Managing Director National Tax OfficeBDO USA,
LLPBoston, [email protected](617) 239-4127
Barbara TorzewskiSenior Tax ManagerBDO USA, LLPTroy,
[email protected](248) 244-6527
mailto:[email protected]:[email protected]
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AGENDA
Tax Automation Artificial Intelligence, Data Analytics &
Robotics Oh My!
ASC 740 Developments
Other Considerations / Current Topics
Questions & Wrap Up
Appendix A Recent ASC Changes & Proposed Changes
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Tax AutomationArtificial Intelligence, Data Analytics &
Robotics Oh My!
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What Does All This Mean?
A Definition of Data Analytics
The process of collection, identifying details, categorizing key
items and creating visualizations that help users understand a set
of data and its meaning. The key to data analytics is not only to
understand the data but having a good understanding of the
questions that need to be answered. It is also important to note
that when someone is reviewing data in a manual fashion, the more
data they have the more difficult it is to understand. With Data
Analytics the larger the data set available, the clearer the
results become and the easier it will be to draw more accurate
conclusions.
Tax Specific Example
Sales & use tax bot which generates estimates of possible
refund amounts to assess whether a sales and use tax reverse audit
has viability.
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What Does All This Mean?
A Definition of Robotics
The automation of repeatable tasks performed by data and
application users. Often when employees are working with data there
are initial steps that they need to perform to gather consolidate,
integrate with other data and finally use the information. Software
Robotics is intended to remove the steps needed to process and
present data by employees and give them more time to consume the
data and make better use of the information.
Tax Specific Example
Bridging a trial balance via upload from source system generated
report into a tax provision software tool to automatically
calculate tax sensitive schedule Ms.
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What Does All This Mean?
A Definition of Artificial Intelligence (AI) AI and Machine
Learning are important next steps in the use of Data Analytics
within the business environment. Similar to standard data
analytics, AI & Machine Learning collect, identify and
categorize the data. However, through the use of AI, the patterns
found within the datasets can now be adjusted by the code we use.
Outliers can be automatically identified as issues or false
positives matches. AI can also be used to identify trends that can
be applied from one dataset to another and visuals (such as
dashboards) can be adjusted accordingly. Data added in future
imports will have the new logic and also contribute to the growing
understanding of our information by the system.
Tax Specific Example Watson (owned by IBM) has teamed up with
tax preparers to assist in coming up with client specific questions
to find potential tax breaks based on client profiles. The tool
also is meant to assist in visiting the tax preparer a more
engaging and interactive experience for the client. The tool shows
questions and suggestions to clients on a separate screen as the
return is being prepared. The verdict is out on whether clients
agree if the experience of filing their tax has improved or
not!
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Introducing.our BOTs
Robot Process Automation (RPA)/Software Robotics/Automation
Uses software applications to automate manual and repetitive
tasks
Removes the robot from the human
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Tax Provision Footnote Bot
3 reports are run from OneSource
Template is configured specifically for client data
Footnotes are created and updated
Final draft of statements is automatically generated
Original process to update footnotes3-5 hoursNew process takes
10 minutes
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Many resources doing the same task
Data or information produced by the task could
be shared
Timely processing of data is vital to the business
The people performing the task do not enjoy the task
The task is repeated often and is time consuming
When to Use Software Robotics
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Tax Automation Top 10 Factors to Ensure a Successful
Implementation
1. Software alone is not the answer 2. Change management is
crucial 3. Demo multiple packages 4. Do not start a project without
enough budget 5. Dont try to implement the software yourself 6.
Hire a consulting firm with appropriate experience 7. Assign an
internal point person to lead the project 8. Dont spend months on
the implementation 9. Ensure your department is properly trained
10. Ensure your department is properly supported
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The examples we will review are for discussion purposes only and
have been intentionally simplified for the classroom setting.
Specific situations need to be analyzed based on the facts and
circumstances of each case. Also, please discuss with your attest
firm since there are divergent views in practice with respect to
many issues. BDO will not be responsible for any loss sustained by
any person who relies on these materials.
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ASC 740 Developments
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ASC 740 DEVELOPMENTS
ASU 2015-17, Balance sheet classification of deferred taxes
Effective date(s) and early adoption: Public business entities for
annual periods beginning after December 15, 2016 Entities other
than public business entities for annual period beginning after
December 15, 2017 and interim reporting periods within annual
reporting period beginning after December 15, 2018.
Early adoption for all entities as of the beginning of any
interim or annual reporting period.
ASU 2016-09, Improvements to Employee Share-Based Accounting
Effective dates and early adoption:
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ASC 740 DEVELOPMENTS (CONTD)
Public business entities for fiscal periods beginning after
December 15, 2016, including interim periods within those fiscal
years
Other entities for fiscal years beginning after December 15,
2017 and interim periods within fiscal years beginning after
December 15, 2018
Early adoption is permitted for: Public business entities for
reporting periods for which financial statements have
not yet been issued All other entities fore reporting periods
for which financial statements have not
yet been made available for issuance An entity that elects to
early adopt in an interim period shall reflect any adjustments
as of the beginning of the annual period that includes that
interim period
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ASC 740 DEVELOPMENTS (CONTD)
ASU 2016-16, Intra-Entity Asset Transfers Effective date(s) and
early adoption: Public business entities should apply the
amendments in annual reporting periods
beginning after December 15, 2017, including interim reporting
periods within those annual reporting periods.
Entities other than public business entities should apply the
amendments in annual reporting periods beginning after December 15,
2018, and interim periods in annual periods beginning after
December 15, 2019.
Early adoption for all entities as of the beginning of an annual
reporting period for which financial statements (interim or annual)
have not been issued or made available for issuance. That is,
earlier adoption should be in the first interim period if an entity
issues
interim financial statements.
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ASC 740 DEVELOPMENTS (CONTD)
Disclosure framework project July 26, 2016, proposed ASU issued
September 30, 2016, comment period ended January 25, 2017, Board
discussed comments received March 17, 2017, Roundtable on all
disclosure projects Final ASU no time frame as yet
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Case Study 1
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Other ASC 740 Topics of Current Interest
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PASS-THROUGH SUBSIDIARIES
Investments in partnerships can be accounted for under the
consolidated, equity or cost method of accounting
Partnerships and other entities treated as partnerships (i.e.
LLCs/S-Corps) are not taxable entities. Rather, the tax
consequences of transactions within the partnership flow through to
the partners
The partners then report their proportionate share of the
partnerships income or loss in their individual capacities
Under ASC 740, a partners future tax consequences of recovering
the financial basis of its investment in the partnership are
recognized as deferred tax assets or liabilities
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PASS-THROUGH SUBSIDIARIES (CONTD)
Deferred taxes are recognized on the outside basis difference of
investments in pass-through subsidiaries the difference between the
financial statement carrying value and the tax basis of the
investment in the partnership- Will often be equal to the net basis
differences in the assets and liabilities of the
partnership- Watch for exceptions related to goodwill and/or
investments in foreign
subsidiaries discussed on next two slides The exceptions to
recognizing deferred taxes in ASC 740 (both taxable and
deductible)
do not apply to the outside basis of the investment in
pass-through subsidiaries- Consideration is necessary for
recoverability should there be a deductible
temporary difference- Ordinary versus capital?
The exceptions in ASC 740-10-25-3 (general exceptions) and
740-30-25-9 (deductible outside basis difference) generally will
apply to a pass-through subsidiarys investment in another
entity
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PASS-THROUGH SUBSIDIARIES (CONTD)
Pass-through subsidiarys investment in another entity- Corporate
parent with consolidated partnership where the partnership
consolidates a foreign subsidiary- A DTL for undistributed
earnings for the foreign subsidiary should not be
recognized if the partnership is able to meet the indefinite
reversal criterion If a pass-through has an investment in a
corporate subsidiary, the outside basis
difference of the investment in the pass-through subsidiary by
the ultimate corporate parent should be bifurcated into two
components:- The outside basis difference related to the second
tier subsidiary, and- The remaining outside basis difference
Deferred taxes generally should not be recognized for the
portion of the outside basis difference that relates to the
pass-through subsidiarys investment in the second tier corporate
subsidiary that meets one of the exceptions to recognize deferred
taxes for outside basis differences
If a pass-through has an investment in a domestic corporate
subsidiary, the exception in ASC 740-30-25-7 would not be
applicable as the partnership cannot recover its investment in the
domestic subsidiary tax-free under the IRC
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PASS-THROUGH SUBSIDIARIES (CONTD)
Similarly, an ultimate corporate parent company may not
recognize deferred taxes on the portion of the outside basis
difference for its investment in a pass-through subsidiary
attributable to nondeductible goodwill- Deferred taxes are not
provided for nondeductible goodwill under ASC 805-740-25-
3 and 25-4- A partner may look through its partnership interest
(outside basis) to the book
and tax differences of individual assets and liabilities within
the partnership (inside basis differences)
There is diversity in practice where some recognize the entire
outside basis difference, including the portion of nondeductible
goodwill
Either practice can be used as long as it is consistently
applied- Discuss with the audit firm involved- BDOs policy is to
accept either as long as the practice is consistently applied
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TAX EFFECTS OF NON-CONTROLLING INTERESTS (NCI) IN PASS-THROUGH
ENTITIES
Income taxes included in consolidated income taxes and
attributed to non-controlling interests on the face of the
consolidated income statement will vary depending on whether the
subsidiary is a partnership or C corporation
For a partnership:- Tax consequences of transactions within the
partnership flow through to the
partners- Partners then report their proportionate share of the
partnerships income or loss
in their individual capacities Therefore, an entity with a
controlling interest in a partnership would only report
taxes on its share of the partnership in consolidated income tax
expense
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BUSINESS COMBINATION ACHIEVED IN STAGES
A business combination that is achieved in stages requires the
acquirer to remeasure to fair value its previously held equity
investment at the acquisition date
Example would be when an entity has an investment in a
partnership accounted for under the equity method and subsequently
acquires the remaining partnership interests from the other
partners
Equity method investment is remeasured to fair value and any
resulting gain or loss is recognized in earnings and not as part of
acquisition accounting
Remeasurement upon obtaining control of the investee increases
or decreases the financial statement carrying value of the
previously held investment without a corresponding change in the
tax basis
Remeasurment would generally be a non-recognition event for
income tax purposes with no change in tax basis
The effect of derecognizing any deferred taxes related to the
outside basis difference of the previously held equity method
investment would be recognized in earnings as part of income tax
expense
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BUSINESS COMBINATION ACHIEVED IN STAGES (CONTD)
Upon gaining control of the previously held equity method
investee, the acquirer will apply acquisition accounting and
recognize the assets and liabilities assumed, including goodwill ;
however, for tax purposes only a portion would get a step-up in
basis
The acquirer recognizes and measures deferred tax assets and
liabilities arising from temporary differences in the assets
acquired and liabilities assumed from the equity method investee-
Deferred taxes recognized on the inside basis differences of the
assets and liabilities
assumed is recorded as part of acquisition accounting- Includes
the inside basis difference that arises from the portion of the
previously
held equity method investment that would not generally get a
step-up in basis- Results in larger inside book-over-tax basis
differences as a result of the previously
held equity method investment which impacts the amount of
goodwill recorded in acquisition accounting
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Case Studies 2, 3, & 4
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TAX REFORM PROPOSALS
Good Bad Ugly
Rate Change 35% to 20% - 15%
Expensing Allows deductibility of both tangible and intangible
asset purchases
Net operating loss carryovers
Move from current 20 year carryover to unlimited carryover
period
Eliminates current 2 year carryback
Only allowed to offset 90% of taxable income in carryforward
year
Interest expense Only allows deduction of interest versus
interest income, excess to be carried over
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TAX REFORM PROPOSALS (CONTD)
Good Bad Ugly
Territorial tax System
100% Dividends received deduction from subsidiaries
Still would tax foreign personal holding company income (Code
Sec 954(a)(1))
Mandatory repatriation
Liability payable over eight years
8.75% tax rate is proposed on previously untaxed cash and cash
equivalents with a reduced 3.5% rate for all other previously
untaxed foreign earnings
Border Adjustment tax (BAT)
Exclude gross income (sales, services, royalties etc.) from the
tax base for exports
Deny the deduction (basis or cost of goods sold) for imports
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TAX REFORM PROPOSALS (CONTD)
ASC 740 Considerations:
Rate Change Pursuant to ASC 730-10-45-15 the effect of changes
in tax laws or rates shall be included in income from continuing
operations for the period that includes the enactment date.
Calculation complications when change is prospective versus
retroactive at an interim date.
Expensing Should create additional deferred tax liabilities.
Potential to create additional naked credits for entities in a
valuation allowance position.
Interest expense Should create a deferred tax asset which would
need to be assessed for recoverability/valuation allowance.
Net operating loss carryovers
For entities that are currently relying on carryback of net
reversing deferred tax assets in support of reducing a valuation
allowance, this source of income would be eliminated. Proposal
could free up naked credits but realization of reversing taxable
temporary differences would be limited to 90% of the amount expect
to reverse in each subsequent year including the indefinite
amount.
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TAX REFORM PROPOSALS (CONTD)
Territorial tax system
Would not have to provide on expected remittance with the
exception of withholding tax. Still would need to monitor FPHCI for
inclusion. Upon sale would still need provide for outside basis
difference since no longer permanent in duration (see ASC
740-30-25-5). Does not appear to be any proposal to eliminate gain
on sale from taxation.
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Case Studies 5 & 6
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BRANCH ACCOUNTING AND DEFERRED TAXES
Issue multiple deferred differences to report for the temporary
differences of a branch U.S. GAAP to U.S. Tax U.S. GAAP to Foreign
Tax U.S. tax impact of Foreign deferred Deferred tax asset for
foreign deferred tax liability as (potential foreign tax credit)
Deferred tax liability for foreign deferred tax assets
Watch dual consolidated loss disclosures
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Case Studies 7, 8, & 9
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PUSH DOWN ACCOUNTING FALLACIES
ASU 2014-17 was issued in November of 2014 and states: An
acquired entity may elect the option to apply pushdown accounting
in the reporting
period in which the change-in-control event occurs Above
guidance relative to acquired entity and does not eliminate the
requirement that
the acquiring corporation record acquisition related adjustments
whether they are pushed down to the target or kept notionally at
the parent level (ASC 805-20)
Main issue seen in practice is when the acquisition related
adjustments are not pushed down to target and targets deferred tax
items would be at a rate different than that of the acquirer and
also in a different currency ASC 830-30-45-11 States: After a
business combination, the amount assigned at the acquisition date
to the
assets acquired and the liabilities assumed (including goodwill
or the gain recognized for a bargain purchase in accordance with
Subtopic 805-30) shall be translated in conformity with the
requirements of this Subtopic
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PUSH DOWN ACCOUNTING FALLACIES (CONTD)
ASU 740-10-30-5 states: Deferred taxes shall be determined
separately for each tax paying component (an
individual entity on group of entities that is consolidated for
tax purposes) in each tax jurisdiction
To summarize above guidance: Record acquisition related
adjustments in the appropriate currency even though they are
not pushed down to the target in the acquiring corporations
financial statements or books and records
Practical issue exists of identifying the location of the
acquisition related adjustments e.g. intangibles - when an entity
is acquired with multi location subsidiaries
Need to work with accounting and valuation in order to assure
appropriate jurisdictional values are assigned
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Case Study 10
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PRESENTATION OF DEFERRED FEDERAL INCOME TAXES ASSOCIATED WITH
DEFERRED STATE INCOME TAXES
ASC 740-10-55-20 states: State income taxes are deductible for
U.S. federal income tax purposes and therefore , a deferred state
income tax
liability or asset gives rise to a temporary difference for
determining a deferred U.S. federal income tax asset or liability,
respectively. The pattern of deductible or taxable amounts in
future years for temporary differences related to deferred state
income tax liabilities or assets should be determined by estimates
of the amount of those state income taxes that are expected to
become payable or recoverable for particular future years and,
therefore, deductible or taxable for U.S. federal tax purposes in
those particular future years.
It is not appropriate to net the federal effect of a state DTL
or DTA against the state deferred tax. ASC 740 generally requires
separate identification of temporary difference and related
deferred taxes for each tax-paying component of an entity in each
tax jurisdiction, including U.S. federal, state, local, and
foreign, tax jurisdictions. ASC 740-10-45-6 states the following
regarding the offsetting of DTAs and DTLs: For a particular
tax-paying component of an entity and within a particular tax
jurisdiction, all deferred tax liabilities
and assets, as well as any related valuation allowance, shall be
offset and presented as a single noncurrent amount. However an
entity shall not offset deferred tax labilities and assets
attributable to different tax-paying components of the entity or to
different tax jurisdictions.
In addition to improper presentation of DTAs and DTLs in the
balance sheet, improperly netting the federal effect of the state
deferred taxes themselves can result in, among other things, (1) an
improper assessment of whether a valuation allowance is necessary
in a particular jurisdiction or (2) improper disclosures related to
DTAs and DTLs.
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Case Study 11
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INTRAPERIOD ALLOCATIONException to the General Rule Losses from
Continuing Operations
ASC 740 requires that items outside of continuing operations
(extraordinary items, discontinued operations, OCI etc.) be
considered in determining the amount of income tax benefit to be
allocated to continuing operations in situations where there are
pretax lossesfrom continuing operations and a valuation allowance
at the beginning and end of the year.
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Case Studies 12 & 13
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UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
Two sides to Every Transaction Consider Competent Authority
Amount of deduction in one jurisdiction vs. amount of income in
the othertax authorities have conflicting interest
May have exposure in either or both jurisdictions
Tax treaties may provide for competent authority negotiations to
resolve conflicts.- Generally high success rate (but may differ by
jurisdiction)
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UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
ASC 740 analysis with competent authority Determine exposure in
each jurisdiction before potential CA relief Determine whether CA
relief will be requested and success probability Determine
potential settlement positions, book resulting exposure/asset
in
each jurisdiction
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Competent Authority Relief FY 2011 through FY2015
RELIEF 2011 2012 2013 2014 20155-year Average
(2011-2015)
Correlative Adjustment 22.84% 34.24% 65.7% 88.7% 83.3%
58.96%
Adjustment Withdrawn 55.68% 63.59% 14.1% 10.8% 15.1% 31.85%
No Relief 21.48%* 2.17% 20.2% .5% 1.6% 9.19%
Total of Correlative Adjustment received or Adjustment Withdrawn
78.52% 97.83% 79.8% 99.5% 98.4% 86.11%
* 83% of this figure is attributable to a single case on which
no relief was granted.
UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
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Case Study 14
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VALUATION ALLOWANCESIn Business Combinations
Established at time of business combination
Evaluate evidence- Combined companys past and expected future
results of operations as of the
acquisition date- Consider tax law provisions that restrict
future use of temporary differences (Code
Section 382 limitations)
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VALUATION ALLOWANCESIn Business Combinations
Two deferred tax assets and valuation allowances need to be
considered in these transactions
Acquired company:- Adjustments to target companys valuation
allowance established for DTAs at the
date of acquisition are reflected as adjustments to
goodwill.
Acquiring Company:- Adjustments to the acquirers valuation
allowance is recorded as a component of
income tax expense (P&L) and not included as part of
acquisition accounting (Goodwill).
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Case Study 15
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Circular 230 and General Disclaimer: These materials do not
constitute tax or legal advice, and cannot be relied upon for
purposes of avoiding penalties under the Internal Revenue Code.
These materials may omit discussion of exceptions, qualification,
definitions, effective dates, jurisdictional differences, and other
relevant authorities and considerations. In no event should a
reader rely on these materials in planning a specific transaction
or litigation. Non-lawyers should not attempt to provide legal
services or legal advice in circumstances where that would violate
laws against the unauthorized practice of law. BDO will not be
responsible for any error, omission, or inaccuracy in these
materials.
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Questions?
Thank You!
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APPENDIX A SLIDES REGARDING RECENT
ASC 740 CHANGES
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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17ASU
2015-17 issued in November by the Board which requires deferred
taxes to be shown as long term in a classified statement of
financial position
Transition method The Board decided that entities should have a
choice of applying the amendments
either prospectively or retrospectively to all periods
presented. Transition Disclosures If an entity applies the
amendments prospectively, the entity should disclose in the
first interim and annual period of change (1) the nature of and
reason for the change in accounting principle and (2) a statement
that prior periods were not adjusted. If an entity applies the
amendments retrospectively, the entity should disclose in the first
interim and annual period of change (1) the nature of and reason
for the change in accounting principle and (2) quantitative
information about the effects of the accounting change to prior
periods.
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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17
(CONTD)
Effective Date and Early Adoption The Board affirmed the
proposal that public business entities would be required to
apply the amendments in annual reporting periods beginning after
December 15, 2016, including interim reporting periods within those
annual reporting periods.
The Board affirmed the proposal that entities other than public
business entities would be required to apply the amendments in
annual reporting periods beginning after December 15, 2017, and
interim reporting periods within annual reporting periods beginning
after December 15, 2018.
The Board decided to allow earlier adoption for all entities as
of the beginning of any interim or annual reporting period.
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING ASU
2016-09 issued on March 30, 2016 The changes as they relate to
income taxes are as follows:
Classify cash paid when directly withholding shares to meet
statutory withholding requirements as a financing activity in the
statement of cash flow. Transition - Retrospective transition
method (application of a different accounting
principal to one or more previously issued financial
statements). Removal of requirement to present excess tax benefits
as a cash inflow from financing
activities and a cash outflow from operating activities.
Transition - Either prospective or retrospective application of
this provision is permitted.
Board decided that all excess tax benefits and deficiencies be
recognized within the income statement. Removes the requirement to
recognize excess tax benefit until reduction of cash taxes.
Transition - modified retrospective method, with a cumulative-
effect adjustment
recognized in equity and prospective transition method for
future excess benefits and deficiencies. All existing windfall
benefits not recognized due to net operating losses are
recognized.
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
Other Issues
The ASU eliminates the requirement to defer recognition of an
excess tax benefit until the benefit is realized through a
reduction of taxes payable
Excess tax benefits and deficiencies are considered discrete
items in the reporting period and are not included in the estimated
effective tax rate
Excess tax benefits and deficiencies are excluded from the
assumed proceeds available to repurchase shares in the computation
of diluted earnings per share when an entity applies the treasury
stock method
The tax impact of dividends on share-based payments will now be
accounted for as income tax expense or benefit in the income
statement rather than as an increase to APIC
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
Effective date(s) Public business entities for fiscal periods
beginning after December 15, 2016, including
interim periods within those fiscal years Other entities for
fiscal years beginning after December 15, 2017 and interim
periods
within fiscal years beginning after December 15, 2018 Early
adoption is permitted for:
Public business entities for reporting periods for which
financial statements have not yet been issued
All other entities for reporting periods for which financial
statements have not yet been made available for issuance
An entity that elects to early adopt in an interim period shall
reflect any adjustments as of the beginning of the annual period
that includes that interim period
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
If early adopted all amendments must be adopted at the same
time
Disclosures In the period of adoption, entities are required to
disclose:
The nature and reason for the change in accounting principle The
cumulative effects of the changes on retained earnings or other
components of
equity as of the date of adoption Cash flows related to excess
tax benefits disclose either:
That prior periods have not been adjusted OR The effect of the
change on prior periods retrospectively adjusted if the change
is
applied retrospectively
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
For changes in the statement of cash flows related to statutory
tax withholding requirements, entities are required to disclose the
effect of the change on prior periods retrospectively adjusted
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
Other issues to consider
Valuation allowance Consider valuation allowance upon adoption
Release after adoption
Determination of the discrete item related to excess tax
benefits Direct effect Full ASC 740 with and without Incremental
effect
Existing APIC Pools No reclassification to retained earnings
upon adoption
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING
(CONTD)
Early adoption other than first-quarter Must treat as if adopted
at the beginning of the year Previously issued financials need to
be recast in future filings (e.g. Form 10-Q,
Form 10-K)
Accounting policy change for forfeitures will create additional
deferred tax considerations
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EXAMPLE OF SHARE-BASED PAYMENTS
Assume Fulham Co. grants a nonqualified stock option (NQSO) 40%
rate Fair value at date of grant is $20 in 20x1 Strike price equals
market at date of grant - $30 At date of exercise the fair value of
the grant is $60
Fulham would recognize the following:
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EXAMPLE OF SHARE-BASED PAYMENTS
Assume the same facts as the previous example except the excess
tax benefit recognized becomes part of an NOL carryover and Fulham
will not record a valuation allowance with respect to its deferred
tax assets.
Fulham would recognize the following:
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INTRA-ENTITY ASSET TRANSFERS ASU 2016-16
ASU 2016-16 was issued on October 24, 2016 Requires that an
entity recognize the income tax consequences of an intra-entity
asset
transfer, other than an intra-entity asset transfer of
inventory, when the transfer occurs. For intra-entity asset
transfers of inventory, the board decided to retain current GAAP,
which requires an entity to recognize the income tax consequences
when the inventory has been sold to an outside party.
The Board decided that entities should apply the amendments on a
modified retrospective basis, with a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of
adoption.
The Board affirmed the proposal that entities should disclose in
the first annual period after adoption, and the interim periods
within the first annual period, the nature of and reason for the
change in accounting principle and certain quantitative information
about the change in accounting principle.
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INTRA-ENTITY ASSET TRANSFERS (CONTD)
The Board decided that public business entities should apply the
amendments in annual reporting periods beginning after December 15,
2017, including interim reporting periods within those annual
reporting periods.
The board decided that entities other than public business
entities should apply the amendments in annual reporting periods
beginning after December 15, 2018, and interim periods in annual
periods beginning after December 15, 2019.
The Board decided to permit early adoption for all entities as
of the beginning of an annual reporting period for which financial
statements (interim or annual) have not been issued or made
available for issuance. That is, earlier adoption should be in the
first interim period if an entity issues
interim financial statements.
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INTRA-ENTITY TRANSACTION EXAMPLE - INVENTORY
Assumptions: Widget Company, a U.S. Corporation, owns 100% of
Guiness Co., an Irish entity. Widget
and Guiness are included in a consolidated financial statement
but file separate tax returns.
Widget sells inventory to Guiness with a book and tax value of
$50 for $100 which has not been sold by Guiness at the reporting
date.
Widgets tax rate is 40% and Guiness tax rate is 12.5%.
Question: What entries should be recorded in the consolidated
financial statements of the
Widget/Guiness Group.
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INTRA-ENTITY TRANSACTION EXAMPLE-CURRENT & PROSPECTIVE
ACCOUNTING-INVENTORY
WidgetDr A/R 100
Cr. Sale 100Dr Cogs 50
Cr. Inventory 50Dr Current tax Expense 20
Cr Current tax Payable 20Guiness
Dr Inventory 100Cr A/P 100
ConsolidationDr A/P 100Dr Sales 100
Cr Inventory 50Cr. Cogs 50Cr. A/R 100
Dr Prepaid tax 20Cr Current tax Expense 20
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INTRA-ENTITY TRANSACTION EXAMPLE-EXPOSURE DRAFT ACCOUNTING
(REJECTED)-INVENTORYFacts are the same as the previous
example.Journal entries are as follows:
WidgetDr A/R 100
Cr Sale 100Dr Cogs 50Cr. Inventory 50
Dr Current tax Expense 20Cr Current Tax Payable 20
GuinessDr Inventory 100Cr A/P 100
ConsolidationDr A/R 100Dr Sales 100
Cr Inventory 50Cr Cogs 50Cr A/R 100
Dr Deferred tax asset 6.251.
Cr Deferred Tax benefit 6.25
1. (50x12.5%)
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INTRA-ENTITY TRANSFER FINAL - NON-INVENTORY TRANSFER
Assumptions: Widget Company, a U.S. Corporation, owns 100% of
Guiness Co., an Irish entity. Widget
and Guiness are included in a consolidated financial statement
but file separate tax returns.
Widget sells intellectual property (IP) to Guiness for $100
which has a zero basis. Guiness is able to amortize the IP for tax
purposes over a ten year period which approximates the estimated
book life.
Widgets tax rate is 40% and Guinesss tax rate is 12.5%
Question: What entries should be recorded in the consolidated
financial statements of the
Widget/Guiness Group with respect to the IP sale?
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138
INTRA-ENTITY TRANSACTION EXAMPLE NON INVENTORYPrior
Accounting
WidgetDr A/R 100
Cr Income 100Dr Current tax
expense 40Cr Current tax
payable 40
GuinessDr I.P 100
Cr A/P 100
ConsolidationDr prepaid tax 40Cr Current Tax
expense 40Dr Income 100
Cr I.P. 100
ASU 2016-16
WidgetDr A/R 100
Cr Income 100Dr Current tax
expense 40Cr Current Tax
payable 40
GuinessDr I.P 100
Cr A/P 100
ConsolidationDr Deferred tax
asset 12.5Cr Deferred Tax
benefit 12.5Dr Income 100
Cr I.P. 100
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DISCLOSURE FRAMEWORK PROJECT
On July 26, 2016 the Board proposed an Accounting Standards
Update, with a comment period of 60 days or ending on September 30,
2016, whichever is longer.
The Board decided to require prospective transition for all
income tax disclosures. Currently, some disclosure requirements in
Topic 740, Income Taxes, are required of
public entities and some are required of nonpublic entities. The
Board decided to replace the term public entity with the term
public business entity as defined in the Master Glossary of the
Codification. The result is that some disclosures will be required
of public business entities while other disclosures will be
required of entitles other than public business entities.
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140
DISCLOSURE FRAMEWORK PROJECT FOREIGN DISCLOSURES &
UNDISTRIBUTED EARNINGS TENTATIVE DECISION
Disclose
Income (loss) before income tax expense (benefit) disaggregated
between domestic and foreign
Income tax expense (or benefit) from continuing operations
disaggregated between domestic and foreign shall be disclosed
An explanation of circumstances that caused a change in
assertion about the indefinite reinvestment of undistributed
foreign earnings and the corresponding amount of these earnings
The aggregate of cash, cash equivalents and marketable
securities held by foreign subsidiaries
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141
DISCLOSURE FRAMEWORK PROJECT-UNCERTAIN TAX POSITION DISCLOSURE
TENTATIVE DECISION
Disclose
Settlements between cash and noncash items UTPs by balance sheet
line item
Removes
The disclosure of tax positions that could reasonably change
within the next twelve months pursuant to ASC 740-10-50-15d
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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES
Disclose If a change in tax law has been enacted and it is
probable that the change will affect
the reporting entity in a future period Income taxes paid
between domestic taxes paid and foreign taxes paid Foreign income
taxes paid to any country that are significant relative to total
income
taxes paid The change in the valuation allowance and explaining
the nature and amounts recorded
or released during the reporting period (for public business
entities only)
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143
DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)Rate
Reconciliation Public Business Entity
Reconciliation between total income tax expense/(benefit) from
continuing operations and PBT times the applicable statutory
federal income tax rate showing the estimated reporting currency
amount of each reconciling difference
Should the public business entity be a foreign entity, the
income tax rate in that entitys country of domicile shall normally
be used as the starting point of the reconciliation (emphasis
added) Different rates shall not be used for subsidiaries or other
segments of the public
business entity If the rate used is other than the U.S. federal
tax rate, the rate used and the basis
for using that rate shall be disclosed If no individual
reconciling item amounts to more than 5% of the computed amount
and
the total difference to be reconciled is < 5%, no
reconciliation need be provided
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144
DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)
Rate Reconciliation Public Business Entity (contd) Reconciling
items that are individually less than 5% of the computed amount may
be
aggregated in the reconciliation The reconciliation may be
presented in percentages or in the reporting currency The statutory
tax rates shall be the regular tax rates if there are alternative
tax
systems Explanations of year-to-year changes in the reconciling
items shall also be
disclosed
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145
DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES (CONTD)
The amounts of federal, state, and foreign carryforwards (not
tax effected) by time period of expiration for each of the first
five years after the reporting date and a total of the amounts for
the remaining years. (public business entities)
The deferred tax asset for carryforwards (tax effected) before
valuation allowance disaggregated by federal, state, and foreign.
Those amounts should be further disaggregated by time period of
expiration for each of the first five years after the reporting
date and a total of the amounts for the remaining years. (public
business entities)
The total amount of unrecognized tax benefits that offset the
deferred tax asset attributable to carryforwards
For entities other than public business entities the amounts of
federal, state, and foreign carryforwards (not tax effected) should
be disclosed
The terms of any rights or privileges granted by a governmental
entity directly to the reporting entity that have reduced, or may
reduce, the entity's income tax burden. Does not apply to
circumstances in which the entity meets the eligibility
requirements that are broadly available to taxpayers without
specific agreement between the entity and the government
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146
DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES
(CONTD)Potential Sample of Carryforward Disclosure
Year of Expiration
FederalCarryforward
State Carryforward
Foreign Carryforward
Federal DTA
StateDTA
ForeignDTA
Less UTP
Net DTA Before VA
2017
2018
2019
2020
2021
Thereafter