Year-End Update From the SEC, PCAOB and FASB - FEI Houston...FASB ASU No. 2015-01 – Extraordinary Items •Companies could present an item net of tax on the income statement that

Year-End Update From the SEC,

PCAOB and FASB

January 19, 2016

Agenda for Today

• Topics to Discuss:

– Update from AICPA Conference on Current SEC & PCAOB

Developments

– ASU FASB Updates for 2015 and 2014

– Leases

– Revenue Recognition

– Private Company Council Reporting Update

© 2016 Hein & Associates LLP. All rights reserved.

Conference Themes

SEC very pleased with PCAOB

– Restatements down

Desire for more “credible” reporting

– Segments

– MD&A

– Disclosures

– ICFR

2014 – 874

2015 – 541


SEC

Initiatives

• Segments – taking deep dive

– Discreet financial information (CODM) • May be adequate with only gross profit

• Even if costs below shared/allocated

(point is not to conclude not a segment if unable to

produce full set of financial information)


SEC

Segments (continued)

• Reassess periodically; consider: – Organization structure changes

– Significant acquisitions/dispositions

– Change on CODM

– Reconcile w/ executive pay

– Congruent w/ budgeting

• Consider aggregation when all are true: – Operating segments have similar economic characteristics

– Operating segments are similar with respect to qualitative criteria


SEC

Segments (continued)

– ICFR Over Process


SEC

ICFR

• Segments

• Income taxes – Use of specialist; ownership by Company

• Governance – Audit committees “gate-keeper” for investors and should not be

management advocates

• Material Weakness should consider: – Likelihood (what COULD occur)

– Magnitude

– Nature and severity of weakness


SEC

Auditor Independence

• Watch scope creep

• Non-audit services (w/out pre-approval)

• Preparing financial statements

• Preparing tax provisions

• Computer system installations

• Work for RP’s – Affiliates – Board Members


SEC

Disclosures

• Common deficiencies – Transparency surrounding tax planning strategies

– Transparency surrounding permanently reinvested funds

– Valuation assumptions & methodologies

• Tabularize narrative information w/ significant numerical data

Restatements

• Debt versus equity treatment

• Statement cash flow classifications and presentations

• Income tax disclosures


SEC

MD&A

• Make sure “story” is consistent – Financial statements

– MD&A

– Internal story – press releases, etc.

• Fresh look each year versus filling in blanks

• Use of metrics and KPIs

• Non-GAAP measures – Very good reasons why important and useful to reader


SEC

MD&A (continued)

• MD&A is forward looking (while F/S are back)

• OK to reference to F/S from MD&A, but never refer to MD&A from F/S

• Strong recommendation to use trends to tell story (don’t simply use year-over-year)

• Tell WHY; not just what

• If estimates change, be transparent on why change occurred

Litmus test: potential investors awakens and reads – complete story understood?


SEC

Enforcement

• 500+ actions in 2015 – 23%

• Financial reporting and auditing violations a focus

• Actively pursuing audit firms for: – Violating independence

– Lack of adequate audit evidence

– Inadequate documentation of audit findings

– Inadequate support of judgmental and subjective issues

– Inadequate testing of valuation assumptions


SEC

Enforcement (continued)

• ICFR lacking

• Renewed emphasis of earnings management cases

• Accounting issues, most frequently:

– Revenue recognition

– Complex financial instruments

– Valuation issues and assumptions

– Inadequate or misleading disclosures


SEC

Miscellaneous

• Pursuing IFRS disclosure without reconciliation


PCAOB Developments

PCAOB

• Focus Areas for 2016 – ICFR

• Auditors often only considering errors found

• Need to assess control effectiveness on “Potential” errors

– Assessing and responding to Risks of Material Misstatement (RMM)

– Accounting estimates

– Segments • ICFR over process

• CODM identification

– Income taxes • ICFR over process

• Disclosure around indefinite reinvestment


PCAOB Developments

PCAOB

• Focus Areas for 2016 – Related party transactions

• Auditors need to improve identification

• RP’s often part of frauds

– Auditing work of specialists • Auditors must audit inputs

– Going concern

– M & A

– Cybersecurity


PCAOB Developments

Miscellaneous

• Adoption of Form AP

– Auditor to file within 35 days of rendering auditor’s report

– Names audit partner

– Identifies other firms that participated in the audit (5% audit

hours)

– Effective 2017

• Pursuing Critical Audit Matters

– Proposed as part of auditor’s report


Learning Objectives

• ASU FASB Updates for 2015 and 2014

• Leases

• Revenue Recognition

• Private Company Council Reporting Update


Debt Issuance Costs – ASU 2015-03

• Relates to debt issuance costs or costs incurred to

obtain debt

• Not defined as an asset

• Classify as a reduction of the related debt liability

• Does change the income statement treatment

• Line of Credit arrangements (ASU 2015-15) allowed

to continue to present as an asset.


Debt Issuance Costs – ASU 2015-03

• Public Business Entities: fiscal years beginning

after 12/15/2015, and interim periods within those

years

• Private Entities: fiscal years beginning after

12/15/2015,

• Early adoption is permitted

• Retrospective application required


Customer Accounting for Cloud Computing

Fees – ASU 2015-05

• A hosting arrangement is defined as when an end user

of the software does not take possession of the

software. Instead, the software application resides on

the vendor’s or a third-party’s hardware, and the

customer accesses and uses the software on an as-

needed basis over the Internet or via a dedicated line.



Fees – ASU 2015-05

• Under the new standard, fees paid by a customer

will be within the scope of the internal-use software

guidance if both of the following criteria are met:

– The customer has the contractual right to take possession of the

software at any time during the CCA period without significant

penalty.

– It is feasible for the customer to run the software on its own

hardware (or to contract with another party to host the software).


Fees – ASU 2015-05

• If you meet both the criteria then you record as

fixed asset – Software and amortize to depreciation/

amortization expense.

• If you do not meet the criteria then record as a

Prepaid Asset and amortize to operating expense.



Fees – ASU 2015-05

• The new standard is effective for public companies

for annual periods, including interim periods within

those annual periods, beginning after December 15,

2015.

• For private companies, it is effective for annual

periods beginning after December 15, 2015.


Balance Sheet Classification of

Deferred Taxes – ASU 2015-17

• Current GAAP requires the deferred taxes to be presented as a net current asset or liability and net noncurrent asset or liability.

• New guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.

• Cannot offset DTA/DTLs for different tax paying components or jurisdictions


Balance Sheet Classification of

Deferred Taxes – ASU 2015-17

• The new guidance will be effective for public

business entities in fiscal years beginning after

December 15, 2016.

• For Private entities, the amendments are effective

for fiscal years beginning after December 15, 2017.

• Early adoption is permitted


Going Concern – ASU 2014-15

• What does going concern mean?

– In preparing financial statements under GAAP, there is a

presumption that an entity will “continue as a going concern”

– There are instances in which there is “substantial doubt about an

entity ability to continue as a going concern”

• Why: Currently, there is no guidance in GAAP

regarding management’s responsibility to evaluate

whether there is substantial doubt.



• Auditors are required to assess whether an entity can

continue as a going concern for 12 months after the

balance sheet date.

• New rules require:

– Management should evaluate whether its probable an entity can meet

its future obligations for 12 months after the financial statements are

issued.

– If conditions exist, disclosure is required concerning management’s

plans to alleviate the substantial doubt or conditions.

– Require an evaluation every reporting period including interim periods



Going concern disclosures:

• Conditions that raised substantial doubt issue

• Managements evaluation of the significance of the

conditions and events

• Management’s plans that alleviated substantial doubt



• Public business entities: Fiscal years, and interim

periods within those years, beginning after 12/15/2015

• Private entities: Fiscal years beginning after

12/15/2016


Discontinued Operations – ASU 2014-08

• What is Discontinued Operations?

– A component of an entity that has been disposed of or is held for

sale

• Why:

– Too many small disposals qualify as discontinued operations

– Disclosures can be onerous and time consuming



• Main Provisions:

– Under the new guidance, a discontinued operation is defined as

a component or group that: • Has been disposed of or is classified as held for sale and

• Represents a strategic shift that has (or will have) a major effect on an

entity’s operations and financial results.

– Strategic shift could include: • (i) a major geographical area of operations,

• (ii) a major line of business,

• (iii) a major equity method investment, or

• (iv) other major parts of an entity.



• When:

– Prospectively for annual periods in fiscal years beginning after

12/15/14.

– Early adoption is permitted, but only for disposals (or

classifications as held for sale) that have not been reported in

financial statements previously issued or available for issuance.


FASB ASU No. 2015-01 – Extraordinary Items

• Companies could present an item net of tax on the

income statement that was extraordinary which is both:

– Infrequent

– Unusual in nature

• Eliminates the concept and presentation guidance of

extraordinary items

• Effective date

– Annual periods beginning after December 15, 2015

– Early adoption permitted


FASB ASU No. 2014-17: Business Combinations (Topic

805): Pushdown Accounting

• Applies to the standalone separate financial statements of an acquired entity, both public and nonpublic, that is a business or nonprofit activity, upon the occurrence of an event in which an acquirer obtains control of the acquired entity.

• Objective is to provide guidance on when and how an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. – This subject is not currently addressed in the codification


FASB ASU No. 2014-17: Business Combinations

(Topic 805): Pushdown Accounting

• Allows an acquired entity the option to apply

pushdown accounting

• Effective date

– November 18, 2014

– Applicable to future acquisitions or most recent acquisitions


Lease Exposure Draft

• Why are they issuing this new standard?

– Existing lease accounting does not meet users’ needs • accounting depends on classification

• contractual rights and obligations (assets and liabilities) are off balance

sheet

• many users adjust financial statements

– Structuring opportunities • current lease classification often based on bright lines

• significant difference in accounting on either side of operating/finance

lease line



• Who does this apply to?

– All leases. (with limited exceptions of leases of intangibles)

– Includes capital and operating leases



• What are the major provisions?

– All leases (except certain short term leases) would be presented

on the balance sheet • DR. Right of Use Asset

• CR. Liability

– Short-term leases would be defined as a lease with a potential

maximum period of 12 months or less



• Two types of leases

– Type A (Capital or Finance Lease) - Accelerated leases –

Lessee consumes more than insignificant portion of leased asset

– Type B (Operating Lease) - Straight-Line lease – Lessee does

not consume more than insignificant portion of leased asset



• Type A – Capital/Finance Lease

• Accelerated leases – Lessee consumes more than

insignificant portion of leased asset

– Lease term is major part of economic life of asset

– PV of lease payments is substantially all of FV of asset

– Examples: Airplane with a 10 year lease; Vehicle lease,

equipment loans, etc.



• Type B – Operating Lease

• Straight-Line lease – Lessee does not consume

more than insignificant portion of leased asset

– Lease term is insignificant relative to economic life of asset

– PV of lease payments is insignificant relative to FV of asset

– Example: Land or building



• Accounting for each type of lease:

– Both leases will have a ROU Asset and Liability at inception • Calculate the PV of all future cash payments

– Finance Lease- Accelerated method: • Recognize amortization expense and interest expense (financing

transaction)

– Operating - Straight-line method • Recognize lease expense



• Agreements with lease and non-lease components

– Separate the non-lease components and expense as incurred

– Elect an accounting policy to combine lease and non-lease

components as a single lease component

• Taxes and Insurance

– Activities or costs that do not transfer a good or service to the

lessee are not components in a lease contract


• Present Value of Future lease payments =

– Fixed Payments (less lease incentives)

– Variable lease payments (CPI)

– Variable items, if applicable, and reasonable certain to exercise –

Termination penalties, Purchase options, Residual Value

Guarantees

– @ Discount rate – Use the rate implicit in the lease. If not

determinable, can use the lessee incremental borrowing rate.



• Lease Term =

– Noncancellable lease period

– Optional renewal periods if reasonable certain to exercise



Leases: Next Steps

• FASB is targeting January 2016 for final standard

• Estimated target of 2019 for Public Co’s and 2020

for private


FASB ASU No. 2014-09 – Revenue from Contracts with

Customers (Topic 606)

• Issued May 28, 2014

• Creates FASB ASC 606

– Revenue from Contracts with Customers

• Eliminates FASB ASC 605

– Revenue Recognition


Revenue From Contracts with Customers – ASU 2014-

09

• Joint Project between FASB and IASB

• US GAAP

– Many standards (over 100)

– Significant Industry specific guidance

• IFRS

– Two key standards: IAS 18, Revenue and IAS 11, Construction

Contracts

– Little industry guidance



09

• Why?

– The new standards will be more principle based (i.e.: IFRS)

– Will be consistent across industries (i.e.: Construction

Contractors, Software, Airlines, etc.)

– Will take time for interpretations and practices to evolve

– More judgment and estimates involved in the recognition

process



09

• Applies to:

– Contracts with customers

– Gain/loss recognition on sale of some nonfinancial assets

(intangibles and PP&E)

– Certain nonmonetary exchanges

– Many industry specific transactions such as real estate sales


Revenue - ASU No. 2014-09

The following topics are scoped out:

• Lease contracts

• Insurance contracts

• Financial instruments

• Guarantees

• Non-monetary exchanges


5-Step Recognition Process

1. Identify the contract(s) with the customer – Some contracts would be combined and accounted for as one contract (change orders)

2. Identify the separate performance obligation(s) – Good services and separate components

3. Determine transaction price – Estimate variable consideration at expected value or most likely amount (unapproved

amounts)

4. Allocate the transaction price – Estimate selling prices if they are not observable

– Residual estimation techniques may be appropriate

5. Recognize revenue – To recognize revenue when (or as) the entity satisfies a performance obligation by

transferring a promised good or service (that is, when the customer obtains control)


Revenue Recognition Observations

• Software, technology, media and multiple deliverable revenue generation will be impacted the most

• Construction contractors – Completed contract method is no longer acceptable

– Non-refundable fees a focus

– Determination if a service and product are highly related (one deliverable)

– Manufacture an asset with an alternative use

• More estimation of variable consideration (i.e.: rebates, discounts, penalties, interest)

• Bill and Hold


PCC Responsibilities

• PCC Responsibilities?

– The Private Company Council (PCC) has two principal

responsibilities: • The PCC and FASB, working jointly, will review and propose rule

alternatives within U.S. GAAP to address the needs of users of private

company financial statements.

• The PCC also serves as the primary advisory body to the FASB on the

appropriate treatment for private companies for items under active

consideration on the FASB’s technical agenda.


PCC Standards

• ASU No. 2013-012, Definition of a Public Business

Entity:

– Required to file F/S w/ the SEC

– Required to file F/S w/ a foreign or domestic regulator in preparation for

selling or issuing securities that are not subject to contractual

restrictions on transfer

– Has securities that are traded, listed, or quoted on an exchange or

over-the-counter market

– Has securities that are not subject to contractual restrictions on transfer,

and it is required by law, contract, or regulation to prepare U.S. GAAP

F/S and make them publicly available on a period basis


PCC Standards – Goodwill

• Goodwill – ASU 2014-02

– Cost and complexity of applying goodwill impairment testing

– Elect to test goodwill for impairment at either the entity level or

the reporting unit level. Goodwill should be tested for impairment

when a triggering event occurs that indicates that the fair value of

an entity (or a reporting unit) may be below its carrying amount.

– Qualitative test

– Elect to amortize goodwill over 10 years


Accounting for Intangible Assets in a Business

Combination – ASU 2014-18

• Why

– Reduces the cost and complexities in determining identifiable

intangible assets in a business combination (i.e.: customer lists)

• Main Provisions

– Customer-related intangible assets unless they are capable of

being sold or licensed independently from the other assets of the

business and;

– Non-compete agreements


Accounting for Intangible Assets in a Business

Combination – ASU 2014-18

• An entity that elects the accounting alternative in

this Update must adopt the private company

alternative to amortize goodwill as described in

ASU No. 2014-02, Intangibles—Goodwill and Other.

• However, an entity that elects the accounting

alternative in ASU 2014-02 is not required to adopt

the amendments in this Update.


Questions?

Year-End Update From the SEC, PCAOB and FASB - FEI Houston...FASB ASU No. 2015-01 – Extraordinary Items •Companies could present an item net of tax on the income statement that

Documents