FASB Update

Rahul GuptaProject ManagerFinancial Accounting Standards Board

August 13, 2014

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

Recent Standards FASB projects EITF projects PCC projects

Today’s Agenda

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Recent Standards

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Recent Accounting Standards Updates

No. Title

2013-12 Definition of a Public Business Entity

2014-01 Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the EITF)

2014-02 Accounting for Goodwill (a consensus of the PCC)

2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the PCC)

2014-04 Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the EITF)

2014-05 Service Concession Arrangements (Topic 853) (a consensus of the EITF)

2014-06 Technical Corrections and Improvements Related to Glossary Terms

2014-07 Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)

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Recent Accounting Standards Updates

No. Title

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

2014-09 Revenue from Contracts with Customers (Topic 606)

2014-10 Development Stage Entities (Topic 915)

2014-11 Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

2014-12 Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the EITF)

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ASU 2014-02, Accounting for Goodwill (a consensus of the PCC)

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ASU 2014-02: Goodwill

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Current U.S. GAAP

Do not amortize goodwill

Test for impairment at least annually or more frequently

Reporting unit level

Two-step test

Optional qualitative assessment

Final Alternative

Amortize over 10 years or less

Test for impairment upon occurrence of triggering event

Entity level or reporting unit level

One-step test

Optional qualitative assessment

ASU 2014-02: Goodwill

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Private Companies

Dec. 15, 2014

1st annual period

Q1 Q2 Q3 YE Q1 Q2 Q3

& interim periods thereafter

Effective Date: Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.

Transition: Amortize existing goodwill prospectively over 10 years or less if the private company can demonstrate that another useful life is more appropriate.

2015

ASU 2014-03, Accounting for Certain Receive-Variable,

Pay-Fixed Interest Rate Swaps—Simplified Hedge

Accounting Approach (a consensus of the PCC)

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Impact of interest

rate swap

Current GAAP PCC Alternative

No hedge accounting

Hedge accounting

Combined instruments

(Not pursued)

Simplified hedge accounting (Final)

Income statement

Volatility in interest expense

as result of changes in FV

Interest expense approximates fixed rate debt

Interest expense approximates fixed rate debt

Interest expense approximates fixed

rate debt

Balance sheet Asset or liability at fair value

Asset or liability at fair value

Only disclosure of settlement

value

Asset or liability at settlement value

(or FV)

Other comprehensive

incomeNo impact

Includes changes in fair value of

effective portion of hedge

No impactIncludes changes

in settlement value (or FV) of the swap

ASU 2014-03: Interest Rate Swaps

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ASU 2014-03: Interest Rate Swaps

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Private Companies

Dec. 15, 2014

1st annual period

Q1 Q2 Q3 YE Q1 Q2 Q3

& interim periods thereafter

Effective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.

Transition: Private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption. Existing swaps as of the date of adoption may qualify for the simplified hedge accounting approach.

2015

ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC)

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Typical private company common control leasing arrangement

ASU 2014-07: Common Control Leasing & VIE

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Owner

Manufacturing Company

Leasing Company

100% Interest 100% Interest

Pays Rent

Leases Land & Building

Bank

Mortgage

Bank

Debt

1) Lessor entity & private company lessee (reporting entity) are

under common control

2) Private company lessee has leasing arrangement with lessor entity

3) Substantially all activity between two entities is related to leasing

activity between lessor entity to the private company lessee

4) If the private company lessee explicitly guarantees or provides

collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of

the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.

ASU 2014-07: Criteria to qualify for scope exception

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ASU 2014-07: Common Control Leasing & VIE

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Private Companies

Dec. 15, 2014

1st annual period

Q1 Q2 Q3 YE Q1 Q2 Q3

& interim periods thereafter

Effective Date: Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.

Transition: Full retrospective approach

2015

ASU 2014-09, Revenue from contracts with customers (Topic 606)

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Objective: single, principle-based revenue standard

Improve accounting for contracts with customers

- More robust framework for recognizing revenue

- Increased comparability across industries & capital markets

- Better disclosures

Excludes contributions and collaborative arrangements

Revenue Recognition

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Substantially converged on major decisionsFinal standard issued on May 28, 2014

Core Principle and Application

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1 • Identify contract(s) with the customer

2 • Identify performance obligations

3 • Determine the transaction price

4• Allocate the transaction price to the

identified performance obligations

5• Recognize revenue when performance

obligation is satisfied

Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which

the entity expects to be entitled in exchange for those goods or services

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• Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors

• Explain the relationship with segment disclosures

Remaining performance obligations

Interim requirements

Information about contract balances

• All quantitative disclosures in annual and interim (Public companies only)

• Opening & closing balances• Amount of revenue recognized from contract liabilities• Explanation of significant changes in contract balances

• Transaction price allocated to remaining performance obligations

• Quantitative or qualitative explanation of when amounts will be recognized as revenue

Disaggregation of revenue

* Most quantitative disclosures are optional for nonpublic entities

Disclosure requirements*

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Rev Rec—Issuance & Effective Dates: Timeline

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Issue final standard May 2014

Effective Date – Public Entity Jan. 2017

A nonpublic company/not-for-profit has the option to early adopt (no earlier than a public company)

Transition alternatives:- Retrospective for all periods presented- Apply when effective

- For year of adoption, disclose amounts of financial statement line items under old method accounting (to allow trend analysis)

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Transition Resource Group (TRG) – Overview

To solicit, analyze, and discuss stakeholder issues arising from implementation of the new guidance

To inform the FASB and the IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues

To provide a forum for stakeholders to learn about the new guidance from others involved with implementation

TRG will not issue guidance

How to Submit an Issue Any stakeholder can submit a potential

implementation issue- We encourage submissions as soon as possible

Issue submitted about new revenue guidance should- Involve guidance that can be applied in different ways resulting

in diversity in practice- Be pervasive (relevant to wide group of stakeholders)

Submission forms will not be public- Issues may be discussed in public

FASB and IASB staff will read all submissions and decide priority of discussing issues

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Additional information on TRG website

Submission form and instructions Meeting dates and materials Replay of meetings Staff contact information TRG members

Additional Information

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www.fasb.com

FASB projects

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Current FASB projects

– Current Agenda – Simplification Initiative– Accounting for Financial Instruments

Topics

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Foundational projects

Promote transparency

Promote simplification

New FASB Agenda: 3 Types of Projects

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Current FASB AgendaFramework Projects Stage

Conceptual Framework: Measurement Initial Deliberations

Conceptual Framework: Presentation Initial Deliberations

Disclosure Framework: Board’s Decision Process Exposure Draft Redeliberations

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Current FASB AgendaRecognition and Measurement Projects Stage

Accounting for Financial Instruments: Classification and Measurement 2nd Exposure Draft Redeliberations

Accounting for Financial Instruments: Impairment 2nd Exposure Draft Redeliberations

Insurance: Improvements to accounting for long-duration contracts Exposure Draft Redeliberations

Leases 2nd Exposure Draft Redeliberations

Accounting for Goodwill for Public Business Entities and Not-for-Profits Initial Deliberations

Clarifying the definition of business Initial Deliberations

Consolidations: Principal Versus Agent Analysis Exposure Draft Redeliberations

Customer’s Accounting for Fees in a Cloud Computing Arrangement Initial Deliberations

Simplifying the Subsequent Measurement of Inventory Exposure Draft Outstanding

Technical Corrections Initial Deliberations

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Current FASB AgendaPresentation and Disclosure Projects Stage

Clarifying Certain Existing Principles on Statement of Cash Flows Initial Deliberations

Disclosure Framework—Entity’s Decision Process Discussion Document Redeliberations

Disclosure Framework—Disclosure Reviews

- Defined Benefits Plans Initial Deliberations

- Fair Value Initial Deliberations

- Income Taxes Initial Deliberations

- Inventory Initial Deliberations

- Interim Reporting Initial Deliberations

Financial Statements of Not-for-Profit Entities Initial Deliberations

Going Concern Final Standard Drafting

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Current FASB AgendaPresentation and Disclosure Projects Stage

Government Assistance Disclosures Initial Deliberations

Insurance: Disclosures about Short-duration Contracts Initial Deliberations

Investment Companies: Disclosures about Investments in Another Investment Company

Initial Deliberations

Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

Exposure Draft Outstanding

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Current FASB AgendaResearch Projects

Accounting Issues in Employee Benefit Plan Financial Statements

Accounting for Financial Instruments: Hedging

Accounting for Financial Instruments: Interest Rate Risk Disclosures

Financial Performance Reporting

Liabilities & Equity—Short-term Improvements

Pensions—Cash Balance Plans

Reducing Complexity - Two Issues

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Complicated, unclear standard obscures its meaning

Accounting treatment is clear, but applying it is lengthy, difficult & expensive

Progress made and in process

Developing internal Board policy on complexity

Broaden thinking on complexity through

outreach

Research project on Simplification Initiative

How FASB is Addressing the Problem

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Objective is to reduce cost and complexity while maintaining or improving the usefulness of the information

Projects would include narrow-scope items that the Board can complete in the short term

Welcome input on ideas

Simplification Initiative Objective

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Simplification Initiative: Tentative Decisions

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Measurement of inventory

• Inventory would be measured at the lower of cost and net realizable value. A reporting entity would no longer consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory.

• Prospective application

Eliminating extraordinary items

• Removed the concept of extraordinary items from U.S. GAAP• Unusual or infrequent items would be retained• Prospective application

Practicability Exception- Equity securities with no readily determinable fair value are

measured at cost, adjusted for impairment and any observable price changes.

FI: Classification & Measurement—Model

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Topic Redeliberated Model (decisions since ED)

Cash flow Test

Current GAAP - No cash flow test. Revert to the current embedded derivative guidance in Topic 815. Keep existing bifurcation requirements that apply to hybrid financial assets and liabilities

Business model

Current GAAP - Retain existing separate accounting models to determine the classification and measurement of loans and securities (based on management’s intent)

Equity Securities

From ED - All equity securities measured at fair value through net income (except equity method and nonmarketable securities)

FVO Current GAAP - Unrestricted for financial assets and liabilities subject to Topic 825

FI: Classification & Measurement

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“FAS 107” Disclosures:

• FV information for assets & liabilities carried at amortized cost • Public Business Entities – required, either

parenthetically on face of statements or in notes• Excluded: receivables and payables due in less than one year,

demand deposit liabilities• Other Entities – no presentation or disclosure

requirement• Regardless of asset size or presence of derivatives

Expected credit loss model reflecting more forward-looking information

Immediate recognition of lifetime expected credit losses on income statement

Measurement of expected credit losses (ECL) - Reflects management’s expectation based on past events, current

conditions, & reasonable and supportable forecasts- Reflect the risk of loss (i.e., the possibility that a loss will occur) as

opposed to reflecting the most likely outcome (statistical mode)

Provide enhanced disclosures compared to current GAAP (still to be redeliberated)

FI: Impairment (Credit Losses)

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FI: Impairment (Credit Losses)

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The proposal applies to the following:

Debt instruments (e.g., loans and securities) measured at:

Loan commitments

Lease receivables

Trade receivables

Pledge receivables (to be redeliberated)

• Amortized cost• FV - OCI

EITF projects

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EITF―Open Issues

Issue Status

Issue 12-F: Pushdown Accounting Exposure Draft Redeliberations

Issue 12-G: Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity

Final Standard Drafting

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

Final Standard Drafting

Issue 13-G: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

Exposure Draft Redeliberations

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Background

- Current U.S. GAAP offers limited guidance about when and how pushdown accounting

should be applied.- Pushdown accounting governed by SEC staff guidance (for SEC registrants)

Pushdown accounting required when 95% (or more) of reporting entity (SEC registrant) is acquired; optional between 80% to 95%; and prohibited below 80% ownership.

Perceived as complex because of different thresholds, exceptions and other related rules.

- Pushdown accounting optional for entities other than SEC registrants.

Exposure Draft Issued on April 28, 2014

- Provides option to apply pushdown accounting when acquirer (as defined in Topic 805)

obtains control of reporting entity. Utilizes existing US GAAP concepts of “control” from Consolidations (Topic 810), and “acquisition

method” from Business Combinations (Topic 805)

Scope and Transition

- An acquired entity, both public and nonpublic, that is a business or nonprofit activity.

Effective only for future acquisitions after effective date (yet TBD).

Pushdown Accounting (EITF Issue 12-F)Exposure Draft Issued – Comment period ended July 31, 2014

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Reflect new basis of accounting established by acquirer for individual assets and liabilities of acquired entity by applying Topic 805 on business combinations (mostly fair value)

Recognize goodwill that arises due to application of Topic 805

Do not recognize bargain purchase gains

Disclose information that enables users to evaluate effect of pushdown accounting

Elects pushdown accounting Do not elect pushdown accounting

Disclose that entity has:• undergone a change-in-control

event, and• elected to continue to prepare its

financial statements using its historical basis

Entities will evaluate at each period whether they’ve gone through a change-in-control event

Pushdown Accounting (EITF Issue 12-F)Exposure Draft Main Provisions – Comments period ended July 31, 2014

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PCC projects

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Private Company Council: Open ProjectsIssue Status

13-01A: Accounting for Identifiable Intangible Assets in a Business Combination

Exposure Draft Redeliberations

14-01: Definition of a Public Business Entity (phase 2) Initial Deliberations

•Some question that the requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful information

User Relevance

•Estimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships

Cost & Complexity

Identifiable Intangible Assets (in a Business Combination): Stakeholder Feedback

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At April 29 meeting, PCC discussed various alternatives, including:‒ Recognizing & measuring only intangible

assets capable of being sold or licensed independently

‒ Principle-based vs rules-based approach

Next steps: directed staff to perform more analysis and outreach

Identifiable Intangible Assets: Proposal

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Questions & Answers

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