Accounting Update: Financial Reporting - PowerPoint Presentation

Slide1

Accounting Update:

Financial Reporting

Hot Topics

George Mensah, Deloitte & Touche LLP

Rae Stewart, Deloitte & Touche LLP

May 12, 2016

Slide2

FASB update

Employee Benefit Plans update

LeasesRevenue

Question and answerAgenda

Slide3

2016 FASB Agenda priorities

Slide4

FASB standard-setting agenda

Projects

(not all-inclusive)

Broad projectsFinancial Instruments: Impairment (nearly completed) – Q2 2016Financial Instruments: Hedging - Q3 2016Narrow projectsBalance sheet classification of debtDefinition of a business (two projects)Improving the equity method of accountingIncome taxes: intra-entity transfers of assetsGoodwill impairment - Q2 2016Goodwill: subsequent accounting

Liabilities

and equity: targeted improvements (instruments with down round features)

Improving the presentation

of net periodic benefit cost

Interest income on purchased callable debt securities

Identifiable intangible assets in a business combination

(public entities)

Nonemployee

share-based payment accounting improvements

Slide5

FASB standard-setting agenda (cont’d)

Projects

(not all-inclusive)

Disclosure projectsDisclosure Framework: Entity’s decision processDisclosure reviews:Fair value measurement Defined benefit plansIncome taxesInventoryInterim reportingDisclosures by business entities about government assistanceSimplifying the Balance Sheet Classification of Debt – Q3 2016

Slide6

Project Name

2016

2017Financial Instruments: Classification & Measurement

XFinancial Instruments: ImpairmentXFinancial Instruments: HedgingXEmployee BenefitsTBDTBD

Major

projects

FASB standard-setting activities

Other ongoing projects to be aware of:

Disclosure framework initiatives

Clarifying the definition of a business

Balance sheet classification of debt

Improving equity method of accounting

Goodwill impairment

*Chart indicates Deloitte’s expected timing

Slide7

Classification

&

Measurement

ASU 2016-01 was issued January 6, 2016

Most

equity securities will be carried at fair value through net

income.

Practicability exception permitted for equity securities that do not have

(1) readily determinable fair values and

(2) qualify for net asset value (NAV) practical expedient

For these exceptions, adjustments are made for

(1) observable price changes and

(2) impairment

Other-than-temporary impairment no longer exists for equity securities.Require public companies to use the exit price notion when measuring FV of financial instruments for disclosure purposesRequire separate presentation of financial assets and financial liabilities by form of financial asset (that is securities or loans and receivables) on the balance sheet.

Clarifies that entities should evaluate the need for a valuation allowance on deferred asset related to available for sale securities in combination with entity’s other DTAs.

Status

Financial

instruments

project

Slide8

Effective Dates:

Public Entities:

fiscal years beginning after December 15, 2017 (including interim periods)

Non

Public Entities:

fiscal years beginning after December 15, 2018 (not including interim periods)

Non Public Entities may elect to early adopt at Public Entities

effective date

.

Main change:

Recognition of unrealized gains and losses previously through OCI now goes through net income.

Status

Contd

Financial

instruments

project

Slide9

Hedge accounting

The FASB

staff

is deliberating targeted improvements in hedge accounting model including

:

Hedges of nonfinancial items

Presentation of changes in FV of highly effective hedges for both cash flow and FV Hedges (present in same line where earnings effect of hedged item is presented)

Disclosure requirements

.

ASU expected to be issued in

Q3 2016

Impairment

Impairment model based on expected rather than incurred losses

Consider historical loss experience, current conditions, and reasonable and supportable forecasts of future conditions

Modified retrospective transition for most assets

Expected to be issued

in second half of 2016

Status

–Other Projects.

Financial

instruments

project

Slide10

Employee benefits: FASB standard setting activities

Slide11

Proposed changes are part of the FASB’s disclosure framework project

FASB applied the guidelines in proposed concepts statement, Conceptual Framework for Financial Reporting, Chapter 8: Notes to Financial Statements, in making its tentative decisions

Exposure draft issued January 26, 2016 Comment letters due April 25, 2016

Changes to the disclosure requirements for defined benefit plans (proposed ASU)New disclosure requirements added and some existing requirements eliminatedRequirement to disaggregate disclosures between foreign and domestic defined benefit pension and other postretirement plansNonpublic entities would need to disclose the effects of a one-percentage-point change of assumed health care cost trend ratesChanges to Disclosures

Disclosure Objectives

Adds an overall objective for the disclosures

Includes guidance on how an entity would consider materiality

Slide12

Additional disclosure requirements would include: Description of nature of the benefits provided, covered employee groups, and type of plan formulaWeighted-average interest crediting rate for cash balance and similar plans

Disclosures required under ASC 820 for plan assets measured using the net asset value (NAV) practical expedientNarrative description of reasons for significant gains and losses from remeasurement

Disclosures proposed to be eliminated:Amount of the accumulated benefit obligation (ABO) and any excess of ABO over plan assetsInformation about plan assets to be returned to the entityDisclosures about transactions from amendments to the Japanese Welfare Pension Insurance Law

Disclosures about (1) benefits covered by related-party insurance and annuity contracts and (2) significant transactions between the plan and related parties Amounts in AOCI expected to be recognized in net periodic benefit cost over the next yearFor nonpublic entities with Level 3 plan assets, a reconciliation of the opening to the closing balancesChanges to the disclosure requirements for defined benefit plans (cont’d)

Slide13

Currently, no specific guidance in US GAAP on presenting net benefit cost in the income statement Net benefit cost comprised of several components that reflect different aspects of an employer’s financial arrangements and the cost of benefits

Proposed amendments would require an entity toPresent the current service cost component

of net benefit cost with other compensation costs for the related employees Present the remaining components of net benefit cost elsewhere in the income statement

Outside of income from operations, if such a subtotal presentedDisaggregation of the other components permitted, but not requiredProposal would limit the portion of net benefit cost eligible for capitalization (e.g., as part of inventory) to the current service cost componentProposed ASU — Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost

Slide14

Tentative decisions on transition:Retrospective application for the change in the

income statement presentation Prospective application for requirement to capitalize only the current service cost component

Comments on the proposed ASU due by April 25, 2016Improving the

presentation of net periodic pension cost and net periodic postretirement benefit cost (cont’d)

Slide15

New standard on leases

Slide16

High-level considerationsThe “Big Picture”

Most leases on balance sheet for lessees

Classification

will drive expense profileLessor model largely unchangedMost changes result from alignment with ASC 606FASB tried to make things easy

Classification, reassessment, transition

Effective 2019 but don’t wait to assess impact

Process and systems

changes may be

required

Potential impact on debt covenants

Slide17

Identifying a lease

Slide18

Scope

What’s in and what’s out?

Introducing the new standard

Applies to leases of property, plant, or equipment

Does

not

apply to:

Leases of intangible assets

Leases to

explore

for or use

nonregenerative

resources

L

eases

of biological

assets

Leases of inventory

Leases of assets under construction

Slide19

A

lease is a

contract, or part of a contract,

that conveys the right to control the use of identified property, plant, or equipment for

a period of time in exchange for

consideration

Consideration

Lessor

Lessee

C

ontrol the use of

an identified

asset

What does the new definition look like?

Definition of a lease

Slide20

Right to obtain substantially all of the

economic benefits from asset

use

Right to direct the use of the asset over lease term andDefinition of a lease

Slide21

Identified asset criteriaIdentified asset — Overview

Contract must depend on use of identified asset

Asset must be explicitly or implicitly identified

Physically distinct portion of a larger asset may be an identified asset

Capacity portion of a larger asset is generally not an identified asset

Right of substitution

Would result in the asset not being deemed a specified asset

Substitution would be considered substantive

if . . .

Lessor has the practical ability to substitute the asset

Lessor

would

benefit from exercising its right of substitution

Warranty or upgrade considerations

Supplier’s right or obligation to substitute an alternative

asset due to operational failure does

not mean the asset is not an identified asset

Supplier’s right or obligation to upgrade the asset similarly does not mean the asset is not an identified asset

Slide22

Benefits related to the ownership of an asset should not be included in the assessment of whether an arrangement contains a lease

Can obtain economic benefits from the use of an asset directly or indirectly in many ways

Economic benefits from the use of an asset include its primary output and by-products, including potential cash flows derived from these items

Right to obtain substantially all of the economic benefits from use

Convey the right to control the use

Definition of a lease

Slide23

Key ingredients of the leases model

Slide24

Lease would be classified as a finance lease (lessee) or a sales-type lease (lessor) when . . .

Lease transfers ownership of the underlying asset to lessee by the end of the lease term

Lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise

Lease term is for a major part of the remaining economic life of the underlying assetPresent value of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying assetLeased asset is so specialized in nature that it is expected to have no alternative use to the lessor at the end of the lease termOverview of the criteria

Lease classification

CLASSIFICATION

CRITERIA

The standard states that the

bright-line thresholds that exist under ASC 840

could be a reasonable approach to evaluate whether

a lease would be classified as a finance

lease

Slide25

Initial determination and reassessmentLease term

lease

term

Noncancelable period,

plus

…

Renewal options that are reasonably certain to be exercised by a lessee

Termination options that are

reasonably

certain

not

to

be exercised by a lessee

Options to extend (or not to terminate) that are controlled by the lessor

Reassessment requirements

Lessees

are required to reassess lease term when

A significant event or change in circumstances occurs that is in the control of the lessee

A contract term obliges the lessee to exercise (or not exercise) a renewal or termination option

Lessee elects to exercise or not exercise a renewal or termination option that

was

not previously deemed reasonably certain of being or not being exercised

Would reassess when there is a modification that does not result in a separate

contract

Lessors would not be required to reassess lease term, unless there is a modification that does not result in a separate contract

Slide26

What amounts are included in lease payments?Lease payments

Slide27

What discount rate should be used?Discount rate

Lessee must use the rate the lessor charges in the lease if readily determinable or, alternatively, its incremental borrowing rateLessor would use the rate it charges the lessee, which is known as the rate implicit in the lease

Nonpublic business entities are permitted to make an accounting policy election to use the risk-free rate when measuring their lease obligations

Reassessment RequirementsLesseeLessorWould generally be updated when there is a remeasurement of the lease obligationWould reassess when there is a modification that does not result in a separate contractWould reassess, in certain instances, when there is a modification that

does not

result in a separate contract

Slide28

Overview of the core accounting models

Slide29

What does the lessee model look like?Lessee accounting model

Initial

Measurement

Most* leases are recorded on the balance sheet using a right-of-use asset approach:Subsequent MeasurementLease obligation — PV of lease payments not yet paid

ROU asset

— lease obligation + initial direct costs – lease incentives + prepaid lease payments

Lease obligation

— amortized

using the effective interest method

ROU asset

— depends upon lease

classification

Expense

recognition pattern:

Finance lease — front-loaded

Operating lease — generally straight-line

Short-term leases

:

A lessee can elect, by asset class, not to record on its balance sheet a lease with a lease term of 12 months or less and which does not include a purchase option that the lessee is reasonably certain to exercise

*

Slide30

What does the lessor model look like?Lessor accounting model

Existing lessor accounting retained with minimal changes

Classification depends on an assessment of control of the underlying asset

Sales-type

Direct financing

Operating

Lessee gains control of the underlying asset

Underlying asset is derecognized

Net investment in a lease is recognized

Selling profit or loss recognized at lease commencement

Initial direct costs recognized

at lease commencement

unless

no selling profit or loss

Lessee

does not

obtain control of the asset, but the lessor relinquishes control

Underlying asset is derecognized

Net investment in a lease is recognized

Profit deferred and amortized into income over the lease term

Initial direct costs deferred and amortized into income over the lease term

Lessor retains control of the underlying asset

Underlying asset remains on the lessor’s balance sheet

Income recognized on a straight-line basis unless another systematic basis is more appropriate

Initial direct costs deferred and expensed

over the lease term in a manner consistent with income

Slide31

Balance Sheet

Income Statement

Cash Flow Statement

Financing LeaseOperating LeasePresentation requirements

Lessee model

Presentation consistent with current lessor model:

Balance sheet

— presentation depends on lease classification

Income statement

— profit or loss recognized in a manner consistent with business model

Cash

f

low statement

— recognized as cash inflows from operating activities

Lessor model

Slide32

Disclosure requirements

Disclosure Objective

Enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases

Lessee disclosuresNature of its leasesInformation about leases that have not yet commencedRelated-party lease transactionsAccounting policy election regarding short-term leases Finance and operating lease costsShort-term and variable lease costsSublease incomeGain or loss from sale-and-leasebackMaturity analysis for lease obligationsWeighted-average remaining lease term

Weighted-average discount rate

Lessor Disclosures

Nature of its leases

Significant assumptions and judgments used

Related-party leases transactions

Tabular disclosure of lease-related income

Components of the net investment in a lease

Information on the management of risk associated with residual asset

Maturity analysis of operating lease payments and lease receivable

Information required by ASC 360

Slide33

Other provisions, effective date, and transition

Slide34

Seller-lessee should evaluate the transfer of the underlying asset under the requirements of ASC 606

Existence of leaseback would not prevent a conclusion that underlying asset was sold

Arrangement in which leaseback is classified as a finance lease would preclude sale accounting

Substantive repurchase options would preclude sale accounting

Sale-and-leaseback transactions

Slide35

Public

business entities

— effective for calendar periods beginning on January 1, 2019 and interim periods therein

All other entities — effective for calendar periods beginning on January 1, 2020, and interim periods thereafterEarly adoption will be permittedLessees and lessors are required to use a modified retrospective transition method for all existing leasesWould apply the new model for the earliest year presented in the financial statements

Application of approach linked to current lease classification and new lease

classification

An entity can use hindsight when evaluating lease

term

Effective date and transition

Transition

TRANSITION RELIEF PACKAGE

Lessees and lessors are

not required to

reassess the following upon transition:

Whether

any expired or existing contracts are leases or contain leases

T

he

lease classification for any expired or existing

leases

Initial

direct costs for any existing

leases

Slide36

Revenue

Slide37

New revenue guidance

Effective date

Background

On May 28, 2014, the FASB and International Accounting Standards Board (IASB) issued a converged standard on revenue from contracts with customers. The FASB’s final standard has been codified as ASC 606. The boards believe that the standard will improve the consistency of requirements, comparability of revenue recognition practices, and usefulness of disclosures.

The new revenue standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15,

2017 (FY18),

for public

entities.

The

effective date for nonpublic

entities

is annual reporting periods beginning after December 15,

2018 (FY19),

and interim reporting periods within annual reporting periods beginning after December 15, 2019.

Early application is permitted

Slide38

Full Retrospective ApproachRestate prior periods in compliance with ASC 250

Optional practical expedientsModified Retrospective Approach

Apply revenue standard to contracts not completed as of effective date and record cumulative catch upRequired disclosuresAmount of each F/S line item affected in current periodExplanation of significant

changesTransition optionsNew revenue guidance

Slide39

Overview

New

revenue guidance

Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or servicesThis revenue recognition model is based on a control approach which differs from the risks and rewards approach applied under current U.S. GAAP

Slide40

A legally enforceable contract (oral

or implied), but must meet

all of the following requirements:

A contract will not be in the scope if: ANDStep 1: Identifying the contractNew revenue guidance

The contract has commercial substance

The parties have approved the contract and are committed to perform

The entity can identify each party’s rights regarding goods or services

The entity can identify the payment

terms for the goods or

services to be transferred

The contract is wholly unperformed

Each party

can unilaterally terminate the contract without compensation

It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer

Collectibility threshold

Slide41

Step 2: Identifying performance obligations

New revenue guidance

Identify all (explicit or implicit) promised goods and services in the contract

Are promised goods and services distinct from other goods and services in the contract?Can the customer benefit from the good or service on its own or together with other readily available resources?

Is the good or service separately identifiable from other promises in the contract?

AND

Account for as a performance obligation

Combine 2 or more promised goods or services &

reevaluate

YES

NO

CAPABLE OF BEING DISTINCT

DISTINCT

WITH

IN CONTEXT OF CONTRACT

The ASU defines a

performance obligation

as a promise to transfer to the customer a good or service (or a bundle of goods or services) that is

distinct

Slide42

Transaction price shall include…Fixed and variable consideration

Noncash considerationAdjustments for significant financing componentAdjustments for consideration payable to customer

Transaction price does NOT include…Effects of customer credit riskWhen accounting for variable consideration an entity shall…

Estimate using expected value (probability weighted) or most likely amount methodsStep 3: Determine the transaction priceNew revenue guidance

Slide43

Apply

the following “constraint”:Include some or all of the amount of variable consideration in the transaction price to the extent that it is probable

that a subsequent change in the estimate would not result in a significant revenue reversal Consider the following factors in assessing whether the estimated transaction price is subject to significant revenue reversal:Highly susceptible to factors outside entity’s influenceUncertainty not expected to be resolved for a long timeEntity’s experience is limitedEntity typically offers broad range of price concessions/payment termsLarge number of broad range possible outcomesStep 3: Determine the transaction priceNew revenue guidanceException for sales or usage based royalties of IP

Slide44

Allocate

transaction price on a relative standalone selling price basis (estimate standalone selling price if not observable)

The expected cost-plus margin method, adjusted market assessment method, or residual method (only if price is highly variable or uncertain) are

acceptableAllocate consideration (and changes) in the transaction price to all performance obligations (based on initial allocation) unless a portion of (or changes in) the transaction price relate entirely to one (or more) obligations and certain criteria are metDo not reallocate for changes in standalone selling pricesIf certain criteria are met, a discount or variable consideration may be allocated to one or more, but not all, of the performance obligations in a contract.

New

revenue

g

uidance

Step 4: Allocate the transaction price

Slide45

Evaluate if control of good or service transfers over time, if not then transfers at a point in time

An entity satisfies a performance obligation over time if…OR

ORMeasure progress toward completion using

input/output methodsStep 5: Recognizing revenueNew revenue guidancePerformance does not create an asset with an alternative use and the entity has both an enforceable right to payment for performance completed to date and expects to fulfil contract as promised

Performance creates or enhances a customer controlled

asset

(e.g., home addition)

The customer receives and consumes the benefit as the entity

performs

(e.g., cleaning service)

Slide46

For performance obligations satisfied at a point in time, indicators that control transfers include, but are not limited to, the following:

Step 5:

Recognizing revenue

New revenue guidanceThe entity has a present right to paymentThe customer has legal titleThe entity has transferred physical possession

The customer

has the significant

risks and rewards of

ownership

The customer has accepted the

asset

Slide47

Disclosures – FASB only

New revenue guidance

Disaggregation of revenue

Information about contract balances

Contract costs

Information about performance obligations

Description of significant judgments

Policy decisions –

t

ime value of money & costs to obtain a contract

Transaction price, allocation methods and assumptions

Remaining performance obligations

Disclosures About Contracts with Customers

Disclosures about Significant Judgments and Estimates

Other Required Disclosures

ASC 270,

Interim Reporting

Interim Only Disclosures

Slide48

ASC 606 updateRevenue

Principal versus Agent Final ASUOn March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),

which was originally proposed on August 31, 2015.The ASU clarifies that:An entity should determine whether it is a principal or an agent for

each specified good or service promised to the customer.A principal obtains control of (a) a good or asset that it transfers to the customer; (b) a right to a service, which it directs another party to provide to the customer; or (c) a good or service that it combines with other goods or services for the customer.The ASU amends existing examples and provides additional examples to illustrate the new guidance.

Slide49

ASC 606 updateRevenue

Additional proposed accounting standard updates:

Narrow scope improvements and practical expedientsIdentifying performance obligations and licensingBoth final ASUs expected to be issued during the second quarter of 2016Additional revenue project:

The FASB added a technical corrections and improvements project to its agenda, and has completed initial deliberations, with a proposed ASU expected to be issued in the second quarter of 2016

Slide50

Question and answer

Slide51

Contact info

George Mensah

Senior Manager, Deloitte & Touche LLPgmensah@deloitte.com

Rae StewartManger, Deloitte & Touche LLPrastewart@Deloitte.com

Slide52

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

Slide53

About Deloitte

Deloitte refers to one or more of Deloitte

Touche

Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.Copyright © 2016 Deloitte Development LLC. All rights reserved.36 USC 220506Member of Deloitte Touche Tohmatsu Limited