Hot Topics George Mensah Deloitte amp Touche LLP Rae Stewart Deloitte amp Touche LLP May 12 2016 FASB update Employee Benefit Plans update Leases Revenue Question and answer Agenda ID: 785332
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Slide1
Accounting Update:
Financial Reporting
Hot Topics
George Mensah, Deloitte & Touche LLP
Rae Stewart, Deloitte & Touche LLP
May 12, 2016
Slide2FASB update
Employee Benefit Plans update
LeasesRevenue
Question and answerAgenda
Slide32016 FASB Agenda priorities
Slide4FASB 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
Slide5FASB 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
Slide6Project 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
Slide7Classification
&
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
Slide8Effective 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
Slide9Hedge 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
Slide10Employee benefits: FASB standard setting activities
Slide11Proposed 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
Slide12Additional 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)
Slide13Currently, 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
Slide14Tentative 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)
Slide15New standard on leases
Slide16High-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
Slide17Identifying a lease
Slide18Scope
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
Slide19A
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
Slide20Right 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
Slide21Identified 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
Slide22Benefits 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
Slide23Key ingredients of the leases model
Slide24Lease 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
Slide25Initial 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
Slide26What amounts are included in lease payments?Lease payments
Slide27What 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
Slide28Overview of the core accounting models
Slide29What 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
*
Slide30What 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
Slide31Balance 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
Slide32Disclosure 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
Slide33Other provisions, effective date, and transition
Slide34Seller-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
Slide35Public
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
Slide36Revenue
Slide37New 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
Slide38Full 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
Slide39Overview
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
Slide40A 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
Slide41Step 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
Slide42Transaction 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
Slide43Apply
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
Slide44Allocate
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
Slide45Evaluate 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)
Slide46For 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
Slide47Disclosures – 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
Slide48ASC 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.
Slide49ASC 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
Slide50Question and answer
Slide51Contact info
George Mensah
Senior Manager, Deloitte & Touche LLPgmensah@deloitte.com
Rae StewartManger, Deloitte & Touche LLPrastewart@Deloitte.com
Slide52This 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.
Slide53About Deloitte
Deloitte refers to one or more of Deloitte
Touche
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