Current accounting and reporting developments webcast series. March 15, 2017

Transcription

1 Current accounting and reporting developments webcast series March 15, 2017 Q1 Q2 Q3 Q4

2 Welcome Beth Paul Accounting Services Group Team Leader National Professional Services Group LinkedIn Diane Howell Partner National Professional Services Group LinkedIn Mark Pollock Partner National Professional Services Group LinkedIn Marc Jerusalem Director National Professional Services Group LinkedIn Lindsey Morris Senior Manager National Professional Services Group LinkedIn PwC Current Accounting and Reporting Developments 2

3 Administrative matters If you experience any technical difficulties during the polling sessions, reply to the question in the Q&A window and include the poll number For better viewing experience, close all other applications Submit questions any time during the session using the Q&A window on the left side of your screen Administrative matters For better sound quality, use headphones To download today s presentation, click on the Resources icon on the left To enlarge the slides click the bottom right corner of the slide window and drag to the desired size or click the green maximize button at the top right of the slide window PwC Current Accounting and Reporting Developments 3

4 CPE administrative details To receive the full 1.5 CPE credits for today s webcast, you must be active during the entire 90 minute webcast. You will be required to answer 6 polling questions during the webcast to verify attendance. You will have 2 minutes to answer each timed poll. CPE is not offered for audio only attendees or viewers of the replay. To download the slides and polling questions, click on Resources. Use the Q&A button to ask questions during the webcast or to respond to polls manually if you have a with technical the polling issue feature. Send an to pwc.assurance.hot.topics@us.pwc.com if you have an issue with the polling feature. PwC Current Accounting and Reporting Developments 4

5 Today s agenda Definition of a business Revenue and leasing implementation SEC update Standard setting update Q&A session PwC Current Accounting and Reporting Developments 5

6 The change of the definition of a business by the FASB could result in more acquisitions being accounted for as asset acquisitions. PwC Current Accounting and Reporting Developments 6

7 Current GAAP definition of a business There are three elements that make up a business: Inputs + Processes = Outputs Inputs and processes are required to be a business. Outputs are not. Many transactions qualify as a business combinations The set of assets acquired does not have to include all of the inputs and processes required. PwC Current Accounting and Reporting Developments 7

8 Why did the FASB make a change? The FASB s goal was to reduce the cost associated with the analysis and narrow the application of the defintion under GAAP. PwC Current Accounting and Reporting Developments 8

9 Business combination vs. asset acquisition Business combination Goodwill Generally recognized for any excess consideration over fair value of the assets and liabilities acquired Asset acquisition Not recognized In-process R&D Capitalized and measured at fair value Expensed at the acquisition date, if there is no alternative use Assumed contingencies Recognized and measured at fair value Recorded only if probable Transaction costs Expensed Capitalized PwC Current Accounting and Reporting Developments 9

10 Screen test in the new definition of a business Is substantially all of the fair value of the gross assets acquired concentrated in a single asset or a group of similar assets? Consider further under the framework YES Asset acquisition PwC Current Accounting and Reporting Developments 10

11 Substantially all/ Similar assets Substantially all? The standard doesn t define the term. Generally interpreted to be 90% Similar assets? Judgement is required to determine if the assets are similar. Need to consider both the nature of the assets and their risk characteristics PwC Current Accounting and Reporting Developments 11

12 Screen test example Facts: ABC Co. acquires 10 single-family homes Includes land, buildings, improvements, and in-place leases Some minor variations between the homes Similar type of home and type of customer How many single assets? Is there a group of similar assets? 10 single assets because the house and improvements cannot be removed from the land. Yes, because the nature of and risks related to all of the assets are similar. PwC Current Accounting and Reporting Developments 12

13 Example: Application of the screen test Is substantially all of the fair value of the gross assets acquired concentrated in a single asset or a group of similar assets? Yes 100% of the fair value is concentrated in the group of similar assets Asset acquisition PwC Current Accounting and Reporting Developments 13

14 The new framework in the definition of a business If the acquisition passes through the screen test, the next step is to consider the new framework. To be a business, a set must have an input and a substantive process that together significantly contribute to the ability to create outputs. Companies no longer consider replacement of missing inputs or processes by market participant. Key change Required to consider whether the set of inputs and processes acquired is capable of being managed as a business, regardless of whether the acquirer intends to manage it in that way. PwC Current Accounting and Reporting Developments 14

15 Assembled workforce If there are no outputs, employees are required as part of the acquistion for the set to meet the definition of a business. If outputs are present, employees do not have to be included in the set but are still evaluated as part of what was acquired. PwC Current Accounting and Reporting Developments 15

16 Example of applying the framework Facts: ABC Co. acquires 10 single-family homes and an office park with six 10-story office buildings Includes land, buildings, improvements, in-place leases, and assembled workforce PwC Current Accounting and Reporting Developments 16

17 Example of applying the framework: Screen test Is substantially all of the fair value of the gross assets acquired concentrated in a single asset or a group of similar assets? No Not a group of similar assets because the class of customer and location of real estate are significantly different Consider the new framework PwC Current Accounting and Reporting Developments 17

18 Example of applying the framework Factors to consider Are there inputs? Is there a substantive process? Response Yes, land, property, improvements and workforce Yes, service performed by the workforce Business PwC Current Accounting and Reporting Developments 18

19 The definition of a business has not changed for purposes of SEC reporting. Under SEC rules, if there is continuity of the acquired entity s operations before and after the transaction, it would be considered a business. PwC Current Accounting and Reporting Developments 19

20 FASB s definition of a business: Effective dates and transition Adoption Effective for fiscal years beginning after December 15, 2017 for public business entities One year deferral for all others Prospective application is required. The guidance can be applied to transactions occurring before the guidance was issued as long as the financial statements have not been issued. PwC Current Accounting and Reporting Developments 20

21 Polling question #1 Will you or your major client (if auditor) adopt the new definition of a business guidance early? A. Yes B. No C. N/A D. Still considering PwC Current Accounting and Reporting Developments 21

22 PwC Current Accounting and Reporting Developments 22

23 Calendar year-end public companies have to adopt the new revenue standard disclosure requirements in 2018, including the interim periods within that year. PwC Current Accounting and Reporting Developments 23

24 New revenue standard disclosure requirements Opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers Information about the entity s remaining performance obligations Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods Disaggregated revenue information These requirements are much more extensive than what we have under current GAAP. PwC Current Accounting and Reporting Developments 24

25 Data to make these new disclosures may not be currently gathered in a structured manner and may not be subject to internal controls. PwC Current Accounting and Reporting Developments 25

26 FASB proposed some technical corrections to the disclosure requirements. Please see our In-Transition publication included on this webcast for the details. PwC Current Accounting and Reporting Developments 26

27 SAB 74 Disclosures - The SEC expects these disclosures to continue to evolve and become more detailed. - If the impact of adoption is not known or cannot be reasonably estimated, companies should consider qualitative disclosure. - These disclosures should include a description of the effect of the accounting policies that the registrants expects to apply, if determined, and a comparison to the registrant s current accounting policies. - The status of implementation and significant implementation matters should be disclosed. PwC Current Accounting and Reporting Developments 27

28 Revenue SAB 74 disclosures Adoption method Current status of filings reviewed as of February 28, 2017 PwC Current Accounting and Reporting Developments 28

29 Revenue SAB 74 disclosures Early adoption Current status of filings reviewed as of February 28, 2017 PwC Current Accounting and Reporting Developments 29

30 Revenue SAB 74 disclosures Adoption impact Current status of filings reviewed as of February 28, 2017 PwC Current Accounting and Reporting Developments 30

31 Equity method investments/public business entities If a registrant s equity method investment is considered significant under Regulation S-X and its financial statements or financial information are required to be included in the registrant s SEC filing, the investee meets the definition of a public business entity. Calendar year-end entities that meet the public business entity definition including equity method investees whose financial information is included in an SEC filing are required to adopt the new revenue standard in Public business entity definition: Entities that file or furnish financial statements (including voluntary filers) with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing). PwC Current Accounting and Reporting Developments 31

32 Full retrospective adoption of the new revenue guidance and the impact on shelf registration after adoption Example: Jan 1, 2018: Registrant adopts the new revenue guidance, electing full retrospective transition and files its Q Form 10-Q on that basis. June 2018: Registrant files a new registration statement on Form S-3 Form S-3 rules require updating 2017 financial statements to reflect adoption of the new revenue guidance (2017, 2016, and 2015) Filing a new registration statement on Form S-3 in the first year of full retrospective adoption would require the new revenue guidance to be applied to an additional year. A draw on an existing shelf through a prospectus supplement does not have the same requirement regarding material changes. It only requires a change to the financial statements if there is a fundamental change, which is a legal determination. PwC Current Accounting and Reporting Developments 32

33 Polling question #2 What is the status of your company s or your major client s (if auditor) revenue implementation plan? A. Already early adopted B. We re in great shape C. Somewhat progressing D. Not much progress yet E. Haven t started yet PwC Current Accounting and Reporting Developments 33

34 New leasing guidance ahead PwC PwC Current Accounting and Reporting Developments 34

35 New leasing guidance: Effective date and transition Adoption date Effective January 1, 2019 for calendar-year public companies - Also for certain non-profit entities and certain employee benefit plans Other entities have an additional year for annual financial statements Early adoption permitted Transition method Modified retrospective approach PwC PwC Current Accounting and Reporting Developments 35 35

36 A calendar year public company will need to retrospectively adjust 2017 and 2018 for the new guidance as they file their 2019 statements. Leases in place as of the beginning of 2017 and any leases entered into thereafter will be subject to the new leases guidance. PwC Current Accounting and Reporting Developments 36

37 Practical expedients/ reliefs Package- at adoption do not reassess: - Whether an arrangement is or contains a lease - Lease classification - Whether initial direct costs would qualify for capitalization under the new standard May apply hindsight to existing leases to determine lease term and asset impairment PwC PwC Current Accounting and Reporting Developments 37 37

38 Does this contain a lease? Companies will need to inventory all leases as of the earliest period presented (1/1/17 for calendar year public companies) because nearly all of them will need to be brought on to the lessee s balance sheet. PwC Current Accounting and Reporting Developments 38

39 Under today s guidance, a lease embedded in another contract is often off-balance sheet since it s classified as an operating lease. But I m applying the practical expedient! Embedded lease identification will be critical under the new guidance as virtually all leases, even operating leases, are coming on to the balance sheet, even if a company is electing the practical expedient. PwC Current Accounting and Reporting Developments 39

40 Identifying a lease under the new rules A lease is present in a contract if it includes both: The right to control use of the asset during the term The right to direct the asset s use The ability to obtain substantially all economic benefits from the use of the asset Is explicitly or implicitly specified An identified asset Supplier has no practical ability to substitute or would not economically benefit from substituting PwC PwC Current Accounting and Reporting Developments 40 40

41 The right to direct the asset s use The right to direct the asset s use Examples: Changing the product mix Deciding when to operate an asset Deciding the destination of a truck or ship PwC PwC Current Accounting and Reporting Developments 41 41

42 Discount rate in transition Lessee will recognize a right-of-use asset and a lease liability at the later of: - Earliest period presented (1/1/17 for public companies) or - Lease commencement date Lease liability - Present value of remaining minimum lease payments and any payment probable under a residual value guarantee - Discount rate used coincides with the date that the liability is recognized (i.e., 1/1/17 for existing leases for a public company) In many cases lessees will be required to use a discount rate as of January 1, PwC PwC Current Accounting and Reporting Developments 42 42

43 The discount rate is not a one-size fits all approach Discount rate must be: Consistent with the lease term Secured borrowing rate considering attributes of leased asset PwC 43 PwC Current Accounting and Reporting Developments 43

44 The discount rate for a 10 year lease of a building will likely differ from the rate for a 3 year car lease. % % PwC 44 PwC Current Accounting and Reporting Developments 44

45 Leasing SAB 74 disclosures Early adoption Current status of filings reviewed as of February 28, 2017 PwC Current Accounting and Reporting Developments 45

46 Leasing SAB 74 disclosures Impact Current status of filings reviewed as of February 28, 2017 PwC Current Accounting and Reporting Developments 46

47 Lessor accounting PwC Some of the changes could significantly impact how lessors account for certain leases. PwC Current Accounting and Reporting Developments 47

48 Leasing guidance or revenue guidance? Which guidance should lessors apply when their arrangement qualifies both as a sale under the new revenue guidance and as a sales-type lease under the new leasing guidance? 1 st Leasing Tee could be day one losses related to variable payments Leasing guidance should be applied to the lease components in the contract. 2 nd Revenue Revenue guidance should be applied to the non-lease components. PwC PwC Current Accounting and Reporting Developments 48 48

49 Variable payments under the new leasing and revenue guidance New leasing guidance Variable consideration that is even partially related to a lease component is not recognized in income until the changes in facts and circumstances on which the variable consideration is based occur. New revenue guidance Variable consideration must be estimated and revenue is recognized when the related performance obligations are satisfied. PwC PwC Current Accounting and Reporting Developments 49 49

50 Lessor accounting for variable payments could result in a day one loss Sales-type leases with significant variable lease payments could have a day 1 loss if present value of the FIXED lease payments < The carrying amount of the leased asset PwC PwC Current Accounting and Reporting Developments 50 50

51 Lessor accounting for variable payments Today s rules compared to the new rules Today s leasing rules Lessors may have considered significant variable lease payments as an important uncertainty that would have resulted in classifying the lease as an operating lease. New leases guidance The guidance on an important uncertainty resulting in an operating lease goes away. A lease with significant variable payments could qualify as a sales-type lease, if one of the other criteria is met. This difference could result in a significant change in the timing and pattern of income recognition as well as presentation and disclosure. PwC PwC Current Accounting and Reporting Developments 51 51

52 Third party residual value guarantees Today s leasing rules Both lessee and third party residual value insurance is included by the lessor in determining whether a lease can be classified as a sales-type lease. New leasing guidance Only a LESSEE provided residual value guarantee is considered when determining whether a lease can be classified as a sales-type lease. Third party residual value insurance is ONLY considered in distinguishing between direct financing leases and operating leases. Leases that are classified as sales-type leases today due to third party residual value insurance would not be a sales-type lease under the new guidance. PwC PwC Current Accounting and Reporting Developments 52

53 Sales-type vs. direct financing lease profit recognition Lessors that use third party residual value insurance to achieve sales-type lease accounting today will have direct financing leases under the new guidance. Distinction between sales-type lease and direct financing lease in timing and geography: Profit recognition Sales-type lease Direct financing lease Timing Geography Recognize selling profit at lease commencement Margin (sales revenue and COGS) Recognize over lease term Interest income PwC PwC Current Accounting and Reporting Developments 53 53

54 Polling question #3 Do you think that your company or your major client (if auditor) has sufficient internal resources to implement the new leases standard? A. Yes B. No C. N/A D. Unsure, still assessing PwC Current Accounting and Reporting Developments 54 54

55 SEC regulatory update Commissioner Acting Chair/ Commissioner Chair (Vacant) Kara Stein Michael Piwowar Nominee Vacant Vacant PwC Current Accounting and Reporting Developments Walter Jay Clayton 55

56 The regulatory environment could be reshaped. PwC Current Accounting and Reporting Developments 56

57 CEO Pay Ratio Rule What you need to know Requires public companies to disclose Median of annual total compensation of all employees, excluding the CEO Annual total compensation of the CEO Ratio of these two amounts Does NOT apply to: Smaller reporting companies Emerging growth companies Canadian companies filing under the multijurisdictional disclosure system Foreign private issuers Registered investment companies Initial public offerings Registration statements on Form 10 The pay ratio disclosure can be expressed as a ratio or a multiple. SEC issued a compliance and disclosure interpretation in October 2016 to clarify and resolve some questions on the rule. PwC Current Accounting and Reporting Developments The Rule became effective January 1, Calendar year-end companies need to present the disclosure beginning with their Form 10-Ks, proxy statements or annual reports filed in

58 A public statement was issued by the acting SEC chair on this rule asking for comments. Comments due: March 23, 2017 PwC Current Accounting and Reporting Developments 58

59 Polling question #4 Will your company or major client (if auditor) comment on the pay ratio rule? A. Yes B. No C. Still evaluating D. N/A PwC Current Accounting and Reporting Developments 59 59

60 Variation margin on derivatives What is it? Increasing number of derivative transactions executed through central clearing houses due to regulatory requirements that certain derivative transactions be centrally cleared. Centrally cleared derivatives require counterparties to post collateral, typically in the form of cash. After the trade date, variation margin is posted as needed based on the price movements of open contracts. PwC Current Accounting and Reporting Developments 60

61 Variation margin on derivatives rule changes What you need to know Rule changes impact the legal characterization of variation margin payments on centrally cleared derivatives. Rule changes became effective on January 3, Variation margin payments shift from collateral to a settlement payment based on the rule changes. PwC Current Accounting and Reporting Developments 61

62 Variation margin on derivatives rule changes question If variation margin is legally characterized as a settlement payment, should it be reported as a separate unit of account or considered a cash flow of the derivative? The SEC staff would not object to companies accounting for the derivative contract, variation margin, and the related interest paid or received on the collateral, as a single unit of account. Variation margin would be considered a settlement payment on the derivative. However, the settlement payment will not terminate the derivative agreement because the contract still exists, and the terms regarding future payments did not change. PwC Current Accounting and Reporting Developments 62

63 Variation margin on derivatives rule changes Accounting and reporting implications Balance sheet offsetting rules will not apply because there are no longer multiple units of account. The income statement could be impacted for companies that separately present unrealized and realized gains or losses. Since derivatives are considered legally settled, the recognition of realized gains or losses may be required. The presentation of collateral cash flows on the statement of cash flows will be impacted for companies that separately present this information from the derivative cash flow. Trades that are legally settled will require that the related cash flows be presented together. PwC Current Accounting and Reporting Developments 63

64 Variation margin on derivatives rule changes question Do the rule changes impact hedge designations? No, the SEC staff did not object to ISDA s conclusion that the rule changes would not require the discontinuation of existing hedging relationships or preclude the use of the short cut method. PwC Current Accounting and Reporting Developments 64

65 New guidance was issued to simplify the accounting for goodwill. PwC Current Accounting and Reporting Developments 65

66 Today s goodwill impairment model Step 0 Perform qualitative assessment to determine if the quantitative test is necessary. Step 1 Compare reporting unit s fair value to its carrying amount to determine if there is potential impairment. Step 2 Determine the fair value of the individual assets and liabilities of a reporting unit in order to perform a hypothetical purchase price allocation. PwC Current Accounting and Reporting Developments 66

67 New goodwill simplification Step 0 Perform qualitative assessment to determine if the quantitative test is necessary. Step 1 Compare reporting unit s fair value to its carrying amount to determine if there is a potential impairment. Step 2 Determine the fair value of the individual assets and liabilities of a reporting unit in order to perform a hypothetical purchase price allocation. PwC Current Accounting and Reporting Developments 67

68 New goodwill simplification effective dates For calendar year end public companies that are SEC filers, the new standard is effective in Other public business entities will have an additional year. All other companies that have not elected the PCC alternative for goodwill will be required to apply the guidance in Available for early adoption in 2017 for any impairment test performed on testing dates after January 1, PwC Current Accounting and Reporting Developments 68

69 Polling question #5 Will your company or major client (if auditor) adopt the new goodwill simplification early? A. Yes B. No C. Still analyzing D. N/A PwC Current Accounting and Reporting Developments 69 69

70 Partial sales of nonfinancial assets Amends ASC as part of phase 2 of the definition of a business project. Examples of nonfinancial assets include: land, buildings, and intangible assets. In-substance nonfinancial assets may include financial assets (such as cash or accounts receivable) if substantially all of the value is concentrated in the nonfinancial assets. PwC Current Accounting and Reporting Developments 70

71 Partial sales of nonfinancial assets Is the counterparty a customer? Yes Apply revenue guidance in ASC 606 No Is the transaction the transfer of a business? No Yes Apply derecognition guidance in ASC Are the assets nonfinancial or in-substance nonfinancial assets? Yes Apply new partial sales guidance in ASC PwC Current Accounting and Reporting Developments 71

72 Partial sales where a noncontrolling ownership interest is retained are measured at fair value. Today, gain or loss on recognition of the retained interest is generally prohibited. PwC Current Accounting and Reporting Developments 72

73 Partial sales of nonfinancial assets Timing of adoption must coincide with the new revenue standard but the method of adoption may vary. Effective for calendar year-end public business entities in 2018 with one year deferral for all others. Early adoption permitted in PwC Current Accounting and Reporting Developments 73

74 Net presentation of pension costs New guidance ahead PwC Current Accounting and Reporting Developments 74

75 Presentation of pension cost Today s guidance What you need to know Net benefit cost for retirement plans is made up of several components which reflect different aspects of the benefit arrangements, including: service cost, interest cost, expected return on assets, and the amortization of various deferred items. Net amount of these components is reported as an aggregate amount of compensation cost, all of which would be included in operating results, to the extent not capitalized into inventory or other assets. PwC Current Accounting and Reporting Developments 75

76 Presentation of pension cost New guidance What you need to know Service cost component within income from operations, Other components of net benefit cost reported separately outside of income from operations, if presented, and Capitalize only the service cost component, when applicable. Impacts No change to when benefit costs are recognized or how they are measured No industry exceptions PwC Current Accounting and Reporting Developments 76

77 Presentation of pension cost Effective date and transition Looking forward Effective for 2018 for calendar year-end public business entities Early adoption permitted in Q1 Retrospective transition for presentation and prospective for capitalization PwC Current Accounting and Reporting Developments 77

78 Polling question #6 How do you prefer to get information about new accounting guidance? A. Webcasts B. Podcasts C. Videos D. Publications PwC Current Accounting and Reporting Developments 78 78

79 Balance sheet classification of debt exposure draft Proposes an overall classification principle for debt Debt is classified as current or noncurrent based on the contractual rights of the lender and the borrower on the balance sheet date. A borrower is not permitted to consider events that may occur after the balance sheet date when it determines the classification of its debt, with the exception of a debt covenant waiver that meets certain conditions. PwC Current Accounting and Reporting Developments 79

80 Balance sheet classification of debt exposure draft Key changes Borrowers will no longer be permitted to consider the intent and ability to refinance short-term debt after the balance sheet date. Borrowers will no longer be required to make a probability assessment on the likelihood of a lender exercising its rights under a subjective acceleration clause. Comments due May 5th PwC Current Accounting and Reporting Developments 80

81 Share based payment for nonemployees exposure draft Key changes As proposed, existing stock compensation guidance is expanded to include nonemployees. Accounting for performance conditions Grant date measurement vs. performance completion (i.e., vesting) date Aligns the post-vesting classification (equity or liability) requirements for employee and nonemployee awards. Comments due June 5th PwC Current Accounting and Reporting Developments 81

82 Stock compensation modifications overview Impacts Provides guidance about which changes require modification accounting Treat changes as a modification unless all the following are the same immediately before and after: Fair value (or calculated value or intrinsic value, if the award is valued in that fashion) of the award Vesting conditions of the award Classification of the award Affects any entity that changes the terms or conditions of a share-based payment award Would exclude certain types of changes from the modification model Existing disclosure requirements continue to apply Final standard expected in the second quarter of 2017 PwC Current Accounting and Reporting Developments 82

83 Polling question #7 Will your company or your major client (if auditor) comment on the balance sheet classification of debt exposure draft A. Yes B. No C. N/A D.Still deciding PwC Current Accounting and Reporting Developments 83 83

84 Q&A session Download The quarter close at: PwC PwC Current Current Accounting Accounting and and Reporting Reporting Developments Developments 84 84

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