AGC Financial Issues Committee

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1 AGC Financial Issues Committee FASB Update Cullen D. Walsh, FASB Assistant Director January 8, 2015 The views expressed in this presentation are those of the presenter and are intended for discussion purposes only; it is not intended to reflect the views of the FASB. Official positions of the FASB are determined only after extensive due process and deliberations. 1

2 Discussion Topics Revenue Implementation Simplification Initiative Projects Private Company Council Alternatives for Private Companies Leases Project What to Expect in 2015 and Beyond 2

3 Revenue Implementation 3

4 FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) Overview Objectives: 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 The TRG will not issue guidance 4

5 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 5

6 Feedback from TRG Meetings Implementation guidance for licenses of intellectual property Determining whether a promised good or service is a separate performance obligation Principal versus agent assessment 6

7 Cumulative catch-up Cumulative catch-up Transition and Effective Date PY2 (2015) PY1 (2016) CY (2017) CY Footnotes Retrospective (with optional practical expedients) Rev rec under new standard Cumulative effect at date of application Rev rec under legacy standard Existing* and new contracts under new standard Existing and new contracts disclosed under legacy standard for CY (2017) *Contracts not completed in prior years as determined under legacy revenue guidance Effective date for annual reporting periods beginning: - U.S. GAAP after December 15, 2016, one-year deferral permitted for nonpublic entities; early application not permitted - IFRS on or after January 1, 2017; early application permitted 7

8 FASB s Effective Date Evaluation Stakeholder input suggests effective date should be extended beyond Public comment letters - Advisory group meetings 8

9 FASB s Response FASB will perform outreach with financial statement preparers and others to better understand - Why effective date should be extended (for example, system/process changes, complexity of entity, extent of changes to entity s revenue model, increased disclosure) - What it should be extended to Outreach participants to include - Entities from industries most impacted by new standard - Some entities that submitted comment letters about date Outreach to be completed in early 2015 FASB would like to work with IASB on this matter 9

10 Simplification Initiative Projects 10

11 Simplification Initiative Objective Reduce cost and complexity while maintaining or improving the usefulness of the information Projects include narrow-scope items that the FASB can complete in the short term Welcome input on ideas 11

12 Examples of Simplification Projects Subsequent measurement of inventory lower of cost & net realizable value Eliminating extraordinary items Accounting for customer s fees paid in a cloud computing arrangement Measurement date for pension plan assets Presentation of debt issuance costs Balance sheet classification of debt Income taxes Share-based payment 12

13 Extraordinary Items Current GAAP requires evaluation of whether an event or transaction is an extraordinary item and separate presentation and disclosure of the item Proposal would remove the concept of extraordinary items from GAAP 13

14 Inventory Simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value Today, inventory is measured at the lower of cost or market which requires an evaluation of net realizable value, replacement cost and net realizable value less a normal profit margin 14

15 Income Taxes Classification of Deferred Taxes Current GAAP requirement - Deferred taxes are classified as current or noncurrent based on the classification of the related asset or liability Alternative - Classify all deferred tax assets and liabilities as noncurrent 15

16 Income Taxes Intra-entity Transfer of Assets Current GAAP requirement - Buyer and seller defer the tax consequences of an intra-entity transfer until the asset is sold to a third party - Exception to the accounting model for comprehensive recognition of income taxes Alternative - Eliminate the exception and require recognition of the income tax consequences associated with an intra-entity transfer when the transfer occurs 16

17 Balance Sheet Classification of Debt Current Guidance Narrow scope rules on specific types of debt transactions Potential Change Overriding principle for the classification of debt that can apply to all transactions Mix of guidance using contractual maturity and management judgments Increase focus on contractual maturity and borrower s rights less focus on judgment or intent 17

18 Share-Based Payment Some potential areas for improvement Accounting for forfeitures Accounting for income taxes upon vesting or settlement of awards (APIC pools) Minimum statutory withholding requirements Share-based payment to non-employees Practical expedients for private companies 18

19 Private Company Council Alternatives for Private Companies 19

20 Accounting for Goodwill After a Business Combination Current U.S. GAAP Final Alternative Do not amortize goodwill Test for impairment at least annually or more frequently Reporting unit level Two-step test Optional qualitative assessment 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 20

21 Interest Rate Swaps Impact of Interest Rate Swap Current U.S. GAAP No Hedge Accounting Hedge Accounting PCC Alternative Simplified Hedge Accounting Income Statement Volatility in interest expense as a result of changes in fair value 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 Asset or liability at settlement value (or fair value) Other comprehensive Income No impact Includes changes in fair value of effective portion of the hedge Includes changes in settlement value (or fair value) of the swap 21

22 Common Control Leasing Arrangements Lessees may elect alternative not to apply VIE guidance when certain conditions are met VIE disclosures are not required instead, specific information on lessor entity is required Important note not meeting the conditions does not automatically result in consolidation 22

23 Intangible Assets in a Business Combination Election to not separately recognize - Non-competition agreements - Customer-related intangible assets that are not capable of being sold or licensed independently in a business combination 23

24 Leases Project 24

25 Proposed Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 25

26 Lessee Model Approaches All leases (more than 12 months) are recognized on a lessee s balance sheet Current U.S. GAAP (IFRS) Capital (Finance) Leases IASB Type A FASB Type A Operating Leases Type A Type B All leases are the same Not all leases are the same; classification is based on existing U.S. GAAP/IFRS 26

27 What to Expect in 2015 and Beyond 27

28 Agenda Strategy Foundational projects preventing future complexity Simplification projects addressing today s complexity 28

29 Foundational Projects Projects that will have an overarching, longstanding impact on U.S. GAAP Examples: Fixing FASB s incomplete conceptual framework Performance reporting research project Disclosure framework project 29

30 Other Projects of Interest - Reporting discontinued operations - Accounting for financial instruments Classification and measurement Impairment Hedging (research) - Review of disclosures for defined benefit plans, fair value measurement, income taxes, inventory, and interim reporting - Liabilities & equity short-term improvements 30

31 Questions or Comments? Cullen D. Walsh Assistant Director

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