Accounting and Auditing Update. Staci L. Brogan, CPA, Shareholder Patricia R. Giudici, CPA, Senior Manager Schneider Downs & Co. Inc.

Transcription

1 Accounting and Auditing Update Staci L. Brogan, CPA, Shareholder Patricia R. Giudici, CPA, Senior Manager Schneider Downs & Co. Inc.

2 Agenda Overview of the standard setting agenda Revenue recognition Lease accounting Other accounting standards updates Accounting standards exposure drafts update 2

3 Overview of the Standard Setting Agenda 3

4 Public Company Initiatives The Securities and Exchange Commission Rigorous oversight Robust enforcement Transformative rulemaking Improving the effectiveness of disclosures for investors and issuers Identifying new and emerging risks Public Company Accounting and Oversight Board Protecting investors Improving audit quality Applying professionalism 4

5 The Role of the FASB Technical agenda Recently completed projects Private companies Not-for-profit organizations International convergence 5

6 FASB Initiatives 6

7 FASB Initiatives FASB Simplification Initiative: Narrow projects through a series of short-term projects Projects are intended to improve or maintain the usefulness of the information reported to investors while reducing cost and complexity in financial reporting 7

8 FASB Initiatives (Con t.) Current and recently-closed projects include: Balance sheet classification of debt Accounting for income taxes, intra-entity asset transfers (recently issued as ASU ) Non-employee share-based payment accounting improvements Accounting for financial instruments hedging (recently issued as ASU and ) Liabilities and equity targeted improvements 8

9 Revenue Recognition 9

10 Overview: ASUs Revenue Recognition Updates: ASU Revenue from Contracts with Customers ASU Deferral of the Effective Date ASU Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU Identifying Performance Obligations and Licenses ASU Narrow-Scope Improvements and Practical Expedients 10

11 Overview: 5-Step Model Step 1 - Identify contract(s) with a customer Step 2 - Identify the performance obligations in the contract(s) Step 3 - Determine the transaction price Step 4 - Allocate the transaction price to the separate performance obligations Step 5 - Recognize revenue when the entity satisfies each performance obligation 11

12 Overview: Adoption Options Effective Dates: Public entities (years beginning after December 15, 2017) Nonpublic entities (years beginning after December 15, 2018) 12

13 Overview: Adoption Options (Con t.) Adoption Methods Retrospectively to each prior reporting period presented with certain allowable practical expedients, OR; Retrospectively with the cumulative effect of initially applying the standards at the date of initial adoption. 13

14 Things to Consider: Step 1 Step 1 Identify Contracts with a Customer Contracts that are within scope Combining contracts Contract modifications 14

15 Things to Consider: Step 2 Step 2 Identify the Performance Obligations in the Contract Identifying performance obligations Performance obligations not explicitly stated within the contract Performance obligations to exclude Distinct goods or services Goods or services separately identifiable for other promises in the contract 15

16 Things to Consider: Step 3 Step 3 Determine the Transaction Price Possible variable amounts to estimate Methods used to estimate a variable amount and reassessment Financing terms within the contract Non-cash consideration Consideration payable to the customer 16

17 Things to Consider: Step 4 Step 4 Allocate the Transaction Price to the Separate Performance Obligations Allocation of transaction price Standalone selling price determination Unobservable selling prices Allocating discounts 17

18 Things to Consider: Step 5 Step 5 Recognize Revenue with the Entity Satisfies Each Performance Obligation Over-time recognition Point-in-time recognition Customer control Methods used to measure progress 18

19 Costs to Obtain or Fulfill a Contract There are two methods to account for costs to obtain or fulfill a contract with a customer: Incremental costs of obtaining a contract Costs that the entity would not have incurred if the contract was not obtained. Recognize as an asset costs that are expected to be recovered. 19

20 Costs to Obtain or Fulfill a Contract (Con t.) There are two methods to account for costs to obtain or fulfill a contract with a customer: Costs to fulfill a contract Other specified guidance will apply (internal use software, inventory, etc.) If other guidance is not present, an asset will be recognized if the costs are directly related to the contract, the costs generate or enhance resources of the entity to be used to satisfy performance obligations in the future, and the costs are expected to be recovered. 20

21 Things to Consider Sale with right of return Warranties Principal vs. agent Customer options for additional goods or services Customers unexercised rights Nonrefundable upfront fees Licensing Repurchase agreements Consignment arrangements Bill-and-hold arrangements 21

22 Things to Consider: Disclosure Disclosure of qualitative and quantitative information: Contracts with customers Disaggregation of revenue Contract balances Performance obligations including transaction price allocated to remaining performance obligations 22

23 Things to Consider: Disclosure (Con t.) Disclosure of qualitative and quantitative information: Significant judgments Determining the timing of satisfaction of performance obligations Determining the transaction price and amounts allocated to performance obligations Assets recognized from the costs to obtain or fulfill a contract 23

24 Manufacturing Considerations Determining transfer of control Production of customized products Volume discounts Warranties 24

25 Retail Considerations Customer incentives Coupons Rebates Loyalty programs Gift cards Licenses and royalties Warranties 25

26 Construction Considerations Combining contracts Price changes Claims Financing components Scope changes Contract costs Loss contracts 26

27 Technology Considerations Multipleelement arrangements Post-contract customer support Extendedpayment terms Licenses Performance bonuses IP 27

28 Implementation Planning Internal task force Education Assess all revenue streams and potential impacts Apply new rules to contracts within scope Internal control design Impact on IT Communication with all stakeholders Parallel revenue schedules and aggregation of information needed for disclosure 28

29 Lease Accounting 29

30 Leases - Overview and Background 30

31 Leases - Overview and Background (Con t.) Accounting Standard Update The result of a joint project by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) The goal of the new standards: transparency and comparability 31

32 Scope and Definition of a Lease The new standard applies to leases of all identified assets except: Leases of inventory, assets under construction, intangible assets and biological assets, including timber Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources (including the intangible right to explore for those resources and the rights to use the land) 32

33 Scope and Definition of a Lease (Con t.) A contract is or contains a lease if it conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration 33

34 Scope and Definition of a Lease (Con t.) Right-of-Use Model 34

35 Scope and Definition of a Lease (Con t.) Lease and Non-Lease Components Many contracts contain leases (lease components) and agreements to purchase or sell other goods or services (non-lease components) Non-lease components are identified and accounted for separately under other applicable Generally Accepted Accounting Principles (GAAP) Maintenance activities are considered non-lease components 35

36 Scope and Definition of a Lease (Con t.) Lease and Non-Lease Components Lessees allocate consideration in the contract to lease and non-lease components on a relative standalone price basis, unless a practical expedient is elected Lessees can make a policy election (by class of underlying asset) to account for each lease component and its related non-lease component as a single lease component 36

37 Scope and Definition of a Lease (Con t.) Lease Term and Lease Payments Lease term includes any non-cancelable periods Reasonably certain is a high threshold for including optional periods (e.g., options to extend or terminate a lease) Reasonably certain = reasonably assured Lease payments consistent with the lease term determination * Include only if reasonably certain of exercise ** Include unless reasonably certain not to be exercised Also includes fees paid by the lessee to the owners of a specialpurpose entity for structuring the transaction 37

38 Lease Classification - Operating vs. Finance At lease commencement, a lessee and a lessor classify a lease using the following criteria: The lease transfers ownership of the underlying asset to the lessee by end of the lease term The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise The lease term is for the major part of the remaining economic life of the underlying asset* * Not applicable for leases that commence at, or near the end of, the underlying asset s economic life 38

39 Lease Classification - Operating vs. Finance (Con t.) At lease commencement, a lessee, and a lessor classify a lease using the following criteria: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals, or exceeds substantially, all of the fair value of the underlying asset (New criterion) The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term 39

40 Lease Classification - Operating vs. Finance (Con t.) A lease that does not meet any of the criteria is an operating lease. A lease that meets any of the criteria is a finance lease. Short-term lease exemption: Lease term of 12 months or less and no purchase option that the lessee is reasonably certain to exercise Accounting policy election, by class of underlying asset Do not recognize lease assets or liabilities 40

41 Lessee Accounting Lease Term and Purchase Options Consider all relevant factors that create an economic incentive to exercise a renewal/purchase option Initial Measurement Include if reasonably certain will exercise Subsequent Measurement Lessee Reassess only upon the occurrence of a significant event/change in circumstances that is within the control of the lessee* Lessor Not required to reassess* 41

42 Lessee Accounting Variable Lease Payments (VLPs) Initial Measurement Only include VLPs that are linked to an index or a rate or are in-substance fixed payments. Subsequent Measurement Lessee Reassess VLPs based on an index or a rate only when the lessee remeasures the lease liability for other reasons (e.g., change in lease term)* Lessor Not required to reassess* 42

43 Lessee Accounting Lessee Recognition and Measurement Finance Lease Operating Lease Initial recognition and measurement Initially measure the right of use (ROU) asset 1 and lease liability at the present value of the lease payments not yet paid Subsequent measurement lease liability Use the effective interest method using the discount rate determined at lease commencement 2 to recognize interest expense and reduce the lease liability for the payments made Measure the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement 2 1 Initial measurement of ROU asset also includes the lessee s initial direct costs and prepayments made to the lessor less lease incentives received from the lessor 2 As long as a reassessment has not occurred. 43

44 Lessee Accounting Lessee Recognition and Measurement (Con t.) Subsequent measurement -ROU asset Finance Lease Amortize the ROU asset, generally on a straightline basis, over the shorter of the lease term of its useful life; and record any impairment of the ROU asset Operating Lease Measure the ROU asset at the amount of the lease liability and adjust for cumulative prepaid or accrued rents (i.e., uneven rent payments), any lease incentives received, lessee initial direct costs; and record any impairment of the ROU asset Income Statement Effect Generally front-loaded expense Interest expense and amortization expense are recorded and presented separately Generally straight-line expense A single lease expense is recognized 1 Initial measurement of ROU asset also includes the lessee s initial direct costs and prepayments made to the lessor less lease incentives received from the lessor 2 As long as a reassessment has not occurred. 44

45 Lessee Accounting - Lessee Presentation ROU asset Lease ROU asset can be presented separately or together with other assets If not presented separately, disclose the line item where they are presented and the amount of lease ROU assets Finance lease ROU assets are prohibited from being presented in the same line item as operating lease ROU assets Lease liability Lease liabilities can be presented separately or together with other liabilities If not presented separately, disclose the line item where they are presented and the amount of lease liabilities Finance lease liabilities are prohibited from being presented in the same line item as operating lease liabilities 45

46 Lessee Accounting - Lessee Presentation (Con t.) Income statement Finance lease: Lease-related interest expense and amortization of the ROU assets are presented in a manner consistent with how the entity presents interest expense and depreciation or amortization of similar assets Operating lease: Lease expense is included in income from continuing operations Statement of cash flows Finance lease: Principal portion of payments are financing activities Interest portion of payments in accordance with ASC 230, Statement of Cash Flows Operating lease: All lease payments are operating activities, except those payments made to bring an asset to the condition and location necessary for its intended use, which is an investing activity Both lease types: Lease payments for short-term leases and variable lease payments (not included in the lease liability) are operating activities Supplemental non-cash disclosure of new leases 46

47 Lessee Financial Statement Disclosures Qualitative Nature of leases Leases that have not yet commenced but that create significant rights and obligations of the lessee Significant assumptions and judgments made in application Main terms and conditions of any sale and leaseback transactions Whether an accounting policy election was made for the short-term lease exemption Finance lease expense, segregated between amortization and interest Operating lease cost Short-term lease cost Variable lease cost Sublease income Gains and losses arising from sale and leaseback transactions Lease payments maturity analysis (similar to that in Topic 840 disclosures) Quantitative Separately for Finance and Operating leases: - Cash paid for amounts included in lease liabilities, segregated between operating and financing - Lease liabilities arising from obtaining ROU assets - Weighted-average remaining lease term - Weighted-average discount rate for leases 47

48 Lessee Accounting Example - Difference in Expense Recognition A lessee enters into a five-year agreement to make the following payments each year: The organization assumes a 7% discount rate for the calculation of the present value of the future payments. There are no renewal periods, purchase options, or other factors to take into consideration for the initial measurement of the present value of future lease payments. Calculation of the present value of future lease payments is $792,

49 Lessee Accounting Example - Difference in Expense Recognition (Con t.) The example below shows the subsequent accounting and impact to the expense recognition for each lease: A - The effective-interest method is used to calculate the lease liability, regardless of the type of lease. B - Amortization is on a straight-line basis (similar to other nonfinancial assets). C - For operating leases, only straight-line lease expense is recognized each year. 49

50 Financial Statement Impact The changes brought about by this new ASU could also have a significant impact on many metrics that organizations use. A few metrics that could be affected are listed below. Metric Leverage Ratio Current Ratio Debt to EBITDA Return on Assets Definition Debt/Equity Current Assets/Current Liabilities Debt/EBITDA Net Income/Total Assets Discuss with all stakeholders the impact that these changes will have and how agreements should be amended or redefined in order to better align with operational and reporting needs. 50

51 Effective Date and Transition Fiscal years beginning after December 15, 2018 Public entity A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market An employee benefit plan that files financial statements with the SEC Fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020 All other entities Standard is applied as of the beginning of the earliest comparative period presented in the financial statements 51

52 Effective Date and Transition (Con t.) Lessees and lessors are required to adopt the new standard using a modified retrospective transition approach Certain transition relief is available Certain disclosures are required in accordance with ASC 250, Accounting Changes and Error Corrections 52

53 Effective Date and Transition (Con t.) All entities may elect to apply all of the following practical expedients (elected as a package and applied to all leases) not to reassess: Whether any expired or existing contracts are, or contain leases Lease classification for any expired or existing leases and all existing leases that were classified as capital leases will be classified as financing leases Initial direct costs for any existing leases (i.e., whether those costs would have qualified for capitalization under the new leases standard) 53

54 Effective Date and Transition (Con t.) All entities can also elect for all leases to (1) use hindsight in determining the lease term when considering lease options to extend or terminate the lease and to purchase the underlying asset and (2) assess impairment of ROU assets Election could be made separately, or in conjunction, with the package of practical expedients above 54

55 What to Do Now! Here are the steps you should take now: 1. Gain an understanding of the FASB lease update. 2. Inventory your leases. 3. Establish software/tracking assistance. 4. Educate stakeholders of your organization. 5. Have a plan in place. 55

56 Other Accounting Standards Updates 56

57 Other Accounting Standards Updates Accounting Standard Update ASU Income Taxes: Balance Sheet Classification of Deferred Taxes Effective Date Public Entities Fiscal years beginning after December 15, 2016 Effective Date All Others Fiscal years beginning after December 15, 2017 ASU Recognition and Measurement of Financial Assets and Financial Liabilities Fiscal years beginning after December 15, 2017 Fiscal years beginning after December 15,

58 Other Accounting Standards Updates (Con t.) Accounting Standard Update ASU Intangibles Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance Effective Date Public Entities Effective upon issuance Effective Date All Others Effective upon issuance ASU Liabilities Extinguishments of Liabilities (Subtopic ) Fiscal years beginning after December 15, 2017 (including certain not-forprofit entities, and certain employee benefit plans) Fiscal years beginning after December 15,

59 Other Accounting Standards Updates (Con t.) Accounting Standard Update ASU Derivatives and Hedging (Topic 815) Effective Date Public Entities Fiscal years beginning after December 15, 2016 Effective Date All Others Fiscal years beginning after December 15, 2017 ASU Investments Equity Method and Joint Ventures (Topic 323) Fiscal years beginning after December 15, 2016 (early adoption permitted) Fiscal years beginning after December 15, 2016 (early adoption permitted) ASU Compensation Stock Compensation (Topic 718) Fiscal years beginning after December 15, 2016 Fiscal years beginning after December 15,

60 Other Accounting Standards Updates (Con t.) Accounting Standard Update ASU Financial Instruments Credit Losses (Topic 326) Effective Date Public Entities Fiscal years beginning after December 15, 2019 Effective Date All Others Fiscal years beginning after December 15, 2020 ASU Not-for-profit entity (Topic 958): Presentation of Financial Statements for Not-forprofit entities N/A Fiscal years beginning after December 15, 2018 ASU Statement of Cash Flows (Topic 230) Fiscal years beginning after December 15, 2017 Fiscal years beginning after December 15,

61 Other Accounting Standards Updates (Con t.) Accounting Standard Update Effective Date Public Entities Effective Date All Others ASU Income Taxes (Topic 740) Fiscal years beginning after December 15, 2017 Fiscal years beginning after December 15, 2018 ASU Consolidation Topic (810) Fiscal years beginning after December 15, 2016 Fiscal years beginning after December 15,

62 Proposed Standards 62

63 Proposed Standards Proposed Standard Proposed Statement of Financial Accounting Concepts Statement # 8 Conceptual Framework for Financial Reporting Proposed ASU Technical Correction to Update No , Not-for-Profit entities (Topic 958): Presentation of Financial Statements of Not-for- Profit Entities Endowment Reporting Comment Letter Date November 9, 2016 November 11, 2016 Proposed ASU Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities November 22,

64 Proposed Standards (Con t.) Proposed Standard Comment Letter Date Proposed ASU Receivables Nonrefundable Fees and Other Costs (Subtopic ): Premium Amortization on Purchased Callable Debt Securities November 28, 2016 Proposed ASU Financial Services Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts December 15,

65 Questions? 65

66 Contact Information Staci L. Brogan, CPA Shareholder Schneider Downs & Co., Inc. One PPG Place, Suite 1700 Pittsburgh, PA (412) Patricia R. Giudici, CPA Audit Senior Manager Schneider Downs & Co., Inc. One PPG Place, Suite 1700 Pittsburgh, PA (412)