Not-for-Profit Accounting Update

Transcription

1 The KPMG Government Institute t Webcast Series: Not-for-Profit Accounting Update Mandy Nelson, KPMG LLP Michael Kraehnke, KPMG LLP Michael Breen, KPMG LLP Michelle Rozich, KPMG LLP April 18, 2013 KPMG Government Institute Webcast Series: Not-for-Profit Accounting Update Welcome and Introduction Lou Mezzina Partner and National Industry Director Higher Education, Research & Other Not-for-Profits The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 1 1

2 Administrative Continuing Professional Education (CPE) regulations require online participants take part in online questions. You must be registered and logged in online. You must respond to a minimum of eight questions in order to be eligible for 2.0 CPE credits. Pop-up questions will appear on your media player. Do not view the presentation on slide show mode, or polling questions will not appear. To ask a question, use the Ask A Question icon on your media player and hit X after submitting your question to close the dialogue box. Help Desk: or outside the United States at Upcoming KPMG Government Institute Webcast Registrants for today s Webcast will automatically be invited to upcoming Webcasts. Individuals not on today s Webcast can register for upcoming Webcasts at or by sending first and last name, company, title, and address to ljones@kpmg.com. Other webcasts on are available on KPMG s t Institute Web site at Title Joint FASB/IASB Revenue Recognition Project -- Update and Discussion with FASB Staff Preview to Re-Exposure of the Joint FASB/IASB Leases Project Applying the FASB Proposed Model for Classification and Measurement of Financial Instruments 3 2

3 Your Speakers Today Mandy Nelson Partner, KPMG LLP Department of Professional Practice Michael Kraehnke Partner, KPMG LLP Department of Professional Practice Michael Breen Senior Manager, KPMG LLP Department of Professional Practice Michelle Rozich Senior Manager, KPMG LLP Department of Professional Practice 4 Agenda Current Accounting and Reporting Matters ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ASU , Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities ASU , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (EITF 12-A) Practice Issues Related to Gifts in Kind Changes to AICPA NFP Audit & Accounting Guide Standard Setting Activities EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Seek Compensation Revenue Recognition Joint Project Accounting for Leases Financial Instruments: Classification and Measurement, and Impairment Not-For-Profit Financial Reporting: Financial Statements Project 5 3

4 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs Objective: Ensuring that fair value has the same meaning in U.S. GAAP and IFRS Improving the comparability of the fair value measurement and disclosure requirements in U.S. GAAP and IFRS Scope: All entities that: Measure assets, liabilities or instruments classified in shareholder s equity at fair value, or Provide fair value disclosures for items not recorded at fair value Effective Date and Transition: For public entities, interim i and annual periods beginning i after December 15, 2011, with early adoption prohibited For non-public entities, annual periods ending after December 15, 2012 with early adoption permitted for interim periods beginning after December 15,

5 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (continued) Valuation Premise and Highest and Best Use: Only applicable to nonfinancial assets Prohibits the grouping of financial instruments Eliminated the terms in-use and in-exchange, instead the highest and best use of nonfinancial assets is either: Stand-alone basis; or In combination with other assets as a group or with other assets and liabilities Principal Market for an Asset or Liability: BC22: The Boards decided to clarify that the principal market is the market for the asset or liability that t has the greatest t volume and level l of activity. However, presumption that, absent evidence to the contrary, the market in which an entity would normally enter into a transaction would be the principal market 8 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (continued) Use of Portfolio Fair Value Measurement Approach: Criteria (paragraph E) need to be met in order to apply the portfolio approach: Offsetting positions 1 in market or credit risk are managed on a net exposure basis according to risk management or investment management documentation Management receives information on that basis Required or elected FVM Portfolio measurement approach not applicable for FV disclosure purposes Accounting policy decision that must be applied consistently Use of the portfolio fair value measurement approach does NOT affect the basis of financial statement presentation 1 = substantially the same both in the nature and duration of risk exposure. 9 5

6 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (continued) Premiums and Discounts in a FV Measurement: Premiums and discounts that reflect size as a characteristic of the reporting entity s holding rather than as a characteristics of the asset or liability are not permitted in a fair value measurement Application of blockage factors for all levels in the fair value hierarchy is prohibited Application of value maximization concept: If the unit of account is not specified in another standard, discounts and premiums should be applied when market participants would take them into account to maximize the value of the asset or liability When a Level 1 input is not available, a discount or premium may be applied only if (1) the premium m and discount are created by a unit of account specified in another standard and (2) market participants would include such premiums or discounts when pricing the unit of account Example: FV measurement of a Reporting unit in connection with a business combination or goodwill impairment testing 10 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (continued) General Disclosures Any transfers between Level 1 and Level 2 of the fair value hierarchy P Hierarchy level for assets and liabilities initially but not subsequently measured at fair value in the statement of financial position, however, the other fair value measurement disclosure requirements do not apply to such assets or liabilities P Why a nonfinancial asset is being used in a manner that differs from its highest and best use and whether such asset is recognized at fair value in the statement of financial position or the fair value is disclosed P = Public entity only required disclosures. NOTE: The ASU did not remove the FV measurement exception provided in ASC paragraph , which permits reporting entities to estimate the FV of (nonhomogenous) loans receivable using an entry price notion for disclosure purposes. 11 6

7 ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (continued) Level 3 Disclosures An entity shall provide the following information about Level 3 fair value measurements: A quantitative disclosure of the unobservable inputs and assumptions used in the measurement A description of the valuation control processes in place A qualitative discussion of the sensitivity of the fair value to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement P 12 Question 1 The concept of highest and best use: A. Was eliminated by ASU B. Is only applicable to nonfinancial assets C. Is only applicable to financial assets D. Is applicable to both financial and nonfinancial assets 13 7

8 Question 1 Debrief B. The concept of highest and best use is only applicable to nonfinancial assets 14 ASU Clarifying the Scope ASU , Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities 8

9 ASU , Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities Clarifies the intended scope and applicability of a fair value disclosure exemption for nonpublic entities Exemption applies to all nonpublic entities A nonpublic entity is not required to disclose the level of the fair value hierarchy within which the fair value measurements are categorized for items disclosed at fair value but not measured at fair value in the statement of financial position Effective upon issuance Applies to December 31, 2012 financial statements 16 Question 2 Which of the following is correct regarding ASU A. A nonpublic entity is not required to disclose the level of the fair value hierarchy for items disclosed but not remeasured at fair value on the balance sheet B. A nonpublic entity is required to disclose the level of the fair value hierarchy for items disclosed but not remeasured at fair value on the balance sheet C. A nonpublic entity is not required to disclose the level of the fair value hierarchy for items remeasured at fair value on the balance sheet D. ASU is effective for annual periods ending on or after December 15,

10 Question 2 Debrief A. A nonpublic entity is not required to disclose the level of the fair value hierarchy for items disclosed but not remeasured at fair value on the balance sheet 18 ASU , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (EITF 12-A) 10

11 ASU , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows Background Not-for-profit entities (NFPs) typically accept donated securities to accommodate the donor s objectives, rather than to meet strategic investment decisions Diversity in practice exists among not-for-profit entities (NFPs) in the classification of the cash receipts from the sale of unrestricted donated securities in the statement of cash flows The near immediate conversion into cash is economically similar to receiving a cash contribution Treating the cash flows as investing activities may be misleading and suggest a level of investing and investment risk that is not present Restricted donated securities are classified as financing cash flows 20 ASU , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (continued) Scope Expanded original scope to include all unrestricted donated financial assets For example, equity securities, debt securities, partnership interests Other non-financial assets are excluded from scope To be addressed in the FASB project, Not-for-Profit Financial Reporting: Financial Statements Criterion Cash receipts resulting from the sale of donated securities by NFPs that upon receipt directed without any NFP-imposed limitations for sale and were converted nearly immediately into cash shall be classified as operating cash flows Nearly immediately not defined but concluded it is synonymous y with promptly p (i.e., within days rather than months) Ability and intent at the time of receipt to avoid significant investment risks and rewards through near immediate conversion to cash is a relevant criterion Should be applied consistently regardless of the type of financial asset being sold 21 11

12 ASU , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (continued) Transition Applied prospectively to cash receipts on or after date of adoption from sale of donated financial assets Retrospective application is allowed, but not required Early adoption is permitted Effective Date Effective for fiscal years and interim periods beginning after June 15, Question 3 Which of the following is correct regarding the concept of nearly immediately in ASU ? A. ASU defines nearly immediately B. Entities are not required to apply the definition consistently C. Ability and intent are not relevant to defining nearly immediately D. Nearly immediately is synonymous with promptly 23 12

13 Question 3 Debrief D. Nearly immediately is synonymous with promptly 24 Practice Issues Related to Gifts in Kind 13

14 Practice Issues Related to Gifts in Kind Significant press coverage and interest from charitable watchdog entities Large dollar values and disparities between values at different NFPs GAAP for contributed GIK is fair value Set-up process Document each step of FV determination Check your footnote wording 26 Question 4 Contributed gifts in kind are recognized at? A. Historical cost B. Fair value 27 14

15 Question 4 Debrief B. Fair value 28 Overhaul of the AICPA Audit and Accounting Guide, Not-for-Profit Entities 15

16 Issuance of Guide The AICPA has issued a comprehensive revision of the Audit and Accounting Guide Not-for-Profit Entities First revision, other than annual conforming changes, since the Guide was released in 1996 Added 160+ pages No effective date no new authoritative literature Incorporates: Authoritative guidance from FASB Codification Non-authoritative guidance from FinREC conclusions Nonauthoritative AICPA literature NFP-related Technical Questions and Answers (TPAs) AICPA White Paper on Fair Value Measurement 30 Chapter 3, Financial Statements and General Financial Reporting Matters Statement of cash flows Chart of common cash flows and their classification Statement of functional expenses FinREC encourages presentation by all NFPs that are supported by the general public Expanded discussion of related parties Expanded coverage of interests in related entities If the objective of the relationship is to accomplish the purpose or mission for which the NFP exists or to serve the NFP s administrative purposes Chart addresses LLPs, LLCs, partnerships, equity-method th investees Consolidations Classification of net assets NFP vs FP subsidiaries 31 16

17 Chapter 4, Cash, Cash Equivalents, and Investments Combination of chapters 4 and 8 of former Guide Restrictions, designations, and similar limitations may prevent items from being cash equivalents Expanded coverage of interests in related entities (aka alternative investments) if the objective is to invest in the entity for investment return Investment pools, including those managed by others Endowments UPMIFA focus Classification of net assets Effect of governing body appropriations on release of restrictions Fund-by-fund dapproach 32 Chapter 5, Contributions Received and Agency Transactions Increased focus on core recognition principles Difficulty in measuring contribution is not justification for not recognizing the gift Clarification of explicit and implicit donor restrictions FinREC guidance for meaning of remote condition Additional guidance on fair value measurement for contributions 33 17

18 Chapter 5, Contributions Received and Agency Transactions (Continued) New section on reporting and valuing noncash gifts Gifts in kind Fundraising and informational materials, advertising, media time or media space Use of property and equipment Guarantees of indebtedness Loans with below- market interest rates Contributed services 34 Chapter 8, Programmatic Investments Programmatic investments are any investment by an NFP that meets the following two criteria: Its primary purpose is to further the tax exempt objectives of the NFP. Production of income or the appreciation of the asset is not a significant purpose Basic considerations When the initial transaction occurs, is the investment programmatic If there is a contribution element, report as contribution expense Use GAAP for similar financial instruments, except for the contribution element, if any Significance of the investments and the quantitative and qualitative risks determine the type of financial statement presentation and the extent of disclosures 35 18

19 Chapter 10, Debt and Other Liabilities New section on tax-exempt (municipal bond) debt based on the AICPA Audit and Accounting Guide, Health Care Entities Expanded discussion of credit enhancements, debt extinguishments, debt modifications, and classification Fair value measurement of liabilities 36 Chapter 13, Expenses, Gains and Losses Fundraising costs (incorporated TPAs) Unusual for an NFP to have contributions but have minimal or no fundraising expense Fundraising brochures and promotional items are expensed when used, not when purchased Fees charged by professional fundraisers, federated fundraisers and similar are reported as expenses even if netted by fundraiser before remitting gifts Costs of soliciting contributed services 37 19

20 Chapter 15, Tax and Regulatory Considerations Expanded discussion Maintaining the NFP s tax-exempt status Intermediate sanctions Lobbying Political campaign activities Income tax positions 38 Question 5 Which of the following statements related to the revised AICPA Audit and Accounting Guide Not-for-Profit Entities is correct? A. The Guide is expected to be issued in 2014 B. The Guide does not include any new authoritative literature C. The Guide includes new authoritative literature on endowments D. The Guide includes new authoritative literature on interests in related entities 39 20

21 Question 5 Debrief B. The Guide does not include any new authoritative literature 40 EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate 21

22 EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate Background A not-for-profit (NFP) entity may operate under arrangements where an affiliated entity assigns employees to work for the recipient NFP entity. Under these arrangements, the contributing entity may continue to pay the personnel costs of the employees and may not seek reimbursement of the personnel costs. Under existing guidance, only certain services ( contributed services ) received from employees of an affiliated entity are recorded. If recognized, these services may be recorded at fair value. Diversity in practice exists and comparability of financial information is impacted. Issue Current accounting possibly understates t necessary operating expenses associated with the recipient NFP. 42 EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate (continued) The Task Force reached a Final Consensus: Scope Applies to NFPs that receive personnel services for any affiliate (NFP, For-profit, or individual) where compensation is not sought. Recognition and Measurement A recipient NFP entity would recognize in its stand-alone financial statements all personnel services received from an affiliate that directly benefit the recipient NFP. These services would be recorded by the recipient NFP at cost. At a minimum, cost should include all direct personnel costs incurred by the affiliate in providing the services to the recipient NFP. Fair value option is available if use of cost significantly misstates value of service received

23 EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate (continued) Example: $ Donor Support Affiliate Red (contributing entity) Affiliation Arrangement Affiliate Blue (recipient NFP) Workers Affiliate Red and Affiliate Blue have an affiliation arrangement. Affiliate Red receives support from donors to employ workers that are assigned to Affiliate Blue to carry out services benefiting Affiliate Blue. Affiliate Red pays for the compensation of the workers and does not seek reimbursement of these costs from Affiliate Blue. Affiliate Blue recognizes the services provided by Affiliate Red, at Affiliate Red s cost (including, at a minimum, payroll and fringe benefits). 44 EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate (continued) Presentation For NFP healthcare entity that provides a performance indicator, the receipt of contributed services from an affiliate would be presented as an equity transfer. For all other recipient i NFPs, the guidance precludes contra-expense or contra-asset t presentation but does not otherwise prescribe how the receipt of the services would be presented. Disclosure The guidance specifies that Subtopic , Related Party Disclosures-Overall, would apply to personnel services received from an affiliate. There are no incremental disclosures required as a result of this guidance. Effective Date and Transition Annual and interim periods beginning after June 15, Prospective application with option to apply a modified retrospective approach. Early adoption is permitted

24 Question 6 Which of the following is correct regarding services provided to a NFP by an affiliate without reimbursement, based on the requirements of EITF 12-B: A. Services would always be recorded by the recipient NFP at cost B. Services would always be recorded by the recipient NFP at fair value C. Services would be recorded by the recipient NFP at cost, but the fair value option is available if cost significantly misstates the value of services received D. A recipient NFP is allowed to make a policy election to record services at either cost or fair value 46 Question 6 Debrief C. Services would be recorded by the recipient NFP at cost, but the fair value option is available if cost significantly misstates the value of services received 47 24

25 Revenue Recognition Joint Project Revenue Recognition Joint Project (based on redeliberations through March 2013 joint board meetings) Objective of project: Develop a standard based on a single model to deal with all types of contracts and business sectors Would replace most of existing U.S. GAAP and IFRS revenue recognition standards Excluded from scope government grants and contributions (e.g., works of art, historical treasures, etc.) Revised Exposure Draft issued November 14, 2011 Redeliberations commenced in July 2012 Final Standard expected in 2013 Effective for periods beginning after December 15, 2016 Elective one-year deferral for nonpublic entities Transition approaches: Retrospective, or Cumulative effect at the date of adoption 49 25

26 Redeliberations Plan Timing Future Meetings (if needed) Topic In-Substance Real Estate Credit Card Loyalty Points Remaining issues and consequential amendments, potentially including licensing and rights to use intellectual property, if needed Cost-benefit analysis 50 Illustrative Implementation Timeline (for calendar year entity) Assess Design Implement Sustain Business as usual Mid- 2013: Expected issuance of revenue recognition standard Optional retrospective Reporting period Potential effective date of revenue recognition standard /1/17 Potential Scenarios: Low impact Moderate impact High impact Retrospective adopter Key: Assess Design Implement Sustain Timeline intended to be illustrative only. Preparation of a timeline for a specific company will require making educated decisions based on specific facts and circumstances

27 Main Steps To Apply the Proposed Revenue Model 1 Identify the contract with a customer 2 Identify the separate performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the separate performance obligations 5 Recognize revenue when (or as) the vendor satisfies a performance obligation 52 Recent Revenue Redeliberations Potential Significant Practice Changes (through March 2013 joint board meetings) Multiple Element Arrangements Revenue that may be allocated to the delivered item would no longer be limited to the amount that is not contingent upon delivery of the undelivered item Estimated Selling Price If the stand alone selling price of a good or service is highly variable or uncertain, the residual approach would be allowed. (May apply to multiple performance obligations that are highly variable or uncertain and should follow behind any specific allocation of a discount.) Variable Consideration The transaction price allocated to performance obligations would include an estimate of variable consideration; however, that variable consideration would be subject to the constraint (revenue recognized should not be subject to a risk of significant ifi revenue reversal). Collectibility Meeting a collectibility threshold (e.g., reasonably assured or probable ) would no longer be a criterion for recognizing revenue. Bad debt expense is presented separately on the face of income statement versus notes 53 27

28 Recent Revenue Redeliberations Potential Significant Practice Changes (continued) (through March 2013 joint board meetings) Time Value of Money The transaction price would be adjusted to reflect the time value of money if the contract has a financing component that is significant to the contract, including accretion on advance payments Timing of Revenue Recognition Each performance obligation would be evaluated to determine whether it is satisfied (a) over time or (b) at a point in time; the criteria could result in more over time revenue recognition (e.g., contract manufacturers) Contract Costs Certain fulfillment costs and contract acquisition costs would be required to be capitalized 54 Question 7 When will the proposed revenue standard be effective for a calendar year-end nonpublic entity? A. Periods beginning after December 15, 2016 B. Periods ending after December 15, 2016 C. Periods beginning after December 15, 2017 D. The proposed revenue standard does not apply to nonpublic entities 55 28

29 Question 7 Debrief C. Periods beginning after December 15, Accounting for Leases 29

30 Overview of Proposed Accounting Models Lessor and Lessee Right to use leased property Lessor Models Lessee Right-of-Use (ROU) Model Receivable and Residual Model (most non-property 1 leases) Lease payments Recognize right to receive estimated future lease payments Recognize residual asset Recognize right-ofuse asset Recognize liability to make estimated future lease payments Operating Lease Model (most property 1 leases) 1 Property = land and/or buildings (or part of a building) Recognize leased property Do not recognize right to receive estimated future lease payments Accelerated ROU Model (most nonproperty 1 leases) Straight-Line ROU Model (most property 1 leases) 58 Proposals Key Impacts Lessees Leases on balance sheet All leases other than some short-term leases Increases in assets and liabilities Impact on key ratios and covenants Impact on net income Most equipment leases and some property leases have financing impact Front-loading of expenses vs. increase in EBITDA Straight-line lease expense (presented in one line-item on I/S) for most property leases and some equipment leases New liability measurement basis E.g., residual value guarantees Reassessment volatility Lessors Balance sheet impact Lease receivables and residual assets recognized, underlying asset derecognized, for most equipment leases and some property leases Residual asset measured on allocated cost basis Impact on net income Most equipment leases and some property leases have financing impact Up-front profit recognition on lease receivable Deferred profit on residual asset Residual asset accretion Straight-line lease income for most property leases and some equipment leases New asset measurement basis Reassessment volatility 59 30

31 Lease Definition Definition of a lease similar to existing GAAP (FASB ASC 840 (FAS 13/EITF 01-8) and IAS 17/IFRIC 4) A contract that conveys the right to control the use of an identified asset or assets for a period of time in exchange for consideration. Identified asset may be explicitly or implicitly specified. Fulfillment of the contract depends on the use of an identified asset or assets, and Customer controls the use of the identified d asset(s) Ability to direct the use of the identified asset(s), and Derive the benefits from use of the identified asset refers to the customer s right to receive substantially all of the potential economic benefits from use of the identified asset(s) throughout the term of the arrangement Assets inseparable from the supplier s goods or services Assess whether the customer can derive the benefits from use of the identified asset Customer cannot derive benefits from use of the asset if it can only obtain those benefits with other goods or services that are not sold separately by the supplier or any other supplier and the asset is incidental to the delivery of services because it is designed to function only with those other goods or services Portion of a larger asset Non-distinct portion would generally not be a lease (e.g., specified percentage of the capacity of a pipeline) Physically distinct portions may be specified assets and subject to lease accounting (e.g., specifically identified strands within a fiber optic cable, floors of an office building, airport terminals, etc.) 60 Separation and Allocation of Contract Consideration to Lease and Non-Lease Components When the stand-alone price (SP) of each component is observable When the SP of one or more, but not all, components is observable When no observable SP for any of the components in the arrangement is available Lessee Separate lease and non-lease components and allocate payments based on relative stand-alone price of components Separate those components with observable SP and allocate observable SP thereto. Allocate the residual to remaining component(s) and, if it includes a lease, account for it as a single lease component. Account for the entire arrangement as a single lease component Lessor Always separate lease and non-lease components and allocate payments using the revenue recognition standard s guidance (i.e., on a relative selling price basis) 61 31

32 Agreements with Multiple Leased Assets Identifying Separate Lease Components Lessee A leased asset is a separate lease component if: - It is distinct (same criteria as for lessors), PLUS - There are observable stand-alone prices 1 for the leased asset or for all of the other leased assets in the contract 2 1 Observable stand-alone prices are those charged by the lessor or a similar supplier for a good or service or a similar good or service when sold separately. 2 A leased asset for which the lessee does not have an observable stand-alone price would be combined with any non-lease elements for which the lessee does not have an observable standalone price. Lessor A leased asset is a separate lease component if it is distinct 3, which requires that both: The lessee can benefit from use of the asset on its own or with readily available resources. Readily available resources are those that are sold or leased separately (by the lessor or any other supplier) or those that the lessee has already obtained (from the lessor or from other transactions or events) ; and The leased asset is neither highly dependent upon, nor highly interrelated with, other underlying assets in the contract. 3 Aligns to proposed separation model in the joint FASB/IASB revenue recognition project. All leased assets must be distinct or grouped into distinct bundles. 62 Lease Classification Short-Term Leases: Not subject to classification requirements if lessee/lessor elects to apply the short-term lease exception. Principle: Lease classification will be based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset during the lease term. Application of the Principle: Classification test will be applied based on the nature of the underlying asset and terms of the lease. Timing: Classification test is performed only at lease commencement, or upon lease modification. Leases of Non-Property (e.g., Equipment) Leases of Property 1 Lessees would apply the accelerated ROU model and lessors would apply the R&R model to leases of nonproperty unless: Lessees would apply the straight-line ROU model and lessors would apply the operating lease model to leases of property unless: The lease term is insignificant in relation to the underlying asset s original economic life; or The lease term is for a major part of the underlying asset s remaining economic life; or The present value of the estimated lease payments is insignificant in relation to the fair value of the underlying asset Inverse of IAS 17 Principle The present value of the estimated lease payments amounts to substantially all of the fair value of the underlying asset Similar to IAS 17 Principle 1 Land and/or buildings (or part of a building) only. The proposed standard excludes integral equipment from the definition of property

33 Lessee Accounting Underlying Principles Overall Principle: A lease is a financing transaction Gives rise to a financing liability that is accreted using the effective interest method Accelerated ROU Model: The lease represents the acquisition of a more than insignificant portion of the underlying asset (similar to acquiring PP&E on credit) ROU asset and lease liability are considered separate and accounted for separately Straight-line ROU Model: The lease is similar to a service arrangement in which the lessee purchases on credit access to the underlying asset for a period of time ROU asset and lease liability are considered inextricably linked and accounting is linked se Expens Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year Year 9 10 Cash Lease Outflow Payments Straight-Line ROU Model Straight (Current line Operating rent expense Lease (old Accounting) standard) Interest Accelerated and Deprec. ROU Model Expense (new standard) 64 Question 8 Which of the following is correct related to the proposed standard for accounting for leases? A. In an accelerated ROU Model, the ROU asset and lease liability are accounted for separately B. In an accelerated ROU Model, the accounting for the ROU asset and lease liability are linked C. In a straight-line ROU Model, the ROU asset and lease liability are accounted for separately D. A lease gives rise to a financing liability that is accreted on a straight-line basis 65 33

34 Question 8 Debrief A. In an accelerated ROU Model, the ROU asset and lease liability are accounted for separately 66 Financial Instruments: Classification and Measurement, and Impairment 34

35 Financial Instruments Project Update CLASSIFICATION AND MEASURMENT FASB proposed ASU issued in February 2013 Changes how entities determine the classification and measurement of financial instruments Financial assets measurement based on both their contractual cash flow characteristics and the business model (amortized cost, FV-OCI, FV-NI) Financial liabilities are generally measured at amortized cost Comment period ends May 15, Financial Instruments Project Update IMPAIRMENT FASB Exposure Draft issued in December 2012 Replaces multiple credit impairment models in current U.S. GAAP Reflects an entity s current estimate of all contractual cash flows that it does not expect to collect Based on all relevant information (past events, current conditions, and reasonable and supportable forecasts) Comment period ends April 30,

36 FASB s Current Expected Credit Loss Model FV-OCI Entities would not need to estimate expected credit losses if both of the following conditions are met: (i) fair value of the individual financial asset is greater than or equal to amortized cost, and (ii) expected credit losses are insignificant PCI financial assets Other in-scope assets Interest income based on expected cash flows at the date of acquisition Expected credit losses at the acquisition date would be recognized as an allowance Credit impairment would follow same approach as originated assets The model would apply to the following financial instruments that are not measured at FV-NI: Debt instruments (e.g. debt securities and loans) measured at amortized cost or FV-OCI Lease receivables recognized by a lessor Receivables that result from revenue transactions Reinsurance receivables Loan commitments 70 Question 9 Under the proposed financial instruments project, an entity s estimate of expected credit losses would be based on the following? A. Past events B. Current conditions C. Reasonable and supportable forecasts D. All of the above 71 36

37 Question 9 Debrief D. All of the above 72 NFP Financial Reporting: Financial Statements Project 37

38 NFP Financial Reporting: Financial Statements Project Objective Improve and build on (or refresh) existing financial reporting model the complete set of financial statements Scope Information provided in financial statements and notes about liquidity, financial performance, and cash flows Net asset classification requirements Restrictions imposed by donors, including whether to broaden to include restrictions imposed by statute, contract, or others Revenues, expenses, gains and losses and whether to define and require those that are (or not) part of operations or a current period financial performance metric Will not revisit recognition and measurement of contributions or of other revenues and expenses Timing Added to agenda November 2011 Exposure draft 2H 2013 Final ASU 2H Question 10 The NFP Financial Reporting: Financial Statements Project will A. Revise recognition and measurement of contributions B. Revise recognition and measurement of all revenues C. Revise recognition and measurement of all expenses D. Not revise recognition and measurement of contributions 75 38

39 Question 10 Debrief D. The NFP Financial Reporting: Financial Statements Project will not revise recognition and measurement of contributions 76 Q & A 39

40 Closing Items Replay this and previous KPMG Webcasts through the KPMG Government Institute at If you are eligible for CPE credit for today s session, you will receive the certificate electronically in four to six weeks. Please complete and return the evaluation form for today s Webcast, located in the Downloadable Files section (lower right corner) of your screen. 78 Contacts Lou Mezzina lmezzina@kpmg.com Mandy Nelson aenelson@kpmg.com Michael Kraehnke mkraehnke@kpmg.com 79 40

41 Thank you for joining today s KPMG Government Institute Webcast KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved NSS The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative ( KPMG International ). 41