Quarterly financial reporting update - September PDF Free Download

Please disable popup blocking software before viewing this webcast Quarterly financial reporting update - September 2017 September 27, 2017 12:00 1:00 pm CT

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Presenters Ryan Brady Partner Accounting Principles +1 312 602 8741 Ryan.Brady@us.gt.com Rahul Gupta Partner Accounting Principles +1 312 602 8084 Rahul.Gupta@us.gt.com Marjorie Whittaker Senior Manager SEC Regulatory Matters +1 202 521 1535 Marjorie.Whittaker@us.gt.com Julia Siegfriedt-Wilson Experienced Manager Accounting Principles +1 312 602 8219 Julia.Siegfriedt-Wilson@us.gt.com Grant Thornton LLP. All rights reserved. 4

Learning objectives Describe the current status of standardsetting projects Recognize the potential impact of recently issued standards on your company Identify recent news and events that may affect financial reporting Grant Thornton LLP. All rights reserved. 5

ASC 606 implementation reminders Change in mindset New judgments and estimates Revisit internal controls Update disclosures Implementation will likely take longer than expected Grant Thornton LLP. All rights reserved. 8

Transition methods Key differences Full retrospective Apply retrospectively to all contracts Not required to disclose the effect of the changes on the current period Disclose the effect of the changes on any prior periods that have been retrospectively adjusted Modified retrospective Apply retrospectively to all contracts at the date of initial application or only those contracts that are not completed contracts Disclose the amount by which each financial statement line item was affected in the period of adoption Recognize cumulative effect in retained earnings in most current period presented Grant Thornton LLP. All rights reserved. 10

Practical expedients Available under both transition methods For contracts modified before the beginning of the earliest reporting period presented under the new standard, an entity does not need to retrospectively restate the contract for those modifications An entity can reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented under the new standard when: Identifying the satisfied and unsatisfied performance obligations Determining the transaction price Allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition Grant Thornton LLP. All rights reserved. 11

Expedients available to those applying the full retrospective transition approach An entity need not restate contracts that begin and are completed within the same annual reporting period For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods For all reporting periods presented before the date of adoption, an entity is not required to disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue Grant Thornton LLP. All rights reserved. 12

Definition of a public business entity (PBE) Entity meets the definition of a PBE solely because it includes, or is required to include, its financial statements or financial information in another entity s SEC filing Entity may use the nonpublic business entity effective dates for ASC 606 and ASC 842 Grant Thornton LLP. All rights reserved. 13

ASC 606 implementation issues Effect of full retrospective adoption by a successor entity on the predecessor period financial statements Issues being considered by the staff Adoption date when an EGC that has elected private company adoption dates ceases to qualify as an EGC Outdated or superseded Regulation S-X requirements Grant Thornton LLP. All rights reserved. 14

New ASUs from FASB ASU Title 2017-11 (Part I) Accounting for Certain Financial Instruments with Down Round Features (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception 2017-12 Targeted Improvements to Accounting for Hedging Activities Grant Thornton LLP. All rights reserved. 16

Down round features Current GAAP Down round features: A features in a financial instrument (such as warrant or convertible preferred stock) that requires a downward adjustment of the contractual exercise price on the basis of a future equity issuance A freestanding financial instrument or a bifurcated conversion option are classified as a liability measured at FV through net income due to presence of a down round provision 100 shares May be purchased at $10 per share (Original strike price) $7 per share Price of subsequently issued common stock Grant Thornton LLP. All rights reserved. 17

2017-11: (Part 1) Accounting for down round features 1 Ignore the existence of a down round feature when evaluating whether financial instruments meet the exception from derivative accounting 2 Entities that do not present EPS: No Recognition and measurement impact 3 4 Entities that present EPS: Recognize the effect of down round feature when triggered as a dividend reduce retained earnings and record APIC Entities that present EPS: Should reduce income available to common shareholders in basic EPS calculation *Note: All entities should consider the applicability of the contingent beneficial conversion feature guidance in ASC 470-20. Grant Thornton LLP. All rights reserved. 18

2017-11: (Part 2) Scope of Topic 480 Scope exception replaces indefinite deferral Mandatorily redeemable financial instruments of certain nonpublic entities: Issued by nonpublic entities that are not SEC registrants Not redeemable on fixed dates or not for amounts that are fixed or determined by reference to an external index Certain mandatorily redeemable noncontrolling interests: Would not have to be classified as liabilities by the subsidiary, under the only upon liquidation exception, but would be classified as liabilities by the parent Issued before November 5, 2003 (only measurement guidance) Grant Thornton LLP. All rights reserved. 19

ASU 2017-11: Effective dates and transition Public business entities Annual periods, including interim periods within those annual periods, beginning after December 15, 2018 All other entities Annual periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020 Early application Permitted, including in an interim period Transition Retrospectively to outstanding financial instruments with a down round feature as (1) a cumulative effect adjustment at the beginning of the fiscal year adopted OR (2) for each prior reporting period presented Grant Thornton LLP. All rights reserved. 20

Component hedging Hedge of financial item Hedge of nonfinancial item Variability in total cash flows Interest rate risk Credit risk ASU 2017-12: Contractually specified component New Variability in total cash flows Overall fair value changes Fx risk Fx risk Overall fair value changes Grant Thornton LLP. All rights reserved. 21

Component hedging: Interest rate risk Current GAAP Component hedging only allowed for "Benchmark interest rates" ASU 2017-12 Separate approaches for fixed-rate and variable-rate "Benchmark interest rate" also includes SIFMA Fixed-rate and variable-rate financial instruments Fixed-rate financial instruments Variable-rate financial instruments Allowed Not allowed Allowed Not allowed Allowed Benchmark interest rates OIS US Treasury LIBOR swap Nonbenchmark interest rates SIFMA Prime Benchmark interest rates OIS US Treasury LIBOR swap SIFMA Nonbenchmark interest rates Prime Any contractually specified rate Grant Thornton LLP. All rights reserved. 22

Qualifying for hedge accounting: Current GAAP Hedge inception Quarter Quarter Quarter Test* effectiveness Test* effectiveness, measure ineffectiveness Test* effectiveness, measure ineffectiveness Test* effectiveness, measure ineffectiveness Prospective assessment Retrospective assessment * Documentation requirements at inception and every quarter include methods to be used to prospectively and retrospectively assess effectiveness and measure ineffectiveness * Quantitative test is required, unless the hedging relationship qualifies for either the short-cut method or critical terms match method Grant Thornton LLP. All rights reserved. 23

Qualifying for hedge accounting: ASU 2017-12 Hedge inception Quarter Quarter Quarter Test effectiveness Test effectiveness Test effectiveness Test effectiveness Prospective assessment Retrospective assessment Have until first reassessment date to document a quantitative test required at hedge inception Entity may elect to subsequently assess hedge effectiveness qualitatively Application of long-haul method permitted if short-cut method was not or is no longer appropriate if: Hedge was highly effective Long-haul method was identified and documented at hedge inception Grant Thornton LLP. All rights reserved. 24

Targeted improvements to hedging: Fair value hedges Hedge of financial item Hedge of non-financial item Fair value hedge Fixed to floating rate debt Inventory Current GAAP Derivative carried at FV through NI Carrying amount of hedged item adjusted for FV changes attributable to hedged risk through NI ASU 2017-12 Entire FV change on derivative presented in the same income statement line item as hedged item's carrying value changes Grant Thornton LLP. All rights reserved. 25

Targeted improvements to hedging: Cash flow and net investment hedges Hedge of financial item Hedge of non-financial item Cash flow hedge Floating to fixed rate debt Commitment to purchase inventory Current GAAP Effective portion of change in FV of derivative recorded in OCI; ineffective portion recognized in NI Amount recognized in OCI reclassified to NI when hedged item affects NI ASU 2017-12 Entire FV change recognized in OCI Amounts reclassified from OCI will be presented in the same IS line item as the hedged forecasted transaction Grant Thornton LLP. All rights reserved. 26

ASU 2017-12: Targeted improvements to hedging Public business entities All other entities December 15, 2018 December 15, 2019 Early adoption is permitted Transition: For existing cash flow and net investment hedges, as of the beginning of the fiscal year of adoption: Apply the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated OCI Corresponding adjustment to retained earnings New and modified presentation and disclosure guidance is required only on a prospective basis. Transition elections may be made on a stand-alone basis to allow existing hedging relationships to transition to the new alternatives available within the ASU Grant Thornton LLP. All rights reserved. 27

Expanded non-public review of draft registration statements IPO and initial registrations under the Securities Act Available to all issuers for: Initial registration of a class of securities under Section 12(b) of the Exchange Act First submission of Securities Act offerings within one year of an IPO or Exchange Act Section 12(b) registration Grant Thornton LLP. All rights reserved. 28

Proposed ASUs from FASB Project Technical Corrections and Improvements to Topic 995, U.S. Steamship Entities Elimination of Topic 995 Technical Corrections and Improvements to Topic 942, Financial Services Depository and Lending Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans Comments due 8/28/17 8/28/17 Targeted Improvements to Related Party Guidance for Variable Interest Entities 9/5/17 Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made 11/1/17 Grant Thornton LLP. All rights reserved. 30

Update on leases implementation Key inquiries on ASU 2016-02, Leases Land easements Rate implicit in the lease Lessee Reassessment of lease classification Lessor Reassessment of lease term and purchase option Variable lease payments that depend on an index or rate Nonqualifying initial direct costs Impairment of net investment in the lease Grant Thornton LLP. All rights reserved. 32

Land easements Board to propose transition provisions Land easements that existed before Topic 842's effective date and were not accounted for under Topic 840 will continue to be accounted for under the entity's current accounting policies Land easements currently accounted for under Topic 840 will apply Topic 842 All new or modified land easements should first be evaluated under Topic 842 Accounting for land easements in existence at transition Lease (Evaluated under Topic 840) Apply Topic 842 Intangible (Or other treatment outside of Topic 840) Continue to apply current accounting policies Grant Thornton LLP. All rights reserved. 33

Rate implicit in the lease Sales-type leases with significant variable payments Application of Topic 842 could result in a negative rate implicit in the lease, rather than a loss at the commencement date Rate implicit in a lease cannot be less than 0% Board clarified that rate cannot be less than zero Grant Thornton LLP. All rights reserved. 34

Lessee reassessment of lease classification Lease modification Change in lease term or option When a lease is modified and that modification is not accounted for as a separate contract, an entity should reassess, at the effective date of the modification, lease classification on the basis of the modified terms and conditions and the facts and circumstances existing as of that date Reassess lease classification if there is a change in the lease term or the assessment of a lessee option to purchase the underlying asset Perform the lease classification reassessment on the basis of the facts and circumstances, and the modified terms and conditions (if applicable), as of the date the entity undertakes the reassessment Grant Thornton LLP. All rights reserved. 35

Variable lease payments that depend on an index or rate Subsequent remeasurement of the lease payments A lessee shall remeasure the lease payments if a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based is resolved such that those payments now meet the definition of lease payments. A change to a reference index or a rate upon which some or all of the variable lease payments in the contract are based does not constitute the resolution of a contingency Grant Thornton LLP. All rights reserved. 36

Nonqualifying initial direct costs Leases previously classified as operating, when not electing the package of practical expedients: Beginning of earliest period presented in the financial statements Costs incurred Written off as an adjustment to equity Costs incurred Adjustment to earnings of the comparative period presented Grant Thornton LLP. All rights reserved. 37

Impairment of net investment in the lease When determining the loss allowance for a net investment in the lease, a lessor shall take into consideration the collateral relating to the net investment in the lease The collateral relating to the net investment in the lease represents the cash flows that the lessor would expect to receive (or derive) from the lease receivable and the unguaranteed residual asset during and following the end of the remaining lease term Grant Thornton LLP. All rights reserved. 38

Lessor reassessment of lease term and purchase option A lessor should account for a lessee exercise of an option to extend or terminate the lease or to purchase the underlying asset as a lease modification, unless the exercise of that option by the lessee is consistent with the assumptions that the lessor made in accounting for the lease at the commencement date of the lease FASB clarifies lessor accounting for exercise of an option Grant Thornton LLP. All rights reserved. 39

Other staff interpretive guidance Guidance involving communications with CorpFin's Office of Chief Accountant (CF-OCA) Compliance and Disclosure Interpretations FAST Act, Securities Act Forms: Interim financial information in draft and filed registration statements Securities Act Rules: Regulation A issuer and concurrent registration on Form 8-A Pro-forma information requirements in connection with multiple significant acquisitions in the same fiscal year Grant Thornton LLP. All rights reserved. 40

Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser Grant Thornton LLP. All rights reserved. 43

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