Relationships backed by performance. Accounting and Financial Reporting Trends T.J. Boyle June 20, 2013
What s New Leases Revenue Recognition Derivatives Other Comprehensive Income AICPA Accounting for Small and Midsize Companies (SME s)
Leases Potentially biggest accounting changes in decades!! What s the big deal Debt covenants Industries leasing companies
Lease Accounting Biggest item capitalize all leases Slow moving to finalize 2010 exposure draft May 2013 updated exposure draft Comment period until September
Lease Accounting Core principle Entity would recognize assets and liabilities for all leases Right to use asset which is depreciated Lease liability which has an interest component
Types of Leases Type A lease leases other than property (ex. Equipment, vehicles, etc.) Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments Recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset.
Types of Leases (cont.) Type B lease - leases of property (land and/or a building or part of a building) Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments Recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.
Leases Income Statement Type A - Lessees may present amortization and interest expense separately or combined with other amort. & int. If combined must disclose in notes. Type B- Lessees would present lease expense as a single line item of lease expense.
Leases Cash Flows Type A would be recorded with interest in operating and principal in financing (similar to debt) Type B Cash payments for lease payments would be presented in operating.
Short term leases As an accounting policy decision, a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term. Similar to an operating lease. At the commencement date has a maximum possible term, including any options to extend of 12 months or less. Cannot have purchase option.
Lessors - Practical View For lessors the practical classification for type A and type B leases is whether or not the lease term is expected to consume a significant portion of the economic benefits embedded in the underlying assets
Type A lease Lessor Derecognize the underlying asset and recognize a right to receive lease payments and a residual asset Recognize the unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term Recognize any profit relating to the lease at the commencement date.
Lessor Type B lease Continue to recognize underlying asset Recognize lease income over the term, typically a straight line basis
Revenue Recognition Entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Overall should not effect pork producers significantly
Revenue 1. Step 1: Identify contract w/ customer. 2. Step 2: Identify separate performance obligations in the contract. 3. Step 3: Determine the transaction price. 4. Step 4: Allocate the transaction price to the separate performance obligations 5. Step 5: Recognize revenue when (or as) performance obligation is satisfied.
Derivatives Changes in the last few years are for disclosures Must track transactions through year
Derivatives Key disclosures Reason for derivative instrument Volume of activity Fair value on a gross basis By type (cash flow hedges, fair value hedges, undesignated positions) Gains and loss (for cash flow hedge must show by effective and ineffective portion)
Other Comprehensive Income Presentation Change No longer allowed to include in Statement of Equity Options Continuous part of income statement Separate but consecutive statement Must show by components In future must disclose in OCI additional reclassification information
Other New GAAP Pronouncements Most are very industry or event specific. 2013-01 Balance Sheet Offsetting Show gross amounts as disclosure 2012 - Goodwill and indefinite lived intangibles now can use qualitative assessment
New Basis of Reporting 2013 AICPA release Financial Reporting Framework for Small & Midsized Entities (SME s) Purpose To be a more usable framework for small business owners and their users This is not GAAP
Cost beneficial Stable framework Designed for SME s Concepts based Benefits
For profit company Who is a SME? Does not have regulatory reporting requirements Owners and management do not intend on going public Does not engage in overly complex accounting Does not have significant foreign ops.
Key Similarities GAAP Financial statements include Financial Position, Income, Equity and Cash flow (although it is allowed to just have one such as financial position) Notes are still required to make them understandable Many of the basics remain the same
Key Differences to U.S. GAAP Start-up costs GAAP expense as incurred. SME- policy decision expense or amortize over 15 years Goodwill GAAP do not amortize, assess for impairment, SME amortize on income tax method or 15 years
Key Differences (cont.) Stock Compensation GAAP measure expense at FV, numerous disclosures and calculations SMEs no recognition Taxes GAAP deferred tax method SMES policy decision for deferred tax or taxes payable method Taxes payable only current amounts due/owed
Key Differences (cont.) Consolidation GAAP based on control SMEs policy decision to consolidate or use equity method Leases GAAP looking to change as discussed earlier SME s essentially no change from current GAAP
Key Differences (cont.) Push-down accounting GAAP little info, SEC allows when control changes 80% SME s allows when change is 50% Derivatives GAAP record at fair value SME s - recognize the net cash paid or received at settlement.
Key Differences (cont.) Investments GAAP Equity Method, Cost Method and Fair Value Option SME s no fair value option, fewer required disclosures for Equity Method Changes in accounting policies GAAP retrospective application required SME s retrospective application not required when it is impracticable
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Relationships backed by performance. Thank you! T.J. Boyle FROST, PLLC tboyle@frostpllc.com 501-376-9241