Download Accounting Standards Update 2010-06

GAAP Update
OACUBO Professional Development Conference
April 18, 2011
Ohio Northern University, Ada, Ohio
Presenters
David M. Andrews, CPA
Partner
Cleveland, Ohio
216.522.1191
[email protected]
Lori A. Kalic, CPA
Director
Cleveland, Ohio
216.522.1478
[email protected]
1
Agenda
 What are the Standard Setters Up To?
 Revisiting Recently Issued Standards
 FASB
 GASB
 What is On the Horizon?
 Other Standards
 Q&A
2
What are the Standard Setters Up To?
 International Convergence
 Principle-based vs. Rule-based
 Focus is on publically traded companies
 Fallout is inevitable – we see it in proposed standards
 Financial Accounting Foundation
 Blue Ribbon Panel – Trustee Working Group
 Made two key recommendations
1. GAAP should have exceptions and modifications for
private companies
2. Exceptions should be determined by a separate private
company accounting standards board
– It did not recommend separate GAAP
– Next step is for the TWG to perform assessment
 FASB Not-for-Profit Advisory Panel
 Codification
3
Revisiting Recently Issued Standards
 Accounting Standards Update 2010-07
 “NFP Mergers and Acquisitions”
 Accounting Standards Update 2009-12
 “Fair Value Measurements and Disclosures –
Using NAV”
 Accounting Standards Update 2010-06
 “Fair Value Measurements – Improving
Disclosures and Measurements”
4
Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
 Issued April 2009
 Formerly known as FAS 164
 Effective for mergers on or after the beginning of the
initial reporting period beginning on or after
December 15, 2009
 Effective for acquisitions for which the acquisition
date is on or after the beginning of the first annual
reporting period beginning on or after December 15,
2009
 Objective of the Statement is to improve relevance,
representational faithfulness, and comparability of
the information that an NFP entity provides in its
financial reports about a combination with one or
more NFPs, businesses, or nonprofit activities
5
Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
 Established principles and requirements for
how a NFP:
 Determines whether a combination is a merger or
an acquisition
 Applies the carryover method in accounting for a
merger
 Applies the acquisition method in accounting for
an acquisition, including determining which of
the combining entities is the acquirer
 Determines what information to disclose to
enable users of financial statements to evaluate
the nature and financial effects of a merger or
acquisition
6
Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
 Merger
 Governing bodies of two or more NFPs cede
control to form a NEW NFP entity
 Carryover method used
 Need not be a new legal entity
 Acquisition
 NFP acquirer obtains control of one or more
nonprofit activities or businesses (SOP 94-3)
7
Accounting Standards Update 2010-07
“Not-for-Profit Entities: Mergers and Acquisitions”
 Disclosures – Merger and Acquisitions
 Very robust disclosures for both types of
transactions and additional disclosures for
“public entities”
 Refer to the ASC when dealing with a merger or
acquisition under the new rules
8
Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
 Issued in September 2009 – Effective periods
ending after December 15, 2009
 Guidance on how entities should estimate FV
of certain alternative investments.
 If investments are within scope of the
guidance – Net Asset Value (NAV) can be
used as a practical expedient to determine FV
if the NAV is as of the measurement date
9
Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
 Investments within the scope:
 There is no readily determinable FV
 An entity that has the following attributes:
– Primary activity is investing
– Ownership is represented by units of ownership (i.e.
partner interests or shares of stock)
– The funds within the investment are pooled
– The entity is a primary reporting entity
 An investment that does not possess one or more
of these attributes but it is industry practice to
issue financials on FV basis
10
Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
 ASU permits use of NAV as a practical
expedient – Subject to any pending sales (on
an investment by investment basis)
 Expands disclosures “by major category” to
include the following:
 Nature of any redemption frequency and any
restrictions
 Unfunded commitments
 Investment strategies of the investees
** The expanded disclosure is required for alternative
investments regardless of whether NAV is used.
11
Accounting Standards Update 2009-12
“Investments in Certain Entities that Calculate Net Asset Value per Share”
 Impact to Fair Value Disclosure
 If entity can redeem investment at NAV on the
measurement date – Level 2
 If entity can never redeem its investment at NAV –
Level 3
 If redeemable at an unknown time in the future –
Judgment is required
12
Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
 ASU 2010-06 – issued in January 2010
 Topic 820 changes – “Improving Disclosures
about Fair Value Measurements”
 Effective for interim and annual periods
beginning after December 15, 2009, except for:
 The disclosures about purchases, sales,
issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those
disclosures are effective for interim and annual
periods beginning after December 15, 2010.
13
Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
 New Disclosures
 Significant transfers in and out of Level 1, 2 and
Level 3 should be separately disclosed as well as
the reasons for the transfers
– Transfers in should be separate from transfers out
– Required to disclose policy about the timing of
recognizing a transfers (i.e. beginning of period, end of
period, or date of event creating the transfer)
 For Level 3 activity, a reporting entity should
present separately information about purchases,
sales, issuances, and settlements on a gross (vs.
net) basis. (Years beginning after 12/15/10)
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Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
 Existing Disclosures “Clarified”
 Level of disaggregation for each “class” of assets
and liabilities carried at fair value based on
judgment
 A reporting entity should provide disclosures
about the valuation techniques and inputs used to
measure fair value for both recurring and
nonrecurring fair value measurements for Level 2
and 3 items
 Conforming amendments for employers’
disclosures related to postretirement benefit
plans
15
Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
 Examples of Disaggregation
 Equity securities by industry
– i.e. real estate, healthcare, consumables
 Debt securities by grade or type
– i.e. commercial, residential, US treasury, corporate
ratings
 Hedge fund investments by position
– i.e. long/short, global vs. domestic, distressed debt
 Other important point
 The fair value disclosure by class should
reconcile back to the line items in the statement of
financial position (balance sheet)
16
Example Disclosure
Level 1
Common stock
Basic industry
Capital goods
Consumer staples
Energy/utilities
Financial
Technology
Bonds:
U.S. Government
Corporate (1)
Foreign (1)
Mutual funds
Equity index funds
Small-cap growth funds
Small-cap value funds
Mid-cap growth funds
Foreign large-cap value funds
Fixed income bond funds
Short-term bonds
Intermediate-term bonds
International equity
Domestic (2)
Benefical interests in perpetual trusts
Alternative investments
Cash and cash equivalents
Accrued interest
$
Level 2
1,520,383 $
1,970,054
2,488,723
2,291,755
2,192,241
2,784,575
-
Level 3
- $
-
23,254,991
8,312,778
2,297,523
Total
- $ 1,520,383
1,970,054
2,488,723
2,291,755
2,192,241
2,784,575
-
456,600
1,555,999
2,333,699
501,725
800,050
6,000,871
326,362
1,246,950
119,730
2,411,707
891,955
17,421
203,661
$ 25,342,767 $ 37,541,370 $ 1,095,616
23,254,991
8,312,778
2,297,523
456,600
1,555,999
2,333,699
501,725
800,050
6,000,871
1,573,312
2,531,437
891,955
221,082
63,979,753
11,009,926
269,307
$ 75,258,986
17
Accounting Standards Update 2010-06
“Fair Value Measurements and Disclosures”
 Why?
 To meet the needs of users of the statements
 More transparency with disaggregated
information
 The reasons behind changes in Level 3 items (vs.
net information that leaves them guessing)
 Also feel information about transfers in and out of
the Levels (1, 2, and 3) and the reasons for them
would be “helpful”
18
Government Accounting Standard No. 51
“Accounting and Financial Reporting for Intangible Assets”
 Effective Date: For periods beginning after June
15, 2009
 Why?
 Establish consistency in financial reporting derecognition,
initial measurement, and amortization
 Applicable to intangible assets, as defined in
GASB 34
 Capitalization is required for eligible tangible
assets i.e. identifiable
 Specific guidance regarding internally generated
computer software
 Provides guidance surrounding amortization
19
Government Accounting Standard No. 53
“Accounting and Financial Reporting for Derivative Financial Instruments”
 Effective date: For periods beginning after
June 15, 2009
 Recognition, measurement and disclosure
associated with derivative instruments
 Requires fair value reporting (limited
exceptions)
 Investment derivative instruments vs.
hedging derivative instruments
20
Government Accounting Standard No. 55
“The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments”
 Effective upon issuance
 Incorporate GAAP hierarchy into GASB
authoritative literature
 Result: improve financial reporting
 Codification
 No real change to existing practice
21
Government Accounting Standard No. 56
“Codification of Accounting and Financial Reporting Guidance Contained in the AICPA
Statements on Auditing Standards”
 Effective upon issuance
 Purpose: To incorporate into GASB literature
financial reporting guidance surrounding:
 Related party transactions
 Going concern considerations
 Subsequent events
 Does NOT establish new standard but
incorporates existing guidance
22
Government Accounting Standard No. 58
“Accounting and Financial Reporting for Chapter 9 Bankruptcies”
 Effective date: For periods beginning after June
15, 2009.
 Retroactive application is required for all prior
periods presented during which a government
was in bankruptcy.
 Accounting and financial reporting guidance for
governments that have petitioned for protection
from creditors by filing for bankruptcy under
Chapter 9 of the United States Bankruptcy Code.
 It requires governments to remeasure liabilities
that are adjusted in bankruptcy when the
bankruptcy court confirms (that is, approves) a
new payment plan
23
What is On the Horizon?
 Leases (2nd Quarter 2011**)
 Revenue recognition (2nd Quarter 2011**)
 Financial Instruments (3rd Quarter 2011**)
 Fair Value Measurements (2nd Quarter 2011)
 Consolidation (2nd and 3rd Quarter 2011)
 Financial Statement Presentation (Undefined)
** FASB will issue amendments for comment prior to
finalizing standards
24
Lease Accounting – Status
 FASB issued Proposed Accounting Standards
Update for Leases (Topic 840) on August 17, 2010
 Comment period expired on December 15, 2010
 The proposed ASU has garnered much attention at
this stage
 Insiders say it is a given that these changes are
coming
 Most existing leases are not grandfathered
 Target date is Q2 – 2011
 Effective date – yet to be determined – 2013/14?
25
Lease Accounting – General Provisions
 With few exceptions, operating leases are
going away.
 “Right-of-use” model:
 Lessee would recognize an asset for its “right to
use” the underlying asset for the lease term and
recognize a liability to make lease payments.
 Lessor would recognize an asset representing its
“right to receive” lease payments and depending
on certain factors would either recognize a lease
liability for its performance obligation, or
derecognize the rights in the underlying assets
that it transfers but continue to carry a residual
asset at the end of the lease term.
26
Lease Accounting – Lessee Accounting
 Initial measurement
 Asset = PV of lease payments plus direct costs
 Obligation = PV of lease payments discounted at
lessee’s incremental borrowing rate
 Subsequent measurement
 Asset – amortized cost – straight line method
 Obligation – amortized cost – effective interest
method
 Required to consider impairment
 Assess carrying amount of liability as warranted
27
Lease Accounting – Lessor Accounting
 Performance Obligation vs. Derecognition
Approach
 Performance Obligation- Lessor retains exposure
to significant risks and benefits
 Derecognition Approach – Lessor does not retain
exposure
– Asset = PV of lease payments plus direct costs
– Obligation = PV of lease payments discounted at
lessee’s incremental borrowing rate
28
Lease Accounting – Lessor Accounting
 Performance Obligation
 Initial measurement
– Determine lease payment using expected outcomes
approach
– Discount using rate lessor charges the lessee
– Include contingent/option payments (be conservative)
 Subsequent measurement
– Amortize asset – interest method
– Amortize performance obligation – systematic approach
29
Lease Accounting – Lessor Accounting
 Derecognition Approach
 Initial measurement
–
–
–
–
Considered to have sold a right to use asset
Derecognize a portion of the underlying asset
Recognize an asset for the residual benefit not
transferred
Recognize a lease receivable, revenue and COGS
 Subsequent measurement
–
–
Residual asset is not remeasured unless lease term
changes or becomes impaired
If lease term increases – residual asset will decrease
and vice versa
30
Lease Accounting – General Provisions
 Lease term assumes the longest possible term
that is more likely than not to occur (options)
 Expected outcome technique to reflect the lease
payments including contingent rentals, term
option penalties and residual guarantees
 Assets/liabilities updated in the period when there
is a significant change to the relevant factors
such that there is significant economic incentive
to exercise or terminate the lease
 Service component of the lease excluded in
evaluating the payments to be made
31
Lease Accounting – General Provisions
 Simplified requirements for leases of 12 months
or less
 Enhanced disclosures around these assumptions
 Biggest change to lease accounting in 34 years
 Still considerable debate on the following:
 Expense recognition pattern for lessees
 Lease term and options
 Contingent payments
 Lessor accounting
32
Lease Accounting – Proposed Update (Cont.)
 Discussion/Issues the Standard Creates
 Obligation now in the financials vs. notes for operating
leases
 Bank covenant issues
 Estimation process for lease term extensions,
contingent rentals, effective interest rates, etc.
 Adoption issues
 Evaluation of impairment of the asset
 Payments on the obligation will be reflected as financing
activities in the SOCF.
 Performance obligation vs. derecognition approach
33
Revenue Recognition
 Objective is to provide one common revenue recognition policy
(simplification)
 4 step model:
 Identify contract
 Identify performance obligations
 Allocate transaction price
 Recognize revenue as obligation is satisfied
 Performance obligations would be separated from goods and
services
 Variable and contingent fees would be included in transaction
price
 Initial estimate of uncollectible amounts would reduce revenue
 Allocation of transaction price to multiple performance
obligations
34
Accounting for Financial Instruments and Revisions
to the Accounting for Derivative Instruments
 Requires organization to present amortized cost and
FV about financial instruments held for collection or
payment of cash flows
 Exception if <50% of assets are measured at FV –
Will not help higher education
 Potential Impact to Higher Education
 Loans receivable (amortized cost)
 Debt
 Split interest liabilities
 Continues deliberation
 Once effective – non publics with < $1B in assets will
have additional 4 years to adopt
35
Accounting for Financial Instruments and Revisions to
the Accounting for Derivative Instruments
 Financial Instruments
 Use of equity method would be restricted; otherwise equity
investments would be carried at FV
 Classification of financial assets based on business strategy
– FV-NI – Fair Value, Net Income
•
Strategy is trading or holding for sale
– FV-OCI – Fair Value, Other Comprehensive Income
•
Strategy is managing risk and maximizing total return
– FV-AC – Fair Value, Amortized Cost
•
Strategy is collection of contractual cash flows
– Reclassifications would be prohibited
36
Fair Value Measurements - Amendments
 Objective is to clarify meaning of FV between
international and GAAP standards
 Clarify definitions related to measuring FV
 Highest and best use and valuation premise
 Measuring FV of an instrument in net assets
 Measuring the FV of financial instruments in a
portfolio
 Application of blockage factors and other
discounts and premiums in a FV measurement
 Additional disclosures
37
Consolidation
 Objective is to provide comprehensive
guidance.
 Basis for consolidation will be “control”
 Power to direct the activities of another entity
 Ability to benefit from that power
 Power exists if ability to direct activities impacts
the entities returns
 Can also have contractual control (i.e. voting
rights)
 Investment companies are excluded
38
Financial Statement Presentation
 Operating, investing and financing for all
statements
 Disaggregating information into material
classes of useful information
 Direct method cash flow statement
 Substantial disclosure for remeasurements in
the financials.
 Provide segment disclosures
39
Government Accounting Standards
 Statement No. 59
“Financial Instruments Omnibus”
 Effective: Periods beginning after June 15, 2010
 Objective: Update and improve existing standards
regarding financial reporting and disclosure
requirements of certain financial instruments and
external investment pools for which significant
issues have been identified in practice
40
Government Accounting Standards
 Statement No. 60
“Accounting and Financial Reporting for Service
Concession Arrangements”
 Effective Date: Periods beginning after December 15, 2011
 Reporting service concession arrangements (SCA) i.e. an
arrangement between a transferor (a government) and an
operator (governmental or nongovernmental entity) in which
 the transferor conveys to an operator the right and related
obligation to provide services through the use of
infrastructure or another public asset (a “facility”) in
exchange for significant consideration and
 the operator collects and is compensated by fees from third
parties.
41
Government Accounting Standards
 Statement No. 61
“The Financial Reporting Entity: Omnibus—an
amendment of GASB Statements No. 14 and No. 34”
 Effective Date: Periods beginning after June 15,
2012 Earlier application is encouraged
 Modifies certain requirements for inclusion of
component units in the financial reporting entity
42
Government Accounting Standards
 Statement No. 62
“Codification of Accounting and Financial Reporting Guidance
Contained in Pre-November 30, 1989 FASB and AICPA
Pronouncements”
 Effective Date: Periods beginning after December
15, 2011.
 Established to incorporate into the GASB’s
authoritative literature certain accounting and
financial reporting guidance that is included in
certain FASB and AICPA pronouncements issued
on or before November 30, 1989, which does not
conflict with or contradict GASB
pronouncements.
43
Questions?
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