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University of Washington―12th Anniversary Financial Reporting Conference
FASB Update
Russ Golden
FASB Chairman
May 5, 2016
The views expressed in this presentation are those of the
presenter. Official positions of the FASB are reached only
after extensive due process and deliberations.
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Agenda
 Revenue from Contracts with Customers
 Leases
 Financial Instruments: Recognition and
Measurement
 Financial Instruments: Credit Losses
 Simplification
 Future Agenda
 Q&A
2
Revenue from Contracts with
Customers
3
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Rev Rec Five Step Model―Core Principle
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
4
Five Step Model―Overview
Steps to apply the core principle:
1. Identify
the contract(s)
with the
customer
2. Identify
the
performance
obligations
• Criteria for
identifying a contract
• Combinations
• Modifications
• Unit of Account
• Distinct Criteria
3. Determine
the
transaction
price
• Variable
consideration
• Significant financing
• Noncash
consideration
• Consideration
payable to customer
4. Allocate
the transaction
price
• Relative standalone
selling price
• Discounts and
contingent amounts
5. Recognize
revenue when
(or as) a
performance
obligation is
satisfied
• Over time criteria
• Point in time indicators
5
Rev Rec―Effective Date
Effective date is deferred for all entities by one year.
 Public entities – 2018 (annual and interim periods)
 Nonpublic entities – 2019 (annual periods); 2020 (interim
periods)
 Earlier adoption as of original effective date (2017) permitted
The effective dates for Topic 606 and IFRS 15 for public
entities are aligned.
6
TRG Activities
TRG Submission Statistics*:
0 Open
94 Closed
Input from TRG led to projects to address
implementation challenges
 Identifying Performance Obligations
Closed Submissions
•
60 Discussed at TRG Meetings
•
31 Closed Technical Inquiries
•
3 Included in forthcoming Tech
Corrections proposed Update
100% of issues submitted to
TRG to date have been closed
and Licensing
 Principal versus Agent Considerations
 Narrow-Scope Improvements and
Practical Expedients
Amendments aimed to clarify Board’s
intent and reduce cost and complexity of
implementing the new guidance
*Statistics as of 4/18/16
7
Clarifications to Issued Standard
 Input from TRG led to projects to address implementation
challenges
- Identifying Performance Obligations and Licensing
- Principal versus Agent Considerations
- Narrow-Scope Improvements and Practical Expedients
Amendments aimed at clarifying Board’s intent & reducing
cost & complexity of implementing the new guidance
8
Identifying the Contract
1
2
3
4
5
Role of collectibility in the revenue guidance has changed:
• Current GAAP: Recognition constraint
• Topic 606 (new standard): Collection must be probable for a contract
to exist
Clarifications
• Objective of collectibility criterion: Determining whether a genuine
contract exists
• Assessment based on whether customer has ability & intention to
pay promised consideration for goods or services that will be
transferred
• Clarify alternative revenue recognition criteria (which is applied when
unable to meet Step 1)
• Introduces ability to recognize revenue prior to contract “termination”
9
Identifying Performance Obligations
1
2
3
4
5
Distinct Promises = Performance Obligations = Unit of Account
Current GAAP―standalone value
Topic 606―two ‘distinct’ criteria (1) capable of being distinct (2)
separately identifiable
Reduce cost and complexity
• No need to assess immaterial promised goods or services
• Shipping & handling practical expedient
Clarifications
• Rearticulate “separately identifiable” principle
• Is nature of promise to transfer each good or service or
combined item?
10
Licensing (Implementation Guidance)
1
2
3
4
5
Current GAAP includes limited, industry specific guidance on revenue recognition
for licenses.
New guidance includes comprehensive model to be applied to all industries.
Contractual
Provisions
Functional or Symbolic
Clarify that there is a
distinction between contractual
provisions that:
Improve operability of “right to
use” vs. “right to access”
assessment
•
•
•
Require transfer of control
of additional goods or
services to customer
(multiple performance
obligations)
Define attributes of a
single promised license
Sales- or UsageBased Royalties
Nature of License:
Based on significant
standalone functionality
•
Functional: point in time
recognition
•
Symbolic: over time
recognition
Clarify scope & applicability
of exception to variable
consideration constraint
guidance
•
Applies when royalty
completely or
predominantly relates to
license
•
Royalties should not be
split into portions to which
exception does and does
not apply
11
Principal vs. Agent Considerations
(Implementation Guidance)
1
2
3
4
•
•
Current GAAP based on risk and rewards notion
New guidance is based overarching principle of control…indicators no longer weighted
in guidance
•
•
Principal (gross revenue) – provides specified good or service
Agent (net revenue) – arranges for specified good or service to be provided
5
Clarifications
•
Unit of account: each specified good or service
•
Control of a service
•
Indicators:
•
Do not override control assessment; relative importance based on facts and
circumstances
•
Reframed to indicate when an entity is a principal (vs. an agent)
12
Determining the Transaction Price
Presentation of Sales Taxes
1
2
3
4
5
Noncash Consideration
Reduce cost & complexity
Clarifications
Policy election: exclude all sales taxes
collected from transaction price
•
Define measurement date as contract
inception
(net presentation)
•
Changes in fair value due to form are not
included in transaction price
•
Equity instruments:
• Current GAAP – specific guidance
• Topic 606 – consistent with other
noncash consideration
If fair value not estimable:
• Current GAAP – use fair value of
assets received or relinquished
• Topic 606 – use estimated selling
price of promised goods or services
Note: if election not applied then principal
versus agent guidance could be applied
Current GAAP policy election allows net or
gross presentation
•
13
Transition
Reduce cost & complexity
• Contract modifications practical expedient
• Retrospective approach – not required to disclose effect of
accounting change in period of adoption
• Modified retrospective approach may be applied to all contracts
or completed contracts only
Clarifications
• Completed contract = substantially all revenue recognized under
legacy GAAP
14
Resources for Implementation
 Transition Resource Group
 Agenda Projects Update
 FASB In Focus – Topic 606
 FASB Technical Inquiry Service
15
Leases
16
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Purpose
1.25 trillion
Lessee
of off-balance sheet operating lease
commitments for SEC registrants*
 Most lease assets and liabilities are off-balance sheet
 Limited information about operating leases
 Lack of transparency about residual values
Lessor
 Consistency with leases and revenue recognition
guidance
* Estimate according to the 2005 SEC report on off-balance sheet activities
17
Right-of-Use Model
A lease contract conveys the right to use an asset (the underlying
asset) for a period of time in exchange for consideration
18
Identifying a Lease
That is explicitly or
implicitly specified
An identified asset
Supplier has no practical
ability to substitute and
would not economically
benefit from substituting
the asset
Lease contracts in the
scope of Topic 842
involve
Decision-making
authority over the use of
the asset
The right to control the
use during the lease
term
The ability to obtain
substantially all
economic benefits from
the use of the asset
19
Lessee Accounting Overview
Balance Sheet
Income Statement
Cash Flow Statement
Finance
Right-of-use
(ROU) asset
Lease liability
Amortization expense
Interest expense
Cash paid for
principal and
interest payments
Operating
Right-of-use
(ROU) asset
Lease liability
Single lease expense on
a straight-line basis
Cash paid for
lease payments
Classification is similar to the classification in Topic 840
Recognition and measurement exemption for short-term leases
20
Lessor Accounting Overview
Balance Sheet
FASB: Direct
Financing &
Sales-Type
IASB:
Finance
Operating
Net investment in
the lease
Continue to
recognize
underlying asset
Income Statement
Interest income and
any selling profit on the
lease1
Lease income, typically
on a straight-line basis
Cash Flow Statement
Cash received for
lease payments
Cash received for
lease payments
1 Selling
profit recognized at lease commencement for sales-type leases,
over the lease term for direct financing leases (note: selling profit is rare
for direct financing leases).
21
Transition Approach and Practical Expedients
Modified Retrospective Approach required
Package of practical expedients:
Definition
Classification
Initial Direct
Costs
Also, may elect to use hindsight with respect to
lease renewals and purchase options
Existing leveraged leases were grandfathered
22
Effective Date
Public Companies*
• Fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years
All Other Organizations
• Fiscal years beginning after December 15, 2019 and interim periods
beginning after December 15, 2020
Early Application
• Permitted for all organizations
* “Public Companies” refers to the following: (1) public business entities, (2) 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, and (3) an employee benefit plan that files or furnishes
statements with or to the SEC
23
Financial Instruments:
Recognition & Measurement
24
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Introduction
FASB-IASB MoU on Convergence
Issued in 2006
Objective
Reduce complexity in accounting for financial instruments
Current Response
Retain current GAAP with targeted improvements to classification and measurement of
equity investments, fair value option for liabilities, and disclosures for financial
instruments
25
Financial Assets–Amendments to
current GAAP
Equity investments measured at each reporting period at fair
value through net income, except
• Equity investments without readily determinable fair value;
only marked to observable price changes
• Equity method investments
• Equity investments that result in consolidation of the investee
• Equity investment in federal home loan bank and federal
reserve bank stock
• Ownership interest in an exchange
26
Financial Assets–Amendments to
current GAAP (continued)
Simplified impairment test for equity investments without
readily determinable fair value
Valuation allowance on deferred tax assets (DTAs)
related to an available-for-sale debt security to be
assessed in combination with other DTAs
Current GAAP retained for all other financial assets
27
Financial Liabilities–Amendments to
current GAAP
Fair value change resulting from changes in own credit
for financial liabilities measured under fair value option
will be recognized through other comprehensive income
(OCI)
Current GAAP retained for accounting for financial
liabilities
28
Financial Instruments–Disclosure
changes
Private entities not required to disclose fair value of
financial instruments not recognized at fair value on
balance sheet
Reduced disclosures for public entities of methods and
assumptions used to estimate fair value for financial
instruments not recognized at fair value on balance sheet
29
Financial Instruments–Disclosure
changes (continued)
Fair value measurements for financial instruments to be based on
exit price notion (current GAAP includes practical expedient to
measure fair value of certain financial instruments using entry
price notion)
Financial assets to be presented grouped by measurement
category and form of instrument
Financial liabilities to be presented grouped by measurement
category
30
Effective Date for Final Standard
All Public Business Entities
Annual & Interim Reporting
Periods beginning after Dec.
15, 2017
Non-Public Business Entities*
Annual Periods beginning
after Dec.15, 2018
Non-Public Business Entities*
Annual and Interim
Periods beginning after
Dec. 15, 2019
Early Application:
Entire standard is available for early application after Dec. 15, 2017
Certain provisions are available for early application upon issuance:
1. Presentation of FV changes due to entity’s own credit changes in financial
liabilities in OCI
2. Non-Public Business Entities no longer required to disclose fair value of financial
instruments not recognized at fair value on B/S
*Includes not-for-profit entities and employee benefit plans
31
Financial Instruments:
Credit Losses
32
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
CECL Scope
■
■
■
■
■
Debt instruments (amortized cost)
Trade and lease receivables
Reinsurance receivables
Loan commitments
Financial guarantees
■ AFS debt securities
■
■
■
■
Defined contribution employee benefit plan
loans
Policy loan receivables of insurance entity
Promises to give (pledges receivable) of NFPs
Related party loans between entities under
common control
CECL
AFS Credit Loss Model
(Targeted changes to
Topic 320)
CECL does not apply
33
34
FASB Model - Current Expected Credit Loss (CECL)
Expected credit loss model reflecting more forward-looking
information (lifetime expected losses)
At each reporting date, an organization recognizes an allowance for
credit losses to reduce the financial asset to the amount expected
to be collected
• Reflects management expectations based on past events, current conditions, and
reasonable and supportable forecasts.
• Includes changes in the estimate of expected credit losses resulting from, but not
limited to:
• Changes in credit risk of assets held by an entity
• Changes in conditions since previous reporting date
• Changes in reasonable & supportable forecasts about the future
Provides enhanced disclosures compared to current GAAP
34
Available-for-Sale Debt Securities
Excluded from the CECL model
Would apply modified impairment guidance in Topic 320
• An allowance approach would be used for recognizing impairment losses, which
would allow for credit loss reversals
• Allowance will be limited to the difference between amortized cost and fair value
• Requirement to consider the length of time that fair value of the security has
been below amortized cost would be eliminated
• When estimating whether a credit loss exists, an entity must still consider if it will
be MLTN to sell the security before recovery of amortized cost
35
Effective Date for Final Standard
Public Business Entities that
are SEC Filers
(Annual and Interim)
Reporting Periods
beginning after Dec. 15,
2018
Public Business Entities that
are not SEC Filers
(Annual and Interim)
Non-Public Business Entities*
(Annual Periods only)
Reporting Periods
beginning after Dec. 15,
2019
Non-Public Business Entities*
(Annual and Interim)
Reporting Periods
beginning after Dec. 15,
2020
The entire standard is available for early application after Dec. 15, 2018
A separation was made in effective date decisions for Public Business entities to allow smaller
community banks that do not file with the SEC additional time to implement the standard
*Includes not-for-profit entities and employee benefit plans
36
Simplification
37
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
Simplification Initiative Objective
 Reduce cost and complexity
while maintaining or improving
the usefulness of the information
 Projects include narrow-scope
items that the FASB can
complete in the short term
Simplification is not always simple
Welcome input on ideas
38
Employee Share-Based Payments
 Reduces complexity for both public
and private companies in key areas:
‒ Accounting for forfeitures
‒ Accounting for income taxes upon vesting or
settlement of awards (APIC pools)
‒ Minimum statutory withholding requirements
‒ Practical expedients for private companies
 Final ASU issued March 2016
39
Nonemployee Share-Based Payments
 Project added to agenda in December 2015
 Objective: reduce cost and complexity
‒ PIR project that lead to issuance of Statement No.
123(R) Share-Based Payment included information
about nonemployee model
‒ PCC input
‒ Stakeholder input received during staff outreach on
potential simplification projects
 Staff research is focused on aligning the accounting
models for employee and nonemployee awards to the
extent possible
40
Future Agenda
41
Copyright 2016 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.
FASB Future Agenda—FASAC Survey
Surveys FASAC & members of other FASB advisory groups
(EITF, PCC, IAC, NFP Advisory Committee, SBAC)
Asked:
• What are the most needed financial reporting improvements and why?
• What is the problem and what are feasible alternatives?
• When is the solution needed, and for whom?
Results discussed with each FASB advisory group
42
FASAC Survey –Feedback by Stakeholder Group
Topics
EITF
FASAC
IAC
NAC
PCC
Financial Performance Reporting
X
X
X
X
X
Improving Cash Flow Classification
X
X
X
X
X
X
X
X
Pensions and OPEB
Liabilities vs Equity
X
Intangible Assets
X
Other Comprehensive Income
X
X
SBAC
X
X
X
X
X
X
X
Consolidations
X
X
Segment Reporting
X
Inventory and Cost of Sales
Collaborative Arrangements
X
Equity Method
X
Income Taxes
X
43
FASAC Survey –Feedback by Stakeholder
Type
Preparer
User
Practitioner
Other
X
X
X
X
Improving Cash Flow Classification
X
X
X
X
Pensions and OPEB
X
X
X
X
Liabilities vs Equity
X
Topics
Financial Performance Reporting
X
Intangible Assets
Other Comprehensive Income
X
X
X
Consolidations
Segment Reporting
Inventory and Cost of Sales
X
X
X
44
Objective of the DP
Help the FASB set its future agenda by
identifying population of key projects to
consider
Determine priority of key projects
Identify perceived financial reporting
issue(s) for each topic
Obtain feedback on potential alternatives or
path forward
45
Timeline and Key Dates
Research on
Survey
Results
Agenda DP
Board Meeting
Issue DP
Q-4
2015
February
2016
May
2016
Board
Deliberations/
Feedback
Decision
Future Agenda
2H 2016
2H 2016
46
Questions or Comments?
47