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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