mcgladrey presentation at may 2012 aicpa cfo conference - fasb/iasb convergence projects

1 ©2012 McGladrey LLP. All Rights Reserved.

FASB/IASB convergence projects update

2 ©2012 McGladrey LLP. All Rights Reserved. ©2012 McGladrey LLP. All Rights Reserved.

Brian Marshall Biography [email protected]

Brian is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Brian’s responsibilities include consulting with clients and engagement teams on complex accounting issues associated with these subject matters, facilitating training events for McGladrey professionals and external participants and writing interpretive guidance for McGladrey publications. He is also responsible for monitoring standard setting by the FASB and the FASB’s EITF, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups. Prior to joining McGladrey in 2007, Brian worked as a Senior Program Manager in IBM’s Accounting Practices Group, serving as a resource on complex technical accounting matters for the Company’s global accounting community. Brian also was employed by Deloitte for over eight years in various offices in the U.S. and Europe, with his last position being a Senior Manager in the Assurance Services Group.


Faye Miller Biography [email protected]

Faye is a director in the National Professional Standards Group of McGladrey LLP. She serves as a firm-wide technical resource for complex accounting issues involving financial instruments, such as derivatives, hedging, alternative investments, and complex equity and debt financing arrangements. As a firm-wide technical resource, Faye conducts training, follows recent developments, assists engagement teams and advises clients on these matters. Faye is also a frequent speaker and author on topics involving financial instruments including proposed or recently issued related accounting guidance. Faye has over 20 years of experience in banking and public accounting, is a past member of the AICPA Accounting Standards Executive Committee, received a Bachelor of Science degree from Pennsylvania State University and Master’s degree from Villanova University.


McGladrey overview

5th largest accounting firm in the U.S. Provide assurance, tax and consulting services Nearly 6,500 professionals and associates in

more than 70 offices nationwide US member of RSM International (RSMI) – 6th

largest network of independent accounting, tax and consulting firms worldwide - More than 700 offices in 86 countries with over

32,000 people


Agenda

Status of convergence projects Revenue Recognition Financial Instruments Leases


Status of convergence projects


Status of convergence projects

Joint standards on Fair Value Measurement & Comprehensive Income issued in 2011 Priority projects in progress

- Revenue Recognition - Financial Instruments - Leases Timing of completion of projects extended many

times Effective dates expected to allow sufficient time

for changes


Timetable for active convergence projects

Joint Project 2Q 2012 2H 2012 2013 & Beyond Revenue Recognition R F Financial Instruments: Liquidity and Interest Rate Risk

Disclosures ED

Impairment ED Classification and Measurement ED Hedging ED, F

Leases ED F Insurance Contracts ED F Consolidation: Policy and Procedures F Investment Companies ED, F


Revenue Recognition


Revenue Recognition

Exposure draft issued in June 2010 Revised exposure draft issued in Nov. 2011 Final standard expected in early 2013


Revenue Recognition

Scope Core principle Steps in applying the model

Identify the contract with a customer

(Step 1)

Identify the separate

performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction price to the

separate performance obligations

(Step 4)

Recognize revenue when (or as) each performance obligation is

satisfied (Step 5)

11 ©2012 McGladrey LLP. All Rights Reserved.


1. Identify the contract with a customer

Enforceable agreement between parties Can be written, oral or implied Combination

- Required for contracts entered into at or near the same time if certain criteria are met

Modifications - Treat separately if separate performance obligation

is added and the consideration is consistent with its standalone selling price

- Otherwise combine with remaining goods or services


2. Identify separate performance obligations

Promise in a contract to transfer a good or service Account for separately if distinct because either of the

following criteria are met: - Good or service is regularly sold separately by the entity; or - Customer can benefit from good or service on its own or

together with other readily available resources

However, bundle of promised goods or services is accounted for as one performance obligation if both of the following criteria are met: - Highly interrelated and require significant integration service;

and - Significantly modified or customized to fulfill contract


3. Determine the transaction price

Amount of consideration to which an entity expects to be entitled from a customer - Variable consideration (e.g.; contingencies, rebates,

royalties), estimate based on probability-weighted or most-likely amount

- Time value of money - Noncash consideration - Consideration payable to a customer Collectibility not considered in transaction price

- Record uncollectible amounts adjacent to revenue


4. Allocate the transaction price

Generally based on relative standalone selling prices of separate performance obligations Standalone selling price

- Observable price when sold separately (best) - Otherwise, estimate based on:

• Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?

Subsequent changes in the transaction price are allocated on a relative standalone selling price basis unless certain criteria are met


5. Recognize revenue

Recognize revenue as performance obligations are satisfied based on transfer of control Determine if satisfied (and revenue recognized)

over time, based on whether entity’s performance: - Creates or enhances an asset the customer controls; or - Does not create an asset with an alternative use and one

of following criteria is met: • Customer receives a benefit as entity performs • Another entity would not need to reperform work completed to

date • Vendor has right to payment for performance to date

Select method of progress toward completion (output or input)


5. Recognize revenue

If prior criteria not met, then satisfied at a point in time Recognize revenue when customer obtains control

based on following indicators: - Entity has right to payment - Entity has transferred physical possession - Customer has legal title and risks and rewards of ownership - Customer has accepted goods or services

Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: - Experience with similar performance obligations - Whether that experience is predictive of outcome


Financial Instruments


Summary of key actions to date

IASB issued IFRS 9 in 2009 on financial assets. Requirements for financial liabilities were added in October 2010

IASB issued ED on impairment November 2009 FASB issued comprehensive ED May 2010 IASB issued ED on hedge accounting December 2010

- FASB issues discussion paper soliciting feedback on above February 2011

Boards jointly issued Supplementary Document on impairment proposing common solution January 2011

Significant redeliberations have been ongoing


Current status of FASB project

Slides that follow are for the FASB project, based on tentative decisions made during redeliberations through April 18, 2012 Significant changes to:

- Classification/measurement from May 2010 ED - Impairment from ED and Supplementary Document No redeliberations on hedging thus ED

represents current status


Classification and measurement, current status Classify at initial recognition based on characteristics of

instrument and business strategy - No subsequent reclassifications

Equity securities – measure at fair value through net income - Practicability exception for nonpublic entities for nonmarketable

equity securities • Measure at amortized cost less impairment • Adjust carrying value for observable price changes

- Won’t apply to equity method investments unless held for sale at initial qualification or certain redeemable securities


Classification and measurement, current status

Debt securities - Measure at fair value through net income if any of

following are true: • Contractual terms are not limited to P&I payments • Held for sale at acquisition • Actively managed/monitored on fair value basis



Otherwise, measure debt securities - At fair value through OCI if business strategy is to

invest cash to maximize total returns or manage interest rate/liquidity risk, by collecting contractual cash flows or selling the instrument

- At amortized cost if: • Business model of holding to collect contractual cash

flows Intend to provide guidance on the nature of sales

activity that would prohibit amortized cost



Financial liabilities – measure at amortized cost if: - Contractual terms are limited to P&I payments, and - Business strategy is not to transact at fair value, and - Instrument is not a short sale Otherwise, measure at fair value through net

income



Hybrid financial instruments - Assets not solely P&I are ineligible for bifurcation.

(Carried at fair value through net income in entirety) - Retain existing bifurcation requirements for financial

liabilities Fair value option for hybrids to avoid bifurcation

of embedded derivative and for groups of financial assets/liabilities (including derivatives) if entity measures net exposure and provides info on that basis to management


Impairment, current status

Nonmarketable equity securities subject to practicability exception - Assess qualitative factors (impairment indicators) - If more likely than not fair value is less than carrying

amount, recognize loss for difference between carrying amount and fair value


Impairment of debt instruments, current status

3 bucket approach – recognize 12 months expected losses for bucket 1 vs. lifetime losses for buckets 2 and 3 Assets start in bucket 1 unless purchased with

explicit expectation of credit loss Move to bucket 2 (if evaluated collectively) and

bucket 3 (if evaluated individually) if more than insignificant deterioration in credit quality occurs such that its reasonably possible contractual cash flows may not be fully recovered


Impairment of debt instruments, current status

Can move back to bucket 1 (other than purchased assets with credit deterioration) Trade receivables:

- If significant financing component – can elect simplified approach with initial and subsequent classification in buckets 2 or 3

- Otherwise, apply expected loss model with practical expedient of using provision matrix


Hedge accounting, current status

FASB solicited feedback on IASB ED but has not begun redeliberations Significant changes proposed in May 2010

FASB ED (in part): - Effectiveness threshold - reasonably effective rather

than highly effective - Qualitative rather than quantitative analysis - No more critical terms match/short cut methods - Eliminate ability to elect to discontinue hedge

accounting


New disclosures, current status

Qualitative discussion of risks and how managed Quantitative tabular liquidity disclosures

- Of cash obligations by nonfinancial entities - Expected maturities of classes of assets/liabilities by

financial institutions

Quantitative tabular disclosures of interest rate risk by financial institutions - Classes of assets/liabilities by repricing date - Issuance of time deposits last 4 quarters - Effect of hypothetical interest rate shifts


Leases


Leases

Exposure draft issued in August 2010 Nearly all leases to be recorded on balance sheet Lessees:

- Asset representing “right of use” - Liability for obligation to make payments Lessors:

- Performance obligation approach vs. derecognition approach

- Asset for receivable under either approach - Liability under performance obligation approach - Derecognize a portion of asset under derecognition

approach


Leases

Responses to ED - Concerns about “front loading” of expenses for

lessees (compared to straight line) - Lease term - Variable lease payments - Lessor accounting


Leases redeliberations

Retain position that leases within scope should be reflected on balance sheet Concerned about “front loading” of expense

recognition under ED approach Discussed 3 approaches in late February

- ED approach (accelerated recognition) - Interest-based amortization approach - Underlying asset approach Divergence in preferences Boards plan to redeliberate

- Currently performing outreach with constituents


Leases, other lessee issues

Scope Short-term leases Lease term Agreements with lease and non-lease

components


McGladrey thought leadership

FASB and IASB Issue Revised Exposure Draft on Revenue Recognition Revised Revenue Recognition Exposure Draft

– What Does It Mean For You? http://mcgladrey.com/Assurance/Accounting-

Resources

http://mcgladrey.com/Assurance/Accounting-Resources

http://mcgladrey.com/Assurance/Accounting-Resources


QUESTIONS?

mcgladrey presentation at may 2012 aicpa cfo conference - fasb/iasb convergence projects

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