Accounting and Auditing Supplement No

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1 Accounting and Auditing Supplement No

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3 ACCOUNTING AND AUDITING SUPPLEMENT NO INTRODUCTION This update includes the more significant accounting and auditing developments from April 2015 through June Included in this update are standard setting and project activities by the Auditing Standards Board (ASB), Accounting and Review Services Committee, Assurance Services Executive Committee, Professional Ethics Executive Committee, FASB, PCAOB, and the SEC. The developments included herein, although believed to be complete at the date at which they were prepared for this course material, may not cover all areas within accounting and auditing relevant to all users of this material. This update may refer you to other sources of information, in which case you are strongly encouraged to review that information if relevant to your needs AICPA. Unauthorized copying prohibited. 1

4 Part I Audit and Accounting Final and Proposed Standards FINAL STANDARDS AND INTERPRETATIONS AICPA Auditing Standards Board Auditing Standards No updates for this period. Auditing Interpretations No updates for this period. Attestation Standards No updates for this period. Accounting and Review Services Committee No updates for this period. Professional Ethics Executive Committee No updates for this period. FASB Accounting Standards Updates FASB Accounting Standards Update (ASU) No , Compensation Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets Issue Date ASU No was issued in April Why Issued This ASU is part of FASB s simplification initiative. 1 1 FASB s simplification initiative is intended to reduce complexity in accounting standards. The objective of the initiative is to identify, evaluate, and improve areas of generally accepted accounting principles AICPA. Unauthorized copying prohibited.

5 A reporting entity with a fiscal year-end that does not coincide with a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other post-retirement benefit plan. Amendments The amendments in this ASU provide a practical expedient for an entity with a fiscal year-end that does not coincide with a month-end. The amendments permit the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. Occurrence of Contribution or Significant Event If a contribution or significant event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to measure defined benefit plan assets and obligations and an entity s fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. An entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the entity s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest rates). Significant Event in an Interim Period For an entity that has a significant event in an interim period that calls for a remeasurement of defined benefit plan assets and obligations, this ASU also provides a practical expedient that permits the entity to remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event. The month-end remeasurement of defined benefit plan assets and obligations that is closest to the date of the significant event should be adjusted for any effects of the significant event that may or may not be captured in the month-end measurement. For example, if the closest month-end is before the date of a partial settlement, then the measurement of plan assets may include assets that are no longer part of the plan. An entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the date of the significant event that are not caused by the entity (for example, changes in market prices or interest rates). If an entity applies the practical expedient, and a contribution is made between the month-end date used to measure defined benefit plan assets and obligations and the entity s fiscal year-end, the entity should not adjust the fair value of each class of plan assets for the effects of the contribution. (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements AICPA. Unauthorized copying prohibited. 3

6 Disclosures The entity should disclose the following: The accounting policy election and the date used to measure defined benefit plan assets and obligations The amount of a contribution (if any) that was made between the month-end date used to measure defined benefit plan assets and obligations and the entity s fiscal year-end. This disclosure is to permit reconciliation of the total fair value of all the classes of plan assets in the fair value hierarchy to the ending balance of the fair value of plan assets. Note that employee benefit plans are not within the scope of the amendments in this ASU. Transition Requirements and Effective Date Public Business Entities Effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. All Other Entities Effective for all other entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, Earlier application is permitted. The amendments in this ASU should be applied prospectively. ASU No , Intangibles Goodwill and Other Internal-Use Software (Subtopic ): Customer s Accounting for Fees Paid in a Cloud Computing Arrangement Issue Date ASU No was issued in April Why Issued The amendments in this update are issued as part of FASB s simplification initiative. Existing GAAP does not include explicit guidance about a customer s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. This ASU updates FASB Accounting Standards Codification ( ASC) to add the term hosting arrangement. Hosting arrangement - In connection with the licensing of software products, an arrangement in which an end user of the software does not take possession of the software; rather, the software application resides on the vendor s or a third party s hardware, and the customer accesses and uses the software on an as-needed basis over the Internet or via a dedicated line. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses AICPA. Unauthorized copying prohibited.

7 If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Hosting arrangements that do not meet certain criteria are service contracts and do not constitute a purchase of, or convey a license to, software. Following are the criteria: The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Transition and Effective Date Public Entities For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, All Other Entities For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, Early adoption is permitted for all entities. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. ASU No , Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (a concensus of the FASB Emerging Issues Task Force) Issue Date ASU No was issued in April Why Issued Under FASB ASC 260, Earnings Per Share, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. When a general partner transfers (or drops down ) net assets to a master limited partnership and that transaction is accounted for as a transaction between entities under common control, the statements of operations of the master limited partnership are adjusted retrospectively to reflect the dropdown transaction as if it occurred on the earliest date during which the entities were under common control. FASB ASC 260 did not address how to present historical earnings per unit for periods before the date of a dropdown transaction that occurs after formation of a master limited partnership. Therefore diversity in practice exists AICPA. Unauthorized copying prohibited. 5

8 This ASU should resolve that diversity in practice. Who Is Affected? The amendments in this update apply to master limited partnerships subject to the master limited partnerships subsections of FASB ASC 260 that receive net assets through a dropdown transaction that is accounted for under the transactions between entities under common control subsections of FASB ASC Main Provisions The amendments in this ASU modify the FASB ASC master glossary s definition of dropdown as follows (new text is underlined and deleted text is struck through): Dropdown A transfer of certain net assets from a sponsor or general partner to a master limited partnership in exchange for consideration. The amendments in this update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. Difference from Current GAAP Current GAAP does not contain guidance for master limited partnerships that specifies how historical earnings per unit should be affected when a dropdown transaction occurs that is accounted for as a transaction between entities under common control. The amendments in this ASU are an improvement to GAAP because the amendments specify how the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated to the various interest holders in a master limited partnership for purposes of calculating earnings per unit under the two-class method, thereby eliminating the diversity in practice. Effective Date Effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. The amendments in this update should be applied retrospectively for all financial statements presented. ASU No , Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force) Issue Date ASU No was issued in May AICPA. Unauthorized copying prohibited.

9 Why Issued The objective of this ASU is to address diversity in practice related to how certain investments measured at net asset value with redemption dates in the future (including periodic redemption dates) are categorized within the fair value hierarchy. Who Is Affected? The amendments in this ASU apply to reporting entities that elect to measure the fair value of an investment within the scope of paragraphs through 15-5 using the net asset value per share (or its equivalent) practical expedient in paragraph Main Provisions The amendments in this update remove the following: The requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. (Those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.) Difference from Current GAAP Current GAAP requires that investments for which fair value is measured at net asset value (or its equivalent) using the practical expedient in FASB ASC 820 be categorized within the fair value hierarchy using criteria that differ from the criteria used to categorize other fair value measurements within the hierarchy. Under the amendments in this ASU, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. Effective Date Public Business Entities Effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. All Other Entities Effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset AICPA. Unauthorized copying prohibited. 7

10 value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity s financial statements. Earlier application is permitted. ASU No , Business Combinations (Topic 805): Pushdown Accounting Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 Issue Date ASU No was issued in May Why Issued This ASU contains amendments to the FASB ASC and the XBRL taxonomy resulting from SEC Staff Accounting Bulletin No. 115 (SAB No. 115). The SEC issued SAB No. 115 to conform existing guidance to ASU No , Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). ASU No , Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts Issue Date ASU No was issued in May Why Issued This update resulted from FASB s decision that for short-duration contracts, the insurance project should focus on making targeted improvements to existing disclosure requirements. This decision was in response to feedback to a previously proposed ASU Insurance Contracts (Topic 834) (2013 proposed update) in which FASB included different recognition and measurement models for both long-duration contracts and short-duration contracts. The feedback received from respondents overwhelmingly supported retaining in GAAP the existing recognition and measurement guidance for short-duration contracts. Those respondents noted that the existing accounting model for short-duration contracts works well and that no changes should be made to existing guidance other than to enhance disclosure requirements. Financial statement users also commented that additional disclosures about the liability for unpaid claims and claim adjustment expenses would increase the transparency of significant estimates made in measuring those liabilities. Those disclosures would provide additional insight into an insurance entity s ability to underwrite and anticipate costs associated with claims. Who Is Affected? The amendments apply to all insurance entities that issue short-duration contracts as defined in FASB ASC 944, Financial Services Insurance and do not apply to the holder (that is, policyholder) of short-duration contracts. Main Provisions The amendments require insurance entities to disclose for annual reporting periods the following information about the liability for unpaid claims and claim adjustment expenses: 1. Incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period AICPA. Unauthorized copying prohibited.

11 presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information. 2. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position. 3. For each accident year presented of incurred claims development information, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of reserving methodologies (as well as any changes to those methodologies). 4. For each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies). 5. For all claims except health insurance claims, the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4). Disclosures Insurance entities should aggregate or disaggregate those disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in FASB ASC 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For health insurance claims, insurance entities should aggregate or disaggregate (1) the rollforward of the liability for unpaid claims and claim adjustment expenses and (2) the total of the incurred-but-notreported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics. Additional disclosures about liabilities for unpaid claims and claim adjustment expenses reported at present value include the following: For each period presented in the statement of financial position, the aggregate amount of discount for the time value of money deducted to derive the liability for unpaid claims and claim adjustment expenses For each period presented in the statement of income, the amount of interest accretion recognized The line item(s) in the statement of income in which the interest accretion is classified Difference From Current GAAP There are limited disclosure requirements in existing GAAP for short-duration contracts about the liability for unpaid claims and claim adjustment expenses AICPA. Unauthorized copying prohibited. 9

12 The amendments in this ASU increase transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities and the development of loss reserve estimates. Effective Date Public Business Entities Effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, All Other Entities Effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, In the year of initial application of the amendments in this ASU, an insurance entity need not disclose information about claims development for a particular category that occurred earlier than five years before the end of the first financial reporting year in which the amendments are first applied if it is impracticable to obtain the information required to satisfy the disclosure requirement. For each subsequent year following the year of initial application, the minimum required number of years will increase by at least one but need not exceed 10 years, including the most recent period presented in the statement of financial position. Early application of the amendments in this update is permitted. The amendments in this ASU should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. Accounting Standards Update : Technical Corrections and Improvements Issue Date ASU No , Technical Corrections and Improvements was issued in June Why Issued This update is part of a standing project to FASB s agenda to address feedback received from stakeholders on the FASB ASC and to make other incremental improvements to GAAP. This perpetual project facilitates FASB ASC updates for technical corrections, clarifications, and improvements and is designed to eliminate the need for periodic agenda requests for narrow and incremental items. These amendments are referred to as Technical Corrections and Improvements. PCAOB No updates for this period AICPA. Unauthorized copying prohibited.

13 PROPOSED STANDARDS AND INTERPRETATIONS AICPA Auditing Standards Board Proposed Auditing Standards No updates for this period. Proposed Attestation Standards No updates for this period. Accounting and Review Services Committee No updates for this period. Professional Ethics Executive Committee Proposed Standards and Interpretations Exposure Draft: Affiliate Proposed Revised Definition AICPA Professional Ethics Division Issue Date The Professional Ethics Executive Committee (PEEC) issued an exposure draft, Affiliate Proposed Revised Definition AICPA Professional Ethics Division, on April 16, 2015, with comments requested by May 18, Explanation for the Proposed Revised Affiliate Definition The PEEC issued this exposure draft for comment pertaining to the definition Affiliate (AICPA, Professional Standards, ET sec ). The proposal provides guidance on how to treat multi-employer employee benefit plans under this definition. Board of Trustees of Multi-employer Employee Benefit Plan The PEEC received feedback concerning the propriety of including all multiple employer and multiemployer plans as affiliates of participating employers that sponsor these plans. The PEEC continues to believe that all multiple employer plans should be considered affiliates of the participating employer that sponsors the plan. It does not believe the same should apply for multiemployer plans. The PEEC consulted numerous sources concerning participating employers of multi-employer plans. Including the Department of Labor (DOL) and IRS rules, it determined that participating employers of multi-employer plans are not considered the plan sponsor. The DOL and IRS identify only the plan s board of trustees as the governing entity and sponsor (ERISA Section 3(16) (B) (iii) and Instructions to Form 5500, Line 2a). The Board of Trustees Role and Responsibilities In an effort to understand the board of trustees role and responsibilities, PEEC consulted the Labor Management Relations Act of 1947, commonly known as the Taft-Hartley Act. This act requires the establishment of a joint board of trustees with equal representation from labor and management. The board of trustees governs all aspects of the multi-employer plan. On the other hand, participating AICPA. Unauthorized copying prohibited. 11

14 employers of a multiple employer plan can govern all aspects of their plan (for example, terminate the plan and change the structure of the plan); the board of trustees governs all aspects of the multi-employer plan. The PEEC believes that only those entities that participate in the board of trustees of a multi-employer plan could potentially have significant influence over the plan. Significant Influence To have significant influence, the entity would need to have 20 percent or more of the voting rights on the board of trustees or, if it has less than 20 percent of the voting rights, some other factor, such as the following, would have to give the entity significant influence: The ability to otherwise participate in the plan s policy-making processes The existence of material intra-entity transactions with the plan (such as when the entity employs a significant percentage of current plan participants and, as such, becomes the source of significant plan contributions) Overlap of managerial personnel between the board of trustees and the union or participating employer Technological dependency (such as when a plan is reliant upon the union or participating employer s financial reporting system) When significant influence is used elsewhere in the affiliate definition, materiality is also a factor to consider. For consistency purposes, the PEEC recommends the incorporation of materiality as well. Therefore, the PEEC proposes the following: When the financial statement attest client is a multi-employer plan, entities such as the union, participating employers, and group associations will be considered an affiliate of the plan when o the plan is material to that entity and o that entity has significant influence over the plan through its participation in the plan s governing board. When the financial statement attest client is a participating employer, multi-employer plans in which its employees participate will be considered an affiliate of the participating employer if o the plan is material to the participating employer and o the participating employer has significant influence over the plan through its participation in the plan s governing board. Group Association of Employers The PEEC also considered the fact that seats on board of trustees may be held by members of a group association instead of participating employers. A group association of employers is typically a trade association established for the promotion of a particular industry as well as the cooperation and collaboration between companies in that industry. The PEEC believes that it would be appropriate to add group associations to item h of the Affiliate definition in Definitions (AICPA Professional Standards, ET sec ) so that any employers that have significant influence over the plan, directly or indirectly through a group association, would need to include the plan as an affiliate when the plan is material to the employer. The text of the proposed revision to item h is modified as follows (new text is underlined and deleted text is struck through): 02. Affiliate. The following entities are affiliates of a financial statement attest client: a. g. omitted AICPA. Unauthorized copying prohibited.

15 h. Any entity, such as a union, participating employer, or a group association of employers, that has significant influence over a multiemployer employee benefit plan financial statement attest client and the plan is material to such an entity. Plan Administrator of Multiple Employer Plan The PEEC agreed that only the participating employer that is selected to act as the administrator of the plan (that is, has the ultimate responsibility for preparing the plan s financial statements or hiring the auditor) should be considered an affiliate of the plan. Therefore, instead of requiring the member to determine if the participating employer has significant influence over the plan, the definition is being revised and new content in item i is being added. Item i now provides that the participating employer that is chosen to act as the plan administrator of the multiple employer plan would be considered an affiliate of the plan. The text of the proposed revision to item i is modified as follows (new text is underlined and deleted text is struck through): 02. Affiliate. The following entities are affiliates of a financial statement attest client: a. h. omitted i. The participating employer that is the plan administrator of a multiple employer employee benefit plan financial statement attest client. Effective Date The PEEC does not believe that a delayed effective date for transition purposes is necessary. Accordingly, the PEEC proposes that the interpretation be effective the last day of the month in which the interpretation is published in the Journal of Accountancy. FASB Exposure Drafts Proposed ASUs Proposed ASU Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities Proposed ASU Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities was issued April 22, The comment deadline is August 20, Why Issued The proposed amendments in this proposed ASU are intended to address the following issues about the current financial reporting for not-for-profit entities (NFPs): Complexities about the use of the currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent. Deficiencies in the utility of information provided to donors, creditors, and others in assessing an entity s liquidity caused by potential misunderstandings and confusion about how restrictions or limits imposed by donors, laws, contracts, and governing boards affect an entity s AICPA. Unauthorized copying prohibited. 13

16 liquidity, classes of net assets, performance, and related terminology, particularly the term unrestricted net assets. Inconsistencies in the reporting (or lack of reporting) of intermediate measures of operations in the statement of activities, including inconsistencies between that reporting and the reporting of operating cash flows in the statement of cash flows. Those inconsistencies cause difficulties in communicating and assessing an entity s financial performance. Inconsistencies in the type of information provided about expenses of the period for example, some, but not all, NFPs provide information about operating expenses by both function and nature. Misunderstandings about and opportunities to enhance the utility of the statement of cash flows, particularly about the reporting of operating cash flows. Who Would Be Affected? The amendments in this proposed ASU would affect NFPs because they usually receive significant contributed resources and operate to further a public purpose rather than to achieve a profit objective, and their stakeholders, unlike those of business entities, generally do not have ownership interests; include charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, among others; and do not include investor-owned entities or entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans. Main Provisions With the exception of not-for-profit health care entities, not-for-profits currently have significant flexibility in how they reporting operating results, if they choose to report an operating measure at all. Under the proposal, an operating excess (deficit) subtotal would be required for all not-for-profits, including health care entities that today are required to report a net-income equivalent performance indicator. The cornerstone of the proposal is a new conceptual approach to defining operating activity in a NFP s statement of activities and statement of cash flows. Items would be classified as operating or nonoperating in the performance statement based on whether they arise from operating, investing, or financing activity. The proposed new approach to defining operating is a departure from traditional distinctions between operating and nonoperating. Today, the focus is largely on whether management considers activities or transactions to be ongoing major and central to an entity s operations. Under the proposal, FASB defines operating classification is determined using new dimensions of mission and availability. Mission considers whether resources result from or are directed at carrying out the purposes or mission for which the NFP exists that is, providing goods and services to beneficiaries, customers, or members. Generic investing or financing activities (for example, investment income not arising from core programs) would not meet the mission dimension and thus, would always be nonoperating. Availability considers whether resources are available for current period activities, based on the presence or absence of limitations imposed by donor-restricted contributions or by actions of an entity s governing board (or in some cases, management). The availability dimension also governs the treatment of contribution-related activity associated with acquisition of long-lived assets used in operations. Resources restricted by donors for the acquisition of property and equipment would be released from restriction within operations and then simultaneously transferred out of operations when the property or equipment is placed in service AICPA. Unauthorized copying prohibited.

17 Movements of resources between operating and nonoperating categories (for example, those associated with board designations of resources or for capital assets acquired through donor-restricted gifts) would be accomplished using a new transfers category, and the operating measure would be reported with and without the effect of the transfers. In order to drive closer alignment between the notion of operating used in statements of activities and statements of cash flows, the proposal would change how certain cash flows are classified. For example, cash payments to acquire property plant and equipment would be reported in operating cash outflows, rather than as investing outflows. Similarly, dividends and interest received by an endowment would be reported as investing inflows rather than operating inflows. In effect, the proposal would create a separate cash flow reporting model for nonprofits. Use of the direct method of reporting operating cash flows would be required. Other proposed changes include the following: The three existing net asset classes (permanently restricted, temporarily restricted, and unrestricted) would be replaced with two net asset classes (net assets with donor restrictions and net assets without donor restrictions). All NFPs would be required to provide an analysis of operating expenses by both their nature and function on the face of the statement of activities, as a separate statement, or within the notes. A net presentation of investment expenses against investment return would be required on the face of the statement of activities. Internal salaries and benefits expenses netted against investment returns would be required to be disclosed. The amount of endowment funds that are underwater would be reported within the proposed with donor restrictions class of net assets (rather than within the unrestricted class of net assets as currently required). NFPs would be required to provide quantitative and qualitative information useful in assessing liquidity, including a description of the time horizon used to manage its liquidity. Effective Date The amendments in this proposed ASU would be applied on a retrospective basis. Application to interim financial statements would not be required in the initial year of application, but information for those interim periods would be restated if reported with annual financial statements for that year. The year that the final ASU is first applied, an NFP would disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each year presented. The effective date, and whether it should be the same for all NFPs, as well as whether early adoption would be permitted, will be determined by FASB after considering stakeholders feedback on this proposed ASU. Questions for Respondents Comments on all matters in this proposed ASU are invited; specific questions are identified in the proposed ASU. Proposed ASU Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date The proposed ASU was issued April 29, The comment deadline ended May 29, Why Issued On May 28, 2014, FASB issued ASU No , Revenue from Contracts with Customers (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods AICPA. Unauthorized copying prohibited. 15

18 within that reporting period, for public business entities, certain not-for-profit entities, and certain employee benefit plans. The effective date for all other entities is for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, FASB is proposing to defer the effective date of the guidance in ASU No on the basis of stakeholders feedback received through the research project. Main Provisions The amendments in this proposed ASU would defer the effective date of ASU No as follows: Public business entities, certain not-for-profit entities, and certain employee benefit plans o would apply the guidance in ASU No to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period; and o earlier application would be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities would apply the guidance in ASU No to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, Application would be permitted earlier only as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period, or an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance in ASU No Subsequent to the period covered in this accounting and auditing supplement, FASB voted to approve a one-year deferral of the effective date of ASU No It is expected that FASB will issue the final amended ASU in the third quarter of Proposed ASU Liabilities Extinguishments of Liabilities (Subtopic ): Recognition of Breakage for Certain Prepaid Stored-Value Cards Proposed ASU Liabilities Extinguishments of Liabilities (Subtopic ) was issued April 30, The comment deadline ended June 29, Why Issued The objective of this proposed ASU is to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value card liability. Description of Prepaid Stored-Value Cards Prepaid stored-value cards are prepaid cards with monetary values redeemable for goods, services, and cash. (commonly referred to as gift cards ) AICPA. Unauthorized copying prohibited.

19 Accounting for Prepaid Stored-Value Cards When an entity sells a prepaid stored-value card that is redeemable at a third-party merchant (or merchants), it recognizes a liability for its obligation to provide the customer with the ability to purchase goods or services at that third-party merchant (or merchants). When the customer redeems the prepaid stored-value card, the liability (or part of that liability) between the entity and the customer is extinguished. Simultaneously, the entity incurs a liability to the merchant that provided the goods or services. This liability is typically extinguished with cash through a cardsettlement process. In some cases, a prepaid stored-value card may be unused wholly or partially for an indefinite time period. Financial or Nonfinancial Liability Some entities support the view that the liability that exists between an entity that sells a prepaid storedvalue card and its customer prior to when the customer redeems the prepaid stored-value card (prepaid stored-value card liability) is a financial liability. Other entities support the view that a prepaid stored-value card liability is a nonfinancial liability. Current Accounting for Breakage FASB ASC , Liabilities Extinguishments of Liabilities, currently includes derecognition guidance for both financial liabilities and nonfinancial liabilities. There currently is diversity in the methodology used to derecognize the portion of the nonrefundable dollar value of prepaid stored-value cards that ultimately is unredeemed (that is, breakage). FASB ASC 606, Revenue from Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities. Under current GAAP, if an entity concludes that a prepaid stored-value card liability is either a financial liability or a nonfinancial liability, it should apply the derecognition guidance in FASB ASC That guidance typically would prohibit derecognition of the liability before a customer redeems the card; the card expires; or the card becomes subject to unclaimed property laws. Upon the effective date of FASB ASC 606, if an entity concludes that a prepaid stored-value card liability is a nonfinancial liability, it would apply the less restrictive breakage guidance included in FASB ASC 606. Who Would Be Affected? The amendments in this proposed ASU would apply to entities that sell prepaid stored-value cards that have all of the following characteristics: The cards do not have an expiration date. The cards are not subject to unclaimed property laws. The cards are redeemable for any of the following: o Cash o Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) o Both of the above The cards are not attached to a segregated bank account like a customer depository account AICPA. Unauthorized copying prohibited. 17

20 Main Provisions Liabilities related to the sale of prepaid stored-value cards within the scope of this proposed ASU are financial liabilities. The amendments in this proposed ASU would provide a narrow scope exception to the guidance in FASB ASC to require that breakage be accounted for consistent with the breakage guidance in FASB ASC 606 for those liabilities with the characteristics described previously. Difference from Current GAAP Neither current GAAP nor the pending guidance in FASB ASC 606 contains specific guidance for the derecognition of prepaid stored-value card liabilities within the scope of the amendments in this proposed ASU. Effective Date The amendments in this proposed ASU would be applied using a modified retrospective basis of application by means of a cumulative-effect adjustment to retained earnings as of the beginning of the annual period in which the guidance is effective. The effective date and the ability to apply the amendments before the effective date will be determined after FASB considers stakeholder feedback on this proposed ASU. Proposed ASU Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Proposed ASU Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing was issued May 12, The comment deadline ended June 30, Background As a result of the issuance of ASU No , Revenue from Contracts with Customers (Topic 606), FASB and IASB announced the formation of the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG). The TRG informs the two boards about potential implementation issues that could arise when organizations implement the new revenue standard; helps some stakeholders to better understand specific aspects of the new revenue standard from others; and does not issue authoritative guidance. The two boards evaluate the feedback received from the TRG and other stakeholders to determine what action, if any, is necessary for each potential implementation issue. Implementation questions submitted to the TRG and discussions at TRG meetings informed FASB about a few issues in the guidance on identifying performance obligations and licensing. Those issues include the following: Identifying the following performance obligations: o When identifying performance obligations, whether it is necessary to identify and evaluate promised goods or services that are immaterial o Determining whether promised goods and services are separately identifiable (that is, distinct within the context of the contract) o Determining whether shipping and handling activities are a promised service in a contract or are activities to fulfill an entity s other promises in the contract AICPA. Unauthorized copying prohibited.

21 Licensing, including the following: o Determining whether the nature of an entity s promise in granting a license is to provide a right to access the entity s intellectual property, which is satisfied over time and for which revenue is recognized over time, or to provide a right to use the entity s intellectual property, which is satisfied at a point in time and for which revenue is recognized at a point in time o The scope and applicability of the guidance about when to recognize revenue for sales-based or usage-based royalties promised in exchange for a license of intellectual property o Whether restrictions of time, geographical region, or use on a license of intellectual property affect the identification of performance obligations. FASB added a project to its technical agenda to improve FASB ASC 606 to address those issues by reducing the risk of diversity in practice arising before the guidance is effective and the cost and complexity of applying FASB ASC 606 both at transition and on an ongoing basis. Who Would Be Affected? The amendments in this proposed ASU would affect entities with transactions included within the scope of FASB ASC 606. Main Provisions The core principle of the guidance in FASB ASC 606 is that an 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 to in exchange for those goods or services. To achieve that core principle, an entity should apply the five steps with which we are familiar. The amendments in this proposed ASU would not change core principles of the guidance. The amendments in this proposed ASU would affect the following two aspects of FASB ASC 606: identifying performance obligations and licensing implementation guidance. Identifying Performance Obligations Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. FASB is proposing to reduce the cost and complexity of applying the guidance on identifying promised goods or services by adding the following guidance: An entity would not be required to identify goods or services promised in a contract with a customer that are immaterial in the context of the contract. An entity would be permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. FASB ASC 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. This proposed ASU would improve the guidance on assessing that criterion by doing the following: Improving the articulation of the principle for determining whether promises to transfer goods or services to a customer are separately identifiable. An entity would determine whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs. o Revising the related factors and examples so they align with the improved articulation of the separately identifiable principle AICPA. Unauthorized copying prohibited. 19