ACCOUNTING ISSUES. Presenters:

Transcription

1 ACCOUNTING ISSUES Presenters: Stephen Sommerville, Partner, PricewaterhouseCoopers LLP Donald Heisler, Partner, Deloitte & Touche LLP Diane M. Irvine, Director, INRIX, Inc., Rightside, XO Group, Inc., Yelp Inc. Brent Johnson, Audit Partner, KPMG Tracy Knox, CFO, Rightside RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 1

2 Agenda Cyber Security SEC Disclosure Update PCOAB Update New Accounting Standards RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 2

3 Cyber Security We Are All Vulnerable Source: Computer Weekly Data Bank RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 3

4 Cyber Security The Cost of an Attack Can Be Significant Source: HP s 2014 Global Report on the Cost of Cyber Crime RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 4

5 Cyber Security Impact For Us Increased Costs New equipment, firewalls and systems Added InfoSec FTEs Increased use of security experts and consultants Increased use of PR and Crisis Communication firms Insurance Policies to cover increased risk of customer and shareholder lawsuits Enhanced Controls Implement cybersecurity screening for new partners Enhanced reporting of events and impact Accounting policies to ensure all costs are estimated, accrued or reported More frequent and extensive communication with the board of directors Increased disclosures in Risk Factors in all SEC Filings RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 5

6 Disclosure Effectiveness Use of Non-GAAP Metrics Consistency of Adjusted EBITDA definitions Level of disclosure in 10-Q vs. 10-K Detailed disclosures re: debt covenants RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 6

7 Segment Reporting During the 2014 AICPA National Conference on Current SEC and PCAOB Developments, the SEC staff noted that they will be refreshing their approach to reviewing segment disclosures and strongly encouraged registrants to do the same. Registrants should not default to the Chief Executive Officer as the function operating in the role of the Chief Operating Decision Maker ( CODM ) simply because that individual has ultimate decision-making authority. The SEC staff also noted that issuers often place a great deal of reliance on the CODM reporting package when identifying operating segments. The CODM reporting package is one data point to be used in combination with other indicators. The SEC staff reminded issuers that the entity-wide disclosures are required even if a registrant has only one reportable segment. In addition, the entity-wide disclosure of revenue by product may be different than how revenue is reflected in segments organized by product. If operating segments have characteristics so similar that they are expected to have essentially the same future prospects, separate reporting of segment information would not add significantly to an investor s understanding. Therefore, aggregation of two or more operating segments is permitted. However, the SEC staff believes that the aggregation criteria are intended to be a high hurdle RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 7

8 Revenue Disclosures One common subjects of SEC staff comment revenue disclosures. The themes include: No commentary on any inconsistencies between the revenue and distribution channels discussed in the business section or MD&A and the revenue policy disclosures. Greater transparency into revenue recognition, including: Disclosing whether there are one or multiple units of accounting Improving disclosure of arrangements with resellers or distributors; Amending financial statement presentation to separate revenue and cost of revenue line items for bundled arrangements (products vs. services); Disclosing the basis of how fair value is determined for elements within a multiple element arrangement; Disclosing the basis for presenting revenue gross versus net in a sales arrangement; Enhancing disclosures related to the determination of selling price between vendor specific objective evidence, third-party evidence, and best estimate of selling price; and Discussing key revenue variables (e.g., quantity and price) that are specific to and necessary for understanding and evaluating results of operations in MD&A. Identifying pricing rates as a key driver of profitability and changes in pricing rates have on profit margin and overall profitability in MD&A. RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 8

9 PCAOB Matters Implementation Issues and Challenges Inspections Fees Additional work Proposed Agenda Items Auditors Report Audit transparency RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 9

10 New Revenue Recognition Standard FASB voted on April 1, 2015 to propose a one-year deferral of new revenue standard Effective date delayed for public companies to fiscal years beginning after December 15, 2017 ie 2018 for calendar year end issuers Non-public companies get a further year deferral 2019 for calendar companies Early adoption is permitted though no earlier than original effective date (calendar 2017) May 12 FASB proposed two amendments to the standard License transactions symbolic vs functional Distinct in the context of the contract Proposed amendments still outstanding for: Practical expedients upon transition Collectability and non-cash consideration New practical expedients for shipping and handling costs and sales taxes collected from customers RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 10

11 Private Company Elections: Accounting Standard Updates ASU Intangibles Goodwill and Other (Topic 350) Applies to all entities except for public business entities and not-for-profit entities Provides significant relief for non-public business entities Definition of a public business entity is not always an easy determination Is this real relief? Considerations for private business entities with plans to go public Considerations for private business entities acquired by a public company (or visa versa) M&A due diligence SEC Reg. S-X Rule 3-05 ASU Derivatives and Hedging Provides for a simplified method of accounting for variable for fixed interest rate swaps Can elect hedge accounting before financial statements are issued Can use settlement value in accounting for hedged amount RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 11

12 Reporting revenue gross as a principal versus net as an agent (Topic Revenue Principal Agent Considerations) Continues to be significant diversity in practice amongst private AND public companies Frequent source of comment by the SEC, both as it relates to accounting and disclosure SEC continues to focus on key considerations such as: Acts as principal in the transaction Takes title to products Has the risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns Acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis. Particularly challenging to apply to services companies, especially those in cloud computing and businesses that are solution providers that utilize another vendors products and/or services. Must objectively assess the substance of the transaction and what is being delivered. RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 12

13 Cloud Computing Considerations With the proliferation of the cloud and cloud-based solutions, a reassessment and careful examination of accounting practices is needed: Proposed ASU Customer s Accounting for Fees Paid in a Cloud Computing Arrangement Software or service? Perform same assessment as vendors under ASC : If there is a software license element - the customer would account for the related fees paid as an internal-use software intangible; if not, the customer would account for the arrangement as a service contract. Cloud computing costs Web site development (ASC ) Development or acquisition of software to be used by the customer ( or ) Infrastructure purchases (ASC 360) Maintenance or ongoing service RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 13

14 Cloud Computing Considerations, Cont: Cloud computing revenues Are y0u delivering a software element? Is this a hosted arrangement? In effect, is this a service contract? What if tangible product (e.g. hardware) is a part of delivering the service? RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 14

15 Other updates Pushdown accounting (ASU ) Now optional for all companies, regardless of the ownership change in the acquired entity SEC issued conforming rules (rescinded Staff Topic 5J) Effective immediately (January 2105). Previously issued financial statements can be revised to apply push down accounting but previously applied push down accounting cannot be reversed. Extraordinary items (ASU ) Eliminates the concept of extra-ordinary items Effective for years beginning after December 15, 2015 Can be applied prospectively or retrospectively Going Concern disclosures (ASU ) Management will consider relevant conditions that are known (and reasonably knowable) at the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. Effective for annual periods beginning after December 15, 2016 RR DONNELLEY SEC HOT TOPICS INSTITUTE SEATTLE, WA 15