2016 Private Company Audit & Accounting Update. John Nicolson Smith Leonard PLLC

Transcription

1 2016 Private Company Audit & Accounting Update John Nicolson Smith Leonard PLLC

2 FASB Accounting Standards Updates

3 Leases (Topic 842) ASU Lessor accounting largely unchanged For lessees - two categories of leases: Finance lease similar to old capital lease Operating lease

4 Leases (Topic 842) ASU Classification as finance (lessee) or sales-type lease (lessor) criteria: Transfer ownership to lessee Purchase option reasonably certain to be exercised Lease term major portion asset s life PV payments plus residual > substantially all FV of asset Specialized nature no alternate use

5 Leases (Topic 842) ASU (continued) Lessee accounting for finance leases substantially unchanged For operating leases, lessee required to recognize: A lease liability - obligation to make lease payments, measured on a discounted basis A right-of-use asset Alternate accounting policy election lease term less than 12 months

6 Leases (Topic 842) ASU (continued) Accounting for operating leases: Split lease payments between interest and principal Expense right of use asset straight line as lease expense New provisions for optional extensions Include renewal periods that are reasonably certain

7 Leases (Topic 842) ASU (continued) Following included in lease payment at the commencement date: Fixed payments less incentives payable to lessee Variable payments based on index or other rate Exercise price of an option if reasonably certain to be exercised Payments for penalties for terminating a lease if reflects exercise of lessee option Certain fees paid by the lessee to the owners of a special purpose entity for structuring the lease For lessee only, amounts probable of being owed under residual value guarantees

8 Leases (Topic 842) ASU (continued) Lease payments specifically exclude the following: Certain other variable lease payments Any guarantee by the lessee of the lessor s debt Certain amounts allocated to non-lease components Reassessment of the lease term and purchase options, and subsequent re-measurement by either the lessee or lessor, is limited to certain specified conditions

9 Leases (Topic 842) ASU (concluded) Results in simplified accounting for sale and leasebacks No longer opportunity for off-balance sheet financing Generally modified retrospective transition approach Effective calendar year 2020 for nonpublic entities Early application permitted

10 Update - Revenue from Contracts with Customers (Topic 606) May 2014 ASU FASB issued Revenue from Contracts with Customers (Topic 606) Applies to all entities Previously scattered guidance: Topic Series Topics SAB 104

11 Update - Revenue from Contracts with Customers (Topic 606) (continued) Topic 606 replaces all U.S. GAAP guidance with a single model Five-step process 1. Identify contracts with customers 2. Identify separate performance obligations within contract 3. Determine transaction price 4. Allocate transaction price to performance obligations 5. Recognize revenue when performance obligations satisfied

12 Update - Revenue from Contracts with Customers (Topic 606) (continued) Does not apply to contracts with customers within scope of: ASC 840, Leases ASC 944, Financial Services Insurance *Caution* Five-step process has appearance of mirroring previous guidance, but in practice, measurement may be different

13 Update - Revenue from Contracts with Customers (Topic 606) (continued) ASU deferral of effective date calendar 2019 for nonpublic companies Nonpublic companies may early adopt beginning 2017 ASU clarifications principal versus agent assessment (gross vs. net presentation) Focus does principal obtain control of goods

14 Update - Revenue from Contracts with Customers (Topic 606) (continued) ASU guidance on accounting for: Licenses of intellectual property Certain shipping and handling costs ASU main provisions include: Clarify the collectability criterion May exclude amounts collected for sales taxes from transaction price Guidance measurement of noncash consideration

15 Update - Revenue from Contracts with Customers (Topic 606) (concluded) Practical guidance from AICPA s Revenue Recognition Task Force Sixteen (16) industry task forces Develop Accounting Guide on Revenue Recognition Expected 2017 Google AICPA Revenue Recognition

16 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities (ASU ) Replaces three classes of net assets with two: Net assets with donor restrictions Net assets without donor restrictions Cash flows - use either the direct or indirect method No requirement indirect method reconciliation

17 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities (ASU ) (continued) Increased disclosures including: Governing board designations, appropriations Composition of net assets with donor restrictions How liquid resources managed Availability financial assets for cash needs Expenses disclosed by both natural classification and functional classification Methods used to allocate costs among program and support functions Underwater endowment funds

18 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities (ASU ) (concluded) Investment return reported net of external and direct internal investment expenses No longer require disclosure of those netted expenses Applied retrospectively Effective for calendar year 2018 Early adoption permitted

19 Income Statement - Extraordinary or Unusual Items (Subtopic ) Concept of extraordinary item eliminated Part of initiative to reduce complexity More closely align U.S. GAAP with IFRS Effective for years beginning after December 15, 2015 May apply amendments prospectively or retrospectively to all prior periods Early adoption allowed

20 Intangibles - Goodwill and Other (Topic 350) Accounting for Goodwill (ASU ) Elections are for nonpublic entities Allows for amortization of goodwill over 10 years Shorter period if appropriate Allows optional simplified impairment model Test for impairment when a triggering event occurs

21 Intangibles - Goodwill and Other (Topic 350) Accounting for Goodwill (ASU ) (concluded) Required to make an accounting policy election Test for impairment at either the entity or the reporting unit level Effective date immediate

22 Business Combinations (Topic 805) Accounting for Identifiable Intangible Assets in a Business Combination (ASU ) Allows a private company to elect an accounting alternative for the recognition of certain intangibles acquired in a business combination Following should not be separated from goodwill: Customer-related intangible assets unless they can be sold or licensed independently Non-competes

23 Business Combinations (Topic 805) Accounting for Identifiable Intangible Assets in a Business Combination (ASU ) (concluded) Decision to adopt must be made upon first transaction within scope If adopt required to adopt ASU Effective immediately

24 Intangibles - Goodwill and Other (Topic 350) Business Combinations (Topic 805) Consolidation (Topic 810) Derivatives and Hedging (Topic 815) Effective Date and Transition Guidance - A Consensus of the Private Company Council (ASU ) Effective dates made immediate for several ASUs applicable to nonpublic entities Extends transition guidance in those updates

25 Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments (ASU ) Eliminates requirement to retrospectively account for adjustments to provisional amounts Recognize in the reporting period in which adjustments are determined, changes in: Depreciation Amortization Other income effects

26 Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments (ASU ) (concluded) Show impact on earnings as if had been recorded in previous periods On the face of the income statement or In the notes (by income statement line) Effective calendar year 2017 for nonpublic entities Early application permitted

27 Investments - Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting (ASU ) Increase in level of ownership or influence investee may qualify for equity method accounting Eliminates requirement to adjust retroactively on step-by-step basis Adopt equity method as of the date the investment qualifies

28 Investments - Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting (ASU ) (concluded) Add cost of additional investment to basis Available for sale investment becomes qualified for equity accounting Realize unrealized holding gains / losses through earnings Applied prospectively Effective calendar year 2017 Early application permitted

29 Consolidation (Topic 810) Amendments to the Consolidation Analysis ) (ASU Improves consolidation guidance for entities, including limited partnerships, limited liability corporations, and securitization structures Places more emphasis on risk of loss when determining a controlling financial interest Changing consolidation conclusions in industries that make use of limited partnerships or VIEs

30 Consolidation (Topic 810) Amendments to the Consolidation Analysis ) (concluded) (ASU Effective for calendar 2017 for nonpublic entities Early adoption is permitted May apply retrospectively in previously issued financial statements for one or more years in cumulative-effect adjustment to retained earnings

31 Intangibles - Goodwill and Other - Internal-Use Software (Subtopic ) Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU ) Relates to fees paid by a customer in a cloud computing arrangement May include: Software as a service Other hosting arrangements Software license included account for that element consistent with acquisition of other software licenses

32 Intangibles - Goodwill and Other - Internal-Use Software (Subtopic ) Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU ) (concluded) If no license, account for as a service contract Likely to impact more entities in future as more large systems are offered in the cloud Can adopt either prospectively or retrospectively Effective calendar year 2016 for nonpublic entities Early adoption permitted

33 Presentation of Financial Statements (Topic 205) Property, Plant and Equipment (Topic (360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU ) Currently too many disposals, small groups of assets or recurring in nature qualify for discop treatment Now a discop only if: Disposal represents a strategic shift with a major effect on operations and financial results Component classified as held for sale, disposed or abandoned

34 Presentation of Financial Statements (Topic 205) Property, Plant and Equipment (Topic (360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU ) (concluded) Expanded disclosures Effective prospectively calendar 2015 for nonpublic entities

35 Presentation of Financial Statements - Going Concern (Subtopic ) GAAP lacked guidance regarding management s responsibility Management and auditors previously looked to audit rules Makes management responsible Requires projections for 12 months from report issuance date

36 Presentation of Financial Statements - Going Concern (Subtopic ) (concluded) Intended to reduce diversity in timing and content of disclosures Provides for expanded footnote disclosures Effective for periods ending after December 15, 2016 Early application is permitted

37 Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes (ASU ) Classify all deferred taxes assets or liabilities as noncurrent Need to consider impact on debt covenants Effective calendar year 2018 for nonpublic entities Early adoption permitted Applied prospectively or retrospectively for all periods presented

38 Interest - Imputation of Interest (Subtopic ) Presentation & Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU ) Simplifying the Presentation of Debt Issuance Costs (ASU ) Debt issuance costs related to liability - reduction from the carrying amount of debt More closely aligns with IFRS For line of credit, may recognize as an asset

39 Interest - Imputation of Interest (Subtopic ) Presentation & Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU ) Simplifying the Presentation of Debt Issuance Costs (ASU ) (concluded) Need to consider impact to debt covenants Effective calendar 2016 for nonpublic entities Early adoption permitted

40 Inventory (Topic 330) Simplifying the Measurement of Inventory ) (ASU ASU does not apply to LIFO or retail methods Previously measurement at lower of cost or market Market could be: Replacement Net realizable value Net realizable value less normal profit margin

41 Inventory (Topic 330) Simplifying the Measurement of Inventory ) (concluded) (ASU Now only lower of cost and net realizable value allowed More closely aligns U.S. practice with IFRS Effective calendar year 2017 for nonpublic companies Applied prospectively Early adoption permitted

42 Financial Instruments - Overall (Subtopic ) Recognition and Measurement of Financial Assets and Financial Liabilities (ASU ) Guidance to improve measurement of financial instruments Equity investments to be measured at fair value Unrealized gain or loss now only flows through income If no readily determinable fair value measure at cost less impairment Eliminates distinction between trading and availablefor-sale securities

43 Financial Instruments - Overall (Subtopic ) Recognition and Measurement of Financial Assets and Financial Liabilities (ASU ) (continued) Does not apply to: Equity method investees Consolidated entities Significant changes in disclosures Debt securities continue to be classified in three categories Trading Available-for-sale Hold to maturity

44 Financial Instruments - Overall (Subtopic ) Recognition and Measurement of Financial Assets and Financial Liabilities (ASU ) (concluded) Effective calendar 2019 for nonpublic entities May adopt early beginning calendar 2018

45 Fair Value Measurements (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (ASU ) Remove requirements to: Categorize within fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient For nonpublic entities, effective for calendar 2017 Earlier application permitted

46 Liabilities - Extinguishments of Liabilities (Subtopic ) Recognition of Breakage for Certain Prepaid Storevalue Products (ASU ) ASU applies to prepaid stored value products Example prepaid gift cards Generally wait until legally released before remove liability Breakage accounted for consistent with guidance in Topic 606 Remove liability proportionate to amounts not expected to be redeemed

47 Liabilities - Extinguishments of Liabilities (Subtopic ) Recognition of Breakage for Certain Prepaid Storevalue Products (ASU ) (continued) Not applicable if liability subject to unclaimed property taxes Example consumer debit cards Applied using either: modified retrospective transition method - cumulative-effect adjustment to retained earnings retrospectively to each period presented

48 Liabilities - Extinguishments of Liabilities (Subtopic ) Recognition of Breakage for Certain Prepaid Storevalue Products (ASU ) (concluded) Effective calendar year 2019 for nonpublic entities Early application permitted

49 Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU ) Applies when change in counterparty to a derivative designated as a hedge Does not require de-designation Provided that other hedge accounting criteria are still met

50 Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU ) (concluded) May be applied prospectively or on a modified retrospective basis Effective calendar year 2018 for nonpublic entities Early adoption permitted

51 Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments (ASU ) Applies to issuers or investors in debt instruments Embedded derivatives are separated from host contract and accounted for separately if certain criteria met Clarifies what steps are required when assessing the clearly and closely related criterion

52 Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments (ASU ) (concluded) Effective calendar year 2018 for nonpublic companies Early adoption permitted

53 Compensation - Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of a Defined Benefit Obligation on Plan Assets (ASU ) Rules clean up for entities with a fiscal year end that does not coincide with a month end Plan and employer year ends will be different Entity measures plan assets and obligations using the month end that is closest to the entity s fiscal year end

54 Compensation - Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of a Defined Benefit Obligation on Plan Assets (ASU ) (concluded) Amendments apply prospectively Effective calendar 2017 for nonpublic entities Early adoption is permitted

55 Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (ASU ) Aspects of accounting for share-based payment awards simplified, including: Income tax consequences; Classification of awards as either equity or liabilities Classification on statement of cash flows

56 Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (ASU ) (continued) The amendments also simplify areas for private companies: Practical expedient for expected term One-time option to measure liability-classified awards at intrinsic instead of fair value Intrinsic option previously allowed but missed by some private companies

57 Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (ASU ) (concluded) Effective calendar year 2018 for nonpublic companies Early adoption permitted

58 Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (ASU ) Primarily affects financial institutions Generally requires financial assets measured at amortized cost be presented at the net amount expected to be collected Losses recognized earlier

59 Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (ASU ) (concluded) Previous criterion probable. Now use reasonable and supportable forecasts Effective calendar year 2021 for nonpublic entities Early adoption permitted beginning calendar 2019

60 Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (ASU ) Statement addresses diversity in practice Early adoption permitted Should be applied retrospectively Effective calendar year 2019 for nonpublic entities

61 Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (ASU ) (concluded) Specific cash flow issues addressed: Debt prepayment or debt extinguishment costs Settlement of zero or insignificant rate coupon debt Contingent consideration payments made after a business combination Proceeds from insurance claims Proceeds from life insurance policies Distributions from equity method investees Beneficial interests in securitization transactions Separately identifiable cash flows and application of the predominance principle

62 AICPA Updates

63 An Audit of Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements (SAS 130) Requirement to Examine and report directly on the effectiveness of internal control over financial reporting Removes option to Examine and report on management s assertion about the effectiveness of internal control over financial reporting

64 An Audit of Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements (SAS 130) (concluded) Revisions of the terms significant account or disclosure Now significant class of transactions, account balance or disclosure

65 Amendment to Statement on Auditing Standards No. 122 Section 700, "Forming an Opinion and Reporting on Financial Statements (SAS 131) Clarifies jurisdictional issues in auditor reporting requirements

66 Statements on Standards for Accounting and Review Services: Clarification and Recodification (SSARS 21) Revises and restates standards for reviews, compilation and preparation engagements Engagement letter now a requirement Changed language in accountant s report

67 Statements on Standards for Accounting and Review Services: Clarification and Recodification (SSARS 21) Allows preparation engagements, which do not require an accountant s report Effective for engagements for periods ending on or after December 15, 2015

68 Questions?

69 Contact Information John Nicolson Smith Leonard PLLC 4035 Premier Drive, Suite 300 High Point, NC

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