Private Company Council Update

Transcription

1 Private Company Council Update FEI - Dallas Chapter Meeting Billy M. Atkinson CPA Past Chair, PCC April 12, 2016 The views expressed in this presentation are those of the presenters. Official positions of the FASB are reached only after extensive due process & deliberations Private Company Council 2 1

2 Private Company Council (PCC) Structure FAF oversight Private company practitioners (4), users (3), preparers (3) Identifies, deliberates & votes on proposed GAAP alternatives for private companies Advisory body to FASB 3 PCC Process PCC Agenda Decision PCC Deliberations FASB endorsement 2/3 vote 2/3 vote Simple majority Exposure Draft PCC re-deliberates FASB final endorsement 2/3 vote Simple majority FASB issues final Standards 4 2

3 Endorsement Process and Voting PCC proposes GAAP alternatives - Two-thirds vote required FASB endorsement by simple majority - FASB act within 60 days - If FASB not endorse, must provide written notification to PCC indicating changes 5 Private Company Decision- Making Framework (PCDMF) 6 3

4 Differential Factors (5) Private v. Public Identify & provide alternatives based on differential factors: Number of primary users and their access to management Investment strategies of primary users Ownership and capital structure Accounting resources Learning about new financial reporting guidance 7 Modules Where guidance could differ for public v. private Recognition & Measurement Display (Presentation) Disclosures Effective Date Applies to PCC look-back projects & ongoing FASB projects Transition Method 8 4

5 Framework Fundamentals Assist in user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework Intended to facilitate decisions & drive consistency Fundamental approach retains or improves information relevant to typical users Applies to both look-back and current projects 9 Definition of a Public Business Entity 10 5

6 Public Business Entity: Current GAAP Definition: A business entity that meets any one of the following 1) Files or furnishes financial statements with the SEC (or is included in a filing) 2) 3) 4) Securities Exchange Act of 1934 required to file or furnish financial statements with a regulatory agency, other than the SEC Required to file financial statements with a foreign or domestic regulatory agency for the sale of securities that are not subject to contractual restrictions on transfer Has issued, or is a conduit obligor for, securities that are traded, quoted, or listed on an exchange or an over-the-counter market. 11 Public Business Entity: New to GAAP Definition: A business entity that meets any one of the following 5) It has one or more securities that are not subject to contractual restrictions on transfer, and it is required to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis. 12 6

7 Public Business Entity: Orgs Affected Scope of Guide Public companies, not-for-profits & employee benefit plans excluded FASB determines if apply to organizations outside of Guide s scope 13 PCC Activities to Date 14 7

8 PCC Specific Projects Goodwill (completed) Interest Rate Swaps (completed) Common Control Leases (completed) Identifiable Intangible Assets (completed) Transitional Guidance (completed) Advising the FASB & Other Issues 15 Final PCC Alternatives Approved by FASB 16 8

9 Goodwill: Solution Current U.S. GAAP Final Alternative Do not amortize goodwill Test for impairment at least annually or more frequently Reporting unit level Two-step test Optional qualitative assessment Amortize over 10 years or less Test for impairment upon occurrence of triggering event Entity level or reporting unit level One-step test Optional qualitative assessment 17 Identifiable Intangible Assets: Solution Current U.S. GAAP Recognize intangibles separately from goodwill in a business combination if contractual-legal or separable Very broadly interpreted today Alternative (December 2014) Do not recognize non-competition agreements Do not recognize customer related intangibles unless they are capable of being sold or licensed independently 18 9

10 Interest Rate Swaps: Solution Impact of interest rate swap No hedge accounting Current GAAP Hedge accounting Alternative Simplified hedge accounting (Final) Income statement Volatility in interest expense as result of changes in FV Interest expense approximates fixed rate debt Interest expense approximates fixed rate debt Balance sheet Asset or liability at fair value Asset or liability at fair value Asset or liability at settlement value (or FV) Other comprehensive income No impact Includes changes in fair value of effective portion of hedge Includes changes in settlement value (or FV) of the swap 19 Common Control Leasing Arrangements Typical private company common control leasing arrangement Owner 100% Interest 100% Interest Manufacturing Company Debt Pays Rent Leases Land & Building Leasing Company Mortgage Bank Bank 20 10

11 Common Control Leasing: Solution Lessees may elect alternative not to apply VIE guidance when certain conditions are met. Not require VIE disclosures instead require specific information on Lessor Important Note Not meeting the criteria above does not automatically result in consolidation. 21 Common Control Leasing: Solution Criteria to qualify: 1) Lessor & private company lessee (reporting entity) are under common control 2) Private company lessee has leasing arrangement with lessor 3) Substantially all activity between two companies is related to leasing activity between lessor to the private company lessee 4) If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor

12 Effective Date and Transition Guidance (ASU ) Change in Accounting Principles: Change in accounting principle (includes PCC alternatives) after the effective date requires preferability assessment (Topic 250) - Diversity in practice in assessing preferability especially with PCC alternatives Voluntary change in accounting principle after the effective date requires full retrospective application (Topic 250) 23 Effective Date and Transition Guidance (ASU ) Removed the effective dates from ASUs , , , and No preferability assessment the first time an alternative is elected Transition guidance extended indefinitely 24 12

13 VIE Issue Common Control Scenarios Questions PCC Agrees with FASB on a Need to Develop Illustrative Guidance No Apparent Rules Changes at this Point Proving to be a Difficult Issue A Continuing Work in Progress 25 Applying VIE Guidance Common Control OWNER 100% Equity 100% Equity Car Co. Purchases 90% of Engines Produced $15k Loan Engine Co. has insufficient equity (Equity = 5% of funding) Industry standard for sufficient equity is 20% Loan to Engine Co. represents 15% of funding Engine Co financed remaining 80% with Bank ABC Car Co. makes significant decisions Arms-length pricing Engine Co

14 Other Notable PCC Input To FASB 27 Issues Going Concern Acctg. Std. Government Assistance Disclosure Revenue Recognition (TRG) Accounting for Financial Instruments Uncertain Tax Positions - Fin 48 - Disclosure of Open Tax Years Development stage entities - Research led to FASB standard 28 14

15 Issues Partnership accounting - Accounting for contributions of nonmonetary assets Disclosure Framework Review: - Materiality - Def. Benefit Pensions & OPEBs - Fair Value - Inventory Town Halls (e.g., SMU, NAAATS, Controllers Conference) 29 PCC Position on Leases Significant improvements have been made to the 2013 and 2010 Exposure Drafts However, 8 out of 10 PCC members reaffirmed their views contained within the December 2013 comment letter. 6 out of 10 PCC members recommend linked presentation for operating leases (i.e., gross asset and liability netted on the face) 30 15

16 FASB Simplification Initiatives Objective: - Reduce cost and complexity - Maintaining or improving the usefulness of the information 31 Employee Share-Based Payments (PCC to FASB Project) - ASU Summary of Simplifications: Accounting for Income Taxes Classification of Excess Tax Benefits on the Statement of Cash Flows Accounting for forfeitures Minimum Statutory Tax Withholding Requirements Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax Withholding Purposes Expected Term (Practical Expedient) Intrinsic Value 32 16

17 Concept of Extraordinary Items Objective (ASU ) Current GAAP Solution Items that are unusual in nature and are infrequent in occurrence to be presented as extraordinary items Preparer, auditor, and regulator costs Eliminate the concept of extraordinary items Reduce cost and complexity of income statement presentation Maintain or improve the usefulness of the information required to be reported by an entity by retaining presentation and disclosure guidance for items that are unusual in nature or occur infrequently Effective Date and Transition: All entities: fiscal years beginning after December 15, 2015, and interim periods within those fiscal years Early adoption permitted; Prospective or Retrospective application 33 Simplifying the Presentation of Debt Issuance Cost (ASU ) Current GAAP Solution Capitalized as a deferred financing cost (asset) Amortized using the effective interest method over the period of the loan Presented as a direct deduction to the liability Similar treatment to discounts and premiums Effective Date and Transition: Public business entities: fiscal years beginning after December 15, 2015, and interim periods within those fiscal years All other entities: fiscal years beginning after December 15, 2015, and interim periods after December 15, 2016 Early adoption permitted; Retrospective application 34 17

18 Simplifying the Measurement of Inventory (ASU ) Current GAAP Solution Lower of cost or market Measures for market value include: Replacement cost Net realizable value Net realizable value less a normal profit margin Inventory will be measured at the lower of cost or net realizable value Reduce cost and complexity of the subsequent measurement Maintain or improve the usefulness of the information required to be reported by an entity Effective Date and Transition: Public business entities: fiscal years beginning after December 15, 2016, and interim periods within those fiscal years All other entities: fiscal years beginning after December 15, 2016, and interim periods after December 15, 2017 Early adoption permitted; Prospective application 35 Income Taxes: Classify Deferred Taxes (ASU ) Current GAAP Solution Deferred taxes classified as current or noncurrent based on classification of related asset or liability (if there is one) Classify all deferred tax assets and liabilities as noncurrent Effective Date and Transition: Public business entities: annual periods beginning after December 15, 2016, and interim periods within those annual years All other entities: annual periods beginning after December 15, 2017, and interim periods after December 15, 2018 Early adoption permitted; Prospective or Retrospective application 36 18

19 Simplifying the Balance Sheet Classification of Debt (In Progress) Current GAAP FASB Proposal The term current liabilities is defined in Topic 210 (Balance Sheet) but the term noncurrent is not explicitly defined Topic 470 (Debt) includes narrowscope guidance on various debt transactions Balance sheet classification is based on facts and circumstances as of the financial statement issuance date for some debt transactions and as of the balance sheet date for others Current GAAP allows the application of judgement about intent and probability Debt would be classified as noncurrent if one or both of the following criteria are met as of the balance sheet date: The liability is contractually due to be settled more than 12 months (or operating cycle, if longer) after the balance sheet date The entity has a contractual right to defer settlement of the liability for at least 12 months (or operating cycle, if longer) after the balance sheet date Project Stage: Exposure Draft expected Q Simplifying the Balance Sheet Classification of Debt PCC recommends the following: - Long-term debt with SACs and/or MACs clauses should not be classified as current, unless the clauses are triggered - Exception for debt-covenant violations - PCC split on treatment of short-term debt refinanced with long-term debt 38 19

20 Simplifying the Equity Method of Accounting Current GAAP Possible Solutions Basis difference The difference between the cost of an investment and the amount of underlying equity in net assets Currently amortized Increase in ownership Entities previously accounted for on otherthan-equity-method of accounting which now qualify to for equity method Tentative Board Decisions: Remove consideration of basis difference (not finalized) Remove retroactive application requirement (ASU ) Currently must use retroactive application of the equity method 39 Seeking Input 40 20

21 Staying in Touch: Providing Input Submit comment letters on proposals PCC on issues affecting you: Outreach meetings Attend/watch upcoming PCC and FASB meetings. Subscribe to the FASB Outlook