www.pwc.com Current Accounting and Reporting Developments Webcast Series Third Quarter 2015

www.pwc.com Current Accounting and Reporting Developments Webcast Series Third Quarter 2015

Welcome Beth Paul Accounting Services Group Team Leader Paula Loop Center for Board Governance and Investor Resource Institute Leader Jason Crouch Partner, National Professional Services Group Ralph Martino Partner, National Professional Services Group 2

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Today s agenda September 16, 2015 Revenue recognition Cybersecurity Cloud computing Discontinued operations Standard setting update SEC/PCAOB update Q&A 5

Revenue recognition Effective date US GAAP Public US GAAP Private IFRS Effective Date Beginning after December 15, 2017 Beginning after December 15, 2018 Beginning on or after January 1, 2018 Early adoption Yes 2018 calendar year No earlier than the original effective date for public entities 2017 calendar year 2019 calendar year Yes No earlier than original effective date for public companies 2017 calendar year 2018 calendar year Yes 6

Revenue recognition Recap of proposed ED Identifying performance obligations Factors that indicate promises are not separately identifiable: Entity provides a significant integration service Goods/services significantly modify/customize other promises Goods/services are highly interdependent or highly interrelated - Each of the goods/services is significantly affected by one or more of the other goods/services in the contract 7

Polling question # 1 What s your company s status with respect to the implementation of the new revenue standard? A. We plan to early adopt so we re pretty far along B. We have assessed our revenue streams and know what areas will be affected at a high level C. We re familiar with the standard and beginning to assess our revenue streams D. We re in the early stages of understanding the potential impact E. N/A or staff 8

Revenue recognition update Proposed amendments Unit of Account Principal vs Agent Assessment Clarify Indicators Control in a Service Arrangement 9

Revenue recognition update Proposed amendments (continued) Sales tax presentation practical expedient Completed contract at transition Collectibility Non-cash consideration 10

Polling question #2 How closely are you following the FASB standard setting activities? A. Very closely (e.g., follow the outcome of board meetings) B. Somewhat closely (e.g., read proposed ASUs, consider commenting) C. I get engaged once a final standard is issued D. Don t follow 11

Cybersecurity A business issue, not just a technology issue 79% of respondents said they detected a security incident in the past 12 months 1 Connectivity and collaboration now extends to all facets of business Cybersecurity exposure grows as companies increase their reliance on emerging technologies Clear evidence of governance and accountability is important 1 s 2015 US State of Cybercrime Survey 12

Cybersecurity Figuring out the cybermetrics that matter most Considerations Evaluate whether the cybermetrics being presented to directors enhance and maximize their oversight function Take a holistic view of IT risks beyond basic cybersecurity when considering cybermetric reporting to directors Evaluate baseline metrics to understand the company s current cyber and IT environment and the gaps to achieving its desired cyber state Discuss and agree on the prioritization of the most important metrics, with a focus on the top 10 or 15 13

Cybersecurity Baseline information for cybermetrics Protections over the crown jewels Coverage by a cyber insurance policy Identification of needed IT upgrades Current and desired state of cybersecurity program Status of IT health Evaluation of tone at the top 14

Polling question #3 What is your company s current status with cybermetrics that are reported to the board/audit committee covering broad IT risks? A. The board currently does not receive cybermetrics B. The board s information is currently limited to cybersecurity and not broader IT risks C. The board receives some cybermetrics, but they could be improved D. The board receives sufficient cybermetrics E. N/A or Staff 15

Customer fees in a cloud computing arrangement What you need to know Lack of existing U.S. GAAP has created diversity in practice Arrangements will be considered multiple element arrangements when: - Customer has the contractual right to take possession of the software without significant penalty - It is feasible for the customer to either run the software on its own hardware or contract with a third party to host the software Arrangements not meeting both criteria are accounted for as services contracts Impact Aligns the customer s evaluation of whether it is obtaining software with the same evaluation by the cloud service provider 16

Customer fees in a cloud computing arrangement (continued) Potential impacts to the Financial Statements Balance sheet Income Statement Cash flow statement Other considerations Is the up-front fee capitalizable or not. If capitalizable, should it be classified as a prepaid asset, intangible asset or another type of asset? Some or all of the costs could be expensed immediately or depending on the asset type, it could be depreciated or amortized. Is it operating (prepaid asset) or investing (intangible asset)? Metrics such as EBITDA can be impacted. For example, depreciation would be added back to an EBITDA metric while an operating expense would not. 17

Polling question #4 How will the new cloud computing guidance impact your company? A. Minimal We have few cloud computing arrangements B. Minimal We are already applying a similar policy C. Significant impact We will likely capitalize more costs D. Significant impact We will likely expense more costs E. Don t know or staff 18

Discontinued operations (ASU 2014-08) Guidance effective for many companies this year Disclosure considerations for discontinued operations: Reconciliation of major classes of assets and liabilities of the discontinued operation Disclose either total operating and investing cash flows for discontinued operations OR depreciation, amortization, capital expenditures and significant operating and investing non-cash items related to the discontinued operation Revision to other footnotes, such as tax, fixed assets, and segments A disposal is required to be reported in discontinued operations if it represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results. 19

Discontinued operations (ASU 2014-08) (continued) Reminder A disposal may not meet the definition of a discontinued operation but if it exceeds the 10% significance test, Item 2.01 8-K reporting requirements will be required, including pro forma financial information. Challenges The new guidance creates challenges for companies explaining their trends in results of operations when they have disposed of a business that did not qualify for discontinued operation presentation. Companies may consider presenting additional disclosures within MD&A which clearly quantify and disclose the impact of the disposal on the company s historical results. 20

Polling question # 5 How do you prefer to learn about accounting and regulatory developments? A. Written publications B. Webcasts C. Videos D. Podcasts 21

Hedging update FASB has discussed proposing changes that will: - Better align hedge accounting with a company s risk management objectives, - Simplify guidance for preparers, and - Enhance disclosures to provide more useful information to investors These changes would impact both financial and non financial hedges Exposure Draft expected in Q4 2015 Simplification of hedge accounting Align hedge accounting more closely with risk management activities Talking theory Getting feedback Coming soon 22

Leases update What you need to know Virtually all leases on balance sheet for lessees FASB and IASB diverged on lessee pattern of income statement recognition Lessors in a financing lease derecognize the underlying asset and recognize a lease receivable and residual asset Modified retrospective transition with some specified relief Looking forward Staff currently drafting final standard Issuance-H2 2015 Effective- expected 2018/19 Talking theory Getting feedback Coming soon 23

FASB simplification Extraordinary items Pension asset measurement date Debt issuance cost Cloud computing fees Inventory measurement Employee benefit plans FASB simplification Measurement period adjustments Balance sheet classification of deferred taxes Intra-entity asset transfers Share based payment accounting Equity method accounting Classification of debt 24

Simplification Balance sheet classification of debt Debt can be classified as noncurrent when either of the following are met: - The liability is due to be settled more than 12 months after the reporting period - The entity has a right to defer settlement of the liability for at least 12 months after the reporting period Subjective Acceleration Clauses (SAC) affect classification when triggered Exception for certain waivers of covenant violations received after the reporting date but before financial statements are issued Impact Principles-based approach for classifying debt Classification based on rights and obligations as of the balance sheet date Looking forward Exposure draft coming soon Prospective transition for all existing debt 25

Polling question #6 Which of the proposed changes to the hedging guidance will provide the most benefit to your company? A. Changes in frequency of effectiveness testing B. Changes related to hedging contractually-specified components of non-financial items C. Changes to financial hedges D. Changes to the shortcut method requirements E. Not sure or staff 26

PCAOB update Recently issued Audit Committee Dialogue will focus on the following areas of concern: Auditing internal control over financial reporting Assessing and responding to risks of material misstatement Auditing accounting estimates, including fair value measurements, and In cross-border audits deficient referred work meaning work performed by other audit firms and used by the signing audit firm The document also discusses emerging issues, such as increased M&A activity, falling oil prices, and undistributed foreign earnings. 27

SEC update Dodd-Frank Clawbacks In July 2015, the SEC proposed various rules that will require listed companies to recover erroneously awarded compensation Issuers required to adopt and comply with policies to recover incentive based compensation in the event of an accounting restatement - Policy would need to be included as an exhibit to Annual Report - Additional disclosure required in the Annual Report if the company was required to recover incentive-based payments Proposal would apply to all companies that have any security (equity or debt) listed on a national securities exchange - No exceptions for foreign private issuers, EGCs, smaller reporting companies (SRCs) or Canadian filers under the multijurisdictional disclosure system 28

SEC update CEO pay ratio CEO s annual pay, median employee s annual compensation, and the ratio of those two amounts must be disclosed Final rule adopted in early August Effective for the first fiscal year beginning on or after January 1, 2017 Total compensation is calculated in accordance with the SEC executive compensation disclosure rules The methodology used to identify the median employee and any material assumptions, adjustments, or estimates used in determining the components of the ratio must also be disclosed 29

Polling question #7 Of the FASB projects we just discussed, which are you most interested in? A. Hedging B. Leases C. Balance sheet classification of debt D. Other simplification projects 30

Q&A session Download The quarter close at: http://www.pwc.com/us/qc 31

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