EY Q1 2013 Financial Reporting Update

The Ernst & Young Q1 2013 financial reporting update

Co-sponsored with Financial Executives International 20 March 2013

Ernst & Young Q1 2013 financial reporting update © 2013 Ernst & Young LLP

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Circular 230 disclaimer

► Any US tax advice contained herein was not

intended or written to be used, and cannot be used,

for the purpose of avoiding penalties that may be

imposed under the Internal Revenue Code or

applicable state or local tax law provisions.

► These slides are for educational purposes only and

are not intended, and should not be relied upon, as

accounting advice.


Today’s moderator

Danita Ostling Ernst & Young LLP

Partner, Professional Practice Director

Ernst & Young organization

Americas IFRS Leader

Join today's Twitter discussion: #EY_Q1Update


Today’s agenda

► Q1 matters to consider

► Convergence projects update

► Future considerations



Today’s presenters

Rachel Eckstein Ernst & Young LLP

Partner

Professional Practice

Lisa Kennedy Ernst & Young LLP

Partner


Robert Wadley Ernst & Young LLP

Partner


The information in this presentation is a summary. Viewers should consult their

own professional advisors to address their individual circumstances and concerns.


Today’s agenda






Reporting amounts reclassified out of accumulated other comprehensive income ► ASU 2013-02 issued in February 2013

► Requires more disclosures about changes in accumulated

other comprehensive income (AOCI)

► Reclassifications from AOCI

► Other current period other comprehensive income

► Requires reporting significant items reclassified out of

AOCI by component in one place

► Components include currency translation and unrealized

gains on available-for-sale securities, etc.

Effective dates for calendar year-ends

Transition method Public Private Early adoption?

Prospective 1Q 2013 YE 2014 Yes


Reporting amounts reclassified out of accumulated other comprehensive income

Identify the effect of

reclassifications on

respective line items in the

statement where net income

is presented by component

► On the face of the financial

statements (if criteria are

met) OR

► In the notes

Cross reference to other

disclosures that provide

additional information

about the effect of the

reclassification

Significant items that are not

reclassified directly to net

income in their entirety

Significant items reclassified

to net income in their entirety

Items reclassified out of AOCI


Reporting amounts reclassified out of accumulated other comprehensive income

Details about AOCI

components

Amount reclassified

from AOCI1

Affected line item in the statement where

net income is presented

Unrealized gains and losses on available-for-sale securities

$ 126,000 Realized gain on sale of securities

Insignificant items (1,000)

125,000 Total before tax

(43,750) Tax expense

$ 81,250 Net of tax3

Amortization of defined benefit pension items

Prior service costs $ (10,000) 2

Transition obligation (25,000) 2

Actuarial (losses) (15,000) 2

(50,000) Total before tax

17,500 Tax benefit

$ (33,500) Net of tax3

1

Amounts in parentheses indicate debits in profit/loss 2 These AOCI components are included in the computation of net periodic pension cost.

(See Note X) 3 Amount agrees with amount reported as reclassifications from AOCI in the disclosure

about changes in AOCI balances


Opinion check

Where do you plan to present significant

amounts reclassified out of accumulated

other comprehensive income when adopting

ASU 2013-02:

A. On the face of the income statement

B. In the notes

C. Undecided

D. Does not apply (Ernst & Young, faculty,

alumni, other)


Accounting standards effective for 2013 For calendar year-end companies

Accounting standards update

Public

companies

Private

companies

ASU 2013-03 — Clarifying the Scope and

Applicability of a Particular Disclosure to

Nonpublic Entities

Not applicable 4

ASU 2013-02 — Reporting of Amounts

Reclassified out of Accumulated Other

Comprehensive Income

4 2014

ASU 2013-01 — Clarifying the Scope of

Disclosures about Offsetting Assets and

Liabilities and ASU 2011-11— Disclosures about

Offsetting Assets and Liabilities

4 4

ASU 2012-07 — Accounting for Fair Value

Information That Arises after the Measurement

Date and Its Inclusion in the Impairment Analysis

of Unamortized Film Costs

2012

4

4= Effective for 2013


Accounting standards effective for 2013 For calendar year-end companies (continued)

Accounting standards update

Public

companies

Private

companies

ASU 2012-06 — Subsequent Accounting for an

Indemnification Asset Recognized at the Acquisition

Date as a Result of a Government-Assisted

Acquisition of a Financial Institution

4

2014

ASU 2012-04 — Technical Corrections and

Improvements

4

2014

ASU 2012-02 — Testing Indefinite-Lived Intangible

Assets for Impairment

4

4

ASU 2012-01 — Continuing Care Retirement

Communities — Refundable Advance Fees 4 2014

ASU 2011-10 — Derecognition of in Substance

Real Estate — a Scope Clarification

4

4

4= Effective for 2013


Proxy update Reminders for this proxy season

► Disclose whether use of compensation consultants raised

conflicts of interest

► Describe conflict and explain how it is being addressed

► Applies to compensation consultants engaged by

management or the compensation committee

► No definition of ―conflict of interest‖

► Smaller reporting companies now required to hold ―say-

on-pay‖ shareholder votes on executive compensation

► Report shareholder vote results on Form 8-K within

four days

► Disclose how frequently say-on-pay votes will occur in

an amendment to the initial Form 8-K within 150 days


Proxy update Trends in shareholder proposals

Topics of shareholder proposals in 2013 (through 15 March 2013)

% put to

vote

in proxy

%

voter

support

(% from 2012 votes

per SEC filings)

Environmental/social ► Disclose political spending and

lobbying activities

► Enhance sustainability reporting

57%

33%

22%

29%

Board of directors ► Hold annual elections of all directors

► Appoint independent director as chair

48%

73%

81%

37%

Compensation-related ► Eliminate accelerated vesting of equity

awards, payments grossed-up for taxes

43%

36%


Estimated annual effective tax rate (EAETR) General reminders

► Make the best estimate of the annual effective tax rate

for the full fiscal year at the end of each interim period

► Use estimated annual effective tax rate to record tax on

a current year-to-date basis

► Project year-end temporary differences and

valuation allowance

► Changes in enacted tax legislation can affect EAETR

► 2 January 2013 – Retroactive reinstatement of the tax

extenders (they’re set to expire again on

31 December 2013)

► Recognized in the interim period of enactment (Q1 2013

for companies with calendar year-ends)


Estimated annual effective tax rate Interim period events

► Changes to indefinite reinvestment assertion

► Record in the interim period the change in assertion occurs

► Record tax effects related to undistributed earnings of prior

years – discrete

► Record tax effects related to current year undistributed

earnings – adjust EAETR

► Discontinued operations

► Revise EAETR applied to income from continuing

operations in current and subsequent interim periods of

current fiscal year

► Recast income taxes related to prior interim periods (as

applicable) between continuing and discontinued operations


Opinion check

Which of the following events is likely to most

significantly affect your EAETR for 2013?

A. American Taxpayer Relief Act of 2012

B. Acquisitions (e.g., change in indefinite

reinvestment assertion)

C. Divestitures (e.g., discontinued operations)

D. Other or not sure

E. Does not apply (Ernst & Young, faculty,

alumni, other)


Today’s agenda






Convergence projects update

Current stage Q2 2013

Financial Instruments

Classification and

measurement

FASB Exposure Draft Comment letter deadline

IASB Exposure Draft

(limited amendments) Deliberate comments

Impairment FASB Exposure Draft Comment letter deadline

IASB Exposure Draft Comment letter period

Hedging

FASB On hold

IASB Review draft (except macro hedging)

Final Standard (except macro hedging to be

included in discussion paper)

Leases FASB Drafting Exposure Draft Exposure Draft

IASB Drafting Exposure Draft Exposure Draft

Revenue recognition FASB Drafting Final Standard Final Standard

IASB Drafting Final Standard Final Standard


Financial instruments project Classification and measurement

► Financial assets classified and

measured in one of three categories

based on:

► Instrument’s cash flow characteristics

► Entity’s business model for

managing the instrument

► Equity instruments measured at

fair value through net income (NI)

► Exception: nonmarketable

equity securities measured at

―modified‖ cost

► Reclassifications permitted only

upon a change in business model

Proposed classification and

measurement model

Amortized cost Solely principal

and interest Hold to collect

Fair value – OCI Solely principal

and interest Hold to collect and sell

Fair value – NI Residual category


Financial instruments project Classification and measurement

► Financial liabilities would generally be classified and

subsequently measured at amortized cost

► Limit on the use of the fair value option

► Changes in instrument-specific credit risk (i.e., own credit)

for financial liabilities measured at FV-NI would be

presented separately in OCI

► Public companies would parenthetically present fair value

for most instruments at amortized cost

► Comments on the proposal are due 15 May 2013

Thought Center Webcast on 21 March 2013 at 1 p.m. Eastern


Financial instruments project Credit losses (impairment)

► Applies to all financial assets that are debt instruments

measured at amortized cost or fair value through other

comprehensive income

► Examples: loans, debt securities, trade receivables

► Expected credit losses would be defined as the

contractual cash flows an entity does not expect to collect

► An estimate of expected credit losses includes:

Time value of money

At least two possible outcomes, one of which reflects a credit loss

Information about past

events

Information about current

conditions

Reasonable and

supportable forecasts


Financial instruments project Credit losses (impairment)

► Receivables

► Historical loss rates for aging buckets may need to be

adjusted for economic forecasts

► Allowances would be required for all receivables, including

those (1) classified as current and (2) from significant

customers that have always paid

► Debt securities

► ―Most likely‖ approach prohibited for estimating credit losses

► Record allowance instead of adjusting cost basis

► Stop accruing interest when collection of substantially all of

principal and interest is no longer probable

Comments are due 30 April 2013


Revenue recognition project Status

► All major topics have been redeliberated as of February

meeting; open items include:

► Sweep issues

► Consequential amendments

► Analysis of cost versus benefit

► Final drafting to begin

► Plan to issue final standard in summer 2013


Revenue recognition project Recent decisions

Variable

consideration

Contract

costs

Nonfinancial

assets

Eliminated

specific

guidance for

sales-based

royalties on

licensed

intellectual

property

Reaffirmed

decision to

require

capitalization

of direct,

incremental,

recoverable

costs to

acquire a

long-term

contract

Reaffirmed

decision to

apply control

and

measurement

requirements

to transfers of

nonfinancial

assets

Licenses

Decided to

treat licenses

as either

―rights‖

transferred at

a point in time

or promises to

provide

―access‖ over

time


Revenue recognition project Disclosures

► Disaggregation of revenue

► Contract assets, liabilities and costs

► Narrative disclosures rather than tabular reconciliations

as previously proposed

► Key judgments related to variable consideration

► Remaining performance obligations (backlog)

► Interim financial statements – many of the annual

disclosures also will be required

► IASB plans to specifically require only disaggregated

revenue at interim periods


Revenue recognition project Transition and effective date

► Transition choice

► Full retrospective

► Modified retrospective approach

► Modified retrospective approach

► Prior year amounts not restated

► New guidance applied to new and existing contracts as of

effective date with a cumulative catch-up adjustment

► Disclose current-year amounts as if they were prepared

under previous revenue guidance

Tentatively effective for annual periods beginning on or

after 1 January 2017


Opinion check

Which transition approach is your company

most likely to use:

A. Fully retrospective

B. Modified retrospective

C. Undecided

D. Does not apply (Ernst & Young, faculty,

alumni, other)


Today’s agenda






Private Company Council activities Private company decision-making framework

► Removed presumption

that industry-specific

guidance is relevant

► Clarified that ―all or

nothing approach‖

would not be required

for exceptions or

modifications

► Clarified ―red flag‖

approach for disclosures

► Exposure draft expected

soon, framework to be

finalized later this year

► Consider exceptions

and modifications to

US GAAP

► Continue work on a

single definition of a

nonpublic entity

(private company)

Next steps Changes to Staff

recommendations


Private Company Council activities Topics of focus

► Recognizing and

measuring identifiable

intangible assets acquired

in business combinations

at fair value

► Consolidation of variable

interest entities

► Accounting for ―plain

vanilla‖ interest-rate swaps

with single counterparties

► Stock-based compensation

► Development-stage

enterprises

► Accounting for interest-rate

swaps with multiple

counterparties

The PCC decided not to

pursue accounting for

uncertain tax positions

Research initiatives Initial agenda

Changes to

US GAAP

Final FASB

endorsement Redeliberations

Exposure

draft

FASB

endorsement Deliberations


Other standard-setting activities

Active projects Current stage

Investment companies ► Final standard expected Q1

Consolidation ► Final standard expected Q2

Liquidation basis of

accounting ► Final standard expected Q1

Repurchase agreements

and similar transactions ► Exposure draft issued Q1

Discontinued operations ► Exposure draft expected Q1

Going concern ► Exposure draft expected Q2

Disclosure framework ► FASB is evaluating next steps


EITF update

No. Issue addressed Status

11-A Release of cumulative translation adjustment when a parent no longer

controls a consolidated foreign entity

Final ASU

2013-05

12-B Personnel services received from an affiliate of a not-for-profit entity

for which the affiliate does not seek compensation

Final

consensus

12-D Recognition, measurement, and disclosure of obligations resulting

from joint and several liability arrangements

Final ASU

2013-04

12-F Application of pushdown accounting in certain circumstances Discussions

12-G Accounting for the excess in the fair value of assets over liabilities of a

consolidated collateralized financing entity

Final

consensus

12-H Accounting for service concession arrangements Discussions

13-A Inclusion of the federal funds effective swap rate as a benchmark

interest rate for hedge accounting purposes

Proposed

ASU

13-B Accounting for investments in affordable housing tax credits Consensus-

for-exposure

13-C Presentation of a liability for an unrecognized tax benefit when a net

operating loss or tax credit carryforward exists

Proposed

ASU


Transactions involving an investment in a foreign entity

Sale of an ownership interest in a consolidated foreign entity

Loss of control Release all of CTA

Retained control Do not release CTA

(treat as equity transaction)

Sale of an ownership interest in a foreign entity

that is an equity method investment

Release pro-rata portion of

CTA

Step acquisition (gaining control) Release all of CTA

EITF update – Accounting for cumulative translation adjustments (CTA)

Transactions within a foreign entity

Substantial liquidation?

Sale of a subsidiary that is a nonprofit

activity or a business

No Do not release CTA

Yes Release all of CTA

Sale of a group of assets that is a

nonprofit activity or a business No

Yes

Do not release CTA

Release all of CTA


EITF update – Inclusion of the fed funds effective swap rate as a benchmark interest rate for hedge accounting

► Would apply

prospectively to

qualifying new or

redesignated hedging

relationships entered

into on or after adoption

► Would not alleviate

ineffectiveness for

existing hedges

Comments due 22 April 2013

Allowed benchmark

interest rates in the US for

hedge accounting

► Interest rates on direct

Treasury obligations of the

US government

►London Interbank Offered

Rates (LIBOR)

Federal funds effective swap rate


SEC update Current activities

► SEC Advisory Committee on Small and Emerging

Companies recommendations to the SEC:

► Increase smaller reporting companies (SRC) definition

to increase to $250M float from $75M

► Expand reporting relief for SRCs

► Permit increased ―tick size‖ for smaller listed companies

► Encourage creation of new equity market

► Statement to Congress to exempt SRCs from conflict

minerals disclosure requirements

► NASDAQ proposed rule requiring listed companies

to have internal audit function


SEC update Other SEC rulemaking

Topic Current status

Conflict minerals

(Dodd-Frank)

► Final rule issued August 2012

► Effective 2013 – First Form SD

due 2 June 2014

► Current legal challenge

General solicitation and

advertising rule (JOBS Act)

► Proposed rule – August 2012

► Awaiting final rule

―Bad actor‖ rule

(Dodd-Frank)

► Proposed rule – May 2011

► Awaiting final rule

Review of Regulation S-K

disclosures for emerging

growth companies

(JOBS Act)

► Report to Congress pending

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