Q4 2013 Accounting & Reporting Developments

F th t / D b 17 2013

Current Accounting and Reporting Developments Webcast Series Fourth quarter / December 17, 2013

Welcome

Beth PaulPartner, National Professional Services Group

Sara DeSmithPartner, National Professional Services Group

Mila PetrovaPartner, National Professional Services Group

Jay SeliberPartner, National Professional Services GroupPartner, National Professional Services Group

Don ReedManaging Director, Advisory Services

pwc.com Current Accounting and Reporting Developments / December 17, 20132

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Today’s agenda

Introduction

i hli h f l k’ fHighlights from last week’s AICPA conference

Accounting hot topics

• Tender offersTender offers

• Modifications to retiree health plans

• Equity method accounting

• Purchase consideration in a business combination

• Grant date of a share-based award

• Non forfeitable dividends on share based awards• Non-forfeitable dividends on share-based awards

Update on standard setting

Q&A


Polling question #1g q

Which of the following best describes your role or responsibilities ithin o r organi ation?within your organization?

A. CFO or Controller / Assistant ControllerB. Financial Reporting Director / ManagerC. Accounting / Finance ManagerD Tax Director / ManagerD. Tax Director / ManagerE. None of the above or PwC Staff


AICPA Conference update

• Quality and transparency

Di l l d• Disclosure overload

• Common reporting issues and comment letter trends

• Renewed enforcement focus on financial accounting fraud

• FASB and IASB convergence projects

• PCAOB proposals on audit reporting

• Conflict minerals and 2013 COSO framework

Refer to PwCDataline 2013-27 released Conflict minerals and 2013 COSO framework released yesterday for more detail on the conference and other insightsother insights


Polling question #2

Did you attend the AICPA conference last week?

A. Yes, in person

B Yes virtuallyB. Yes, virtually

C. No



• Acceptance of a revocable tender offer by shareholders may create a written put option accounted for as a mark to market liability

Tender offers

written put option accounted for as a mark-to-market liability

• Offers to repurchase stock options from employees:

• Equity buyout amount paid in excess of fair value is compensation

• Equity-to-liability modification catch-up compensation cost Equity to liability modification catch up compensation cost for any increase in fair value since original grant date



• Providing retirees with cash to buy health insurance on an exchange in lieu of administering a retiree healthcare plan directly still

Modifications to retiree health plans

in lieu of administering a retiree healthcare plan directly still considered a retiree healthcare benefit plan

• Reductions or elimination of benefits could create a negative plan amendment, a curtailment or both

• Negative plan amendment reduces the obligation and will be g p grecognized in income in future periods

• Curtailment may require recognition of deferred costs


Polling question #3

Which of the following elements is required to account for an in estment nder the eq it method?investment under the equity method?

A. Control

B. 25% ownership interest without significant influence

C. Significant influence

D. Wholly owned

E. None of the above


Accounting hot topicsEquity method accounting For incorporated

entities, presumption is that ownership, directly or indirectly, of 20% or more of the Assessment of significant influence 20% or more of the outstanding voting interest is significant influence.

Assessment of significant influence

• Assessment requires judgment based on the f d i For unincorporated

entities, (e.g. partnerships) use of the equity method is required unless the

Quantitative and q alitative

facts and circumstances

• Quantitative considerations required unless the

investment is so minor that the partner has virtually no influence over the partnership.

i ll h

qualitative assessment is required to determine whether the ability to

• Qualitative considerations

Practice generally has viewed investments of more than 3 to 5 percent to be more than minor.

the ability to exercise significant influence exists.


minor.

Accounting hot topicsEquity method accounting (continued)

Key indicators of significant influenceKey indicators of significant influence

• Representation on the board of directorsRepresentation on the board of directors

• Participation in policy-making processes

• Material intra-entity transactionsy

• Interchange of managerial personnel

• Technological dependency

• Relative size of ownership interest


Accounting hot topicsEquity method accounting (continued)

The guidance i th t “

Key decisionsDetermine if consolidation is required,

if not

requires that “a difference between the cost (i.e. carrying amount) of

i t t d if not…

Determine if significant influence exists,

if so…

an investment and the amount of underlying equity in net assets of an investee should be

Measure and account for the basis differencesinvestee should be accounted for as if the investee were a consolidated subsidiary ” This subsidiary.” This difference is often referred to as a basis difference.


Accounting hot topicsEquity method investee financial statement requirements

Audited financial statements of an equityKey year end reminders statements of an equity method investee are required if they exceed the 20% significance threshold on either the

y y

• Audited financial statements required if significance thresholds exceeded

investment or income test described in Rule 1-02w.

• May need to re-assess prior period significance conclusions

• Reperforming significance tests may In addition to assessing the current annual period, registrants must re-assess their conclusion on prior years if there has been a change to the previously reported

epe o g s g ca ce tests ay cause an equity method investee to become significant

change to the previously reported amounts due to events such as reporting discontinued operations or revising financial statements to reflect the retrospective adoption

f ti i i l


of a new accounting principle.

Accounting hot topicsEquity method investment – disclosure considerations

• Summarized financial information Summarized financial information is required in the footnotes if any of the three significance tests under Rule 1-02(w) exceeds

• Summarized financial information may be required under S-X 4-08(g)

• Balance sheet disclosures include under Rule 1 02(w) exceeds 10 percent on an individual or on an aggregated basis.

current assets, noncurrent assets, current liabilities, noncurrent liabilities, redeemable preferred stock and non controlling interests

Disclosures should be included for the same periods and the same dates

th i t t ( t

and non-controlling interests

• Income statement disclosures include sales, gross profit, income from

as the registrant (e.g. two years for balance sheet information and three years for income statements information).

continuing operations and net income


)

Accounting hot topicsPurchase consideration in a business combination

Arrangements which

Key considerations• Determining consideration transferred

gbenefit the acquirer typically represent compensation expense.

Determining consideration transferred

• Settlement of pre-existing relationships

• Payments made to selling shareholders who b l f h bi d i

The guidance requires an acquirer to identify

d l become employees of the combined entity and separately account for transactions that are not part of the business combination, even if the transactions foccur simultaneously.


Accounting hot topicsPurchase consideration in a business combination

Factors to consider in assessing contingent considerationFactors to consider in assessing contingent consideration

• Whether payments are forfeited if employment ceases

Th d i f i i l• The duration of continuing employment

• The level of compensation

• Incremental payments to employees vs. other selling shareholdersc e e ta pay e ts to e p oyees vs. ot e se g s a e o de s

• The relative number of shares owned by continuing employees

• The linkage of the consideration to the value of the business

• The formula for determining consideration

• The nature of any other arrangements


Polling question #4

Does your company currently benefit from a tax holiday in any jurisdiction in which you operate? which you operate?

A. Yes

B. No

C. What’s a tax holiday?

D. I’d like a holidayy

E. N/A or PwC staff


Accounting hot topicsGrant date of a share-based award

• Mutual understanding of the award’s key terms and conditions is a key criteria

• Discretionary performance condition – determining the grant date is y p g goften difficult

- Not a one-size-fits-all determination

P f diti t b bj ti l d t i bl d • Performance condition must be objectively determinable and measurable

- What the condition is and how “actual” results will be evaluated i iagainst it

• Often requires significant judgment that should be contemporaneously documented


Accounting hot topicsGrant date of a share-based award – examples

Scenario Level of Grant date*judgment

September 2013 – CEO granted stock options that vest upon achieving a budgeted U.S. GAAP revenue target for 2014 The 2014 budget is set to be approved by the Board

Low April 2014

2014. The 2014 budget is set to be approved by the Board of Directors, which the CEO is a member of, in April 2014. The entity has a proven history of achieving the budgeted revenue for the past 10 years.

February 2013 – CEO is granted stock options that vest upon achieving adjusted EBITDA of $500 million for the current fiscal year

Medium It depends

pwc.com Current Accounting and Reporting Developments / December 17, 201321* Assuming other criteria to establish a grant date are met

Accounting hot topicsNon-forfeitable dividends on share-based awards

• Non-forfeitable dividends – retained regardless of whether the employee g p yvests in the award

• Accounting differs based on classification of the award

Liability-classified Equity-classified

Expected to be forfeited Expected to vest


Reduction of retained earningsCompensation expense


• Awards that give employees the right to non-forfeitable dividends

Non-forfeitable dividends on share-based awards

• Awards that give employees the right to non-forfeitable dividends are participating securities and the two-class method is used to calculate EPS

• Two class method allocates earnings away from common • Two-class method – allocates earnings away from common shareholders to participating security holders

• Allocation based on the holders’ respective rights to receive di id d if ll di t ib t d i f th i d dividends as if all undistributed earnings for the period were distributed


Polling question #5

Which of the PCC’s approved accounting alternatives most interests you?

A. Accounting for goodwill subsequent to a business combination

B. Accounting for certain receive-variable, pay-fixed interest rate swaps

C. Applying VIE guidance to Common Control Leasing Arrangements

D. They all interest me!

E None or not applicableE. None or not applicable


Private Company Council (PCC) updateAccounting and reporting alternatives

The PCC has approved the following accounting and reporting alternatives:

The first two alternatives were accounting and reporting alternatives:

• Accounting for Goodwill Subsequent to a Business Combination

alternatives were endorsed by the FASB on November 25, 2013. The final Accounting Standards Updates (ASU) t d t • Accounting for Certain Receive-Variable, Pay-

Fixed Interest Rate Swaps - Simplified Hedge Accounting Approach

(ASU) are expected to be issued later this year or early next year.

All three accounting alternatives permit

l d ti d

• Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements

early adoption and, as such, an eligible entity could apply these alternatives to its 2013 financial statements.


f

Accounting for goodwill subsequent to a business combinationOverview

Amortization modelAmortization model

• Existing and new goodwill would be amortized over 10 years, or shorter if a company can justify a shorter useful life

Practical expedient of 10 years is permitted

Impairment assessment

• Trigger-based impairment assessment (same t i t GAAP) ith t th tit id New goodwill

alternative is expected to reduce financial statement

triggers as current GAAP) either at the entity-wide level or at the reporting unit level (policy election upon adoption)

• In the event of a trigger a single step impairment preparer’s cost by simplifying the impairment model

• In the event of a trigger, a single step impairment test (same as the step one test in the current model)

• Impairment Charge = Difference between the fair value of the entity (or reporting unit) and the


value of the entity (or reporting unit) and the carrying amount of the entity (or reporting unit)

Polling question #6

How prepared is your organization to implement the new revenue recognition standard? standard?

A. Very prepared

B. Somewhat prepared

C. Not yet prepared

D. Not applicable or PwC staffpp


FASB updateJoint FASB/IASB revenue recognition project

Boards concluded joint meetings in OctoberFi l d d d Q • Final standard expected Q1 2014

Three key decisions reached• Variable consideration: Include if ‘probable’ that changes in estimate Variable consideration: Include if probable that changes in estimate

will not result in a significant revenue reversal

• Accounting for licenses – ‘Static’ or ‘dynamic’

C ll t bilit th h ld (‘ b bl ’) dd d• Collectability threshold (‘probable’) added

Effective date and transition• Effective date: For annual periods, and interim periods therein, p , p ,

beginning after December 15, 2016; one year deferral for non-public entities (US GAAP)

• Transition options: Full retrospective or practical expedient


Transition options: Full retrospective or practical expedient approach

Intangible assets are an increasing share of business value

32%20% 20%

Components of S&P 500 Market Value

Today…

Corporate performance goals

83%68%

32%prioritize quarterly financial results

G i f d

32%

68%80% 80%

Going forward…

Performance goals need to account for and align with the non-financial issues that drive

17%32%

1975 1985 1995 2005 2010Intangible assets Tangible assets

long-term value

1975 1985 1995 2005 2010


g g

Source: Ocean Tomo, LLC Annual Study of Intangible Asset Market Value

Non-financial reporting comes of age with multiple business benefits• Since the early 2000s, several countries and stock exchanges have required

or encouraged integrated or sustainability reporting as standards emerged

• When businesses assess what to include in an integrated report, they go through a process of strategic alignment with the executive team as to what the important performance goals are and what’s going to drive value to the business

• A survey of 43 companies participating in an integrated reporting pilot revealed the following benefits:

I d i l Connecting teams93%: breaks down silos

Improved internal processes93%: leads to better quality data collection

Better view of strategy & business model95%: clearer view of the business

d l

Board focus95%: increase focus on getting the right KPIs


model

30

getting the right KPIs

Source: Black Sun / IIRC, 2012

Sustainability Accounting Standards Board (SASB)Vision• A world where all forms of capital are f f p

accounted for and managed –creating sustainable value for current and future generations.

MissionMission• Create and disseminate sustainability

accounting standards for use by publicly-listed corporations in disclosing material sustainability issues for the benefit of investors and the public.

OrganizationOrganization• The SASB is an independent 501(c)(3)

non-profit organization and is accredited to set standards by the

Note: The SASB is recommending its metrics be reported in the Management Discussion and Analysis, therefore excluding them from the financial audit process


American National Standards Institute.

them from the financial audit process.

Aggressive pace for standards


Polling question #7

Does your organization produce a corporate sustainability report?

A. Yes

B. No

C. Don’t know


Q&A session

Download The quarter close at: http://www.pwc.com/us/qc4

pwc.compwc.com Current Accounting and Reporting Developments / December 17, 201334

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pwc.compwc.com Current Accounting and Reporting Developments / December 17, 201337

Q4 2013 Accounting & Reporting Developments

Business

Transcript of Q4 2013 Accounting & Reporting Developments