Seattle Alumni Speed Training 2016 · 12/6/2016 · • Final standard was issued in June 2016...

Seattle Alumni Speed Training 2016

Kelly SnowEric Coats

December 6, 2016

David CordovaBrian Rose

Russ SavageKelsey FennertyJeff Kummer

AGENDA:

• Welcome• SEC & Regulatory Update• Financial Instruments• The Global Tax Reset and BEPS• BREAK• Revenue Recognition• Discussing the FASB’s New Lease Accounting Standard• Tax Reform Developments and Election Outcomes• Closing

SEC & Regulatory Update

Copyright © 2016 Deloitte Development LLC. All rights reserved. 4SEC & Regulatory Update

• SEC overview, current landscape, and rulemaking

• Disclosure effectiveness

• SEC comment trends

• PCAOB Update

• Question and answer

Agenda

5Copyright © 2016 Deloitte Development LLC. All rights reserved.

SEC Organizational Structure

OpenChairman White(since 2013)

CommissionerPiwowar(since 2013)

Open

InvestmentManagement

Office of Chief Accountant (OCA)

Trading and Markets

CommissionerStein(since 2013)

22 other offices

Corporation Finance

Economic and Risk Analysis Enforcement

*Lisa Fairfax and Hester Peirce nominated for open seats by President Obama, subject to Senate confirmation


Enforcement Initiatives

Financial Reporting and Audit (“FRAud”) Task Force

• Focus on financial statements, reporting and disclosures, and audit failures

• Monitor restatement activities

• Use of technology and tools for “data mining” and data analysis

Other policy-related initiatives

• Admission of wrong-doing

• Focus on the individual

FY 2015 FY 2014 FY 2013

Number of enforcement actions 807 755 676

Orders for penalties and disgorgements $4.2 billion $4.2 billion $3.4 billion


Enforcement Initiatives Whistleblower program

7

• Largest payment announced to date - $30 million

• Retaliation and “Pre-taliation” concerns

Original information

Penalty more than$1 million

10% - 30%award

Disclosures & F/S 17.5%

Offering Fraud 15.6%

Manipulation 12.3%

SEC & Regulatory Update

FY 2015 FY 2014 FY 2013

Whistleblower tips received 3,923 3,620 3,238


SEC Rulemaking and Interpretations

Dodd-Frank Act

• Continued effort on required rulemakings

• Recent rulemaking

—Final rule - CEO pay ratio disclosure

—Proposed rules

—Pay versus performance

—Executive compensation clawback

JOBS Act

• Regulation Crowdfunding

• FAST Act

Non-GAAP Measures - Updated Compliance & Disclosure Interpretations (C&DIs)

Disclosure effectiveness


Misleading measures (C&DI 100.01- 100.04)

Financial measures using unrelated GAAP principles (C&DI 100.4)

• Adjusted Revenue

• A registrants' own set of principles to determine and present GAAP is not permitted

Presenting liquidity measures on a per share basis (C&DI 102.05)

• Designated performance measures that are really liquidity measures

Non-GAAP tax expense – (C&DI 102.11)

• Impact adjustments are expected to have on a registrants tax rate

• Presenting adjustments net of tax is not permitted

Non-GAAP MeasuresNon-GAAP Areas of SEC Concern


More prominent presentation of Non-GAAP Measures (C&DI 102.10)

Examples of prominence issues:

• Full non-GAAP Income Statement

• Omitting comparable GAAP measures from press release headlines

• Bolder larger font

•

•

Non-GAAP measure that precedes a comparable GAAP measure

Equally prominent description for a GAAP measure (e.g. “record performance”)

• Tabular disclosures

• Disclosures related to forward looking non-GAAP measures

• Same discussion and prominence for GAAP measures

Non-GAAP MeasuresNon-GAAP Areas of SEC Concern (Continued)

“This quarter will be a great opportunity for companies to self correct”

– Mark Kronforst, Chief Accountant, SEC’s Division of Corporation Finance


Non-GAAP MeasuresTop 10 Non-GAAP questions to consider based on recent SECfocus

1. Is the measure misleading or prohibited?

2. Is the measure presented with the most directly comparable GAAP measure and with no greater prominence than the GAAP measure?

3. Is the measure appropriately defined and described, and clearly labeled as non-GAAP?

4. Does the reconciliation between the GAAP and non-GAAP measure clearly label and describe the nature of each adjustment, and is each adjustment appropriate?

6. Is there transparent and company-specific disclosure of the substantive reason(s) why management believes that the measure is useful for investors and the purpose for which management uses the measure? Is the measure consistently prepared from period to period in accordance with a defined policy, and is it comparable to that of the company’s peers?

7. Is the measure balanced (i.e., it adjusts not only for nonrecurring expenses but also for nonrecurring gains)?

8. Does the measure appropriately focus on material adjustments and not include immaterial adjustments that would not seem to be a focus of management?

9. Do the disclosure controls and procedures address non-GAAP measures?

10. Is the audit committee involved in the oversight of the preparation and use of non-GAAP measures?

SEC Chair Mary Jo White

“When disclosure gets to be too much or strays from its core purpose, it could lead to… information overload…”

SEC Commissioner Kara Stein

“…It baffles me that such a huge portion of public disclosures are presented in a format that isn’t structured and easily accessible for analytics…”

Former SEC Commissioner Daniel Gallagher

“Today’s…disclosure documents are no longer efficient mechanisms for clearly conveying material information to investors…”

Disclosure Effectiveness



What is it?

• Providing better information to investors – more understandable, more useful and eliminating excessive disclosure

• Could result in additional disclosures

What has the SEC staff done lately?

• Request for comment on financial disclosures about entities other than the registrant

• S-K concept release – comments closed July 21, 2016

• Disclosure Update and Simplification proposed rule –issued July 13, 2016

–September 2015

1

2

3

Focus on material and relevant matters

Reduce or eliminate redundant disclosures

Tailor disclosures to company’s facts and circumstances

Disclosure Effectiveness (Continued)


Disclosure Effectiveness (cont.)Regulation S-K Concept Release

Background on Regulation S-K and the Release What’s in?

• The overall disclosure framework

• Disclosures for investment and voting decisions –

Specific business and financial disclosure requirements in Regulation S-K

• Core company business information • Public policy and sustainability matters

• Company performance, financial information, and future prospects • Exhibits

• Risk and risk management • Scaled requirements

• Securities of the registrant • Frequency of interim reporting

• Industry guides • Presentation and delivery


What’s out?

Public-company disclosure issues that are not a focus of the release

SEC is encouraging comments on any disclosure topic

Disclosure Effectiveness (cont.)Regulation S-K Concept Release

• Proxy Info – Compensation and governance information

• Modernization of the EDGAR system

• Non-GAAP measures • Disclosures required for foreign private issuers

• Inline XBRL • Business development companies

These topics may be considered in future stages of the SEC’s disclosure effectiveness project


Disclosure Effectiveness (continued)Disclosure Update and Simplification proposed ruleType of Requirement and Goal

Redundant or duplicative requirements

Eliminate requirements that result in disclosure of substantially the same information as that required under other Commission rules,U.S. GAAP, or IFRSs. (Example Debt obligation)

Overlapping requirements Eliminate requirements that convey reasonably similar information, or information that is not materially incremental to that required underother SEC requirements, U.S. GAAP, or IFRSs and that may no longer be useful to investors. (Example segments)

Integrate certain disclosure requirements with other related Commission disclosure requirements. (Example dividend restrictions)

Modify or eliminate overlapping disclosures or refer them to the FASBfor potential incorporation into U.S. GAAP. (Example income taxes)

Outdated requirements Amend requirements that have becomeobsolete as a result of the passage of time or changes in the regulatory, business, or technological environment. (Example Market price disclosures)

Superseded requirements Amend requirements that are inconsistent with new accounting, auditing, disclosure requirements, and more recentlyupdatedCommission disclosure requirements. (Example extraordinary item)


SEC Review Process Filing Reviews

About 9,000 registrantsFocus on 2,500 registrants that comprise 98% of market cap

All issuers reviewed at least 1 out of every 3 years

Percentage of issuers reviewed:

Staff is listening to analyst/earnings calls, reviewing press releases, Web sites, social media, and issuing comments

Comments are posted to EDGAR 20 days after completion of review

44% 48% 48% 52% 52% 51%

FY10 FY11 FY12 FY13 FY14 FY15


Topic

12 Months- 12/31/15 12 Months- 12/31/14

Rank Frequency* Rank Frequency*

MD&A:• Results of operations• Liquidity issues• Critical accounting policies, estimates

124%11%8%

124%13%11%

Fair value measurement, estimates 2 22% 2 23%

Non-GAAP measures 3 16% 5 13%

Revenue Recognition 4 14% 3 16%

Income taxes 5 11% 7 12%

Segment reporting 6 11% 9 11%

Signatures, exhibits, agreements 7 11% 4 15%

Intangible Assets and Goodwill 8 10% 8 11%

Acquisitions, mergers, business combinations 9 9% 6 12%

Commitments, Contingencies, and Litigation 10 8% 11 10%

* Percentage of all 10-Ks and 10-Q comment letter-yielding reviews that included at least one comment on the respective topic.Source: Derived from data provided by Audit Analytics.

SEC Comment Letter Trends:Overall Summary


SEC Comment Letter Trends Areas of Focus

Non-GAAP Measures (16%)

• Transparency & Consistency

• Misleading measures

• Usefulness of the measure

Metrics

• Clearly define metrics and explain how calculated

• Explain how used by management and why important to investors

• Describe how a metric is related to current or future results of operations


Revenue Recognition (14%)

• Gross vs Net

• Multiple element arrangements

• Contra-revenue items

• SAB 74 Disclosures on new Revenue ASU

Income Taxes (11%)

• Valuation Allowance

• Rate reconciliation

—Appropriate breakout (and descriptions of) adjustments

• Impact of foreign operations

• Repatriation of foreign cash



Segments (11%)

• SEC staff’s focus is evolving:

—Chief Operating Decision Maker (CODM) package- no longer determinative

—Staff will consider total mix of information

• Aggregation of operating segments still a focus - consider both quantitative and qualitative factors

• Consider whether CODM is someone other than CEO

• Both SEC and PCAOB are focusing on segments



Business Combinations

• Purchase price allocation

• Determination of fair values and key assumptions

Goodwill and Intangibles Impairment

• Valuation Assumptions and sensitivity (FRM 9510)

• Specific events that caused the impairment – “why now”

• Early warning disclosures



SEC Comment Letter Trends

• Ninth Edition — October 2015

• Insights into areas the SEC staff has focused on in recent comment letters including:

– Financial Statement Accountingand Disclosure Topics

– SEC Disclosure Topics

– Disclosure Topics in Initial PublicOfferings

– Industry-Specific Topics

• Consumer & Industrial Products

• Energy & Resources

• Financial Services

• Health Sciences

• Technology & Telecommunications

Financial instruments

FASB standard settingCopyright © 2016 Deloitte Development LLC. All rights reserved. 25

Topics

Financial Instruments

Classification and measurement

Derivative contract novations

Contingent puts and calls in a debt host contract

CECL


Classification and measurement


Accounting Standards Update No. 2016-01Classification and measurement

Overview of the standard

• ASU 2016-01 was issued January 6, 2016

• Makes significant changes to:

− Classification and measurement of investments in equity securities

− Presentation of certain fair value changes for financial liabilities measured at fair value under the fair value option

− Disclosure of fair value of financial instruments


Accounting Standards Update No. 2016-01 (cont.)Classification and measurement (cont.)

Overview of the standard (cont’d)

• Equity investments

− Most equity securities will be carried at fair value through net income

◦ Practicability exception permitted for equity securities that do not (1) have readily determinable fair values and (2) qualify for the net asset value (NAV) practical expedient

◦ Equity method investments and investments that are consolidated are excluded from the scope of the new guidance

− Accounting for equity securities for which the practicability exception has been elected

◦ Measured at cost, less impairment

◦ Adjustments are made for (1) observable price changes and (2) impairment

◦ When considering “observable” changes they should be known or reasonably known and no undue cost is necessary in identifying such transactions

◦ Other-than-temporary impairment no longer exists for equity securities


Accounting standards update No. 2016-01 (cont.)Classification and measurement (cont.)


• Instrument-specific credit risk for fair value option liabilities

− Separately recognize in OCI changes in fair value attributable to instrument-specific credit risk

◦ Entire change in fair value of derivative liabilities is still presented in net income

− Instrument-specific credit may be calculated by either:

◦ Determining the excess of total change in fair value over the change in fair value that results from a change in a base market risk (e.g., risk-free interest rate, benchmark interest rate) or

◦ Using another method that the entity believes is a more faithful representation




• Valuation allowance on a deferred tax asset (DTA) related to an AFS debt security

− Eliminates existing diversity in practice, where entities may either:

◦ Evaluate the need for a valuation allowance on a DTA related to AFS debt securities separately, or

◦ Evaluate the need for a valuation allowance on a DTA related to AFS debt securities in combination with the entity’s other DTAs

− Valuation allowance on a DTA related to an AFS debt securities now may only be assessed in combination with the entity’s other DTAs




• Disclosure changes

− Non-public entities no longer required to disclose FV of financial instruments not recognized at FMV (e.g. debt)

− Public entities no longer required to disclose methods and significant assumptions used to estimate FV of financial instruments not recognized at FMV

− Public entities must use exit price notion to estimate FV of items carried at amortized cost

− Financial assets and financial liabilities must be presented separately, grouped by (1) measurement category and (2) class of financial asset




• Effective date

− PBEs: fiscal years beginning after December 15, 2017 (including interim periods)

− Non PBEs: fiscal years beginning after December 15, 2018 (not including interim periods)

− Early adoption of certain provisions is permitted*

− Non-PBEs may adopt consistent with PBE effective date

Only the following provisions may be early-adopted:

• Instrument-specific credit risk presented separately in OCI

• Elimination of certain fair value disclosure requirements for financial instruments not recognized at fair value (only applies to non-PBEs).


Derivative contract novations


Accounting Standards Update No. 2016-05Derivative contract novations

• A change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument.

− Effective date (early adoption permitted):

− Public companies: fiscal years beginning after 12/15/16

− Other entities: annual periods beginning after 12/15/17 and interims after 12/15/18


Contingent puts and calls in a debt host contract


Accounting Standards Update No. 2016-06Classification and measurement

• In assessing whether a contingent put or call option is clearly and closely related to a debt host, an entity is required to only perform the four-step decision sequence in ASC 815-15-25-42.

− The event that triggers exercisability does not need to be evaluated

− Effective date (early adoption permitted):

− Public companies: fiscal years beginning after 12/15/16

− Other entities: annual periods beginning after 12/15/17 and interims after 12/15/18


Current expected credit loss model


Concept Current GAAP CECL

Loss horizon Produces an estimate of all inherent losses in the portfolio as of the balance sheet date (i.e., losses that have been incurred)

Requires institutions to estimate the contractual cash flows that are not expected to be collected over the estimated life of the loan (i.e., forward-looking)

Loss recognition

Recognizes an allowance over a defined loss emergence period after a loss event (e.g., unemployment) has occurred

Does not have a recognition threshold and produces a life-of-loan estimate

Basis for estimates

• Relevant information about past events (including historical loss experience with similar assets)

• Current conditions

• Relevant information about past events (including historical loss experience with similar assets)

• Current conditions• Reasonable and supportable

forecasts

Comparison of CECL and existing GAAPFASB impairment project (cont.)


• Final standard was issued in June 2016 (ASU 2016-13)

FASB impairment project–where we are today

• For calendar year public SEC filers the guidance is effective January 1, 2020

• For all other calendar year entities the guidance is effective on January 1, 2021

• A one year deferral for interim periods is available for non public business entities

• Early adoption is permitted as of 1/1/19

• Modified retrospective application with cumulative-effect adjustment recognized in first period of adoption

Effective date and transition

Overview of the modelFASB impairment project

The Global Tax Reset and BEPS

David Cordova

The Global Tax ResetAn overview

The Global Tax Reset and BEPSCopyright © 2016 Deloitte Development LLC. All rights reserved. 42

Multinational companies face a new kind of tax-related challenges

Government deficits and related cut-backs, media attention and activist group interest has resulted in political interest in tax reform

The Global Tax Reset

Perception MNCs are not paying fair share of taxes

Loss of trust between tax authorities and business

Rise of source country taxation

General context


This new global tax environment has resulted in the following actions:

The Global Tax Reset

43

Change in tax authorities’ approach to

interpretation of tax law and

tax treaties

Responsible Tax agenda

Unilateral action

BEPS is part of the bigger picture

EU Commission

Fight Tax Abuse & State Aid

OECD’s BEPS project

Overview of actions


How will this play out?Tax is increasingly a theme for analysts and the media

Reporting the impactHow will this play out and how are corporates responding?


Deloitte’s Global Multinational Survey

Unilateral Legislative Changes

• Over 50% of respondents are anticipating significant unilateral legislative changes to protect the tax base that is not coordinated with what other countries are doing

Compliance Burden

• Nearly 90% of respondents are anticipating that their income tax compliance burden will substantially increase as a result of the additional reporting from the BEPS recommendations, such as country-by-country reporting and TP reporting

Legislative and Treaty Changes

• Almost 50% of respondents are anticipating significant legislative and treaty changes in their country as a result of the BEPS initiative

Results confirm the Global Tax Reset


Results confirm the Global Tax ResetDeloitte’s Global Multinational Survey

Strongly Agree AgreeNeutral DisagreeStrongly Disagree

There is increased media and political interest in tax in my country

Strongly Agree Agree

Neutral Disagree

My organization is concerned about increased media, political and activist group interest in tax

Strongly Agree AgreeNeutral DisagreeStrongly Disagree

The C-Suite and/or Board of Directors of my organization have enquired about the increased media and political activist group interest in tax

93% Agree

74% Agree

60% Agree

ResponsibleTax Agenda


Cross-border income flows increasingly disputed by the tax authorities

Lack of trust by tax authorities and the desire for a larger share of the “profit” pie is resulting in adjustments between all tax jurisdictions – not just between

high/low tax jurisdictions

High Taxed CountriesInterest

Royalties

Products

Services

Low Taxed Countries

Changes intax authorities

approach tointerpretation ofexisting tax law

and treaties


The bottom line

In an increasingly globalized digitalized world; what is the properamount of income that should be allocated between countries

for multinationals with cross border trade?

Changes intax authorities

approach tointerpretation ofexisting tax law

and treaties

Every country seems to want a bigger piece of the “profit” pie


Successfully navigating the Tax Reset

Category Practices Increased Actions Multinational Leading

External tax law/treaty modifications

• Tax law changes• Tax audit assessments• Treaty qualification standards• Government information exchanges• Anti-abuse rules• Penalties

• Avoid surprises/monitor, identify, and prioritize activities, including planning for effective dates

Multinational tax implications

• Broader income tax base• Withholding taxes• Controversy• Transfer Pricing APA’s• Transfer Pricing changes (more profit

splits)• Permanent establishments

• Planning needed for greater tax expense, uncertainty and emphasis on transfer pricing

Tax planning and reporting

• Alignment of business/tax structure• Substance/business purpose• Reporting and compliance• IT System modifications• Substantiation of intercompany

payments• Modifications to intercompany

arrangements (financing, royalty, value chain, etc.)

• Pressure testing existing structures, greater business tax alignment/ increased budgets and resources/reallocation of priorities, act on TP and CbC now

Stakeholder management

• Education/Communication to Top Management

• Agreement on risk profile• Risk management with Board/Audit

Committee• Public reporting • Financial accounting scrutiny • Tax department budget and

resources

• Proactive stakeholder communication/risk management and brand protection


Areas that multinationals should manage now

Intensive activity by tax authorities in many jurisdictions

• Manage audits and risk reviews• Dispute resolution (and perhaps litigation)

TP documentation • Update and strengthen documentation

Intercompany agreements • Develop or review agreements, to ensure related party transactions are appropriately documented

PE and residency • Develop or review guidelines to manage PE and residency risks

Substance

• Review- Compliance in practice with intercompany agreements, PE and residency

guidelines (is the business living the structure?)- Level of substance in holding companies, hubs, and similar entities

• Identify and correct weaknesses

Tax advantaged structures• Review and assess• Consider alternatives where appropriate

Financing• Deal with tightening of local and foreign interest deductibility rules (including

thin cap and anti-hybrid rules)• Consider options

Transparency • Deal with any new foreign disclosure requirements and media attention, where applicable


Areas that multinationals must prepare for

New TP principles for intangibles and risk

• Adapt existing structures to deal with new approaches by OECD and specific jurisdictions

Expansion of PE concept • Adapt existing structures to comply with new (anticipated) rules

Harmful tax practices and treaty abuse

• Evaluate substance in hubs and holding companies• Where necessary, restructure into more sustainable structure

- Consider operating companies as holding companies where necessary- Shut down haven or tax preferred entities with insufficient substance- Set up in locations where people functions can be established

More limits on financing• Evaluate impacts in affected countries• Restructure location of debt

Neutralisationof hybrids

• Unwind existing structures where there has been a legislative change• Develop and implement alternatives

Country-by-country reporting• Implement systems to collect and report required data

European CommissionAnti abuse program


Recent State Aid Headlines


State Aid concepts – Four criteria

State Aid

Intervention by the State or

through State resources

Giving rise to an advantage on a selective basis

Competition has been or may be

distorted

Intervention is likely to affect trade between Member States

1> <2

3> <4


Tax rulings – Selectivity

European Commission (“EC”) recently issued a white paper, which included a discussion of how Tax Rulings may be considered ‘selective’. Tax rulings confer a selective advantage if:

• The ruling misapplies national tax law and results in a lower amount of tax;

• The ruling is not available to undertakings in similar legal and factual situations; or

• The local tax administration applies a more favourable tax treatment compared with taxpayers in similar legal and factual situations

− For example, where the ruling allows a transfer pricing arrangement that is not at arm’s length

− For example, where the ruling allows for alternative, indirect methods of arriving at taxable income where more direct methods are available


State Aid – Specific challenges

European Commission (“EC”) in process of reviewing tax rulings obtained by certain MNEs to determine if rulings constitute Illegal State Aid and has

• Concluded Dutch ruling provided illegal state aid to Company A (10/21/15)*

• Concluded Luxembourg ruling provided illegal state aid to Company B (10/21/15)*

• Concluded Belgium rulings on Excess Profits provided illegal state aid to 35 companies (1/11/16)*

• Initiated investigation into whether the Irish government provided Company C with illegal state aid

• Initiated investigation into whether Luxembourg provided Company D and Company E with illegal state aid

• Indicated potential challenge to Company F (1/21/16)

In addition to cases above, EC is reported to be assessing facts of > 300 taxpayers

If EC finds member states provided rulings that constitute illegal state aid, EC has required member states to compute/charge MNEs for previously provided state aid


EU Anti-Tax Avoidance Directive

January 28, 2016Directive proposal

May 25, 2016ECOFIN meeting

June 17, 2016ECOFIN meeting

December 31, 2018 January 1, 2019 December 31, 2019 January 1, 2020

Deadline for EU Member States to transpose the Directive in their national laws for all provisions except for exit taxation

Provisions applicable (except for exit taxation)

Deadline for EU Member States to transpose the Directive in their national laws the provision for exit taxation

All provisions applicable

Set of legally binding anti-avoidance measures

Three measures linked to BEPS• Interest limitation• Hybrids• CFC rulesThree measures going beyond BEPS• General Anti-Avoidance Rule (GAAR)• Exit taxation• Switch-over clause

Failure to reach political agreement.

Disagreement on

• Scope of anti-hybrid rule (EU vs. non EU)

• Scope of CFC rules (EU vs. non EU/ substance requirement/ burden of proof)

• Switch-over clause (whether it should be included at all)

On 21 June 2016, further to the meeting of 17 June 2016, a political agreement was reached between all EU Member States after numerous discussions and changes to the original proposal


EU Anti-Tax Avoidance Directive

• Interest limitation: Interest charges exceeding interest revenues (and equivalent taxable revenues) would be deductible up to 30% of the taxpayer’s EBITA or up to EUR 3mio (whichever is higher)

• Exceptions (group-wide test/standalone entity)• Option for Member States to apply a carry-back or carry forward on exceeding interest cost.• Grandfather rule for loans concluded before 17 June 2016 if not subsequently modified

• Hybrid mismatches rules: Case whereby two EU Member States give a different characterization to the same taxpayer/instrument

• In cases of double deduction: deduction should occur only in the State of source of the payment• In case of deduction without inclusion: deduction should not be allowed

• Controlled foreign company income rules: Anti deferral tax measure whereby the tax base of a taxpayer would include the non-distributed income of an entity under conditions (basically where profits of this entity are not taxed or taxed at much lower rate than the country of the taxpayer)

• General anti-abuse rule: Case whereby non-genuine arrangements or a series thereof carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions shall be ignored for the purposes of calculating the corporate tax liability. Wording similar to the GAAR inserted in the Parent-Subsidiary Directive

• Exit taxation for cross-border transfer of assets, residence or business carried on by permanent establishment: Subject to four circumstances

• Tax base: Fair market value of the transferred assets, at the time of exit, less their value for tax purposes

• Deferral provision by paying in instalments over a 5 year period provided the assets/residence of a taxpayer’s head office/ permanent establishment are transferred to another European Member State or a third country that is party to the EEA Agreement

• Switch-over clause: Removed

Agreement 20 June 2016

Anti-Tax Avoidance Directive

Tax Talent Development FOR INTERNAL USE ONLY © 2016 Deloitte Development LLC. All rights reserved.

ATAD in a nutshell

Anti-Tax Avoidanc

e Directive

Controlled Foreign Company Rules (inspired by BEPS Action 3)

Interest Restrictions (inspired by BEPS Action 4)

Hybrid Mismatches (inspired by BEPS Action 2)

Exit Taxation (not in OECD BEPS reports)

General Anti-Abuse Rule (not in OECD BEPS reports)

Member States should implement in national law by January 1, 2019(exit tax January 1, 2020).

61


“As these rules would have to fit in 28 separate corporate tax systems, they should be limited to general provisions and leave the implementation to member states as they are better placed to shape the specific elements of those rules in a way that fits best their corporate tax systems”

Source: Council of the European Union – Council Directive 2016/0011 (Anti-Tax Avoidance Directive)

A major step in BEPS implementation

Why a directive? What is a directive?

62

Presenter

Presentation Notes

Bill Dodwell Aart Nolten to make comment deviations due to different tax systems (in analogy with the VAT directive)


CFC rules

14 member states have CFC rules

Key characteristics:• Aimed at catching artificially diverted low-taxed (passive) income• >50% control test of companies or permanent establishments (PEs)• Rate Test: Company/PE taxed at <50% of effective tax rate in parent company member state. • Application to EU subsidiaries / PE?• EU member states must chose from two options: • Option 1 (objective test): − Passive income (interest, royalties, dividends, certain buy/sell co’s, etc)− Optional exclusion if income from defined categories is 33% or less;− Substance exemption (staff, equipment and premises)

• Option 2 (subjective test): − Nondistributed income of a CFC from nongenuine arrangements, which means that the CFC would not

own the assets or have taken the risk if it were not controlled by a company with the significant “people functions.”

63

Presenter

Presentation Notes

Bill Dodwell


EU HoldCo

Non-EU Company

Non-EU Company

US Parent

Non-EU CompanyLoan/license

Loan/license

20% rate

• 5% rate • No

substantial activities

• 0% rate• No substantial

activities

Non-EU Company Loan/license

Substantial activities

CFC income pickupCFC income pickup

X

X

CFC rules (cont.)

Examples of impacted structure: IP & Financing

64


Non-EU Company

Goods

Goods

• 20% rate

• No substantial activities

• <10% rate

CFC income pickup

X

CFC rules (cont.)

Examples of impacted structure: PrincipalCo

EU HoldCo

Non-EU Company

Non-EU Company

US Parent

65


Finance /IP

branch

Finance /IP

branch

• 20% rate

• <10% rate• No substantial

activities

• <10% rate• No

substantial activities

CFC income pickup CFC income pickup

X

X

CFC rules (cont.)

Examples of impacted structures: branches

EU HoldCo

US Parent

Non-EU Company

Non-EU Company

66


CFC rules: how will they impact companies

Recommendations and considerations

Recommendations:

• Review existing structure for potential CFC exposure• Monitor implementation of CFC rules by individual EU member states (local

implementation may differ) (ultimately by January 1, 2019)

Considerations:

• Add activities/functionality to CFC• Take passive activities out from under EU• Move passive activities into higher-taxed jurisdiction

67

Presenter

Presentation Notes

Bill Dodwell


Key points:Fixed ratio• 30% of tax-based EBITDA—which must exclude tax-exempt income• Can calculate on group basis Group ratio• Income based or asset based Possible reliefs• Unlimited carryforward of capped interest• Three-year carryback of capped interest• Five year carryforward of excess capacity

Interest restrictions

EUR 3m deductible

Borrowing costs

Financing income

30% of tax-based EBITDA

deductible

68

Presenter

Presentation Notes

Bill Dodwell


Optional exclusions• “Grandfathering” of pre-June 2016 loans• Long-term public infrastructure projects where lenders in EU• EUR 3 million de minimis level• Standalone companies, i.e. no associates• Financial sector• Conditional delay for interest rules until January 1, 2024 (or one full fiscal year after

the OECD reaches agreement as a minimum standard, whichever is earlier)

Interest restrictions (cont.)

69

Presenter

Presentation Notes

Bill Dodwell Bill to mention UK position at the end of this slide and Aart to comment on impact in The Netherlands and several other countries.


Interest restrictions: impact

Recommendations and considerations

• Illustration of expected change

Grandfathered loan

• Under leveraged

• Over leveraged

• >30% EBIDTA

LoanLoan

US Parent

EU Company

EU Company

EU Company

• Over leveraged• >30% EBIDTA

FinCo

Consider transfer

• Review impact based on projected tax-based EBITDA capacity and projected interest cost

• Identify and “do not touch” existing loans that are potentially grandfathered• Monitor implementation of interest restrictions by individual EU member states (local

implementation may differ)• Consider rebalancing between locations with over- and undercapacity. Consider other

local interest deductibility rules when rebalancing.

70

Presenter

Presentation Notes

Bill Dodwell Bill to mention UK position at the end of this slide and Aart to comment on impact in The Netherlands and several other countries.


Anti-Hybrid rule restricted to EU mismatchesProposal for hybrid mismatch rules with third countries before the end of 2016?No imported mismatch & no hybrid branch clauses in hybrid mismatch rules, but EU member states may decide to implement imported mismatch rules unilaterally (e.g. UK)

Hybrid mismatches

EU Company

US Parent

Hybrid instrument

Reverse hybrid

Loan/license

EU Company

US Parent

Note: Watch imported mismatch rules

EU Hybrid Entity

EU Company

EU Parent

Loan/license

No deduction

Example EU hybrid: Examples non-EU hybrid (not in ATAD):

71

Presenter

Presentation Notes

Bill Dodwell Aart Nolten at the end of the slide to comment hybrid mismatch to 3rd countries and impact.


EU HoldCo

US Parent

EU HoldCo

US Parent

Transfer tax residence to other country (where step up to FMV in assets is obtained)

Branch

Transfer IP

Illustration of expected change

Exit Taxation

Countries will be forced to tax in two circumstances (in short):• Asset or business transfer to/from head

office to a PE• A taxpayer transfers its tax residence

Calculate gain and offer five-year installments, with interest + guarantee

Triggers immediate payment if assets/business/company sold

72

Transfer PricingIntellectual Property


Intellectual Property planningBEPS Action 8

Contractual relationships between parties are a starting point for any transfer pricing analysis

Location where important functions related to intangible assetsare performed is key

Members of the group should be compensated for functions performed, assets used and risks assumed in the development, enhancement, maintenance, protection, and exploitation of intangibles

If legal owner does not control or perform functions related to development, enhancement, maintenance, protection or exploitation,it will not be entitled to ongoing benefit attributable to outsourced functions

Tax authorities already applying new guidance


Intellectual Property planningBEPS Action 8 (cont.)

Emphasis on functions performed, assets used and risk incurred

Transfer pricing outcomes in line with value creation

Identify legal owner

Identify party performing important functions

Confirm conduct of the

parties consistent with

contracts

Identify the controlled

transaction related to the

important functions

Determine the arm’s length price for the important functions

Design and control of research and

marketing programs

Management and control of budgets

Control over strategic decisions

over intangible development

Important decisions regarding

defense and protection

Ongoing quality control

Steps in determining intangible returns

Important functions

EnhancementDevelopment Maintenance Protection Exploitation


Substance requirement post-BEPS

To be entitled to IP returnMust control operational risks

• Operation means: Development, enhancement, maintenance, protection, exploitation (aka DEMPE functions)

• Thus IP return has shifted from financial capital to people functions

− Financial capital gets a projected risk-free return or a risk-adjusted return

− The OECD has not agreed on what to do with actual returns (who gets the unanticipated upsides)

Controlling operational risks requires for each operational riskIn-location people that

• Are qualified, have decision-making authority, demonstrate in-location exercise of decision-making authority as it relates to risk mitigation

• No in-location white lab coat requirement or headcount requirement

Board meetings are no longer sufficient

Setting procedures and policies no longer sufficient

Transparency


Automatic Exchange of Information

Rulings

• Developed a framework for compulsory spontaneous information exchange between governments in respect of taxpayer-specific rulings – should apply where the absence of an exchange of a ruling may give rise to BEPS concerns

• Framework details six types of ruling that will be subject to such exchange

• A ruling is defined widely as “any advice, information or undertaking” that a tax authority gives to a specific company or group on which reliance can be placed

• Companies need to be aware that rulings obtained in one country will be shared with other tax authorities

Country-by-country reporting

• Model legislation requires the ultimate parent entity of an multinational group to file the country-by-country report in its jurisdiction of residence, including backup filing requirements when that jurisdiction does not require filing

• The package also contains model agreements to facilitate the exchange of country-by-country reports among tax administrations


BEPS Action 13 recommendations

BEPS Action 13 proposes a new three tier global standard for transfer pricing documentation. The text in green represents additional information required under the new documentation model as compared to current OECD guidelines.

Evolution of existing transfer pricing documentation requirements

• Group wide description including supply chain, value drivers, main markets, high level functional analysis, details of business changes

• High level description of IP strategies, IP location and R&D management and location

• High level description of group financing arrangements

• Consolidated group accounts

• Description of APAs or other rulings

Transactional/Entity specific

• Local management structure, detailed functional analysis, economic analysis and reconciliations of TP to accounts

• Local documentation nuances continue?

A new requirement

• Revenue

• Profit before tax

• Cash tax paid

• Current Tax accrual

• Capital and retained earnings

• NBV of tangible assets

• Number of employees

• Complete list of entities and PE’s for each country, with activity codes to be attached to template

Master file Local file Country-by-country template

ObjectivesEnsure consideration of transfer pricing requirements

Transfer pricing risk assessment Transfer pricing audit

Questions?

Please remember to complete your evaluation


This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this presentation.


Revenue Recognition


Objectives

• Recognize the scope of the new standard

• Recognize the principles for recognizing revenue and capitalizing costs, and the disclosure requirements

• Identify areas that require professional judgment when adopting the new standard

• Recognize the implementation challenges entities may encounter


Goals of the new standard

Convergence of revenue recognition principles under U.S. GAAP and IFRS

Improve revenue recognition requirements and disclosures by…

Removing inconsistencies

Providing amore robust framework

Improvingcomparability

Providing moreuseful

information

Eliminatingindustry-specific

guidance


Effective Date

• In August 2015, the Financial Accounting Standards Board (“FASB”) issued an ASUthat defers the effective date of Accounting Standards Codification (“ASC”) 606 byone year.

—Annual reporting periods beginning after December 15, 2017 (public)

—Annual reporting periods beginning after December 15, 2018 (nonpublic)

• Additionally, the ASU allows entities to early adopt ASC 606 as of the original effective date (annual reporting periods beginning after 12/15/16, FY2017).

• In September 2015, the International Accounting Standards Board (“IASB”) issued anamendment to International Financial Reporting Standard (“IFRS”) 15 in order to defer the effective date by one year.

—Annual reporting periods beginning on or after January 1, 2018

• The IASB continues to allow entities to early adopt IFRS 15.


New revenue guidance Standard setting activity

Issue Status

2014-09 Revenue from Contracts with Customers Final ASU issued May 28, 2014

2015-14 Effective Date Delay (deferral for one year) Final ASU issued August 12, 2015

2016-12 Narrow-Scope Improvements and Practical Expedients (collectibility, contract modification in transaction, sales tax practical expedient, transition disclosures, non-cash consideration)

Final ASU issued May 9, 2016

2016-10 Identifying Performance Obligations andLicensing (clarify guidance on identifyingperformance obligations and recognizinglicense revenue)

Final ASU issued April 14, 2016

2016-08 Principal Versus Agent (clarifying application of the guidance)

Final ASU issued March 17, 2016

2016-XX Technical Corrections (minor amendments and clarifications)

Exposure draft expected soon.


Full retrospective approach

• Restate prior periods in compliance with ASC 250

• Optional practical expedients

Modified retrospective approach

• Apply revenue standard to contracts not completed as of effective date and record cumulative catch-up

• Required disclosures:

—Amount of each F/S line item affected in current period

—Explanation of significant changescumulative catch-up

Transition Methods

Existing contracts New ASU + cumulative catch-up

Legacy GAAP Legacy GAAP

UPDATEPractical expedient for contract modifications

(FASB & IASB)

January 1, 2018 Initial Application Year

2018Current Year

2017 2016Prior Year 1 Prior Year 2

New contracts New ASU

Completed contracts Legacy GAAP Legacy GAAP


New Revenue GuidanceSecurities and Exchange Commission

Five-year table

At the September 2014 Financial Accounting Standards Advisory Council (FASAC) meeting, the SEC staffclarified its views on how registrants would reflect their implementation of ASC 606 in the five-year tablerequired under SEC Regulation S-K, Item 301

• The staff indicated that it would not object if a registrant reflected its adoption of the new revenue standard in the five-year table on a basis that is consistent with the adoption in its financial statements (i.e., reflected in less than each of the five years in the table)

• A registrant could present in the five-year table:

—Only the most recent three years if the registrant uses the full retrospective method to adopt the new revenue standard

—Only the most recent fiscal year if it uses the modified transition basis

Regardless of the transition method adopted, registrants would be expected to disclose the method they used to reflect the information (e.g., how the periods are affected) and that the periods are not comparable


Scope of the New Revenue Standard

• Applies to an entity’s contracts with customers

• Does not apply to:

—Lease contracts (ASC 840, ASC 842)

—Insurance contracts (ASC 944)

—Certain financial instruments and other contractual rights or obligations

—Guarantees (other than product or service warranties)

—Nonmonetary exchanges whose purpose is to facilitate a sale to another party

• Some key aspects apply to transfer (sale) of nonfinancial assets

Glossary termsContract: An agreement between two or more parties that creates enforceable rights and obligationsCustomer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration


New Revenue Standard The five-step model

Copyright © 2016 Deloitte Development LLC. All rights reserved. Revenue Recognition 90

Identify the contract with a customer

(Step 1)

Identify the performance obligations in the contract

(Step 2)

Determine the transaction

price(Step 3)

Allocate the transaction

price toperformance obligations

(Step 4)

Recognize revenue when

(or as) the entity

satisfies a performance

obligation(Step 5)

Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services

This revenue recognition model is based on a control approach, which differs from the risks and rewards approach applied under current U.S. GAAP


Step 1: Identifying the Contract

A legally enforceable contract (oral or implied) must meet all of the following requirements:

A contract will not be in the scope if:

The contract has commercial substance

The parties have approved the contract and are committed to perform

The entity can identify each party’s rights regarding goods or services

The entity can identify the payment terms for the goods or services to be

transferred

The contract is wholly unperformed Each party can unilaterally terminate the contract without compensation

Step1

Step2

Step3

Step4

Step5

It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services

that will be transferred to the customer

AND

Criteria impacted by ASU 2016-12

Collectibility threshold


Combining Contracts

Combining Requirement

In most cases, entities will apply the model to individual contracts with a customer.However, the new standard requires entities to combine contracts entered into at or near the same time with the same customer if they meet one or more of the criteriaindicated below:

a. The contracts are negotiated as a package with a single commercial objective.

b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract.

c. The goods or services promised in the contracts (or some goods or servicespromised in each of the contracts) are a single performance obligation


Portfolio Approach

Portfolio Approach

• Although in general the standard should be applied on an individual-contract basis, a“portfolio approach” is permitted if it is reasonably expected that the approach’s impact onthe financial statements will not be materially different from the impact of applying the revenue standard on an individual-contract basis.

—Entities with a very large number of customer contracts or a wide array of productcombination options will likely use this approach

—A portfolio approach would be appropriate only if

—It is applied to a group of contracts (or performance obligations) with “similarcharacteristics” and

—The entity “reasonably expects” that the effects on the financial statements ofapplying the standard to the portfolio “would not differ materially” from the effects ofapplying guidance to the individual contracts (or performance obligations) in thatportfolio.


The ASU defines a performance obligation as a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct

Identify all (explicit or implicit) promised goods and services in the contract

Step 2: Identifying Performance Obligations

Are promised goods and services distinct from other goods and services in the contract?

Capable of Being Distinct Distinct Within Context of Contract

Can the customer benefit from the good or service on its own or

together with other readily available resources?

Is the good or service separatelyidentifiable from other promises

in the contract?

AND

Account for as a performance obligation

Combine 2 or more promised goods or services and reevaluate

YES NO

Step1

Step2

Step3

Step4

Step5

Impacted byASU 2016-10

A series of goods or services with the same pattern of transfer may

be a single obligation


Identifying Performance Obligations Why was the ASU 2016-10 issued?

The following implementation questions submitted to the TRG informed the Board about certain concerns with the guidance on identifying performance obligations:

Identifying Performance Obligations

a. Whether a promise is separately identifiable, and whether the good or service is “distinctwithin the context of the contract” (which is one of the criteria required to separatelyaccount for the good or service)

b. Whether shipping and handling activities should be consider a separate performance obligation.

c. When identifying performance obligations, whether it is necessary to identify and evaluatepromised goods or services that are immaterial



Distinct goods or services

The ASU clarifies the meaning of a promise that is separately identifiable.

• Objective is to determine whether the nature of the entity’s overall promise is to:

—Transfer each of those goods or services (multiple performance obligations) or

—Transfer a combined item or items to which the promised goods or services are inputs (one combined performance obligation)

• Factors that indicate that two or more promises to transfer goods or services to acustomer are not separately identifiable include, but are not limited to, thefollowing:

a. Performing a significant service of integrating

b. Significantly modification or customization

c. The goods or services are highly interdependent or highly interrelated

The ASU amended and added examples to the standard’s implementation guidance to clarify these principles.



Shipping and handling services

Implementation questions arose regarding whether shipping would need to be considereda performance obligation.

The ASU adds guidance that clarifies when shipping and handling activities occur:

• Before control transfers to the customer, they are fulfillment costs

• After control transfers, entities are allowed to elect a policy to treat shipping andhandling activities as fulfillment costs

If revenue is recognized before contractually-agreed shipping and handling activities occur,the related costs of those activities should be accrued.



Options to acquire additional goods and services

• Represents a performance obligation (requiring the deferral of revenue) if it provides amaterial right that would not have been received without entering into that contract:

— incremental discounts on additional goods/services

— favorable renewal options on services



Warranties

• Assurance warranties (those that assure compliance with agreed-upon specifications) use a cost accrual accounting model

• An option to purchase or those warranties that provide a service in addition to agreed-upon specification would be a potential performance obligation

Upfront fees

• An entity should assess whether the fee relates to the transfer of a promised good orservice.

• An upfront fee is often an advance payment for future goods or services and,therefore, would be recognized as revenue when those future goods or services are provided.

• Generally, recognize advance payments when future good or services are provided (maybe beyond initial contract term).


Step 3: Determining Transaction Price

Transaction price shall include…

• Fixed consideration

• Variable consideration (estimated and potentially constrained)

• Noncash consideration (FASB updates)

• Adjustments for significant financing component (practicalexpedient available)

• Adjustments for consideration payable to customer

Transaction price does NOT include…

• Effects of customer credit risk

Principle: The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer (which excludes estimates of variable consideration that are constrained)

Step1

Step2

Step3

Step4

Step5


When accounting for variable consideration an entity shall…

• Estimate using following methods:

1) expected value (probability weighted)

or

2) most likely amount

Variable consideration should include revenue to the extent that it is “probable” that asignificant reversal in the amount of cumulative revenue recognized will not occur (i.e.“constraint”)

Factors to consider:

• Highly susceptible to factors outside entity’s influence

• Uncertainty not expected to be resolved for a long time

• Entity’s experience is limited

• Entity typically offers broad range of price concessions/payment terms and large numberof broad range possible outcomes

Determining Transaction Price

Need to consider whether adjustments are for

concessions or credit risk


Determining Transaction Price

When accounting for consideration payable to the customer:

• Account for consideration payable to a customer as a reduction of the transactionprice and, therefore, of revenue unless the payment to the customer is in exchangefor a distinct good or service that the customer transfers to the entity and paymentis at fair value.

• If the consideration payable to a customer includes a variable amount, it’s aform of variable consideration that is subject to the constraint.


Narrow-scope improvements & practical expedients Sales taxesand noncash transactions

Presentation of Sales Taxes and Other Similar Taxes

• The ASU provides entities with a policy election to exclude amounts collected fromcustomers for sales taxes from the transaction price (i.e. report sales tax on a net basis) without applying the principal/agent guidance.

• Gross reporting of sales taxes or other similar taxes is only appropriate if an entity isthe principle for such taxes under the principal/agent guidance.

Noncash transactions

• ASC 606 stated that noncash consideration should be measured at fair value but didnot provide clear guidance on when to measure consideration.

• The ASU amends ASC 606 to clarify that…

—noncash consideration should be measured at contract inception

—variable consideration guidance only applies to variability resulting from reasonsother than the form of the consideration (i.e., the constraint would not apply tovariability due to the form of the consideration)


Step1

Step2

Step3

Step4

Step5

Allocate transaction price on a relative stand-alone selling price basis (estimatestand-alone selling price if not observable)

• The expected cost-plus margin method, adjusted market assessment method, or residual method (only if price is highly variable or uncertain) are acceptable

Allocate transaction price to all performance obligations (and subsequent changesbased on initial allocation), unless a portion of (or changes in) the transaction pricerelate entirely to one or more obligations and certain criteria are met

Do not reallocate for changes in stand-alone selling prices

If certain criteria are met, a discount or variable consideration may be allocated toone or more, but not all, of the performance obligations in a contract

Step 4: Allocating Transaction Price


Evaluate if control of a good or service transfers over time, if not then controltransfers at a point in time. An entity satisfies a performance obligation over time if…

Measure progress toward completion using input/output methods

Step 5: Recognizing Revenue

Performance does not create an asset with an alternative use and the entity has an enforceable right to payment for performance completed to date

Performance creates or enhances a customer controlled asset (e.g., home addition)

The customer receives and consumes the benefit as the entity performs (e.g., cleaning service)

Step1

Step2

Step3

Step4

Step5

OR

OR


Point in time

For performance obligations satisfied at a point in time, indicators that control transfersinclude, but are not limited to, the following:

The entity has a present right to payment

The customer has legal title

The entity has transferred physical possession

The customer has the significant risks and rewards of ownership

The customer has accepted the asset

Step1

Step2

Step3

Step Step4 5

Recognizing Revenue


Licensing

• Significant standalone functionality

• Recognized at a point in time

• Software, biological compounds or drugformulas, completed media content

Functional(right to use, typically)

• Does not have standalone functionality

• Entity provides both a right to intellectual property AND support and maintenance for the intellectual property

• Revenue is recognized over time.

• Examples include brands, trade names, logos,franchise rights

Symbolic (right to access)

Sales or Usage based Royalty

Notwithstanding the above, if consideration is paid in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property,revenue should be recognized at the later of when the subsequent sale or usageoccurs or the performance obligation has been satisfied or partially satisfied.


LicensingOther provisions of the ASU

• If Royalty exception guidance does not apply, should be accounted for as variable consideration

• Guidance applies when a license is the predominant item

Royalties

• Restrictions of time, geography, or use affect the scope of the license (i.e., they are attributes), but do not define it’s nature when evaluating whether its functional or symbolic.

• Restrictions should be distinguished from provisions that require the entity to transfer additional licenses to the customer

Restrictions

• If a license that provides a right to use an entity’s IP is renewed or extended, revenue should not be recognized until the beginning of the renewal period (rather than upon the time the renewal agreement is reached).

Renewals


Contract Costs

Costs to obtain a contract

• Capitalize costs of obtaining a contract if they are incremental and expected to be recovered (e.g., sales commissions)

—One-year practical expedient

Costs to fulfill a contract

• Recognize assets in accordance with other Topics (e.g., inventory, PP&E, software), otherwise capitalize costs that:

—Relate directly to the contract (or specific anticipated contract

—Generate/enhance a resource that will be used to satisfy obligations in the future and

—Are expected to be recovered

• Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) must be expensed when incurred

Amortization and impairment

• Capitalized costs are amortized on a systematic basis consistent with the transfer of the related goods or services

• Recognize impairment immediately if costs are not deemed recoverable


Potentially Capitalized

• Direct labor• Direct materials• Costs explicitly chargeable to the

customer• Payments to subcontractors

Expensed as Incurred

• General & administrative costs• Cost of wasted materials• Costs related to satisfied or partially

satisfied performance obligations (prior performance)

Contract Costs


Principal versus agent considerationsA practical approach to applying the ASU 2016-08

1. Identify each specified good/service to be provided to the customer

• Not the same as a performance obligation

2. Assess whether the entity controls each specified good/service before it istransferred to the customer

• Several indicators are included in the ASU to assist in the determination of control

Assessing whether the entity controls the specified good or service before it is transferred to the customer determines whether the it is a principal or an agent


Principal versus agent considerations Application of the control principle

Control

Inventory Risk

Responsibility for providing the good or service

Latitude in establishing price


Recap of ASU’s

• Collectibility

• Sales tax presentation (gross v. net)

• Noncash consideration

• Completed contracts

• Technical Correction – change in accounting principle

• Distinct in the context of contract

•

•Immaterial promised goods and services

Shipping and handling services

Narrow Scope Improvements


Licensing

• Licenses – functional v. symbolic

• Sales- or usage-based royalty exception to constraint guidance

• Impact of restrictions in a license

• Renewals of license

• Unit of account for assessment

• Nature of goods or services

• Applying the control principle

• Interaction of control principle with the indicators

Principal vs. Agent Considerations


Other Guidance

Sale with a right of return

• Not a performance obligation but do not recognize revenue for goods expected to be returned

• For consideration paid that the entity does not expect to be entitled, recognize a refundliability and asset to recover products from customers

Consignment arrangements

• Control typically passes to other party (dealer or distributor) when that party sells productto customer or specified period expires


Other Guidance

Repurchase agreements

• If entity has an obligation or right to repurchase the asset, the customer does notobtain control and is accounted for as a lease (ASC 840) or a financing arrangement

Bill-and-hold arrangements

• Evaluate if control has passed to customer (specific criteria provided, similar to current requirements)

• Must consider whether additional performance obligations exist subsequent to transfer ofcontrol to customer (for example, for custodial services) and, if so, allocate a portion of thetransaction price to those performance obligations

Customer acceptance clauses

• Entity is able to assert control has transferred if entity can objectively determine good or service meets agreed upon specifications

—If unable to do so, entity must wait for customer acceptance to conclude control hastransferred


Disclosures Overview

Disaggregation of revenue

Information about contract

balances

Information about

performance obligations

Description of significant judgments

Transaction price, allocation

methods and assumptions

Remaining performance obligations

Annual Disclosures (ASC 606 & IFRS 15)

ASC 270,Interim

Reporting

Interim Only Disclosures

IAS 34,Interim Financial

Reporting*

* IAS 34 was only amended to require disaggregated revenue information; none of the other annual disclosures will be required in interim financialstatements for IFRS preparers. Refer to the following slides for information regarding FASB requirements for interim revenue disclosures

Practical expedients

Contract costs


Disclosures

* An entity must at a minimum provide revenue disaggregated according to the timing of transfer of goods or services (e.g. goods transferred at apoint in time and services transferred over time.

Category Disclosure RequirementsPractical expedient available for non-

public entities

Interim requirement (ASC 270)

Disaggregation of revenue

Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors

Yes* Yes

Sufficient information to understand the relationship between disaggregated revenue and each disclosed segment’s revenue information

Yes Yes

Contract balances

Opening and closing balances (receivable, contract assets & contract liabilities)

No Yes

Amount of revenue recognized from beginning contract liability balance

Yes Yes

Amount of revenue recognized from performance obligations (PO’s) satisfied in prior periods (e.g. changes in transaction price estimates)

Yes Yes

Explanation of significant changes in contact balances (using qualitative and quantitative information)

Yes No


Disclosures

Category Disclosure Requirements

Practical expedient

available for non-public entities


Performance obligations (POs) & Remaining performance obligations (RPOs)

Qualitative information regarding when PO’stypically satisfied, significant payment terms,nature of goods/services promised, obligationsfor returns/refunds, warranties

No No

Transaction price allocated to the RPOs• Disclose quantitative amounts

Yes Yes

• Quantitative or qualitative explanation ofwhen RPO amounts will be recognized asrevenue

Yes Yes

Significant judgments & estimates

Qualitative information regardingdetermining the timing:

• Performance obligations satisfied over time

(e.g. methods of measuring progress, whymethods are representative of transfer ofgoods or services, judgments in evaluatingwhen customer obtains control ofgoods/services)

Yes No

• Performance obligations satisfied at a pointin time, specifically the significant judgmentsused in evaluating when a customer obtainscontrol

Yes No


Disclosures

* This includes the methods, inputs, and assumptions used to a company’s assessment.

Category Disclosure RequirementsPractical expedient available for non-

public entities


Significant judgments & estimates (cont’d)

Qualitative and quantitative information*regarding:

• Determining the transaction price(e.g. estimating variable consideration,adjusting for time value of money, noncashconsideration)

Yes No

• Constraining estimates of variableconsideration

Yes No

• Allocating the transaction price, includingestimating standalone selling prices &allocating discounts and variableconsideration

Yes No

• Measuring obligations for returns,refunds, and other similar obligations

Yes No


Category Disclosure Requirements

Practical expedient

available for non-public entities


Contract costs Qualitative information concerning:

• Judgments made in determining the amountof the costs incurred to obtain or fulfill acontract

Yes No

• The method it uses to determine theamortization for each reporting period

Yes No

Quantitative information about:

• The closing balances of assets recognizedfrom the costs incurred to obtain or fulfill acontract, by main category of asset

Yes No

• The amount of amortization and anyimpairment losses recognized in thereporting period

Yes No

Practical Expedients

Disclose use of practical expedients forsignificant financing components andcontract costs

No No

Disclosures


• Analyze impact of standards on business units and revenue streams

• Develop project plan and roadmap

• Analyze pro forma effect on financial statements

• Determine and resolve specific accounting and tax issues

• Design system solutions, where needed

• Evaluate impact on periodic financial processes

Near-Term Actions Important Decisions

• Transition method

• Contract vs. portfolio approach

• System solutions

• Accounting policy choices

Revenue Recognition – Preparing for the Changes

The following summarizes some important near-term actions and decisions that companies will likely need to undertake, given the timeline:


Common Implementation Steps

Companies implementing new revenue standard focusing on:

Step Description

Assessment • Identify and pinpoint key issues to business groups/units

• Assessment of process and system implications

• Development of project roadmap and business group/unit analysis efforts

Scenario development • Analysis of key contract types, in areas where revenue accounting will likely change• Analyze the impact for originating transactions and modifications

Business requirements development

• Presentation and documentation of key requirements for any system changes required• Identification of affected billing or ledger systems, and data requirements

Design, development and testing of needed systems adjustments

• Focused design and coding development, to automate any key calculation differences required by the new revenue rules

• Acceptance testing to help support consistency with accounting requirements

• Design of a process to identify and analyze new sales offerings/contract types for consideration under the new revenue accounting rules


Overview of potential key system challengesThe following provides several potential system related issues in implementation of the revenue recognition standard for companies

Issue DescriptionDisparate systems / multiple source data systems

• Many entities perform revenue allocation in disparate systems with inconsistent data; as a result of the implementation of the standard, data stress levels will rise and companies may want to consider an automated tool or customization as part of the implementation solution

Significant use ofspreadsheets in process

• Many entities, especially if acquisitive, rely on use of spreadsheets to manage revenue; the requirements of the standard may add complexities to those manual processes

• Entities may want to consider a bolt-on revenue recognition tool or customizing current system

Performance obligations

• Recording and tracking revenue for each performance obligation or contract in the sales or billing cycle may not be available in current systems

• System requirements may need to include the ability to reallocation revenue to completed performance obligations when changes in estimate of a variable transaction price occur

Disclosure • Most changes for disclosure will require changes to the structure and data elements needed for the month-end reports


Overview of potential key data and process impactsThe following provides several potential data and process impacts related to the implementation of the revenue recognition standard for companies

Issue DescriptionRecognition: distinct criteria • Significant judgment may be needed when determining whether the goods or services are

distinct within the context of the standard; as a result, policies and processes may need to be revised and/or developed

Recognition: performance obligations

• The guidance may increase the number of performance obligations with the contract or arrangements and may result in an increase to the number of data elements required to be captured

Initial measurement:time value of money

• Given that when determining the transaction price, an entity should adjust the amount of promised consideration for the effects of the time value of money (if the contract has a significant finance component), processes may need to be developed and data elements captured to satisfy the requirement

Allocation • An entity will likely be less constrained by the new allocation requirements for revenue recognition but may need to use more judgment around estimating the stand alone selling price for allocation; as a result, policies and process may need to be revised and/or developed to meet the new requirements


Implementation effortsAICPA task forces

Industry task forces

• 16 industry groups established with 163 issues being addressed

• Objective to perform industry specific overview of the revenue standard and identify top issues that may warrant industry specific interpretive guidance

• Issues that, if not investigated on the group level, could lead to inconsistencies in implementation

What will be the end product

• AICPA publication similar to the AICPA accounting and audit guides

• Public comment period

• Not authoritative guidance, but expected to be widely accepted


Crossroads: COSO and Revenue Recognition Implementation

• COSO Principle 9: The organization identifies and assesses changes that could significantly impact the system of internal control

• New accounting standard represents a change which should be appropriately factored into the risk-assessment process

• Common areas of Material Weaknesses:

—Revenue recognition

—Non-routine transactions

—Personnel resources, competency, and training, and resources

Common COSO Challenge Leading PracticeLack of consideration or evaluation of external events and their impact on risk assessment and ICFR.

For example:• Impacts on roles are not considered• Adequate training is not provided• Roles and responsibilities related to changes

not monitored

In response to risks arising from changes, management determines whether

1) new controls are needed or

2) the risks are adequately addressed by existingcontrols


Deloitte Advisory - Scope and AnalysisWe design advisory services by leveraging our established methodology and refining it based on ourknowledge of our clients’ desired results. Below are the suggested areas of scope and potential Deloitteactivities, management involvement and deliverables.

Deloitte activities Management involvement DeliverablesProgram management

• Advise management as it establishes a Program Management Office (PMO) and deploy PMO tools and processes

• Identify stakeholder groups• Participate in Engagement kick off meetings with stakeholders to review

engagement scope, objectives, deliverables and timeline• Participate in weekly status reports and meetings

• Identify select stakeholders within the finance andoperations functions

• Attendance in kick-off meetings

• Kick-off deck• Weekly status reports

Engagement scoping

• Participate in workshops with stakeholders to identify significant revenue streams and related contracts for inclusion in the scoping analysis

• Advise management as you set up a central repository for collection of scoped-in contracts and supporting documentation (i.e. ShareFile or SharePoint)

• Hold revenue recognition ASC 606 training session with key accounting and finance team members

• Attendance in scoping workshops and training• Identification of significant revenue streams and

scoped-in contracts• Set up of a central repository for scoped-in contracts• Collection of contracts and supporting documentation

• Contract scoping summary for each revenue stream

• Advice related to management’s set up of centralized repository for scoped-in contracts

• Training materials

Contract analysis

• Gain an understanding of and analyze a limited sample of contract arrangements against the new revenue standard

• Summarize contract analysis using contract analysis template

• Review and provide feedback on the contract analysis • Contract review documents

Accounting & operational impact analysis

• Participate in workshops and interviews on follow up/incremental questions resulting from the analysis of revenue arrangements

• Document analysis of potential accounting differences, considerations and recommendations

• Participate in a high-level workshop to understand the potential impacts of the new revenue standard on process, data and systems

• Provide high-level observations of potential impacts

• Involvement in additional workshops and interviews• Review and provide feedback on the accounting

impact analysis• Review and provide feedback on the operational

impact analysis

• Preliminary potential accounting and operational impact analysis

• Advice related to preliminary accounting position summaries on selected topics

Executive summary & roadmap

• Prepare an executive summary, including: summary of high-level advice and consultative comments related to management’s development of a roadmap and work-plan for implementation of the new revenue standard, and recommended next steps

• Participate in closing meeting with stakeholders

• Review and provide feedback on the executivesummary related to a roadmap and work-plan

• Attendance in closing meeting

• Executive summary• Advice related to roadmap for

in-depth assessment and implementation for management’s consideration


Deloitte Advisory - Scope and Analysis: illustrative timeline

Below is an illustrative timeline for the proposed analysis activities and related deliverables:

Week # 1 2 3 4

Participate in engagement kick-off

5 6

Perform initial scoping analysis to identifypotential revenue streams

Participate in focused working sessions, led by management with relevant personnel to advise in the evaluation and documentation ofrevenue recognition requirements

Analyze a sample of representative contractsand provide advice on management in-scoperevenue streams

Advise management with its efforts to identifyand document accounting considerations andwith its development of a heat map

Participate in a high-level workshop to advise management as it develops an understandingof data, processes and systems

Advise management as it develops high-level implementation roadmap

Provide illustrative transaction use-case scenarios

Work product readout; conduct final summaryand discussion

Engagement Readout Meetings


Illustrative work products

The following work products are available as part of the advisory services, for management’s reviewand consideration:

Work product Description Illustrative deliverable examplesAccounting issue documentation

• Identify potential accounting issues thatmay arise based on the types of productand service offerings in significant revenuestreams

• Advise management as it drafts preliminaryaccounting positions

Accounting issue heat map/Contract scopingsummary

• Through working sessions and analysis of keyrevenue streams, advise management as itprioritizes accounting issues and contractscope identified by level of expected impact

Contract and review template

• Advise management as it creates adocumentation template to identify andcapture key contract terms during reviewprocess; these key terms will serve as thebasis for the illustrative use-case scenario development

Illustrative transaction use-case scenarios

• Illustrative use-case scenarios to analyze thepotential impact under the new revenuestandard comparing current and prospectiveaccounting treatment

Implementation roadmap development

• Outlines a customized strategy and detailedproject steps to develop and implement along-term resolution, addressing technicalaccounting and operational aspects of thenew revenue standard

Discussing the FASB’s New Lease Accounting Standard


The “Big Picture”

Most leases on balance sheet

for lessees

Classification will drive expense

profile

Lessor model largely unchanged

Most changes result from

alignment with ASC 606

FASB tried to make things easy

Classification, reassessment,

transition

Effective 2019 (2020 for nonpublic)

but don’t wait toassess impact

Process and systems changes may be required

Potential impact on debt

covenants


What’s in and what’s out…Introducing the new standard

Scope

• Applies to leases of property, plant, or equipment

• Does not apply to:

−Leases of intangible assets

−Leases to explore for or use nonregenerative resources

−Leases of biological assets

−Leases of inventory

−Leases of assets under construction


What is a lease under ASC 842?Definition of a lease

A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.

• Asset may be explicitly or implicitly specified

• Physically distinct part of larger asset may be an identified asset

• Substitution rights must be considered if substantive [based on practical ability + economic benefit to substitute]

• Warranty or upgrade considerations do not impact the determination of whether an identified asset exists

Depend on the use of an identified asset

Convey the right to control the use

• Right to obtain substantially all of the economic benefits from asset use (directly or indirectly)

• Right to direct the use of the asset throughout the period of use, which is based on:

o The customer having the ability to direct the “how and for what purpose” the asset is used throughout the period of use

o The relevant decisions about how and for what purpose the asset is used are predetermined and either (1) the customer operates the asset or (2) the customer designed the asset that predetermines how it will be used over the period of use.


Separating lease and nonlease componentsContracts that contain multiple components

Contracts with lease and nonlease components (i.e., separate services)

An activity is a nonlease component if it transfers a good or service to the lessee

• CAM and utilities would likely be nonlease components

• Property taxes and insurance would likely not be separate components

Note: Consideration in the contract is only allocated to the contract components

Contracts with multiple lease components for different underlying assets

An asset will be considered a separate lease component if:

• Lessee can benefit from the use of the underlying asset either on its own or using other resources that are readily available

• The underlying asset is not highly dependent on or highly interrelated with other assets in the arrangement

Note: Land and other elements evaluated separately unless the accounting for the land element would not be significantly different

Standard provides specific lessee and lessor guidance on how consideration should be allocated to each contract component


Overview of the criteriaLease classification

Classification criteria

Lease would be classified as a finance lease (lessee) or a sales-type lease (lessor) when . . .• Lease transfers ownership of the underlying asset to lessee by the end of the lease term

• Lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise

• Lease term is for a major part of the remaining economic life of the underlying asset

• Present value of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset

• Leased asset is so specialized in nature that it is expected to have no alternative use to the lessor at the end of the lease term

The standard states that the bright-line thresholds that exist under ASC 840 could be a reasonable approach to evaluate whether a lease would be classified as a finance lease


Measurement considerationsKey ingredients

Lease term

• Noncancelable period plusrenewal options for those period(s) in which the lessee is reasonably certain to exercise the options

• Lessees would reassess lease term upon occurrence of a significant event or change in circumstances under its control

• Lessors would not be required to reassess lease term

Lease payments

• Fixed payments included within lease agreement

• In-substance fixed payments

• Variable payments based on an index/rate

• Residual value guarantees based on amount expected to be paid

• Purchase or termination options if lessee is reasonably certain to exercise said options

Discount rate

• Rate the lessor charges the lessee when available, which would be the rate implicit inthe lease

• Incremental borrowing rate when the rate the lessor charges the lessee is not available

• Reassessment required in certain instances (change in lease term, certain modifications, change in purchase option considerations)


What does the lessee model look like?Lessee accounting model

• Lease obligation—PV of lease payments not yet paid

• ROU asset—lease obligation + initial direct costs—lease incentives + prepaid lease payments

Initial measurement

• Lease obligation—amortized using the effective interest method

• ROU asset—depends upon lease classification

• Expense recognition pattern:

- Finance lease—front-loaded

- Operating lease—generally straight-line

Subsequent measurement

Most* leases are recorded on the balance sheet using a right-of-use asset approach:

* Short-term leases: A lessee can elect, by asset class, not to record on its balance sheet a lease with a lease term of 12 months or less and which does not include a purchase option that the lessee is reasonably certain to exercise.


Illustrative exampleLessee accounting model

Finance lease Operating lease

This table highlights the differences in accounting for the lease under the finance lease and operating lease models:


What does the lessor model look like?Lessor accounting model

• Existing lessor accounting retained with minimal changes except for real estate and integral equipment• Classification depends on an assessment of control of the underlying asset

Sales-type Direct financing Operating• Lessee gains control of the

underlying asset• Lessee does not obtain control of

the asset, but the lessor relinquishes control

• Lessor retains control of the underlying asset

• Underlying asset is derecognized

• Net investment in a lease is recognized

• Selling profit or loss recognized at lease commencement

• Underlying asset is derecognized

• Net investment in a lease is recognized

• Profit deferred and amortized into income over the lease term

• Underlying asset remains on the lessor’s balance sheet

• Income recognized on a straight-line basis unless another systematic basis is more appropriate

• Initial direct costs recognized at lease commencement unless no selling profit or loss

• Initial direct costs deferred and amortized into income over the lease term

• Initial direct costs deferred and expensed over the lease term in a manner consistent with income


ROU assetLease liability

Amortization expense

Interest expense

Principal (Financing)

Interest (Operating)

ROU assetLease liability

Lease expense (single line on straight-line

basis)

Lease payments (Operating)

Balance sheet Income statement Cash flow statement

Financing lease

Operating lease

Lessee model

Presentation consistent with current lessor model:

• Balance sheet—presentation depends on lease classification

• Income statement—profit or loss recognized in a manner consistent with business model

• Cash flow statement—recognized as cash inflows from operating activities

Lessor model

Presentation requirements


Overall objective

Disclosures should enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.

Organizations will need to begin disclosing qualitative and quantitative aspects about the leases that may not have previously been a consideration

Disclosure requirements

Lessor disclosures• Nature of its leases

• Significant assumptions andjudgments used

• Related-party leases transactions

• Tabular disclosure of lease-related income

• Components of the net investment ina lease

• Information on the management of risk associated with residual asset

• Maturity analysis of operating lease payments and lease receivable

• Information required by ASC 360

Lessee disclosures• Nature of its leases

• Information about leases that have not yet commenced

• Related-party lease transactions

• Accounting policy election regarding short-term leases

• Finance and operating lease costs

• Short-term and variable lease costs

• Sublease income

• Gain or loss from sale-and-leaseback

• Maturity analysis for lease obligations

• Weighted-average remaining lease term

• Weighted-average discount rate


Effective date and transition

• Public business entities—effective for calendar periods beginning on January 1, 2019 and interim periods therein

• All other entities—effective for calendar periods beginning on January 1, 2020, and interimperiods thereafter

• Early adoption will be permitted

Effective date

• Lessees and lessors are required to use a modified retrospective transition method for all existing leases

• Would apply the new model for the earliest year presented in the financial statements

• Application of approach linked to current lease classification and new lease classification

• An entity can use hindsight when evaluating lease term

Transition

Transition relief packageLessees and lessors are not required to reassess the following upon transition:

• Whether any expired or existing contracts are leases or contain leases

• The lease classification for any expired or existing leases

• Initial direct costs for any existing leases

Tax Reform Developments and Election Outcomes: A 2017 Tax Policy Preview

Jeff Kummer Deloitte Tax LLP

December 6, 2016

Copyright © 2016 Deloitte Development LLC. All rights reserved.

• President-elect Trump seems to have a strong mandate for “change” but not necessarily for his agenda, especially since the campaign was light on policy

• The incoming President will confront a Congress with its own agenda(s) and political dynamics

• Senate Majority Leader Mitch McConnell has expressed interest in acting on tax reform in 2017, matching the long-held position of House Speaker Paul Ryan

• Republicans retained their majority in the Senate (51-48 with one seat undecided), but not every member is necessarily in lock-step with the incoming administration

• Incoming Senate Democratic Leader Chuck Schumer is more open to tax reform than outgoing leader Harry Reid, however he faces a daunting map for 2018 and a potentially expanding rift between the progressive and more moderate members of his caucus

• In the House, Republicans saw the size of their majority reduced but not significantly (238-193 with four seats undecided)

Election 2016 – A Few Initial Observations


Tax Reform Debate is Heating Up

•House Republicans released a tax reform “blueprint” on June 24, indicating the direction they want to take the tax reform debate

•Delivers on goal of reducing both corporate and individual tax rates as well as addressing passthroughs

•Unlike prior GOP tax plans, the GOP blueprint pivots toward supporting policies designed to create economic growth

•Tax reform is one of a handful of issues where there is a consistent call for action from House and Senate Republicans


Comparing Business Tax Proposals

Trump Tax Plan House GOP Tax Reform Blueprint

H.R. 1 (2014 Camp Tax Reform Plan)

CorporateRate 15% 20% 25% (phased in over 5 years)

Pass-through Rate

15%, but unclear to which entities and income it

applies/other restrictions25% Taxed at individual rate

Expensing/Depreciation

US manufacturers may elect full expensing or interest deductibility; election

irrevocable after 3 years

Full expensing in year one of all assets, tangible and intangible,

other than land Phase in repeal of MACRS

Interest Deduction

Loss of deduction specific to US manufacturers

No current deduction for net interest expense (disallowed deductions may be carried

forward indefinitely)

• Modified section 163(j) and implements new thin cap rules

• Section 163(j) interest deduction limit for adjusted taxable income reduced from 50% to 40%.


Comparing Business Tax Proposals



Corporate AMT Repeal Repeal

Repeal with 50% refund of AMT credit carryforward for

three years with full refundability in year four

§199 Deduction Implicit repeal Repeal Repeal (over 2 years)

Net Operating Losses No proposal

• Eliminate NOL carryback• Permit indefinite

carryforward with amount “increased by an interest factor”

• Limit current deduction to 90% of taxable income

• Eliminate NOL carryback• Limit current deduction to

90% of taxable income


Comparing International Tax Proposals



InternationalRegime

• No changes currently specified to current regime (2015 plan called for retaining current worldwide regime and foreign tax credits but repealing deferral)

• Territorial (via 100% dividend exemption)

• Eliminate most subpart F rules; retain foreign personal holding company rules

• Provides US corp shareholders 95% DRD for foreign source dividends received from 10%+ owned foreign corporation

• 15% minimum worldwide effective rate on foreign base company intangible income

• 12.5% minimum worldwide effective rate on foreign base company sales income

Deemed Repatriation 10% tax rate

Differential rates for cash (8.75%) and noncash (3.5%)

assets, payable over 8 years at taxpayer’s election

Differential rates for cash (8.75%) and noncash (3.5%) assets, payable

over 8 years (no interest charge; FTCs and NOLs may offset tax)

Border-Adjusted Tax

BaseNo proposal

Tax imposed on imports, but not exports (similar concept to other countries’ credit-invoice VATs)

No proposal


How Individual Tax Proposals Stack Up



Top Individual Rate 33% 33% 25% (plus 10% surtax on MAGI)

Capital Gains/ Dividends

No change in rate; repeal 3.8% net investment income tax (NII)

Tax at ordinary rates with 50% exclusion (i.e., effective top rate

of 16.5%); repeal NII

Tax at ordinary rates with 40%above-the-line deduction (i.e.,

effective top rate of 21%); retain NII

Carried Interest Ordinary income Ordinary income

Ordinary income for a portion of carried interest of partners providing services to certain

partnerships

Itemized Deductions

Cap at $200k/$100k (joint/single)

• Repeal state & local tax deduction

• Review mortgage interest and charitable deductions to make more “effective and efficient”

• Repeal deductions for state & local tax, medical expenses, employee business expenses

• Phased-in cap of $500k for mortgage interest (no home equity lines)

• Dollar-for-dollar phase out of principal residence capital gain exclusion


How Individual Tax Proposals Stack Up



Standard Deduction/

Personal Exemption

Consolidate standard deduction& personal exemption into

larger standard deduction of $15k/$30k (single/joint);

eliminate head of household

Consolidate standard deduction & personal exemption into larger

standard deduction of $12k/$24k; consolidate personal

exemption for children & child tax credit

Consolidate standard deduction & personal exemption into larger

standard deduction of $11k/$22k; eliminate head of

household; phase-out for upper income taxpayers

Health Care

• Repeal Affordable Care Act (ACA) entirely, including related taxes (e.g., med device tax, “Cadillac” tax, additional Medicare tax)

• Cap exclusion for employer-provided health benefits

• Provide refundable credit for those without employer-provided health benefits

• Repeal ACA entirely, including related taxes

No proposal

Estate & Gift Tax

Repeal, but capital gains held until death subject to tax (first

$10m tax-free)Repeal Retain

Indiv. AMT Repeal Repeal Repeal


Other Tax Provisions



Misc. Revenue Raisers

• Phase out deferral of inside build-up on life insurance contracts for high earners (included in 2015 plan; unclear if still under consideration)

• Eliminate most business tax expenditures other than R&D credit

Eliminate most businesstax expenditures other

than R&D credit and LIFO

• Repeal of LIFO and LCM• Amortize §197 expenditures

over 5 years• Amortize advertising

expenditures over 10 years• Extend §197 intangibles

amortization to 20 years• Repeal entertainment

expense deduction• Repeal like-kind exchanges• Repeal income exclusion for

non-shareholder capital contributions

• Repeal percentage depletion

New Provisions

• Create above-the-line deductions for child care and elder care expenses

• Create new tax-preferred savings accounts to encourage saving for child care and elder care expenses

Consider creation of new retirement savings vehicles


Tax Plan Revenue Estimates

• Tax Policy Center (TPC) Estimate of Trump Plan (Static)

• TPC Estimate of Trump Plan (Dynamic)

• 10-year revenue effect = -$6.2 trillion

• 10-year revenue effect = -$6 trillion

• Tax Foundation Estimate of Trump Plan (Static)• Tax Foundation Estimate of Trump Plan

(Dynamic)*

• 10-year revenue effect = -$4.4 trillion-$5.9 trillion• 10-year revenue effect = -$2.6 trillion-$3.9 trillion

TPC Estimate of House GOP Blueprint (Dynamic) • 10-year revenue effect = -$2.5 trillion-$3 trillion

Tax Foundation Estimate of House GOP Blueprint (Dynamic) • 10-year revenue effect = -$191 billion

• JCT Static estimate of H.R. 1• JCT Dynamic estimate of H.R. 1

• 10-year revenue effect = revenue neutral• 10-year revenue effect = between +$50-$700

billion**

* Ranges provided because of uncertainty about application of pass-through tax rate

** Ranges depending on which assumptions and models are used to make the calculations


• Senate Finance Committee Chairman Hatch is working on proposal for “corporate integration”

−Contours still under development, but generally expected that it would give corporations a deduction for dividends paid while requiring all dividend recipients to pay tax on them at ordinary income rates

−Recipients subject to full tax, i.e., not at preferred rates, would include not just taxable shareholders but also foreign investors and those individuals who hold stocks in retirement accounts, charities, and pension funds

−Prospects for any action are unclear; Chairman Hatch has so far delayed releasing it in 2016

• In 2017, Senate Republicans are likely to continue to be supportive of tax reform, though they may find themselves pivoting back toward a more “traditional” approach

Senate Republicans -- Looking at an Alternative Way of Doing Tax Reform


Is 2017 the Year for Tax Reform?


Things are suddenly getting much worse

6135

4647

Source: Gallup poll -- http://www.gallup.com/poll/197474/economic-confidence-surges-election.aspx?g_source=Economy&g_medium=lead&g_campaign=tiles

Democrats’ view of the economy before the election

Democrats’ view of the economy after the election

Getting Worse Getting Better

159

Republicans’ view of the economy before the election

Republicans’ view of the economy after the election

1681

4944

Things are suddenly getting much worse better

http://www.gallup.com/poll/197474/economic-confidence-surges-election.aspx?g_source=Economy&g_medium=lead&g_campaign=tiles


Tax Reform in 2017: Glass Half Full

Glass Half Empty

• There is general agreement by both political parties on the need to lower the corporate tax rate and reform international tax rules

• The sense of urgency related to BEPS, increased foreign acquisitions of U.S.-based companies, and EU state-aid actions is increasing

• Parties have real and deep differences over whether tax reform should raise more revenue

• Parties remain divided over whether to reduce the top marginal rate for individuals; relatedly, they have very different views as to whether the tax code should be made more progressive or not



Glass Half Empty

• The House GOP – as part of its tax reform blueprint – has shown a willingness to bifurcate the top marginal rates for individuals and passthrough entities, meaning they are open to cutting tax rates substantially for passthroughs with little or no rate reduction for upper income wage earners

• This is a very helpful symbolic development, but

‒ There will still be tension over what qualifies as a “small business”

‒ Even with bifurcated rates, the GOP will want to provide at least some rate reduction for upper income taxpayers (currently taxed at 39.6%) –something that is likely to be met with disfavor by many Democrats



Glass Half Empty

• The economy appears to be solid allowing Congress space to work on big but difficult issues

• Significant tax reform work already done with discussion drafts released by Camp, Baucus and Wyden as well as the White House framework and House GOP blueprint

• Dynamic scoring may make it easier to achieve deficit-neutral tax reform

• Permanent extension of expiring tax provisions in PATH Act lessen cost of tax reform

• The Camp tax reform plan highlighted obstacles to passage

• Tax reform is always easier said than done. The actual task of paring back popular credits and deductions offers ample opportunities for well-organized opposition to arise

• Question as to whether everyone is currently on the same tax reform page

• The 2018 mid-term elections are only 696 days away, followed closely by the 2020 Presidential election in 1424 days


Final Takeaways


•Reconciliation instructions cannot be prescriptive – may only specify:−The committee(s) charged with reporting legislation−The budget impact of legislation to be reported −May also be used to raise the statutory debt limit−Date by which committee(s) must report conforming legislation

•A maximum of three reconciliation bills can be moved in one year – one each for revenues, spending, and the debt limit

•Recent uses: 2001 tax cuts, 2003 tax cuts, 2010 health reform law

GOP Control Raises Prospects of “Budget Reconciliation”

After the Election: An Outlook on Federal Tax Policy


Tax Reform Through Reconciliation – Is it Really an Option?

Arguments for Using Reconciliation Arguments Against Using Reconciliation

Cannot be filibustered, meaning it can pass the Senate with just 51 votes (or 50 plus the tie-breaking vote of the Vice President)

Procedural rules can have major substantive impacts by preventing inclusion of provisions that:• Have no budgetary or have budget effects that are “merely

incidental”• Increase the deficit outside the budget window

Democrats may demand concessions on key issues (overall cost, estate tax, marginal rates, etc.) that some Republicans may find unacceptable

Increased political durability of passing major legislation on a bipartisan basis (for example, see what may happen to the ACA next year)


Lame Duck and Tax Extenders Observations

• Post-election legislative session began Nov. 14• Primary purpose of the “lame duck” session is to fund the federal government which

is currently set to close for all “non-essential services” at midnight Dec. 9• Last year’s PATH Act made a number of provisions with the broadest support

permanent or extended them for five years, leaving the remaining 30-plus tax extenders looking for a vehicle at the end of 2016

• Current debt ceiling expires March 15, 2017 setting a deadline early in the new Congress


Broadening the Base: More than Just “Closing Loopholes”

Source: Joint Committee on Taxation publication JCX-141R-15, “Estimates Of Federal Tax Expenditures For Fiscal Years 2015-2019,” Dec. 7, 2015.

Largest Corporate Tax Expenditures –2015 $ Billion

Deferral of active CFC income 99.3

§199 deduction 11.7

Deferral on like-kind exchanges 11.0

Exclusion for muni bond interest 9.7

Low-income housing tax credit 7.3

Deferral of gain on installment sales 6.9

§179 expensing 4.8

Expensing of R&D expenditures 4.7

Reduced tax on corporate income below $10M 4.0

Special treatment of life insurance co. reserves 2.9

Accelerated depreciation -20.0*

Largest Individual Tax Expenditures –2015 $ Billion

Tax-preferred retirement plans 157.4

Exclusion of employer-provided health benefits 145.5

Reduced rates on LT cap gains/dividends 131.7

Earned Income Tax Credit 72.7

Mortgage interest deduction 71.0

State and local tax deduction 62.2

Child tax credit 57.1

Charitable contribution deduction 45.6

Exclusion of Social Security benefits 37.6

Property taxes deduction 32.4

Exclusion of cap gains at death 32.4

In 2014, the 10 largest corporate tax expenditures accounted for about 80% of total corporate expenditures, and the 10 largest on the individual side accounted for about 66%

*Accelerated depreciation is a negative expenditure (brings in revenue) in the short term but a revenue loss in the longer term.

https://www.jct.gov/publications.html?func=startdown&id=4858


• Newly-elected presidents have moved significant tax changes early in their administration

− President Clinton signed OBRA 93 on August 10, 1993

− President Bush signed EGTRRA on June 7, 2001

− President Obama signed ARRA on February 17, 2009

• Fundamental economic indicators helped drive those efforts

− Worsening deficit picture helped clear path for tax increases in OBRA 93

− Increasing budget surpluses eased tax cut efforts in 2001

− Financial crisis provided impetus for tax/stimulus legislation in 2009

• Do political and economic factors align for action on tax reform early in 2017?

Can History Predict the Future of Tax Reform?


Things to Think About: Tax Reform Landscape

• Divining tax policy in 2017 and beyond is difficult when there are few details and there appear to be different approaches to tax reform within the Republican party

• That said, ignoring the tax reform process could be a mistake

− Despite strong headwinds facing taxwriters, conceptually everyone still agrees that tax reform is necessary

− There is a greater sense of urgency among congressional taxwriters given developments in the global tax landscape

− As an example, the PATH Act passed with great speed – approved by the House and Senate and signed into law within a 24-hour period


Jeff Kummer

[email protected]

202.220.2148

Questions?

mailto:[email protected]

Seattle Alumni Speed Training 2016 · 12/6/2016 · • Final standard was issued in June 2016...

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