Year-End Update: Private Company Edition...Statement of Cash Flows – Classification of Certain...

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Year-End Update: Private Company EditionJohn Stewart, Heather Cozart, Nathan Clark & Jeff BryanDecember 14, 2017

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Donn Maiorino (Me)

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New Accounting Standards Effective 2017 Calendar

Year-End

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Consolidations

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ASU 2015-02 – Consolidation Analysis

• Presumption in the voting model that a general partner controls a limited partnership is eliminated

• Fees paid to decision maker or service provider are less likely to be considered a variable interest

• Revised guidance for analyzing fees paid to a decision maker when evaluating the primary beneficiary of a VIE

• Variable interests held by related parties are less likely to be consolidated by the reporting entity

• Deferral of consolidation requirements in ASU 2009-17 for certain investment companies is eliminated

Summary of Changes

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ASU 2015-02 – Consolidation Analysis

• Entities will need to re-evaluate their consolidation conclusions• May result in less consolidation

Impact

• Modified retrospective approach (cumulative effect adjustment to equity)

• Full retrospective approach (restating all periods presented)

Implementation

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Consolidations – Partnerships

• Change to the evaluation of whether limited partners lack power to direct the activities that most significantly impact the entity’s economic performance

• Ignoring other VIE characteristics, a limited partnership will not be a VIE if either of the following are true:

+ A simple majority or lower threshold of limited partners is able to exercise substantive kick-out rights over general partners

+ Limited partners with equity at risk are able to exercise substantive participating rights over the general partners

VIE Model – Evaluating if the entity is a VIE

• Removed presumption that a general partner controls a limited partnership

• Generally only a single limited partner that is able to exercise substantive kick-out rights will consolidate

Voting Model

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VIE Analysis – Related Party Considerations

Does the reporting entity have both

power and economics?

Yes – Consolidate

No – does another party, including related parties,

individually have power and economics

No – Does the enterprise including

related parties together have power

and economics

Yes – related party tie-breaker

• Primary beneficiary analysis prior to the release of ASU 2015-02

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Does the reporting entity have both power and

economics?

Yes – Consolidate No – Is there a single decision maker or is

power shared?

Shared – Does the enterprise including

related parties together have power and

economics

Single – Considering direct and indirect

interests, does reporting entity have power and

economics?

Yes – Consolidate No – Next slide

• Primary beneficiary analysis under ASU 2015-02

• Indirect interests are proportional. E.g. entity owns 20% interest in related party that has 40% interest in VIE: entity has an 8% interest.

• (n/a - if related party is under common control)

NEW STEPS

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No - Does the enterprise including related parties together have power and

economics

No – stop consolidation analysis Yes – Are one or more of the related parties

under common control with decision maker, and together do they have power and

economics?

Yes – related party tie-breaker

No – are substantially all of activities conducted on behalf of a single VIE

holder?

Yes – Single VIE holder consolidates

No – Stop consolidation analysis

NEW STEPS

• Primary beneficiary analysis under ASU 2015-02

• Single decision maker

• Special consideration is given to a related party that receives substantially all of the activities of a VIE

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Related Party Tie Breaker

• The party within the related party group that is most closely associated with the VIE is the primary beneficiary

• Somebody has to win!

The Tie Breaker Test

• Existence of principal-agency relationship

• Relationship and significances of the activities of the VIE to the various parties within the group

• A party’s exposure to the variability associated with the anticipated economic performance of the VIE

• The design of the VIE

Significant judgment: consider the following

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Reconsideration

• Arrangement that changes the adequacy of equity at risk

• Return of equity that exposes other interest to expected losses of the entity

• Additional equity investment or legal entity curtails expected losses

• Changes that occur in which equity holders at risk lose power

Variable Interest Reconsideration

• Assessment should occur continuously, not just at each reporting period

• Often changes to the primary beneficiary determination will coincide with changes in power.

Primary Beneficiary Reconsideration

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ASU 2016-17Interest Held through Related Parties Under Common Control

• Changes how the second criteria of primary beneficiary is applied (i.e. obligation to absorb VIE losses or receive VIE benefits)

• Reporting entity who is single decision maker of a VIE must consider all direct interests, and indirect interests in a VIE on a proportionate basis

• Changes the way indirect interests held through related parties under common control are evaluated

• Now consider the economics of potential exposure before determining the party most closely associated with the VIE (related party tie-breaker)

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ASU 2017-02Clarifying When a NFP Should Consolidate a For Profit Entity

• Clarifies when a NFP that is a general or limited partner should consolidate a for profit entity.

• Under current GAAP, a NFP entity that is general partner applies consolidation guidance in Subtopic 810-20. When amendments of Update 2015-02 become effective, guidance in 810-20 will no longer exist, creating uncertainty.

• Retains the consolidation guidance from Subtopic 810-20 (will become Subtopic 958-810 when ASU 2015-02 becomes effective).

Effective Dates • FYEs beginning after 12/15/16• Interim periods with FYs beginning after 12/15/17

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Polling Question #1

Will the new consolidation guidance affect your business?a. Yesb. Noc. Undecided

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Opportunities for Simplification

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ASU 2015-04 Simplification for Measurement Date of Employer’s Defined Benefit Obligation

• For a reporting entity with a fiscal year-end that does not coincide with a month-end

• This Update permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year.

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ASU 2015-07 Simplification to Fair Value Measurement and NAV

• ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.

• Removes requirement to make certain disclosures for all investments eligible to be measured at FV using the NAV practical expedient.

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Simplifying the Measurement of Inventory • ASU 2015-11 requires inventory to be measured at the lower of cost

or net realizable value+ vs. at the lower of cost or market. Market could be replacement

cost, net realizable value, or net realizable value less a normal profit margin

• Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation

• Subsequent measurement of inventory is unchanged using the LIFO or retail inventory method

• Should be applied prospectively

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ASU 2015-16• Business Combinations – Simplifying the Accounting for Measurement-Period

Adjustments+ Requires an acquirer to recognize adjustments to provisional amounts as

identified during the measurement period– Eliminates retrospective accounting for measurement period adjustments– Calculate adjustments as if accounting had been completed at acquisition

date

+ Effective date• Public business entities - fiscal years beginning after 12/15/15

– Including interim periods with those years• All other entities - fiscal years beginning after 12/15/16

– And interim periods within fiscal years beginning after 12/15/17

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ASU 2016-07• Investments – Equity Method and Joint Ventures – Simplifying the Transition to the Equity Method of

Accounting

+ Changes how to account for an investment in the period it qualifies for equity method accounting due to an increase in level of ownership or degree of influence

• Eliminates requirement to account for the investment as if the equity method had been in effect during all previous periods

– No retroactive step-by-step adjustment required• Requires cost to acquire additional equity interest be added to current basis

– Adopt equity method of accounting as of the date the investment becomes qualified – Recognize through earnings unrealized gains/losses on AFS securities that become

qualified for equity method

+ Effective for fiscal years beginning after 12/15/16• Including interim periods within those fiscal years• Early application permitted• Prospective application

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Other Notable Accounting Standard Updates

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• Income Taxes – Balance Sheet Classification of Deferred Taxes

+ Requires deferred income tax assets and liabilities be classified as noncurrent in classified balance sheet, net

• No change to recognition, measurement, or disclosure requirements

• Report only one single net noncurrent deferred tax asset or liability

+ Effective dates• Public business entities – fiscal years beginning after 12/15/16

– Including interim periods within those fiscal years• Other entities – fiscal years beginning after 12/15/17

– And interim periods within fiscal years beginning after 12/15/18– Early adoption is allowed

ASU 2015-17

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ASU 2016-14• Presentation of Financial statements of Not-for-Profit Entities• Changes presentation of components of net assets:

+ Replaces 3-class presentation (unrestricted, temp restricted, permanently restricted) with 2-class presentation (without donor restrictions, with donor restrictions)

• Present or disclose analysis of expenses by natural and functional classification • Present investment returns net of direct investment expenses• Change presentation and add disclosures re: underwater endowments• Disclose qualitative and quantitative info re: liquidity and available resources

+ Better enable NFPs to “tell their financial story”• See AICPA NFP Section illustrative financial statements and footnotes

Effective Dates• Fiscal years beginning after 12/15/17• Early adoption permitted, modified retrospective

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ASU 2016-15

• Cash outflows = financing activityDebt Prepayment or Debt Extinguishment Costs

• Cash flows attributable to principal = financing activity• Cash flows attributable to accreted interest related to debt

discount = operating activity

Settlement of Zero (or insignificant) Coupon Debt

Instruments

• Cash receipts from payments on a transferor’s beneficial interest in securitized trade receivable = investing activity

• Transferor’s beneficial interest obtained = noncash activity (disclose)

Beneficial Interests in Securitization Transactions

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

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ASU 2016-15

• Cash receipts = operating, investing, or financing activity…• … based on related insurance coverage (nature of loss)

Proceeds from the Settlement of Insurance Claims

• Cash inflows = investing activity• Cash outflows for premiums paid = investing or operating activity, or

combination thereof

Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies

• Accounting policy election to classify using one of two approaches• Cumulative earnings approach• Nature of distribution approach

Distributions Received from Equity Method Investees

• FYs beginning after December 15, 2017 and interim periods within for public companies

• FYs beginning after December 15, 2018 and interim periods within FYs beginning after December 15, 2019 for private companies

EFFECTIVE DATES

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

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ASU 2016-18Statement of Cash Flows (230): Restricted Cash• Requires cash flow statement include changes in “restricted cash and equivalents”

• “Restricted cash and equivalents” to be included when reconciling beginning of period and end of period cash and cash equivalents.

Effective Dates (Public)• FYs beginning after 12/15/17, and interim

periods within

Effective Dates (Private)• FYs beginning after 12/15/18, and interim

periods within beginning after 12/15/19

Retrospective application Early adoption is permitted

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ASU 2017-01 Business CombinationsClarifying the Definition of a Business• Provides “screen” to determine when a set (inputs, processes, outputs) is not a business• When substantially all fair value of assets acquired is concentrated in single asset or group of

similar assets, the set is not a business• If screen is not met, to qualify as a business, at minimum, it must include an input and a

substantive process that together significantly contribute to the ability to create an output• Intended to reduce number of transactions accounted for as business combinations

Effective Dates (Public)• Annual periods beginning after 12/15/17,

including interim periods within

Effective Dates (Private)• Annual periods beginning after 12/15/18,

& interim periods w/in annual periods beg. after 12/15/19

Early adoption is permitted

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ASU 2017-04 Intangibles – Goodwill and OtherSimplifying the Test for Goodwill Impairment• Eliminates Step 2 from goodwill impairment test

+ No longer required to calculate implied fair value of goodwill if Step 1 indicates impairment• If reporting unit carrying value exceeds FV in Step 1, then difference = goodwill impairment• Eliminates requirement for reporting unit with zero or negative carrying amount to perform a qualitative

assessment

Effective Dates: Public SEC filer• Adopt for annual or any interim impairment test for FYs beginning after 12/15/19.

Effective Dates: Public non-SEC filer• Adopt amendments for annual or interim impairment test in FYs beginning after 12/15/20.

Effective Dates: Private• Annual or interim impairment test in FYs beginning after 12/15/21.

Early application is permitted for testing dates after 1/1/17.

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Private Company Council Alternatives

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PCC Alternatives – Original Transition Guidance

Accounting Standards Update Original Effective Date Transition

Goodwill Amortization (2014-2)

Annual Periods Beginning After December 15, 2014 Prospective

VIEs – Common Control Leasing(2014-7)

Annual Periods Beginning After December 15, 2014 Retrospective

Interest Rate Swaps(2014-3)

Annual Periods Beginning After December 15, 2014 Modified or Full Retrospective

Identifiable Intangibles(2014-18)

First in-scope transaction in FY beginning after December 15, 2015

Prospective

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ASU 2016-03• Goodwill and Other, Business Combinations, Consolidation,

Derivatives & Hedging – Effective Date and Transition Guidance+ Makes PCC alternatives effective immediately by removing effective

dates+ Allows private companies to avoid the preferability assessment when

first electing a PCC alternative• Any subsequent change requires justification that the change is

preferable• Retains the original transition guidance

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On the Horizon

SURPRISE!

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Polling Question #2Has your company adopted any of the PCC alternatives?

a. Goodwill amortizationb. Common Control Leasing c. Identifiable Intangiblesd. Interest Rate Swapse. More than one of the above

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Going Concern

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ASU 2014-15Presentation of Financial Statements: Going Concern

• Management required to evaluate whether conditions / events raise substantial doubt about ability to continue as a going concern

• Aligns with new auditing standard• Effective for fiscal years beginning after 12/15/15.

STEP 1Determine whether conditions or events give rise to substantial doubt (before considering management’s plans)• Based on ability to meet

contractual obligations for period 12 mos. from issuance date

STEP 2Consider management’s plans to alleviate substantial doubt.• Disclosure requirements if substantial doubt is raised• If not alleviated, must explicitly disclose “substantial

doubt”• If alleviated, must still disclose conditions/events and

plans which alleviate

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Why a New Revenue Standard?

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Scope (Includes)•All contracts with customers, except:

+ Leases (Topic 840)+ Insurance contracts (Topic 944)+ Financial instruments (Topic 825)+ Guarantees (Topic 460)+ Non-monetary exchanges between organizations in same line of

business to facilitate sales to customers (Topic 845)

•Sales of Non-Financial Assets + Outside organization’s ordinary activity (Topic 610)

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Major Concept Changes•Created single principle based guidance

+ Core Principle

•Focus is on analyzing the contract not analyzing the transactions by industry

•Changed+ From when “Realized/Realizable” and “Earned”+ To “When Performance Obligation is Satisfied”

• Increased emphasis on disclosures

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5 Step Process

ID Contract

ID Performance Obligations

Determine Transaction

Price

Allocate Transaction

PriceRecognize Revenue

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Identify the Contract

Parties have approved and are committed

Rights of each and payment terms can be identified

Commercial substance Collection is probable

Contract Exists When

ID Contract

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Identify the Performance Obligations

Good or Service is Distinct

Customer can benefit from good or service• On its own• Together with other readily

available goods or services (including goods or services previously acquired from org.)

Good or Service is Distinct (within the contract)

Promised good or service is separable from other promises Indicators for separate P.O.’s• No significant service of integrating the

goods or services• Good or service does not modify

another good or service in the contract• Good or service is not highly

dependent on or interrelated with other goods or services

It is a Separate Performance Obligation When Both Criteria are Met:

ID Performance Obligations

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Determine the Transaction Price

• 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, excluding amounts collected on behalf of third parties (for example, some sales taxes).

Determine Transaction

Price

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Allocate Transaction PriceAllocate to each performance obligation the amount to which the entity expects to be entitled.

Based on relative stand alone selling price: •Observable•Estimate•Residual estimation techniques

Discounts and contingencies applied entirely to specific performance obligation only if specified criteria met

Allocate Transaction

Price

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Revenue Recognition

Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service

Recognize Revenue

Performance obligations satisfied over time, if specified criteria are met

All other performance obligations satisfied at a point in time

Revenue is recognized by measuring progress towards complete satisfaction of

the performance obligation

Revenue is recognized at the point in time when the customer obtains control of the

promised asset

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Performance Obligations Over Time• Determine if satisfied (and revenue recognized) over time based on meeting

any of the following criteria:+ Customer simultaneously receives and consumes benefits as the entity

performs

+ Entity’s performance creates or enhances an asset that customer controls as it is created or enhanced

+ Entity’s performance does not create an asset with an alternative use to the entity and there is an enforceable right to payment for performance completed to date

• If satisfied over time, select method of progress toward completion (e.g., output or input method)

Recognize Revenue

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Disclosures

• Annual and interim disclosures for public business entities greatly expanded

• Private company disclosure requirements are extensive as well, but substantially less than those of public business entities

To enable users of financial statements to understand the nature, timing, and uncertainty of revenues and cash flows arising from

contracts with customers.

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Differences for Non Public Entities•Disclosures not required

+ Quantitative disaggregation + Contract balances + Remaining performance obligations+ Explanation of why methods used provide a faithful depiction of the

transfer of goods or services + Significant judgments made in evaluating when a customer obtains

control+ Methods, inputs, and assumptions used to determine the transaction

price and to allocate the transaction price

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Effective Dates•Current Effective Dates

+ 2018 for Public Organizations• If using retrospective transition contracts entered into in 2016 must

be evaluated

+ 2019 Non Public Organizations

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Transition Options• Full retrospective application

+ Apply new standard to all prior periods+ Certain practical expedients are allowed

• Retrospectively with cumulative effect adjustment + No restatement of prior periods+ Apply new standard to in-progress contracts as of the initial application date and

to subsequent contracts+ Recognize a cumulative effect adjustment at initial application date for effects of

applying new standard to in-progress contracts+ Disclose in the period of adoption the effect on each line item in the financial

statements as a result of adoption (ie: how things would have been recognized differently under standards in effect for prior years)

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Implementation Planning• Socialize the changes

+ Within the organization+ With key stakeholders

• Create a transition plan+ Team (internal and external)+ Obtain education + Analyze process and timing + Decision making framework + Documentation + Timeline

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How prepared is your company for the new revenue recognition standard?

a. Fully prepared and ready to implementb. Mostly prepared and ready to implementc. Somewhat prepared but not ready to implementd. Not prepared but starting to plane. There’s a new revenue recognition standard?

Polling Question #3

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Leases

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Significant Financial Statement Impact• New lease standard generally requires all leases to be capitalized and

recognized on the balance sheet

• Exception for short term leases

• Implementing the new leasing standard may:+ Change key ratios used for debt covenants+ Affect bonus and share-based payment calculations+ Alter dividend information

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Key Questions in Accounting for Leases

If not within scope of lease standard, must look to different ASC

WHY ASK

Required for initialaccounting

Required for subsequentaccounting

Account for non-lease components differently

Do I have a lease?

What is the term?

What is the discount rate?

Any non-lease components?

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Lease defined as “the right to control the use of an identified asset for a period of time in exchange for consideration.”• Control:

-Right to economic benefits-Right to direct use of asset

• Determining “right to direct use” may require judgment

• If supplier has substantive substitution rights, customer does not have control; therefore no lease.

Do I have a lease?

What is the term?



GUIDANCE

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• Term: Noncancelable period for which lessee has right to use asset plus periods covered by—- Option to extend if lessees is reasonably

certain to exercise the option- Option to terminate if lessee is

reasonably certain not to exercise option- Renewals or extensions of lease at option

of lessor• Exception to the general rule to recognize all leases on the balance sheet for leases with terms of 12 months or less.

Do I have a lease?

What is the term?



GUIDANCE

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Rate implicit in the lease is rate that causes the PV of the net investment in the lease to equal sum of:• Fair value of asset minus related

investment tax credit • Capitalized initial direct costs

incurred by lessor• If rate cannot be determined, use

incremental borrowing rate• Private companies may elect a

policy for all leases to use risk-free discount rate

Do I have a lease?

What is the term?



GUIDANCE

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• Non-lease components accounted for separately

• Example: equipment lease contract also includes maintenance services

• Allocate contract consideration and initial direct costs to components based on relative standalone price of separate components

Do I have a lease?

What is the term?



GUIDANCE

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Finance vs. Operating Lease Classification

FINANCE LEASE

Substantially the same as a capital lease plus•Lease of specialized asset for which no alternative use at end of lease term

All leases that do not meet criteria for finance lease

OPERATING LEASE

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Initial Measurement

Very narrowly defined – excludes costs that would have been incurred regardless of whether the lease was obtained

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• “Leases between related parties should be classified in accordance with the lease classification criteria applicable to all other leases on the basis of the legally enforceable terms and conditions of the lease.”

• ASC 842-10-55-12

Related Party Leases

Change from ASC 840 GUIDANCE

A complete “about face” by FASB+ ASC 840 was economic substance over

legal form+ ASC 842 is legal form over economic

substance

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Transition: Effective Dates• Effective dates for public companies

+ Fiscal years beginning after December 15, 2018, including interim periods – i.e., calendar 2019 starting in Q1

• Effective dates for private companies+ Fiscal years beginning after December 15, 2019

– i.e., calendar 2020 year-end and calendar 2021 interim statements

• Modified retrospective application with optional practical expedients

+ Must apply new standard as of beginning of the earliest period presented

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Transition: Practical Expedients• You may be able to elect “practical expedients” to ease burden of adoption

+ Re-assess whether expired or existing contracts are or contain leases

+ Re-assess lease classification for any expired or existing leases

+ Re-assess initial direct costs for existing leases

+ May use hindsight in determining lease term

You do not need to

You may

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Possible Implementation Challenges

Systems

Operations

Financial Reporting

• Lessees with significant lease portfolio may need to evaluate current system and evaluate whether it can capture relevant data for new standard

• Compliance with debt covenants and other contracts

• May affect lease vs. buy decisions• System change may require change to internal controls

• Increased use of management judgment• Deferred income taxes may be affected• New disclosure requirements

POSSIBLE CHALLENGES

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Implementation Next StepsInventory all existing lease contracts

+ Aggregate similar leases to avoid redundant analyses+ Identify short term leases that will not be capitalized

Assess implementation challenges and options+ Existence of substantive substitution rights+ Choice of discount rate+ Determination of lease term+ “Practical expedients”

Estimate impact implementation will have on financial statements, key ratios and metrics+ Evaluate impact changes will have on other contracts, e.g., loan agreements, management

compensation+ If necessary develop plan to mitigate impact on other contracts

1

2

3

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Polling Question #4How prepared is your company for the new leasing standard?

a. Fully prepared and ready to implementb. Mostly prepared and ready to implementc. Somewhat prepared but not ready to implementd. Not prepared but starting to plane. There’s a new leasing standard?

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Polling Question #5With the new leasing standard in mind do you plan to seek out software to track and properly record leases for your business?

a. Yesb. No c. Maybed. Undecided

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Financial Instruments

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Financial Instruments Project - Background

Answer: To reduce complexities in accounting for financial instruments!

FASB Response: Retain current guidance with targeted improvements to classification and measurement of equity investments, fair value option for liabilities and disclosures for financial instruments.

Why was there a need for the financial instruments project?

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What is changing (Assets)?

Equity Investments:Measured at each reporting period at fair value through net income, except for:

Investments accounted for

under the equity method

(ASC 323)

Equity investments

without readily determinable

FV; only marked to observable

price changes

Investments in consolidated subsidiaries

Federal Home Loan Bank and

Federal Reserve Bank

stock

Certain derivative

instruments

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What is changing (Assets)? (cont.)

Will now have a measurement alternative that determines value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or

similar investment of the same issuer.

Equity Investments:Measured at each reporting period at fair value through net income, except for:

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What is changing? (Disclosures)

Financial assets and financial liabilities required to be presented separately, grouped by measurement category and form of instrument

Reduces the number of disclosures for PBEs including methods and assumptions used to estimate FV for financial instruments not carried at FV on the balance sheet

FV Measurements for financial instruments to be based on exit price notion

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What is changing? (Disclosures)

Expanded disclosures concerning the effects of instrument-specific credit risk and financial liabilities measured under the FVO

New disclosures for equity investments without readily determinable fair values under the new measurement alternative

Entities will also need to disclose the portion of unrealized gains and losses that relate to equity investments held at the reporting date

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Non-public business entities (including not-for-profit and employee benefit plans) annual and interim reporting periods beginning after December 15, 2019

All public business entities annual and interim reporting periods beginning after December 15, 2017

Non-public business entities (including not-for-profit and employee benefit plans) annual reporting periods beginning after December 15, 2018

Effective Dates

Non PBEs Interim Reports

PBEs

Non PBEs Annual Reports

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TransitionRetrospective

application with a

cumulative-effect

adjustment to the statement

of financial position at

beginning of year in which new guidance

is adopted, with two

exceptions

Equity investments without readily determinable fair values (including

disclosure requirements) will be applied prospectively

Exit price notion to measure fair value of financial instruments for disclosure

purposes will be applied prospectively

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Current Expected Credit Losses (CECL)

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Introduces approach based on expected losses to estimate

credit losses

Modifies impairment model for AFS debt

securities

Provides simplified model for purchased financial assets with credit deterioration

Addresses recognition,

measurement, presentation and

disclosure of credit losses

Applies to ALL ENTITIES

What is included under the new standard?

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Does• Loans made to participants by defined contribution employee benefit plans• Policy loan receivables of an insurance entity

NOT• Pledges receivable (promises to give) of a not-for-profit entity• Related party loans and receivables between entities under common control

Apply to:• AFS debt securities (continue to be assessed for impairment under current

guidance with limited amendments)

CECL Scope

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Current Expected Credit Loss “CECL” Scope

Applies • TRADE RECEIVABLES• LEASE RECEIVABLES

To• Reinsurance receivables that result from insurance transactions• Most debt instruments (not measured at fair value)

:• Financial guarantee contracts• Loan commitments

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CECL Scope

Applies • Receivables that result from revenue transactions in the scope of ASC 606• Financing receivables

To• Contract assets• Lessor’s net investment in sales-type and direct financing leases

:• Off-balance sheet credit exposures

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CECL Model

Recognize an allowance for credit losses that results in the financial statements reflecting the net amount expected to be collected from the financial asset

Core Concepts

Objective

Based on an asset’s

amortized cost

Reflect the risk of loss

Consider available relevant

information

Reflect losses over an asset’s contractual life

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CECL Model (Impact on Trade Receivables)Entities will need to adjust their existing processes for estimating credit losses on trade receivables. Risk of loss factors will reflect:

Current balances, even if the entity historically has

recorded no credit loss allowance

Individually significant balances for which an entity

has historically concluded there is

no risk

Very short-term receivables that are typically settled in a

matter of days

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CECL – Financial Statement Effects

Recognition of expected credit losses

Balance Sheet• Allowance equal to the amount of current expected

credit loss is recorded at origination/acquisition

Income Statement• Initial recognition of impairment allowance recognized

through earnings (except for PCD assets and certain beneficial interests)

• Subsequent changes in impairment allowance (up or down) recognized through earnings

• Reversal of impairment is required

Write-Off

Direct Write-Off• When asset

is deemed uncollectible – no change from current standards

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New model has targeted improvements to existing impairment model

Eliminates concept of “other-than-temporary”

Allows for reversal of credit losses through current-period earnings

AFS Debt Securities (New Model)

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Must disclose information concerning:

Credit qualityAllowances for expected credit

losses

Policies for determining

write-offs

Past-due status Nonaccrual status

Collateral-dependent

financial assets

New Disclosures

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CECL– Effective Dates

• Annual and Interim: reporting periods beginning after Dec. 15, 2019

PBEs that are SEC filers

• Annual and Interim: reporting periods beginning after Dec. 15, 2020

PBEs that are not SEC filers

• Annual: reporting periods beginning after Dec. 15, 2020• Interim: reporting periods beginning after Dec. 15, 2021Other entities

• Available after Dec. 15, 2018Early

application

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• (modified retrospective approach)

Record cumulative-effect adjustment to the statement of

financial position as of the beginning of the first reporting

period in which guidance is effective

• Other-than-temporarily impaired debt securities

• PCD assets• Certain beneficial interests within the

scope of ASC 325-40

Provides instrument-specific transition guidance for

Transition

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Polling Question #6Do you believe that CECL will have an affect on your business?

a. Yesb. No c. Maybed. Undecided

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Derivatives and Hedging

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ASU 2017-12 Derivatives and HedgingTargeted Improvements to Accounting for Hedging Activities

• Better reflect economic results and simplify hedge accounting guidance

• No requirement to measure ineffectiveness or record separately

• More time to perform initial quantitative hedge assessment

• Subsequent effectiveness assessment may be qualitative

• “Critical terms” method - assume matching maturities if within 31-day period

• Change in FV recorded in same line item as effects of hedging instrument

Effective Dates (Public)• FYs beginning after 12/15/18 and interim

periods within

Effective Dates (Private)• FYs beginning after 12/15/19 and interim

periods beginning after 12/15/20

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Tax Reform

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Your PresentersNathan Clark | Partner, DHG [email protected]

Nathan has 18 years of public accounting experience, including fifteen years with Big-4/national firms, with a deep focus on accounting method changes. His experience ranges from working with small privately held businesses to publicly traded, Fortune 500 companies. He has significant experience in retail, manufacturing, real estate, and hospitality industries, among others.

Nathan specializes in capitalization, depreciation, and revenue recognition. He routinely implements engagements for tangible property regulation compliance, as well as studies focused on capitalization issues including, depreciation reclassification, Sec. 174, bonus depreciation, cost segregation, internally developed software, and ready and available. He is also a national resource for tax issues associated with the FASB/IASB Revenue Recognition Standard (ASC 606) and Lease Standard (Topic 842).

mailto:[email protected]

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Major Tax Reform Issues Impacting ASC740• 25% pass-through tax rate• 20% corporate tax rate• Interest expense limitation• Full expensing of property• Small business reforms• Net Operating Losses – indefinite carryforward, 90% utilization• AMT – elimination/modification• Consider State Conformity to IRC if operating in multiple jurisdictions

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Major Tax Reform Issues Impacting ASC740• Elimination – various credits and deductions• Like Kind Exchange – only allowed for real property• Deemed repatriation of foreign earnings• International tax reforms

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Polling Question #7Which of the following tax reform changes will likely impact you or your business?

a. Maximum pass-through tax ratesb. Reduced corporate income tax ratec. International tax reformsd. Other

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Timing of Tax Reform

Tax Law Enacted

President Signs Tax Bill

House/Senate Compromised Bill

Joint Conference Committee (This week)

Full Senate (passed December 2, 2017)

Senate Finance Committee (passed November 16, 2017)

Full House (passed November 16, 2017)

House Ways and Means Committee (passed November 9, 2017)

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Effective Date of Tax Reform• If signed into law in 2017:

+ Most tax effective dates January 1, 2018+ Select effective dates in 2017, e.g. full expensing of property

• If signed into law in January, 2018:+ Same effective dates as above

• ASC740 application: + Reflect law as of the date when signed into law+ If signed in 2018, disclosures to 2017 financial statements?

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Tax Reform Implications – Accounting for Income Taxes

• When tax rates are reduced:+ Existing DTA/DTLs repriced at new rates in the period enacted+ Scheduling of deferred realization may be required if new rates

not effective 1/1/2018+ If in a DTA position, credit the DTA and debit income statement

(expense)+ If in a DTL position, debit the DTL and credit the income

statement (benefit)+ DTA/DTLs originally recorded through Other Comprehensive

Income are re-measured through income tax expense, not OCI

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Other Assurance Concerns• You may only have days/weeks to record/reprice

DTAs/DTLs and provision

• What will significant provision to return adjustments mean?

• Communicate with your assurance team

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More Information• Dixon Hughes Goodman Tax Reform Center –

www.dhgtax.com

• DHG:TV Financial Statement Implications of Tax Reform -http://ow.ly/bjJP30h9V4C

http://www.dhgtax.com/

http://ow.ly/bjJP30h9V4C

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Polling Question #8What have you done to prepare for tax reform?

a. Modeled taxable income to understand its impactb. Currently implementing tax savings strategies in advance of

tax reformc. I’m going to wait and see what happensd. I do not believe tax reform will happen

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