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May 17, 2013
IIA ColumbusQuarterly accounting update – Spring 2013
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Today’s presenter from McGladrey
Brandon Rucker, Partner
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Agenda
Recently issued and effective guidance10 min.
FASB/IASB convergence projects40 min.
Questions and closing remarks10 min.
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Objective
By the end of this webcast, you will have a high level understanding of certain recently issued and effective accounting guidance as well as the status of the major FASB/IASB convergence projects.
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Recently issued and effective guidance
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ASU 2013-02 - Reporting of amounts reclassified out of accumulated other comprehensive income
Addresses presentation requirements for items reclassified out of accumulated other comprehensive income (AOCI)
No change to the current requirements for reporting net income or other comprehensive income
Requires an entity to provide information about the amounts reclassified out of AOCI by component
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ASU 2013-02 - Reporting of amounts reclassified out of accumulated other comprehensive income
On the face of the statement where net income is presented or in the notes, present amounts reclassified out of AOCI by the respective line items in net income if the amount is required to be reclassified to net income in its entirety
For amounts not required to be reclassified in their entirety to net income, cross-reference to other disclosures
Effective date and transition
Public Effective prospectively for reporting periods beginning after December 15, 2012
Nonpublic Effective prospectively for reporting periods beginning after December 15, 2013
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ASU 2013-04 - Obligations resulting from certain joint and several liability arrangements
Provides guidance on obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date- Applies to debt arrangements, other contractual
obligations, and settled litigation and judicial rulings Currently there is diversity in practice
- Some entities record the entire obligation- Other entities record less than the entire obligation, such
as an amount corresponding to the proceeds received
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ASU 2013-04 - Obligations resulting from certain joint and several liability arrangements
Measure obligations as the sum of the following: - The amount the reporting entity agreed to pay on the
basis of the arrangement among its co-obligors - Any additional amount the reporting entity expects to pay
on behalf of its co-obligors Disclose the nature and amount of those obligations as
well as other information about those obligations
Effective date and transition
Public Effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013
NonpublicEffective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter
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ASU 2013-05 - Cumulative translation adjustments
Resolves the diversity in practice as to whether ASC 810-10, Consolidation—Overall, or ASC 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment (CTA) into net income upon a derecognition event
The derecognition guidance in ASC 810-10 supports releasing the CTA upon the loss of a controlling financial interest
ASC 830-30 provides for the release of the CTA only if a sale or transfer represents a complete or substantially complete liquidation of an investment in a foreign entity
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ASU 2013-05 - Cumulative translation adjustments
Differentiates between transactions within a foreign entity and those that relate to an investment in a foreign entity
For transactions within a foreign entity, ASC 830-30 applies: - CTA should be released only if the sale or transfer results in the
complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided
For transactions that change an investment in a foreign entity, the CTA should be released upon the occurrence of either:- Events that result in the loss of a controlling financial interest
in a foreign entity, or- Events that result in an acquirer obtaining control of an
acquiree in which it held an equity interest immediately before the acquisition date (i.e., a step acquisition)
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ASU 2013-05 - Cumulative translation adjustments
Effective date and transition
PublicEffective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013
Nonpublic Effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter
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Other recently issued guidance
Nonpublic calendar year-end entities - ASUs effective in 2013- 2011-10 - Derecognition of in Substance Real Estate – a Scope Clarification- 2011-11 - Disclosures about Offsetting Assets and Liabilities - 2012-02 - Testing Indefinite-Lived Intangible Assets for Impairment- 2012-06 - Subsequent Accounting for an Indemnification Asset Recognized at the
Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution
- 2012-07 - Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs
- 2013-01 - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
- 2013-03 - Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities
Nonpublic calendar year-end entities - ASUs effective in 2014- 2011-06 - Fees Paid to the Federal Government by Health Insurers- 2012-01 - Continuing Care Retirement Communities - Refundable Advance Fees- 2012-04 - Technical Corrections and Improvements- 2012-05 - Not-for-Profit Entities: Classification of the Sale Proceeds of Donated
Financial Assets in the Statement of Cash Flows
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Other recently issued guidance
Public calendar year-end entities - ASUs effective in 2013- 2011-10 - Derecognition of in Substance Real Estate – a Scope
Clarification- 2011-11 - Disclosures about Offsetting Assets and Liabilities - 2012-01 - Continuing Care Retirement Communities - Refundable Advance
Fees- 2012-02 - Testing Indefinite-Lived Intangible Assets for Impairment- 2012-04 - Technical Corrections and Improvements- 2012-06 - Subsequent Accounting for an Indemnification Asset Recognized
at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution
- 2013-01 - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
Public calendar year-end entities - ASUs effective in 2014- 2011-06 - Fees Paid to the Federal Government by Health Insurers- 2012-05 - Not-for-Profit Entities: Classification of the Sale Proceeds of
Donated Financial Assets in the Statement of Cash Flows
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FASB/IASB convergence projects
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Major FASB/IASB convergence projects timeline
Project Status 2Q
Financial Instruments
Recognition and measurement ED issued in February 2013 C
Impairment ED issued in December 2012 C
Hedging DP issued in February 2011
Leases ED issued in August 2010 ED
Revenue Recognition Revised ED issued in November 2011 F
ED = exposure draft DP = discussion paper C = comment deadline F = final
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Financial Instruments project
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Recognition and measurement – Exposure draft
Issued February 14 Comment period ends May 15 Applies to all entities and most financial instruments
- Certain specialized industry guidance would be retained Transition would be through cumulative effect
adjustment to opening balance sheet No proposed effective date
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Recognition and measurement - Summary
Measure debt financial assets based on cash flow characteristics and business model1. Contractual cash flows criterion – Fail and instrument
must be measured at fair value through net income (FV-NI)• Contractual terms provide for principal & interest (P&I)
payments on specified date- P = Amount transferred by the holder at initial recognition- I = Consideration for time value and credit risk
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Recognition and measurement - Summary
1. Contractual cash flows criterion (continued)• Consider terms that change the timing/amount of P&I
payments as they may cause instrument to fail criterion- Variable rates that are not just consideration for time value and
credit risk- Leveraged terms- Rate resets where index and time period are not calibrated- Certain prepayment/term-extending options- Conversion options
• Separate guidance provided for evaluating beneficial interests
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Recognition and measurement - Summary
2. Business model assessment• Amortized cost (AC): Hold to collect contractual cash
flows• Fair value through other comprehensive income (FV-
OCI): Hold to collect contractual cash flows and to sell• FV-NI: All other
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Recognition and measurement - Summary
2. Business model assessment (continued)• Determined at recognition based on how assets are
collectively managed- Consider how performance is reported to key
management- How management is compensated- Frequency, volume and reasons for past sales and
expected future sales• Sales as a result of significant credit deterioration
would not be inconsistent with AC classification, but sales for other reasons should be infrequent for that business model
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Recognition and measurement - Summary
2. Business model assessment (continued)• Current tainting provision is eliminated; however, sales
inconsistent with stated business objective could call in to question credibility
• Reclassification would occur only under the following circumstances- Business model changes (should be very infrequent) and- Change must be significant and demonstrable to external parties
• The following are not business model changes- A change in intention for particular assets
- Temporary disappearance of a particular market
- Transfer of assets to another part of the entity with a different business model
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Recognition and measurement - Summary
Equity securities (other than equity method investments) – Measure at FV-NI- Practicability exception for nonmarketable
equity securities• Measure at AC less impairment
- Assess impairment indicators qualitatively to determine if more-likely-than-not that fair value is less than carrying amount◦ If so, impairment is measured at excess of
carrying amount over fair value• Adjust carrying value for observable price changes
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Recognition and measurement - Summary
Financial liabilities:- Measure at FV-NI if:
• Business strategy at inception is to transact at fair value, or
• Liability is a short sale- Measure nonrecourse financial liability using model for
related financial assets if liability is required to be settled only with cash flows from the related assets
- Measure all others at AC
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Recognition and measurement - Summary
Hybrid instruments:- Financial assets – apply cash flow characteristic/business model
assessment (FV-NI if cash flows are not solely P&I as defined)- Financial liabilities – apply ASC 815-15 to determine if derivative
should be bifurcated, account for host instrument under new model
Fair value option limited to:- Certain hybrid financial liabilities- Groups of financial assets/liabilities managed net on FV basis- Financial assets otherwise eligible to be classified as FV-OCI- Certain hybrid nonfinancial liabilities
• Changes in FV of liabilities attributed to instrument specific credit risk would be recognized in OCI, not NI
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Recognition and measurement - Summary
Presentation- Group items on balance sheet and income statement
based on classification (FV-NI, FV-OCI and AC)- Public entities disclose FV of most financial instruments
parenthetically on face of balance sheet Disclosure requirements
- Reclassifications due to change in business model- Sales of AC or FV-OCI assets- Information for equity securities for which practicability
exception was elected- Information on core deposit liabilities (required for public
entities only)
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Recognition and measurement - Summary
Convergence?- Nearly converged on debt instruments- IASB permits equity securities that are not held for trading
to be FV-OCI- Different criteria for fair value option
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IASB ED on expected credit losses
Issued in March with comment period ending in July Similar to FASB proposal, requires recognition of
expected (rather than incurred) credit losses on financial assets exposed to credit risk
Unlike FASB, losses recognized on those assets that have not experienced credit quality deterioration are limited to 12-month expected credit losses rather than lifetime
Stay tuned – Boards intend to engage in redeliberations after comments are received on respective proposals
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Leases project
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Current status
Project objective is to develop a new approach to lease accounting that would ensure that assets and liabilities arising under leases are recognized on the balance sheet
The FASB and IASB have completed substantive redeliberations and are looking to issue a revised ED in the second quarter of 2013
Initial ED issued in August 2010, with redeliberations starting in 2011
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Redeliberations during the quarter
How to identify and account for separate lease components in a contract containing a lease of multiple underlying assets- For contracts containing multiple underlying assets,
identify the separate lease components using the criteria from the revenue recognition project
- For separate lease components containing a lease of more than one underlying asset, determine the lease classification based on nature of the primary asset
- For a single lease component containing both land and building elements, do not account separately for the elements
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Revenue Recognition project
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Current status
The FASB and IASB have completed substantive redeliberations and are looking to issue a final standard in the second quarter of 2013
During the first quarter the Boards reached tentative decisions on the following items among others:- Disclosures - Effective date & transition
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Tentative decisions - Disclosures
Several disclosures removed from those proposed in the 2011 ED- Quantitative reconciliation of contract assets and liabilities- Quantitative reconciliation of costs to obtain or fulfill a contract
Several other disclosures from those proposed in the 2011 ED not required for private companies (FASB only)- Quantitative disclosures of disaggregation of revenue- Information about methods, inputs and assumptions to determine
transaction price and estimate standalone selling price, among others
Many annual disclosures will be required to be provided on an interim basis for public companies
Disclosures will be significantly expanded from today’s requirements
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Tentative decisions - Effective date & transition
Effective date for public companies- Annual reporting periods beginning after December 15,
2016, including related interim periods- Early application is prohibited (FASB only)
Effective date for private companies (FASB only)- Annual reporting periods beginning after December 15,
2017, including related interim periods- Early application is allowed (earliest would be for annual
reporting periods beginning after December 15, 2016)
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Tentative decisions - Effective date & transition
Transition options- Retrospective
• Apply new revenue guidance to all prior periods- Modified retrospective
• No restatement of prior periods• Apply new revenue guidance to in-progress contracts
as of the adoption date going forward and subsequent contracts
• Recognize a cumulative effect adjustment to retained earnings for application of the new revenue guidance to in-progress contracts
• Disclose in the year of adoption the effect on each line item in the financial statements as a result of adoption
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Questions and closing remarks
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Questions?For more information, please contact:
Brandon Rucker* [email protected] ( 704.442.3812
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