accounting update - windham brannon 16 accounting update - 2017 update 2017-06—plan accounting:...

Accounting Update

Chris Rouse &Kerry Buchan

#WBInsights17

Accounting Update - 2017

A FASB Accounting Update for 2017A review of the recent Accounting Standards Updates issued by FASB with the focus on important implications for preparers of financial statements

Presented by:• Chris Rouse, Principal• Kerry Buchan, Principal

#WBInsights17 2


The Players in the Financial Reporting Arena• Financial Accounting Standards Board (FASB)• Private Company Council (PCC)• International Accounting Standards Board (IASB)• American Institute of Certified Public Accountants (AICPA)• International Auditing and Assurance Services Board (IAASB)• Public Company Accounting Oversight Board (PCAOB)• Securities and Exchange Commission (SEC)• U.S. Congress (#*<@!>*%#)• State Boards of Accountancy (SBoA)

#WBInsights17 3


• Current status of financial reporting• FASB and IASB Convergence Project

• Since the 2006 Memorandum of Understanding was entered into, all 12 original projects have been completed

• “Insurance” appears to be abandoned • FASB and IASB continue to work to converge

amendments and clarifications to Revenue Recognition

• The IASB Chair said in 2014 “When current projects completed, no more will be undertaken”

#WBInsights17 4


• Current status of financial reporting• FASB Convergence Activities in 2017 and beyond

• IASB recently issued IFRS on Financial Instruments with different measurements than FASB was willing to adopt

• FASB has issued its financial instruments document without derivatives, and recently issued a hedging ASU

• FASB Chair has said FASB will continue to work with IASB to improve IFRS and will participate in collaborative process with other standard setters to support worldwide investors

• FASB project “Comparability in International Accounting Standards” (see FASB website)

#WBInsights17 5


• Current status of financial reporting• SEC Roadmap to use of IFRS by US public companies

• 2014 Roadmap remains suspended• SEC Staff Study listed a number of “issues”, including

most significantly …• Lack of consistent application of IFRS• Lack of adequate independent funding of IASB• Lack of industry guidance in IFRS• Cost of conversion from GAAP to IFRS

• SEC Chief Accountant has said “US will need to have a strong voice” in IASB standard setting

#WBInsights17 6


• Current status of financial reporting• SEC Roadmap to use of IFRS

• In December 2014, SEC Chief Accountant said SEC would seek input from interested parties as to whether filers should be permitted to include as supplemental info financial statements and/or disclosures prepared using International Financial Reporting Standards

• To become effective, would be subject to rule-making process

• Nothing substantive has happened yet

#WBInsights17 7


• FASB Accounting Standards Updates• 2017 – 13 ASUs issued thru Nov 30 2017• 2016 – 20 ASUs issued• 2015 – 17 ASUs issued• 2014 – 18 ASUs issued• Check out FASB web site for ASUs at

www.fasb.org/home click on “Standards” tab

#WBInsights17 8


Update 2017-13—Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments• Adds SEC paragraphs pursuant to an SEC Staff

Announcement made at the July 2017 EITF meeting.

Effective years beginning after 12-15-2017 for publics and 12-15-2018 for non-publics

#WBInsights17 9


Update 2017-12 —Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (400 pages)

• Intended to align hedge accounting with the entity’s risk management activities

• Facilitates and expands opportunities for hedge accounting• Provides more time and expedient methods for the initial

quantitative effectiveness assessment• May qualify to use a qualitative approach for subsequent

effectiveness assessment• New and expanded disclosures


#WBInsights17 10


Update 2017-11—Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception• Part I affects entities that issue financial instruments that

include “down round” features• A down round feature reduces the strike price of the issued

financial instrument if the issuer sells shares of its stock for an amount less than the current strike price

• Under the new standard, a down round feature would no longer preclude equity classification of the instrument

#WBInsights17 11


Update 2017-11—Continued• Part II simply cleans up the extensive “Pending Content” in

FASB ASC 480 that was indefinitely deferred • This was done to improve the readability of FASB ASC 480


#WBInsights17 12


Update 2017-10—Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)• Applies to entities operating infrastructure under the terms of a

service concession arrangement (as defined in ASC 853)• e.g. A government body grants an entity the right to operate

infrastructure (airports, bridges, tunnels) for a specific period• Clarifies that, in such arrangements, the grantor (governmental

body) is the ‘customer’ in the arrangement• Only applies to arrangements within the narrow scope of ASC 853Effective years beginning after 12-15-2017 for publics and 12-15-2018 for non-publics

#WBInsights17 13


Update 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting• Issued to provide clarity, to reduce diversity in practice, and

to reduce cost and complexity• Provides guidance about which changes to the terms and

conditions of a share-based payment award require an entity to apply ‘modification accounting’ in Topic 718

• Provides criteria for avoidance of modification accounting –must meet all criteria

Effective years beginning after 12-15-2017 for all entities

#WBInsights17 14


Update 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities• Issued to amend the amortization period for certain purchased

callable debt securities held at a premium.• Reduced amortization period from the contractual life of the

instrument to the earliest call date.• Better aligns the amortization period of premiums to

expectations incorporated in market pricing on the securities.Effective years beginning after 12-15-2018 for publics and 12-15-2019 for non-publics

#WBInsights17 15


Update 2017-07—Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost• Requires that the ‘service cost’ component of net benefit

cost be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period.

• The other components of net benefit cost are required to be presented separately from the service cost component and outside of ‘income from operations’, if presented.


#WBInsights17 16


Update 2017-06—Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the EITF)• Under Topic 960, investments in master trusts are presented in a

single line item in the statement of net assets available for benefits. Similar guidance is not provided in Topics 962 or 965.

• This ASU requires a plan’s interest in each master trust to be presented in separate line items in the statement of net assets available for benefits and the statement of changes in net assets.

• Changes to disclosures related to interest in master trusts.Effective years beginning after 12-15-2018 for all plans.

#WBInsights17 17


Update 2017-05—Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets• Eliminates the guidance specific to real estate sales in ASC

360-20• Affects entities that enter into a contract with a noncustomer

to transfer a nonfinancial asset that is not a business or NFP• Affects entities that historically had transactions within the

scope of the real-estate-specific derecognition guidance• Defines an in substance nonfinancial asset and clarifies that

transfers of nonfinancial assets are in the scope of ASC 610-20

#WBInsights17 18


Update 2017-05—Continued• Clarifies that transfers of businesses and NFPs are under ASC 810• Eliminates the in substance real estate exceptions under ASC 810

and ASC 860• Clarifies how to account for partial sales transactions• Improves consistency in accounting for similar transactions in

different industries


#WBInsights17 19


Update 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment• Makes parts of the Private Company Council standard

(ASU 2014-02) applicable to all entities• Eliminates “Step 2” in the goodwill impairment test

currently required by ASC 350-20-35• No more ‘hypothetical purchase price allocation’ - If fair

value of the reporting unit exceeds its carrying amount, recognize impairment up to that amount, but not to exceed the carrying value of goodwill

Effective dates: Years beginning after 12-15-2019 for public SEC filers, after 12-15-2020 for public Non-SEC filers, and 12-15-2018 for non-publics.

#WBInsights17 20


Update 2017-03—Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)• Amends SEC paragraphs within the Codification related to

these topics

#WBInsights17 21


Update 2017-02—Not-for-Profit Entities—Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity• Provides clarity for NFP consolidation once ASU 2015-02

becomes effective• ASU 2015-02 introduced complexities for NFPs. This ASU

updates the guidance so the guidance for both limited partners and generals partners is found under ASC 958-810

Effective years beginning after 12-15-2016.

#WBInsights17 22


Update 2017-01—Business Combinations (Topic 805): Clarifying the Definition of a Business• Many ‘asset purchases’ were being treated as business

acquisitions. Definition is intended to correct this.• Introduces a ‘screen’ to eliminate the need to evaluate a business

– when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (or group)

• There is a lot to consider, but should help simplify the accounting for many acquisitions.


#WBInsights17 23


• Update No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

• Update No. 2016-19 Technical Corrections and Improvements

• Update No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)

• Requires restricted cash to be included in cash and cash equivalents for purposes of cash flow statement

#WBInsights17 24


• Update No. 2016-17 – Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control

• This is an update of ASU 2015-02 that will affect general partners of partnerships that are under common control with the general partner

• Update No. 2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

• This is about the recognition of the tax effect of intra-entity transfers primarily related to intellectual property

#WBInsights17 25


• Update No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)• Addresses eight specific transactions of narrow focus

• Debt extinguishment costs – financing• Zero coupon bonds settlement accreted interest –

operations• Contingent consideration from business combination – split

between operations and financing• Settlement of insurance claims – based on nature of loss• Proceeds from corporate owned life insurance policy –

investing• Premiums may be operating, investing or a combination

#WBInsights17 26


Update No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)

• Addresses eight specific transactions of narrow focus (cont)• Distributions from equity method investees – Its complicated

• Cumulative earnings approach – basically investing• Nature of distribution – based on source of distribution,

if known• Beneficial interest in securitization transactions – investing• Application of predominance principle – figure it out

yourself


#WBInsights17 27


Update No. 2016-14 – Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities

• Its about restricted and unrestricted net assets, and about tweaking cash flow presentation

• Present restricted and unrestricted on face, with details in footnotes

• Cash flow can continue to be direct or indirect, but if direct the indirect is not required

• Enhanced disclosures, including quantitative and qualitative matters

Effective in years beginning after 12/15/2017

#WBInsights17 28


Update No. 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

• Revises current “incurred losses” methodology to apply “expected losses” methodology

• Based on past events, historical experience, current conditions and reasonable and supportable forecasts

Effective for publics years beginning 12-15-2019, and for non-publics years beginning 12-15-20

#WBInsights17 29


• Update No. 2016-12 – Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

• Includes excluding sales taxes from transaction price

• Update 2016-11 – Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)

• Update No. 2016-10 – Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

• The guidance on licensing is useful now

#WBInsights17 30


Update No. 2016-09 – Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

• Part of Simplification Initiative• Puts income taxes into one “bucket”• Can elect to recognize forfeitures up front or as they

occur• Non-publics can apply “practical expedient” when

determining term of award• A non-public can use the intrinsic value method

Effective 12-15-16 for publics, 12-15-17 for non-publics

#WBInsights17 31


• Update No. 2016-08 – Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

• Clarification can be helpful now

• Update No. 2016-07 – Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

• Eliminates the requirement to retroactively apply the step method when ownership goes over 20%

#WBInsights17 32


• Update 2016-06 – Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)

• Update No. 2016-05 – Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)

• “Novation” is replacing a party to a hedge contract• Novation does not create a new contract so long as

hedge criteria continue to be met

#WBInsights17 33


• Update No. 2016-04 – Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force)

• Effect is to eliminate up-front recognition of estimated non-redemptions (“breakage”) except when it is “probable” to happen

Effective for publics in years beginning after 12-15-17, and 12-15-18 for non-publics. Early adoption is permitted.

#WBInsights17 34


• Update No. 2016-03 – Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council)

• Eliminates requirement to assess preferability of PCC Standards upon initial adoption

• Update No. 2016-02 – Leases (Topic 842)• Will be covered in Part 2

#WBInsights17 35


• Update No. 2016-01 – Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

• Represents FASB divergence from IFRS convergence project for Financial Instruments

• Requires changes in fair value of investments in equity securities (other than equity method investees) to be recognized in income

• May elect to carry non-marketable securities at cost plus or minus changes resulting from observable price changes

• Does not change accounting for debt securities held as investments

Effective for publics in years beginning after 12-15-2017, and 12-15-2018 for non-publics.

#WBInsights17 36


• Update No. 2015-17 – Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

• Eliminates requirement to classify deferred taxes based on classification of related timing difference

• All deferred taxes will be long term• Net all deferred tax assets and liabilities and present

as a single amountEffective for public companies years beginning after 12/15/2016, and for non-publics years beginning after 12/15/2017. Early application is permitted

#WBInsights17 37


• Update No. 2015-16 – Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

• Applies to business acquisitions where there are provisional amounts where fair values could not be determined as of the financial statement date

• Changes current retrospective recognition of provisional amounts to recognize when determined

#WBInsights17 38


• Update No. 2015-11 – Inventory (Topic 330): Simplifying the Measurement of Inventory

• Changes “market” in LCM to Lower of cost or net realizable value

• NRV is estimated selling price less costs to complete, dispose and transport

• Does not apply to inventory valued using LIFO or Retail Method

• Required to write down “when evidence exists” that NRV is lower than cost

Effective for fiscal years beginning after 12-15-16 including interim periods for publics

#WBInsights17 39


• Update No. 2015-07 – Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

• Applies to investments in private investment funds that do not frequently or timely measure net asset value

• Removes requirement to categorize within the fair value hierarchy assets measured at net asset value using practical expedient

• Requires disclosures for assets measured using practical expedient

Effective years beginning after 12-15-15 for publics, and after 12-15-16 for non-publics

#WBInsights17 40


• Update No. 2015-03 – Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

• Simplifies the presentation of debt premiums, discounts and issuance costs by netting issuance costs against the debt

Effective years beginning after 12-15-15 for publics, and after 12-15-16 for non-publics

#WBInsights17 41


• Update No. 2015-01 – Elimination of the Concept of Extraordinary Items

• Just what it says• Retains disclosure requirements for unusual and

infrequent items

Effective years beginning after 12-15-15

#WBInsights17 42


End of Part I

Bon Auditpetite!Chris [email protected]

Kerry Buchan [email protected]

#WBInsights17 43

Revenue Recognition

& Leases

Chris Rouse

#WBInsights17


Update No. 2014-15 – Going Concern• Prior to this, going concern accounting was in audit and

SSARS Standards• FASB started out with a “Business Risks” approach to

going concern• FASB later moved to a 12 month – 24 month model• FASB ended with a Standard very similar to current

GAAS/SSARS Standard• Requires management to assess going concern for a

period of 12 months from date financial statements are available to be issued

#WBInsights17 45


Update No. 2014-15 – Going Concern (continued)• List of factors to consider included in Standard

• Negative financial trends• Possible financial difficulties, eg loan defaults or

need to restructure loans, denial of trade credit• Internal matters, eg labor issues, dependence on

particular projects, uneconomic long-term commitments, need to revise operations

• External matters, eg legal matters, new legislation, loss of key customer or supplier etc

• Create a checklist of factors and complete checklist when preparing financial statements

#WBInsights17 46


Update No. 2014-15 – Going Concern (continued)• When conditions identified that raise substantial doubt,

management should consider whether it’s plans to mitigate those conditions will alleviate the substantial doubt

• Mitigating effect considered only to extent …• It is probable that plans will be effectively

implemented, and if so …• It is probable that the plans will mitigate the

conditions

#WBInsights17 47


Update No. 2014-15 – Going Concern (continued)• If substantial doubt alleviated, disclose …

• Conditions and events giving rise to going concern, and their possible effect(s) on the entity

• Management’s evaluation of those conditions and events in relation to ability to meet obligations

• Mitigating conditions and events, and …• Management’s plans to address the conditions and

events

#WBInsights17 48


Update No. 2014-15 – Going Concern (continued)• If substantial doubt not alleviated, disclose that

there is substantial doubt about etc., and the above disclosures of conditions, obligations and plans

• Effective for the annual period ending after December 15, 2016

#WBInsights17 49


Update No. 2016-02 – Leases (Topic 842)• Key take-aways• Bottom Line – the major effect on financial statements is the

balance sheet capitalization of operating leases; everything else is beans

• Lessees will “capitalize” all leases• Lessees will separately display operating and financing leases• Substantial new disclosure requirements for operating leases• Not much change for lessors• When adopted all prior presented financials will apply using

“modified retrospective” presentationEffective date is years beginning after 12/15/2018 for publics (and interims within), and beginning after 12/15/19 for non-publics (and interims after)

#WBInsights17 50


Determining Whether a Contract Contains a Lease1. Is there an identified asset (i.e., PP&E)?

• If Yes, go to 2• If No, it’s not a lease

2. Does the customer have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use?

• If Yes, go to 3• If the supplier has the benefits, it’s not a lease• If Neither, go to 3

3. Does the customer have the right to direct how and for what purpose the identified asset is used?

• If yes, it’s a lease and 4 and 5 are not applicable• If No, it’s not a lease• If neither, go to 4

#WBInsights17 51


Determining Whether a Contract Contains a Lease4. Does the customer have the right to operate the asset without the supplier having the right to change the operating instructions?

• If Yes, it’s a lease• If No, go to 5

5. Did the customer design the asset in a way that predetermines how and for what purpose the asset will be used?

• If Yes, it’s a lease• If No, it’s not a lease

#WBInsights17 52


Determining Whether a Contract Contains a Lease• Identified asset

• May be specific or implicit• e.g., a specific truck or a truck to be later identified

• Lessor substitution rights can negate lease accounting• No identified asset if supplier has “substantive”

substitution rights• Substantive if supplier has practical ability to substitute

and would benefit economically from substitution• If lessee can’t determine if substantive, then presume it

is not substantive

#WBInsights17 53


Determining Whether a Contract Contains a Lease• Right to control use of asset

• Power to direct the use of the asset• Right to operate the asset without the supplier

having change rights, or• The customer designed the asset in a way that

predetermines its use• If customer specifies output and cannot change it, it

is a supply or service contract and not a lease• Receives economic benefits of use

#WBInsights17 54


Lessee Accounting• Finance leases meets any one of the following criteria

• Transfers ownership by the end of the lease term• Grants lessee purchase option that lessee is “reasonably

certain” to exercise• Lease term is for the “major part” of the remaining

economic life of the asset• Present value of lease payments and any residual value

guarantee by the lessee equals or exceeds “substantially all of the fair value of the asset”

• The asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term

• All other leases are operating leases

#WBInsights17 55


Lessee Accounting• Lease payments include …

• Fixed payments less incentives to be paid to lessee• Variable lease payments fixed and determinable at lease

inception• Exercise price of purchase option that is reasonably certain of

being exercised• Payments for termination penalties if lease term reflects

exercise of option to terminate lease• Amounts probable of being owed under residual value

guarantee• Lease payments specifically exclude ...

• Variable lease payments not fixed at inception• Lessee guarantee of lessor debt• Amounts allocated to non-lease components

#WBInsights17 56


Lessee Accounting• Lease vs non-lease components

• Lease may have multiple components, e.g. building and machines

• Separate components if (1) lessee can benefit either separately on its own or if combined with other readily available resources, and (2) the right of use is neither highly dependent upon nor highly interrelated with the other assets in the lease

• Land is a separate component unless not significant to classification of lease or amount is insignificant

#WBInsights17 57


Lessee Accounting• Lease vs non-lease components (continued)

• Non-lease components are not capitalized• Non-lease components are generally services, but not always

• Only plant, property and equipment is lease component; all other components would be non-lease components

• Lessee may use practical expedient and not separate non-lease components

• Allocate lease consideration based on relative standalone selling prices of each component

• Use observable info first, unobservable next and residual allocations last

#WBInsights17 58


Lessee Accounting• Initial measurement of lease obligation (continued)

• Lease term• FASB changed from “most likely” period to …

Non-cancelable period plus extension that lessee is “reasonably certain” to exercise, plus any extensions under the control of the lessor

• Reassess lease term if … • Significant event or change under the control of lessee

directly affects “reasonable certainty”• An event covered by the contract occurs that requires

lessee to exercise, or not exercise, options• The lessee changes their mind re “reasonably certain”

#WBInsights17 59


Lessee Accounting• Initial measurement of lease obligation (continued)

• Measurement of right of use liability and asset• Lease liability is present value of lease payments not paid,

discounted using …• Rate implicit in the lease if readily determinable, or if

not then …• The lessee’s incremental borrowing rate, or … • Non-public entities may use risk-free interest rate

• Right of use asset is measured as … • The lease liability• Lease payments made before commencement, less any

lease incentives received• Initial direct costs

#WBInsights17 60


Lessee Accounting• Subsequent measurement

• Finance lease follows principles for property and debt• Right of use asset is amortized on straight line basis

from commencement over the lease term• Lease liability is present value of remaining lease

payments and interest is expensed• Lease liability is not adjusted for changes in

variable payments due to index

#WBInsights17 61


Lessee Accounting• Subsequent measurement (continued)

• Operating leases are different• Lease liability is present value of remaining payments,

excluding changes resulting from variable lease payments (e.g., due to change in index)

• Right to use asset is lease liability adjusted for ...• Prepaid or accrued rent due to uneven lease

payments• Unamortized lease incentives• Unamortized initial direct costs• Any impairment of assets

#WBInsights17 62


Lessee Accounting• Subsequent measurement (continued)

• Operating leases are different• Income statement recognizes a single lease cost as

operating expense• Impairment considerations

• Included in consideration of all long-lived asset impairment

#WBInsights17 63


Lessee Accounting• Short-term lease exception

• Leases with a term of 12 months or less, no options that are “reasonably certain” to be exercised, and does not include a purchase option

• Requires an accounting policy election (i.e., disclosure if adopted)

#WBInsights17 64


Lessee Accounting• Related party leases

• No special provisions for accounting for related party leases

• Standard refers to “legally enforceable” provisions

#WBInsights17 65


Lessor AccountingLease classification

• Sales-type lease has same definition as financing lease for lessees

• Transfers ownership• Option to purchase that lessee is reasonably certain to

exercise• Lease term is major part of remaining economic life• Present value of lease payments plus lessee guaranteed

residual value equals or exceeds substantially all of the fair value of the asset

• The asset is specialized and will have no alternative use to lessor at end of lease

#WBInsights17 66


Lessor Accounting• Lease classification (continued)

• Direct financing lease• Meets none of the requirements of sales type lease,

but the … • Present value of lease payments plus residual

guarantee by a third party equals or exceeds substantially all of the fair value of the asset, and it is probable that lessor will collect lease payments and residual value guarantee

• All other leases are operating leases

#WBInsights17 67


Lessor Accounting• Lease vs non-lease components

• Same allocation as for lessees• Consider revenue recognition guidance (a contract with a

customer)• May elect out of allocation

#WBInsights17 68


Lease Modifications• For both lessees and lessors, lease modification is a change in

scope (the leased asset(s)) or term of lease• Separate contract if (1) there is additional right of use and, (2) lease payments increase commensurate with standalone price for the additional right of use• Change to existing lease for all other modifications

results in remeasurement• Modifications require reassessment of lease

classification

#WBInsights17 69


Presentation and Disclosure• FASB views

• Separate display and/or disclosure of lease assets and liabilities is important to user understanding of financial position, results of operations and future cash flows

• Statement of financial position• Lessee

• Present or disclose right to use assets and lease liabilities separately from other assets and liabilities

• Cannot present financing lease assets and liabilities and operating lease assets and liabilities in the same line item on the statement of financial position

• Lessor• Present or disclose lease assets separately from other

assets#WBInsights17 70


Presentation and Disclosure• Statement of comprehensive income

• Lessee• Operating leases in expenses as a single lease cost (ie,

no interest breakout)• Financing lease separately recognize amortization and

interest elements• Lessor

• Option to present or disclose based on business model• Revenues, gains or financing income

#WBInsights17 71


Presentation and Disclosure• Statement of cash flow

• Lessee• Aligns with income statement• Operating leases in operations• Financing leases in financing and interest expense• Payments for leasehold improvements in investing• Non-cash change is disclosed

• Lessor• All cash receipts are operating

#WBInsights17 72


Presentation and Disclosure• Disclosures

• Overall – get a great disclosure checklist• Both lessees and lessors

• General description of leases• Basis, terms and conditions of variable lease payments• Existence, terms and conditions of options to extend or

terminate leases• Assumptions and judgments in determining whether

contract contains a lease• Assumptions and judgments in determining non-lease

components• Leases with related parties

#WBInsights17 73


Presentation and Disclosure• Lessee

• Qualitative disclosures• Narrative regarding options recognized and not

recognized• Existence of residual value guarantees• Restrictions or covenants• Determination of discount rate• Non-lease components• Leases in progress

#WBInsights17 74


Presentation and Disclosure• Lessee (continued)

• Quantitative disclosures• Finance least cost segregated by amortization

and interest• Operating lease cost• Variable lease cost• Short-term lease cost• Sublease income• Gain or loss on sale and leaseback

#WBInsights17 75


Presentation and Disclosure• Lessee (continued)

• Quantitative disclosures• For each type lease …

• Cash paid for amounts included in lease liabilities

• Non-cash lease liabilities arising from obtaining right-to-use assets

• Weighted average remaining lease term• Weighted average discount rate

#WBInsights17 76


Getting Ready for the New Lease Standard• Review the Illustrations in the new Standard• Lessee advisors and Lessors are very aware of the new Standard,

and are evaluating lease terms in light of the new Standard• When evaluating new leases, consider

• Lease terms (“reasonably certain)• Non-lease components• Discount rates (rate implicit vs borrowing rate)

• Re-evaluate informal related party leases

In conclusion … • The devil is in the details … Study the new Standard and related

Illustrations carefully#WBInsights17 77


The New Revenue Recognition StandardUpdate 2014-09 – Revenue Recognition• Overarching principle for recognizing revenue

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

• In effect, revenue is recognized as changes in assets and liabilities are recognized

#WBInsights17 78


The New Revenue Recognition Standard• Five steps to achieve core principle

• Identify the contract with a customer• Identify the separate performance obligations• Determine the transaction price• Allocate the transaction price to performance obligations• Recognize revenue when the entity satisfies a performance

obligation

• Compare to (1) persuasive evidence, (2) delivery, (3) fee fixed or determinable and (4) collectability assured

#WBInsights17 79


The New Revenue Recognition Standard• Revenue recognition concerns

• Transitions• Training• Systems modifications• Company policies• Tax accounting• Others

#WBInsights17 80


The New Revenue Recognition Standard• Getting ready for the new standard

• Study the parts of the new standard that apply to you, and review the implementation guidance on the FASB and AICPA websites

• Evaluate current contracts with customers• Identify performance obligations and information systems• Identify transaction prices

#WBInsights17 81


The New Revenue Recognition Standard• Getting ready for the new standard (continued)

• Evaluate current revenue recognition practices and compare to requirements of new standard

• Communication of completion of performance obligations

• Consider necessary changes in contract to achieve desired revenue recognition timing

• Transfer of risks and rewards of ownership

#WBInsights17 82



• Consider effect on compensation arrangements, income taxes, etc.

• May effect timing of compensation based on revenue or net income

• Some tax revenues are determined by GAAP• Consider changes to information system to capture necessary

info• Much of the information necessary to implement the new

standard does not exist in the accounting department

#WBInsights17 83



• Evaluate current revenue recognition practices and compare to requirements of new standard

• Communication of completion of performance obligations• Consider necessary changes in contract to achieve desired

revenue recognition timing• Transfer of risks and rewards of ownership

#WBInsights17 84


The New Revenue Recognition Standard• Getting ready for the new standard

• Point: This is a complicated standard – the first time

– after that it’s a snap

#WBInsights17 85


In Conclusion…

Bon Auditpetite!

Chris [email protected]

#WBInsights17 86

accounting update - windham brannon 16 accounting update - 2017 update 2017-06—plan accounting:...

Documents