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FASB Update

AAA Government & Nonprofit Section Meeting – 3/28/2014. FASB Update. Jeffrey D. Mechanick , FASB Assistant Director Email: jdmechanick@fasb.org Phone: (203)-956-5301.

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FASB Update

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  1. AAA Government & Nonprofit Section Meeting – 3/28/2014 FASB Update Jeffrey D. Mechanick, FASB Assistant Director Email: jdmechanick@fasb.org Phone: (203)-956-5301 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations.

  2. Agenda • Two Noteworthy ASUs from 2012-2013 • NFP Financial Statements Project • Two “Convergence” Projects • Leases, Revenue Recognition • Some Initiatives to Improve Relevance/ Reduce Complexity • Disclosure Framework, Private Company Council, Simplification Initiative

  3. Services Received from Personnel of an Affiliate (ASU 2013-06) • Personnel services received from an affiliate (parent/sub or common control) for which the affiliate doesn’t charge the recipient NFP should be recognized in the recipient NFP’s financial statements, measured at the actual costs incurred by the affiliate • Contributed services criteria no longer applicable • FV practicability exception if cost will significantly over-state or understate the value of the services received • Entities under Topic 954 (healthcare) would report as equity transfer • Effective for f/y beginning after 6-15-2014. Modified retrospective application; early adoption permitted

  4. Obligations Resulting from Joint and Several Liability Arrangements (ASU 2013-04) • Requires an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of: • amount the entity agreed to pay on the basis of its arrangement among its co-obligors, and • any additional amount the entity expects to pay on behalf of its co-obligors • Also requires disclosures about nature and amount of obligation and other information about those obligation • Effective date: • Public entities: f/y beginning after 12-15-2013 • Nonpublic entities: f/y ending after 12-15-2014 • Retrospective application; early adoption permitted

  5. NFP Financial Reporting Initiative

  6. Financial Statements of Not-for-Profit Entities Topics

  7. Net Assets Current GAAP Proposed GAAP + Disclosures

  8. Financial Performance: Operating Measure

  9. Financial Performance: Operating Measure

  10. Financial Performance: Statement Approach Retain Flexibility

  11. One Statement ApproachStatement of Activities

  12. Two Statement ApproachStatement of Current Operations

  13. Two Statement Approach (cont’d)Statement of Changes in Net Assets

  14. Cash Flow Statement

  15. Reporting of Expenses Expense by nature and function  one place in the F/S (statement of activities, separate statement, or schedule in notes) FUNCTION NATURE

  16. Remaining Topics • Reporting of investment expenses (Board discussion begun) • Liquidity and financial flexibility (Board discussion begun) • NFP-specific notes(in-process) • Expiration of capital restrictions and other display issues concerning capital transactions

  17. Project Timeline

  18. Why a Leases Project? • Lessee • Most lease assets and liabilities are off-balance sheet • Limited information provided about operating leases • Lessor • Lack of transparency about residual values • Enhance consistency with lessee proposal and revenue recognition proposal * Estimate according to the 2005 SEC report on off-balance sheet activities

  19. Proposed Right-of-Use Model

  20. Reducing Cost & Complexity in Response to Feedback on the 2010 ED • Short-term leases • Option to exclude leases with a maximum term of 12 months or less • Variable lease payments • Excluded if payments are not linked to an index or a rate • Renewal options • Excluded unless significant economic incentive to exercise the option

  21. Dual Approach (Impacts Income Statement) Start of lease End of lease Most equipment/ vehicle leases (Type A) Asset consumption more than insignificant Most real estate leases (Type B) Asset consumption not more than insignificant

  22. Lessee Accounting Overview (2013 ED) Income Statement Cash Flow Statement Balance Sheet Type A Type B

  23. Lessee Model: Four Approaches Considered in Response to Stakeholder Feedback on 2013 ED 1 Land, buildings, or integral equipment 1 Land, buildings, or integral equipment

  24. Lessor Accounting Overview (2013 ED) Income Statement Cash Flow Statement Balance Sheet Type A Type B

  25. Revenue Recognition Converged on major decisions up to now Final standard expected in 1H 2014 Effective Date: Years Beginning After Dec. 15, 2016 (public entities), Dec. 15, 2017 (nonpublic entities) • Objective: single, principle-based revenue standard • Improve accounting for contracts with customers • More robust framework for recognizing revenue • Increased comparability across industries & capital markets • Better disclosures • Nonpublic entities exempt from most quantitative ones

  26. R.R. - Scope Impacts almost all industries * Also excluded: contributions, collaborative arrangements

  27. R.R. - Core Principle 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 or services

  28. R.R. - Steps to Apply the Core Principle

  29. R.R. - Various Guidance Included • Warranties • Licenses • Right of return • Customer options for additional goods or services • Breakage (customers’ unexercised rights) • Principal versus agent • Bill and hold arrangements • Repurchase agreements • Nonrefundable upfront fees • Customer acceptance

  30. Revenue Recognition: Implementation Significant effort likely to be expended as the U.S. moves from the current industry-specific guidance to this new, broader, principles-based approach • FASB’s formation of a transition resource group • To identify and discuss broader issues, including those that may warrant follow-up standard-setting activity by the FASB • Similar to what we’ve done in the past following issuance of FAS 157 (Valuation Resource Group) and certain other broad standards • AICPA’s formation of various industry-focused groups • Includes one for Healthcare and one for NFPs

  31. Disclosure Framework Project • Objective • Improve effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements • Reducing volume of notes is not primary focus • Sharpening the focus on important information can increase usefulness and reduce volume

  32. DF - Decision Processes

  33. Disclosure Framework – Next Steps • Board Process • Reporting Entity Process Exposure Draft of chapter in Concept Statement 8 Comments due July 14, 2014 Proposed ASU on an Entity’s Decision Process Consider results of field Test entity’s use of discretion

  34. Private Company Council • Established by FAF on May 30, 2012; overseen by FAF • Identifies, deliberates & votes on proposed alternatives within existing U.S. GAAP for private companies • Based on agreed-on criteria w/FASB (Private Company Decision-making Framework) • Subject to FASB endorsement and public due process • Primary advisory body to FASB on active FASB agenda issues on behalf of private companies

  35. Standing FASB Project: Two Key Objectives • Private Companies • Monitor and consider proposed and final PCC alternatives for private companies with U.S. GAAP, in accordance with endorsement process • Public Companies, NFPs, EBPs • Determine whether such proposed and final alternatives are also appropriate for public companies, not-for-profit organizations, and employee benefit plans

  36. Private Company Council (PCC) Projects • Final Alternatives • Update No. 2014-02, Accounting for Goodwill • Separate FASB project currently considering for public companies, NFPs • Update No. 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach • Not extended to public companies, NFPs (health care at this time); being considered as part of FASB’s Hedging Project. • Update No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements • Not applicable to NFPs (already scoped out of VIE guidance)

  37. Goodwill Current U.S. GAAP Final PCC Alternative • Do not amortize goodwill • Test for impairment at least annually or more frequently • Goodwill impairment test • At reporting unit level • Two-step test • Optional qualitative assessment • Amortize goodwill • Test for impairment upon occurrence of triggering event • Goodwill impairment test • At entity level or reporting unit level • One-step test • Optional qualitative assessment

  38. Private Company Council (PCC) Projects • Current Project • Issue No. 13-01A, Accounting for Identifiable Intangible Assets in a Business Combination • FASB simultaneously considering for public companies, NFPs • Preagenda Research/ Potential Future Projects • Stock Compensation • Disclosures(select areas)

  39. Simplification Initiative“Quick-hit” projects to help address two types of complexity:

  40. Questions / Comments ?

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