Accounting & auditing update

1. Jennifer Blake, Senior Manager Accounting & auditing update

3. Agenda • New Accounting Standards • Proposed Standards • Private Company Council

4. What’s new for 2013? Comprehensive Income Intangible Assets

5. Asu 2013-02 comprehensive income

6. Comprehensive Income • What is other comprehensive income? • Gains and losses that are included in equity but that bypass the income statement • Unrealized gains/losses on available for sale securities • Changes in defined benefit pension plans • Cash flow hedge gains and losses • Foreign currency gains and losses • What is accumulated comprehensive income?

7. Comprehensive Income • Adds additional disclosures for items reclassified out of accumulated other comprehensive income Does not change the current requirements for reporting net income or other comprehensive income

8. Comprehensive Income • Additional disclosure requirements: • Changes in the balances of each component of accumulated other comprehensive income (AOCI) • The effect of significant reclassifications out of each component of AOCI on the line items in the statement of income

9. Changes in AOCI Balances by Component • Disaggregate the total change of each component of other comprehensive income and separately present: • Reclassification adjustments • Current-period other comprehensive income • Both before-tax and net-of-tax presentations are acceptable • Presented on the face of financial statements or as a separate disclosure in the notes

11. Significant Items Reclassified Out of AOCI • Required to present information about significant items reclassified out of AOCI by component either: • On the face of the statement where net income is presented or • As a separate disclosure in the notes to the financial statements.

14. Comprehensive Income • Effective Date • Public Companies • Fiscal years, and interim periods within those years, beginning after December 15, 2012 (December 31, 2013 financial statements). • Nonpublic Companies • Fiscal years beginning after December 15, 2013 (December 31, 2014 financial statements). • Disclosures applied prospectively

15. Asu 2012-02 INTANGIBLES – GOODWILL AND OTHER

16. Indefinite-Lived Intangible Assets • Amends the current guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. • Under the current guidance an entity must: • Atleastannually • Calculate and compare the asset’s fair value with its carrying value • Record impairment loss if asset’s carrying value exceeds its fair value

17. Indefinite-Lived Intangible Assets • Under new guidance an entity has the option of first performing a qualitative assessment • Determine whether it is more likely than not that the asset is impaired • Evaluate events and circumstances that may affect the significant inputs used to determine the fair value of the asset • If based on qualitative assessment it is determined that it is more likely than not the asset is impaired, then the entity could proceed to the quantitative impairment test

18. Qualitative Assessment Cost factors Financial performance Legal, regulatory, contractual, political, business, or other factors Other relevant entity-specific events Industry and market considerations Macroeconomic conditions

19. Considerations Do internal personnel have skills and knowledge to perform assessment? What supporting documentation do we need to substantiate conclusions about each event and circumstance considered in the qualitative assessment? Is the most recent determination of fair value a good proxy for the current-period fair value?

20. Indefinite-Lived Intangible Assets • Effective Date • Annual and interim impairment tests performed in fiscal years beginning after September 15, 2012 • Early adoption is permitted

21. Significant Proposed Guidance Credit Impairment Leases Financial Instruments

22. Proposed Credit impairment model

23. Proposed Credit Impairment Model Changes the requirement for accounting for the estimate of credit losses from an “incurred” to an “expected” loss model Provides a single impairment approach for all financial assets measured at amortized cost or fair value through OCI Certain limited circumstances would allow a practical expedient

24. Expected vs. Incurred Loss Model

25. Measurement of Expected Credit Losses • No prescribed methodology however the proposal requires the estimate of current expected credit losses to: • Incorporate the time value of money • Reflect all internally and externally available information considered relevant in making the estimate • Reflect at least two possibilities • That a credit loss exists, and • That no credit loss exists • Reflect how credit enhancements mitigate expected credit losses • Does not require a discounted cashflow analysis

26. Examples of Estimating Credit Losses Loss rate approach Base component and a credit risk adjustment By-vintage basis Collective estimation method and an individual asset estimation method

27. Other Key Aspects • Interest Income • Based on contractual cash flows • Should remain separate from the credit losses • Accounting for Nonaccrual • Not probable that an entity will receive payment of substantially all of the principal • Cost recovery method • Probable entity will receive substantially all principal but not probable the entity will receive all of the interest • Cash basis method

28. Other Key Aspects • Troubled debt restructurings • Definition and determination of TDRs remain the same • Cost basis adjusted • Post modification effective interest rate equals the pre-modification effective interest rate • Impairment from restructuring recorded as direct write-off

29. Effective Date and Transition Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective No effective date has been proposed for the final guidance

30. PROPOSED lease ACCOUNTING

31. Leases – Lessee Accounting • Right of Use (ROU) approach • Recognize and record all leases • Asset = right to use the underlying asset • Liability = future lease payment obligations • Both asset and liability initially measured at the present value of the future lease payments • Leases with maximum lease term of 12 months or less may be excluded

32. Initial Measurement

33. Subsequent Measurement • Liability • Effective interest method used to make lease payments • Asset • Two different approaches dependent on underlying asset and terms of lease • Financing • Straight-line

34. Subsequent Measurement

35. Example • Assume lessee enters into a 3- year lease with the following annual payments • Year 1 - $20,000 • Year 2 - $24,000 • Year 3 - $28,000 • Initial Measurement of the ROU asset and liability to make lease payments is $64,012 based on a discount rate of 5%.

36. Example

37. Example

38. Transition - Lessee • Capital Leases • Carry forward amounts recorded as of the date of initial application, or • Apply full retrospective approach • Operating Leases • Full retrospective approach, or • Modified retrospective approach at the beginning of the earliest comparative period presented

39. PROPOSAL ON CLASSIFYING AND MEASURING Financial instruments

40. Financial Instruments • Applies to most financial instruments, except for the following: • Instruments classified in stockholders’ equity • Stock compensation arrangements • Pension plan assets and obligations • Lease receivables and payables • Financial guarantee contracts • Derivative instruments under ASC 815

41. Classification of Financial Assets • Classification dependent on: • their contractual cash flow characteristics • The business model in which they are managed • Three classification and measurement categories • Fair Value – Net income (FV-NI) • Fair Value – OCI (FV-OCI) • Amortized Cost

42. Contractual Cash Flow Characteristics Assessment • Do the contractual terms of the financial asset “give rise on specified dates to cashflows that are solely payments of principal and interest on the principal amount outstanding (SPPI)”? • No, then generally classified and measured FV-NI • Examples: equity securities, debt instruments with commodity-indexed payments • Yes, then assess business model

43. Business Models • Three distinct business models • Hold to collect • Amortized Cost • Hold and sell • FV-OCI or FV-NI (optional) • Other that is not consistent with (1) and (2) above • FV-NI

44. Classification of Financial Liabilities • Measured at amortized cost, with the following exceptions: • Short sale obligations – FV-NI • Financial liabilities for which entities business strategy is to subsequently transact at fair value – FV-NI • Nonrecourse financial liabilities that are contractually required to be settled with only the cash flows from related financial assets – accounted for on same basis as related financial asset

45. Presentation • The following is required to be presented on the face of the entity’s balance sheet • Financial assets and liabilities, by measurement category • Separate line item for hold-to-collect financial assets that have been identified for sale • Parenthetical fair value information for all financial assets and liabilities accounted for at amortized cost (exception: demand deposits and receivables/payables due in less than one year) • Parenthetical amortized cost information for its own outstanding debt instruments accounted for at FV-NI

46. Effective Date and Transition Cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective No effective date has been proposed for the final guidance

47. PRIVATE COMPANY COUNCIL

48. Private Company Council (PCC) • Created in 2012 to identify and vote on differences in U.S. GAAP for private companies • Will decide on exceptions and modifications to U.S. GAAP for private companies • FASB will be responsible for “endorsement” rather than ratification of the PCC’s decisions • 60 days to act of PCC decisions • Must provide public, written notice if FASB fails to endorse

49. Differentiating Factors for Public and Private Companies • Types and number of financial statement users • Financial statement user access to management • Investment strategies of equity investors • Ownership and capital structures • Accounting resources • Learning about new financial reporting guidance

50. Proposed Decision Making Framework • Identifies five areas for possible alternative guidance for private company • Recognition and measurement • Disclosures • Presentation • Effective date • Transition