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Current Topics in Accounting May 28, 2010

Current Topics in Accounting May 28, 2010. Dan Nutley, Partner Ilene Jacobson, Manager California Central Valley Office.

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Current Topics in Accounting May 28, 2010

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  1. Current Topics in AccountingMay 28, 2010 Dan Nutley, Partner Ilene Jacobson, Manager California Central Valley Office

  2. The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.

  3. Today’s Discussion • Accounting Standards Codification • Fair Value Measurements • Non-Controlling Interests • IFRS and US GAAP Convergence • Variable Interest Entities • Subsequent Events

  4. Today’s Discussion • Revenue Recognition • Uncertain Tax Positions • Update on Select FASB Projects • Statement Standards for Tax Services • Four Statements Auditing Standards • Statement on Standards for Accounting and Review Services

  5. What is the Codification? • FASB Statement No. 168 – ASC is the authoritative source for U.S. GAAP (nongovernmental) in addition to guidance issued by the SEC • It eliminates the U.S. GAAP hierarchy (for nongovernmental entities) and instead integrates U.S. GAAP into a single authoritative codification • Effective for financial statements issued for interim and annual periods ending after September 15, 2009

  6. Codification Content • The following literature is included in the Codification: • FASB Statements, Interpretations, Technical Bulletins, Staff Positions, Staff Implementation Guides, and Statement No. 138 Examples • EITF Abstracts and Topic D • Derivative Implementation Group Issues • Accounting Principles Board Opinions • Accounting Research Bulletins • FASB Accounting Interpretations • AICPA Statements of Position, Practice Bulletins, incremental accounting guidance from Audit and Accounting Guides, and Technical Inquiry Service questions and answers (for Software Revenue Recognition only) • Select SEC guidance – an “S” precedes SEC content in ASC

  7. How is the Codification Structured? Areas - Topics - Subtopics - Sections - Subsections

  8. Exposure Drafts • Exposure drafts are located • “Other Sources” section of the Codification • FASB website • Exposure drafts are titled “Proposed ASUs” • FASB due process for exposure drafts is not changing due to the Codification

  9. Ongoing Standard Setting Process • New standards are issued in form of Accounting Standards Update (“ASU”) • Accounting Standards Update location • Home page of codification • FASB website • Once issued an ASU is referenced with year and number, such as “Update No. 2009-12” • ASU will be issued this way regardless of how such guidance is developed (for example, FASB Statements, FASB Staff Positions, and EITF Abstracts).

  10. Ongoing Standard Setting Process • ASU – Not authoritative • Upon issuance of ASU, both the old and pending rules will be included in the Codification • Impact? • Disclosures • References in company research memos • References in company accounting manuals

  11. Fair Value Measurements Fair Value Measurements - Overview (ASC 820) • Defines fair value for financial reporting purposes • The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. • Establishes a framework for measuring fair value • Fair value hierarchy (levels 1, 2 and 3) • Exit market (principal), valuation premise • Expands disclosures about the use of fair value

  12. Fair Value Measurements Effective Date (ASC 820) • Effective for fiscal years beginning after Nov. 15, 2007 (i.e., 2008 for calendar year end companies) • Partial Deferral under FSP FAS 157-2 • One year deferral for non-financial assets and liabilities • Examples of items deferred would include • Non-financial (non-recurring) items acquired in a business combination • Impairments under FAS 142 and FAS 144

  13. Fair Value Measurements Additional FASB guidance • FSP Statement 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active • FSP Statement 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly • FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

  14. Fair Value Measurements FSP Statement 157-4 • Requires two-step approach • Step 1 – Assess factors to determine if market has become inactive • There has been a significant decline in volume compared to normal levels • Do not presume transactions are not orderly • Step 2– If market is inactive, perform additional analysis as the transaction price may not represent fair value • Understand facts and circumstances • Use of judgment

  15. Fair Value Measurements FSP Statement 157-4 • Identifying transactions that are not orderly • Not appropriate to conclude that all transactions in market are not orderly due to inactivity • Observable transactions must be evaluated based on weight of evidence (orderly transaction?) • Not required to undertake all efforts to make determination, but cannot ignore information that is available without undue cost and effort • Transaction price may have to be weighted (vs. disregarded) in determining fair value

  16. Fair Value Measurements New disclosure requirements • FSP FAS 157-4 • Inputs and valuation techniques used to measure FV in interim and annual periods • Changes in valuation technique or inputs made during the interim period • Disaggregation guidance – disclose debt and equity securities by major security type • FSP FAS 107-1 and APB 28-1 • Extends disclosure requirements under Statement 107 to interim financial statements • Requires disclosure of methods and significant assumptions used to estimate fair value

  17. Fair Value Measurements Proposed guidance • FSP FAS 157-f • Provide guidance on the measurement of liabilities in accordance with Statement 157 • FSP FAS 157-g • Estimate fair value of certain alternative investments using net asset value (NAV) per share of the investment unless fair value is readily determinable

  18. Noncontrolling Interests in Consolidated Financial Statements Statement 160 (ASC 810) • Effective for annual periods beginning after December 15, 2008 (1/1/09 for calendar Y/E) • Noncontrolling interests considered equity • Noncontrolling interests’ share of subsidiary earnings is not an expense • Loss allocation in excess of noncontrolling interest basis will be required (i.e., debit balances are ok) • Transition – • Prospective accounting application • Retroactive application for presentation and disclosure

  19. Noncontrolling Interests in Consolidated Financial Statements Statement 160 (ASC 810) • Increase in parent ownership interests is an equity transaction • Decrease in parent ownership interests • Without a loss of control: equity transaction • With a loss of control: • New basis recognition event • Retained interests recorded at fair value • Revaluation of retained equity interests recognized as gains and losses

  20. Noncontrolling Interests in Consolidated Financial Statements Statement 160 (ASC 810) • Statement of Cash Flows • Indirect method - Start with net income as defined by Statement 160 • While control is maintained, transactions with noncontrolling interests should generally be reported as a financing activities • FASB reconsidering scope of Statement 160 (ASC 810-10) is addressing selected implementation questions

  21. The March Toward Convergence FASB / IASB Relationship: • September 2002 - Norwalk Accord • October 2005 - The FASB and the IASB reaffirmed their commitment to convergence • 2006 – Reaffirmation of Memorandum of Understanding • 2008 – Update of Memorandum of Understanding • Memorandum of Understanding: • Short term convergence project to eliminate narrow differences • Joint long-term projects to develop common standards • Coordinating future technical topics

  22. The March Toward Convergence Short-term projects • Fair Value Option (FASB) – Completed • Borrowing costs (IASB) – Completed • Segment reporting (IASB) – Completed • Income taxes (Joint) – IASB’s issued ED to replace IAS 12, Income Taxes; FASB will issue ITC on IASB’s standard • Joint Ventures (IASB) – ED issued – final standard expected 2009 • Impairment (Joint) – deferred based on 2008 MOU • Earnings per Share (Joint) – EDs issued August 2008 • Research and Development (FASB) – Inactive • Subsequent events (FASB) – FAS 165 issued in May 2009

  23. The March Toward Convergence Long-term projects • Business Combinations (Joint) – Completed • Consolidations (Joint) – IASB issued ED in December 2008 • Derecognition (Joint) – IASB issued ED in March 2009 • Fair Value Measurements (IASB) – ED issued on May 28, 2009 • Financial Instruments (Joint) – IASB/FASB issued ITC in March 2008; FASB issued ED to simplify hedge accounting • Financial Statement Presentation (Joint) – Discussion papers issued in 2008 • Revenue Recognition (Joint) – Discussion paper issued in December 2008 • Leases (Joint) – Discussion paper issued March 2009 • Liabilities and Equity (Joint) – ED expected soon from boards • Conceptual Framework (Joint) – Eight phase project – ED issued in May 2008 on first two

  24. Variable Interest Entities • Amends FASB Interpretation 46(R) • Key changes • Eliminates scope exception for QSPEs • Methodology for determining primary beneficiary • Emphasizes a “qualitative” analysis, including both of the following: • 1. Power to direct activities that most significantly impact the VIE’s economic performance, and • 2. Right to receive benefits or obligations to absorb losses that could potentially be significant to the VIE

  25. Variable Interest Entities • Key changes (continued) • Continuous reassessment of PB • Enhanced disclosures • Effective date and Transition • Annual period beginning after November 15, 2009 • Option of retrospective or cumulative effect adoption • No grandfathering of previous VIE and PB determinations

  26. Subsequent Events • FASB Statement No. 165, issued May 2009 (ASC 855) • Effective for periods after June 15, 2009 • Recognition guidance • Recognized subsequent events • Non-recognized subsequent events

  27. Subsequent Events • Subsequent events should be evaluated through: • Public companies – issuance date • Privately held companies – Date the financial statements are available for issuance • Requires disclosure of the date through which subsequent events have been evaluated • Auditor report date = Company’s date

  28. Revenue Recognition • EITF consensus issued in October 2009 • ASU 2009-13 (EITF 08-1) • Multiple-Deliverable Revenue Arrangements • Updates ASC 605, Revenue Recognition • ASU 2009-14 (EITF 09-3) • Certain Revenue Arrangements That Include Software Elements • Updates ASC 985, Software

  29. Multiple-Deliverables • Current practice => EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables • Determine separate unit of accounting – • Standalone value to the customer • Objective and reliable evidence of fair value of undelivered items • Delivery or performance is probable and in control of vendor • Allocate consideration amount separate units based on relative fair value (VSOE and TPE) • Residual method if no evidence of fair value for undelivered items

  30. Multiple-Deliverables • ASU 2009-13, Multiple-Deliverable Revenue Arrangements • When VSOE (Vendor Specific Objective Evidence) or TPE (Third Party Evidence) cannot be determined, company may use “best estimate of selling price” • Allocate consideration to all deliverables at inception of the arrangement • Eliminates the residual method of revenue recognition • Expands disclosures requirements significantly

  31. Multiple-Deliverables • Transition • Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2009 • Early adoption is permitted • If adopted in an interim period, requires retrospective application from the beginning of an entity’s fiscal year • May elect to adopt retrospectively for all prior periods, unless it is impracticable to do so

  32. Arrangements that Include Software Elements • ASU 09-14, Certain Revenue Arrangements That Include Software Elements • Modifies scope of SOP 97-2, Software Revenue Recognition • SOP 97-2 requires VSOE of selling price for products or services within scope of SOP 97-2 • SOP 97-2 requires a higher threshold for VSOE

  33. Key Changes • Scope change – SOP 97-2 does not apply to the following transactions activities • Nonsoftware components of tangible products • Software components and nonsoftware components of the tangible product function together to deliver the tangible product’s essential functionality • Provides guidance on how to determine tangible product’s “essential functionality”

  34. Arrangements that Include Software Elements • Transition • Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2009 • Early application only permitted if vendor early adopts EITF 08-1

  35. Uncertain Tax Positions • ASC 740 Income Taxes • ASU 2009-06 (Sep 2009) disclosures for non-public entities: • Amount of interest and penalties related to uncertain tax positions recognized in the income statement and the statement of financial position • Description and estimate of uncertain tax positions for which it is reasonably possible that amounts will change in the next 12 months • Description of open tax years by major jurisdiction

  36. Update on Selected FASB Projects • Financial Instruments • Revenue Recognition • Leases • Financial Statement Presentation

  37. Statement Standards for Tax Services • No 1 Tax Return Positions • No 2 Questions on Returns • No 3 Certain Procedural Aspects of Preparing Returns • No 4 Use of Estimates • No 5 Departure From a Position Previously Concluded in an Administrative Proceeding or Court

  38. Statement Standards for Tax Services • No 6 Knowledge of Error: Return Preparation and Administrative Proceedings • No 7 Form and Content of Advice to Taxpayers • Updated effective January 1, 2010

  39. Four Statements Auditing Standards • SAS 117 Compliance Audits • SAS 118 Other Information in Documents Containing Audited Financial Statements • SAS 119 Supplementary Information In Relation to the Financial Statements as a Whole • SAS 120 Required Supplementary Information • Effective periods beginning on or after December 15, 2010

  40. Statement on Standards for Accounting and Review Services-Compilation and Review Engagements • Framework for Performance and Reporting on Compilation and Review • Establishes Standards and Provides Guidance for Compilations and Reviews • Effective for periods ending on or after December 15, 2010

  41. Questions?

  42. Organizations and Their Websites • FASB - www.fasb.org • Accounting Standards Codification - asc.fasb.org • IASB - www.iasb.org • GASB - www.gasb.org • Private Company Financial Reporting Committee - www.pcfr.org • AICPA - www.aicpa.org • IFRS (AICPA) - www.ifrs.com • International Federation of Accountants - www.ifac.org • Financial Executive International - www.financialexecutives.org • Center for Audit Quality - www.theCAQ.org • Public Company Accounting Oversight Board – www.pcaob.org • SEC – www.sec.gov

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