McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects

1 ©2012 McGladrey LLP. All Rights Reserved.
FASB/IASB convergence projects update

2 ©2012 McGladrey LLP. All Rights Reserved.©2012 McGladrey LLP. All Rights Reserved.
Brian Marshall Biography
brian.marshall@mcgladrey.com
Brian is a partner in the National Professional Standards Group of
McGladrey LLP. His primary areas of expertise include general
revenue recognition, software revenue recognition, asset impairments,
and business combinations accounting. Brian’s responsibilities include
consulting with clients and engagement teams on complex accounting
issues associated with these subject matters, facilitating training
events for McGladrey professionals and external participants and
writing interpretive guidance for McGladrey publications. He is also
responsible for monitoring standard setting by the FASB and the
FASB’s EITF, writing Firm comment letters on proposed standards to
the FASB and has been a member of EITF working groups.
Prior to joining McGladrey in 2007, Brian worked as a Senior Program
Manager in IBM’s Accounting Practices Group, serving as a resource
on complex technical accounting matters for the Company’s global
accounting community. Brian also was employed by Deloitte for over
eight years in various offices in the U.S. and Europe, with his last
position being a Senior Manager in the Assurance Services Group.

Faye Miller Biography
faye.miller@mcgladrey.com
Faye is a director in the National Professional Standards Group of
McGladrey LLP. She serves as a firm-wide technical resource for
complex accounting issues involving financial instruments, such as
derivatives, hedging, alternative investments, and complex equity
and debt financing arrangements.
As a firm-wide technical resource, Faye conducts training, follows
recent developments, assists engagement teams and advises
clients on these matters. Faye is also a frequent speaker and author
on topics involving financial instruments including proposed or
recently issued related accounting guidance.
Faye has over 20 years of experience in banking and public
accounting, is a past member of the AICPA Accounting Standards
Executive Committee, received a Bachelor of Science degree from
Pennsylvania State University and Master’s degree from Villanova
University.

McGladrey overview
 5th largest accounting firm in the U.S.
 Provide assurance, tax and consulting services
 Nearly 6,500 professionals and associates in
more than 70 offices nationwide
 US member of RSM International (RSMI) – 6th
largest network of independent accounting, tax
and consulting firms worldwide
- More than 700 offices in 86 countries with over
32,000 people

Agenda
 Status of convergence projects
 Revenue Recognition
 Financial Instruments
 Leases

Status of convergence projects

Status of convergence projects
 Joint standards on Fair Value Measurement &
Comprehensive Income issued in 2011
 Priority projects in progress
- Revenue Recognition
- Financial Instruments
- Leases
 Timing of completion of projects extended many
times
 Effective dates expected to allow sufficient time
for changes

Timetable for active convergence projects
Joint Project 2Q 2012 2H 2012 2013 & Beyond
Revenue Recognition R F
Financial Instruments:
 Liquidity and Interest Rate Risk
Disclosures
ED
 Impairment ED
 Classification and Measurement ED
 Hedging ED, F
Leases ED F
Insurance Contracts ED F
Consolidation: Policy and Procedures F
Investment Companies ED, F

Revenue Recognition

Revenue Recognition
 Exposure draft issued in June 2010
 Revised exposure draft issued in Nov. 2011
 Final standard expected in early 2013

Revenue Recognition
 Scope
 Core principle
 Steps in applying the model
Identify the
contract with
a customer
(Step 1)
Identify the
separate
performance
obligations in
the contract
(Step 2)
Determine
the
transaction
price
(Step 3)
Allocate the
transaction
price to the
separate
performance
obligations
(Step 4)
Recognize
revenue when
(or as) each
performance
obligation is
satisfied
(Step 5)
11 ©2012 McGladrey LLP. All Rights Reserved.

1. Identify the contract with a customer
 Enforceable agreement between parties
 Can be written, oral or implied
 Combination
- Required for contracts entered into at or near the
same time if certain criteria are met
 Modifications
- Treat separately if separate performance obligation
is added and the consideration is consistent with its
standalone selling price
- Otherwise combine with remaining goods or services

2. Identify separate performance obligations
 Promise in a contract to transfer a good or service
 Account for separately if distinct because either of the
following criteria are met:
- Good or service is regularly sold separately by the entity; or
- Customer can benefit from good or service on its own or
together with other readily available resources
 However, bundle of promised goods or services is
accounted for as one performance obligation if both of
the following criteria are met:
- Highly interrelated and require significant integration service;
and
- Significantly modified or customized to fulfill contract

3. Determine the transaction price
 Amount of consideration to which an entity
expects to be entitled from a customer
- Variable consideration (e.g.; contingencies, rebates,
royalties), estimate based on probability-weighted or
most-likely amount
- Time value of money
- Noncash consideration
- Consideration payable to a customer
 Collectibility not considered in transaction price
- Record uncollectible amounts adjacent to revenue

4. Allocate the transaction price
 Generally based on relative standalone selling
prices of separate performance obligations
 Standalone selling price
- Observable price when sold separately (best)
- Otherwise, estimate based on:
• Cost plus margin
• Adjusted market assessment
• Residual technique allowed if highly variable or uncertain
• Others?
 Subsequent changes in the transaction price
are allocated on a relative standalone selling
price basis unless certain criteria are met

5. Recognize revenue
 Recognize revenue as performance obligations are
satisfied based on transfer of control
 Determine if satisfied (and revenue recognized)
over time, based on whether entity’s performance:
- Creates or enhances an asset the customer controls; or
- Does not create an asset with an alternative use and one
of following criteria is met:
• Customer receives a benefit as entity performs
• Another entity would not need to reperform work completed to
date
• Vendor has right to payment for performance to date
 Select method of progress toward completion
(output or input)

5. Recognize revenue
 If prior criteria not met, then satisfied at a point in time
 Recognize revenue when customer obtains control
based on following indicators:
- Entity has right to payment
- Entity has transferred physical possession
- Customer has legal title and risks and rewards of ownership
- Customer has accepted goods or services
 Recognize amount allocated to performance obligation
except for certain variable consideration, which is limited
to reasonably assured amount based on:
- Experience with similar performance obligations
- Whether that experience is predictive of outcome

Financial Instruments

Summary of key actions to date
 IASB issued IFRS 9 in 2009 on financial assets.
Requirements for financial liabilities were added in
October 2010
 IASB issued ED on impairment November 2009
 FASB issued comprehensive ED May 2010
 IASB issued ED on hedge accounting December 2010
- FASB issues discussion paper soliciting feedback on above
February 2011
 Boards jointly issued Supplementary Document on
impairment proposing common solution January 2011
 Significant redeliberations have been ongoing

Current status of FASB project
 Slides that follow are for the FASB project,
based on tentative decisions made during
redeliberations through April 18, 2012
 Significant changes to:
- Classification/measurement from May 2010 ED
- Impairment from ED and Supplementary Document
 No redeliberations on hedging thus ED
represents current status

Classification and measurement, current
status
 Classify at initial recognition based on characteristics of
instrument and business strategy
- No subsequent reclassifications
 Equity securities – measure at fair value through net
income
- Practicability exception for nonpublic entities for nonmarketable
equity securities
• Measure at amortized cost less impairment
• Adjust carrying value for observable price changes
- Won’t apply to equity method investments unless held for sale
at initial qualification or certain redeemable securities

status
 Debt securities
- Measure at fair value through net income if any of
following are true:
• Contractual terms are not limited to P&I payments
• Held for sale at acquisition
• Actively managed/monitored on fair value basis

status
 Otherwise, measure debt securities
- At fair value through OCI if business strategy is to
invest cash to maximize total returns or manage
interest rate/liquidity risk, by collecting contractual
cash flows or selling the instrument
- At amortized cost if:
• Business model of holding to collect contractual cash
flows
 Intend to provide guidance on the nature of sales
activity that would prohibit amortized cost

status
 Financial liabilities – measure at amortized cost
if:
- Contractual terms are limited to P&I payments, and
- Business strategy is not to transact at fair value, and
- Instrument is not a short sale
 Otherwise, measure at fair value through net
income

status
 Hybrid financial instruments
- Assets not solely P&I are ineligible for bifurcation.
(Carried at fair value through net income in entirety)
- Retain existing bifurcation requirements for financial
liabilities
 Fair value option for hybrids to avoid bifurcation
of embedded derivative and for groups of
financial assets/liabilities (including derivatives)
if entity measures net exposure and provides
info on that basis to management

Impairment, current status
 Nonmarketable equity securities subject to
practicability exception
- Assess qualitative factors (impairment indicators)
- If more likely than not fair value is less than carrying
amount, recognize loss for difference between
carrying amount and fair value

Impairment of debt instruments, current
status
 3 bucket approach – recognize 12 months
expected losses for bucket 1 vs. lifetime losses
for buckets 2 and 3
 Assets start in bucket 1 unless purchased with
explicit expectation of credit loss
 Move to bucket 2 (if evaluated collectively) and
bucket 3 (if evaluated individually) if more than
insignificant deterioration in credit quality occurs
such that its reasonably possible contractual
cash flows may not be fully recovered

Impairment of debt instruments, current
status
 Can move back to bucket 1 (other than
purchased assets with credit deterioration)
 Trade receivables:
- If significant financing component – can elect
simplified approach with initial and subsequent
classification in buckets 2 or 3
- Otherwise, apply expected loss model with practical
expedient of using provision matrix

Hedge accounting, current status
 FASB solicited feedback on IASB ED but has
not begun redeliberations
 Significant changes proposed in May 2010
FASB ED (in part):
- Effectiveness threshold - reasonably effective rather
than highly effective
- Qualitative rather than quantitative analysis
- No more critical terms match/short cut methods
- Eliminate ability to elect to discontinue hedge
accounting

New disclosures, current status
 Qualitative discussion of risks and how managed
 Quantitative tabular liquidity disclosures
- Of cash obligations by nonfinancial entities
- Expected maturities of classes of assets/liabilities by
financial institutions
 Quantitative tabular disclosures of interest rate risk
by financial institutions
- Classes of assets/liabilities by repricing date
- Issuance of time deposits last 4 quarters
- Effect of hypothetical interest rate shifts

Leases

Leases
 Exposure draft issued in August 2010
 Nearly all leases to be recorded on balance sheet
 Lessees:
- Asset representing “right of use”
- Liability for obligation to make payments
 Lessors:
- Performance obligation approach vs. derecognition
approach
- Asset for receivable under either approach
- Liability under performance obligation approach
- Derecognize a portion of asset under derecognition
approach

Leases
 Responses to ED
- Concerns about “front loading” of expenses for
lessees (compared to straight line)
- Lease term
- Variable lease payments
- Lessor accounting

Leases redeliberations
 Retain position that leases within scope should
be reflected on balance sheet
 Concerned about “front loading” of expense
recognition under ED approach
 Discussed 3 approaches in late February
- ED approach (accelerated recognition)
- Interest-based amortization approach
- Underlying asset approach
 Divergence in preferences
 Boards plan to redeliberate
- Currently performing outreach with constituents

Leases, other lessee issues
 Scope
 Short-term leases
 Lease term
 Agreements with lease and non-lease
components

McGladrey thought leadership
 FASB and IASB Issue Revised Exposure Draft
on Revenue Recognition
 Revised Revenue Recognition Exposure Draft
– What Does It Mean For You?
 http://mcgladrey.com/Assurance/Accounting-
Resources

QUESTIONS?

McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects

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McGladrey presentation at May 2012 AICPA CFO conference - FASB/IASB convergence projects