Accounting Trends for CFOs

© 2014 McGladrey LLP. All Rights Reserved.
Accounting trends and update for CFOs

Rick Day Biography
rick.day@mcgladrey.com
Rick is the National Director of Accounting for McGladrey LLP. He
has overall responsibility for the Firm’s accounting guidance, training
on all accounting topics, and leadership of McGladrey’s Accounting
Standards Group.
Rick joined McGladrey in 1981 and became a partner in 1990. He
recently served as Director of McGladrey’s Western Regional
Professional Practice Office. In this capacity, he had overall
responsibility for all audit and accounting quality assurance elements
and procedures for this region. As a designated SEC compliance
reviewer, Rick has been responsible for assisting many of our
publicly held clients with compliance matters and mergers and
acquisitions.

Brian Marshall Biography
brian.marshall@mcgladrey.com
Brian is a partner in the National Accounting Standards Group of
McGladrey LLP. His responsibilities include consulting with clients and
engagement teams on complex accounting issues, facilitating training
events for McGladrey professionals and external participants and
writing interpretive guidance for McGladrey publications. He also is
responsible for monitoring standard setting by the Financial
Accounting Standards Board (FASB) and the FASB’s Emerging Issues
Task Force (EITF) and Private Company Council (PCC), writing firm
comment letters on proposed standards to the FASB and has been a
member of several EITF working groups. Brian’s primary areas of
expertise include general revenue recognition, software revenue
recognition, asset impairments, and business combinations
accounting.
Prior to joining McGladrey, Brian worked as a senior program
manager in the accounting practices group of a Fortune 50 company
and also was employed by a Big Four accounting firm for over eight
years in various U.S. and European offices, with his last position being
a senior manager in the assurance services group.

Agenda
 Private Company Council activities
 FASB/IASB joint projects status
 Other FASB developments

Private Company Council
(PCC) activities

Private Company Council
 Established in 2012 to improve the process for
setting accounting standards for private companies
 Two primary responsibilities
- Utilizing the private company decision-making
framework, determine exceptions or modifications to
existing GAAP
- Act as the primary advisory body to FASB on
appropriate treatment for private companies for
items under active consideration on FASB technical
agenda

ASU 2013-12 – Definition of a Public Business Entity
 Provides a single definition of a public business entity
(PBE)
- Applicable to new guidance only
 PBEs may not elect private company alternatives
 A PBE is a business entity meeting any of the following
conditions:
- Required by the SEC to file or furnish financial statements, or
does file or furnish financial statements, with the SEC
(including other entities whose financial statements or
financial information are included in a filing)
- Required by the Securities Exchange Act of 1934 to file or
furnish financial statements with a regulatory agency other
than the SEC

ASU 2013-12 – Definition of a Public Business Entity
 A PBE is a business entity meeting any of the following
conditions (continued):
- Required to file or furnish financial statements with a foreign or
domestic regulatory agency to sell or issue securities that are
not subject to contractual restrictions on transfer
- Has issued, or is a conduit bond obligor for, securities that are
traded, listed, or quoted on an exchange or an over-the-
counter market
- Has securities that are not subject to contractual restrictions on
transfer, and it is required by law, contract or regulation to
prepare U.S. GAAP financial statements (including footnotes)
and make them publicly available on a periodic basis
 Refer to our summaries, “FASB defines public business
entity” and “Q&A on the new public business entity definition”

ASU 2014-03 – Interest rate swaps alternative
 Provides private companies with an accounting
alternative for certain interest rate swaps
 Scopes out benefit plans, not-for-profit entities and
financial institutions (banks, savings and loan
associations, savings banks, credit unions, finance
companies, and insurance entities)
 Can elect for existing and new qualifying swaps
 Allows up until the date on which the first annual
financial statements are available to be issued to
meet documentation requirements

 Allows simplified hedge accounting for certain swaps
used to convert variable rate debt to fixed rate
- Assumes 100% effectiveness
- Permits recording swap at settlement value
 Criteria to apply:
- Swap and debt have same rate index and reset period
- Swap is “plain-vanilla” with no floor or cap on the variable
interest rate unless borrowing has a comparable floor /cap
- Repricing and settlement dates match or differ by no more
than a few days
- Swap’s fair value at inception ~ zero
- Notional amount of the swap <= debt principal
- All debt interest payments during swap term are hedged

 Extends the exemption from certain fair value disclosures to
private companies for which such swaps are their only
derivatives
 Private companies can elect to apply the alternatives early to any
financial statements that have not yet been made available for
issuance
 Refer to our white paper, “Simplified accounting for private
companies: Certain interest rate swaps”
Effective date and transition
Effective retrospectively to certain types of swaps, using either a modified
retrospective approach or a full retrospective approach, in annual periods
beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015.

ASU 2014-07 – Variable interest entities alternative
 Provides private companies with an accounting
alternative for certain common control leasing
arrangements:
- A private company may elect not to apply the variable
interest entity (VIE) model in assessing whether to
consolidate a lessor entity if:
1. The lessor entity and the private company (reporting
entity) are under common control;
2. The private company has a leasing arrangement with
the lessor entity;
3. Substantially all of the activities between the two
entities relate to the leasing activity; and

- A private company may elect not to apply the variable
interest entity (VIE) model in assessing whether to
consolidate a lessor entity if (continued):
4. If the private company explicitly guarantees or provides
collateral for any obligation of the lessor entity related
to the leased asset, then the principal amount of the
obligation at inception of the guarantee or collateral
arrangement is not more than the value of the leased
asset
 Additional disclosures required

 Other guidance, including ASC 460, Guarantees, ASC 840,
Leases, and non-VIE guidance in ASC 810, may be applicable
 Private companies can elect to apply the alternatives early to any
financial statements that have not yet been made available for
issuance
 Refer to our white paper, “Simplified accounting for private
companies: Common control leases”
Effective for annual periods beginning after December 15, 2014, and
interim periods within annual periods beginning after December 15,
2015.

ASU 2014-02 – Goodwill alternative
 Provides private companies with a simplified approach
to the subsequent accounting for goodwill
 Amortize goodwill over a period not to exceed 10 years
 Goodwill impairment testing
- Test only when there is a triggering event rather than
annually
- Test at either the entity level or reporting unit level
- One-step test
• Compare the fair value of the entity (or reporting unit) to
its carrying amount to measure impairment instead of
performing current two-step goodwill impairment test

 Private companies can elect to apply the alternatives
early to any financial statements that have not yet been
made available for issuance
 If alternative is elected, application is generally required
to begin as of the first day of the fiscal year of adoption
- As a result, a full year of goodwill amortization will be
required in the year of adoption
Effective prospectively to goodwill existing as of the beginning of the
period of adoption and new goodwill recognized in annual periods
beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015.

 Refer to our white paper, “Simplified accounting for
private companies: Goodwill”
 FASB is currently discussing the accounting for
goodwill for public business entities and not-for-
profit entities
 FASB and PCC are also continuing to discuss a
related issue, PCC Issue No 13-01A, on Accounting
for identifiable intangible assets in a business
combination

Considerations for electing private company
alternatives
 Companies should carefully consider the new
public business entity definition in ASU 2013-12
- More companies may be considered PBEs
 Private companies anticipating going public or
eventually being acquired by a PBE should
consider the difficulty involved in transitioning to
public company accounting
- Currently no specific transition guidance provided
- Retrospective application would be required

Considerations for electing private company
alternatives
 Private companies should discuss with their
lenders, and other financial statement users,
whether it is acceptable to utilize these alternatives
 Refer to our summary, “FASB defines public
business entity”

FASB/IASB joint projects
status

FASB/IASB joint projects timeline
2014
Project Status 1H 2H
Revenue recognition Final ASU expected F
Leases ED issued in May 2013 RD RD
Financial instruments
• Classification and
measurement
ED issued in Feb. 2013 RD RD, F
• Impairment ED issued in Dec. 2012 RD RD, F
• Hedging DP issued in Feb. 2011
Insurance ED issued in June 2013 RD RD
F = Final RD = Redeliberations

Revenue recognition
Why should you be
interested?
• Revenue recognition policies of almost all
entities will be affected
• Virtually all industry-specific guidance will
be superseded
What’s the status? • Final ASU expected in Q2 2014
What’s happened
recently?
• Drafting final standard
When would it be
effective?
• 2017 for calendar year-end public
companies
- Disclosure of effect of adoption
required once final ASU is issued
• 2018 for calendar year-end private
companies

Leases
Why should you be
interested?
• Accounting by lessees and lessors could
change drastically
What’s the status?
• Second ED issued in May 2013
• Redeliberations commenced in
November 2013
What’s happened
recently?
• Joint meetings in March and April
• Boards did not agree on lessee model
• Differences also on lessor model
• Joint decisions on a number of items
including discount rate, modifications and
in-substance fixed payments
What’s next? • Continued redeliberations

Financial instruments – Classification and
measurement
Why should you be
interested?
• As proposed in 2013 ED, more
financial assets would be measured at
fair value
What’s the status? • Redeliberations are well underway
Have any significant
decisions been reached in
redeliberations?
• Existing separate guidance for loans
and debt securities will be retained
with modification as well as for hybrid
financial assets and liabilities
What’s next?
• Consider in addition to most equity
investments, what other financial
assets should be measured at FV-NI

Financial instruments – Impairment
Why should you be
interested?
• Could significantly accelerate
recognition of expected credit losses
What’s the status? • Redeliberations are in process
Have any significant
decisions been
reached in
redeliberations?
• Reaffirmed upfront recognition of
lifetime expected credit losses
• However for FV-OCI assets, expected
credit losses would only be recognized
if FV is less than amortized cost and
would be limited to the difference
between FV and amortized cost
What’s next?
• Decide extent of impairment recognition
when asset is identified for sale or
MLTN requirement to sell exists

Other FASB developments

ASU 2014-08 – Discontinued operations
 Changes criteria for reporting discontinued operations,
including removal of requirements to evaluate whether cash
flows have been eliminated from ongoing operations and
whether there will be any significant continuing involvement
 Disposal of a component of an entity (or group of
components) is a discontinued operation if considered a
strategic shift resulting in a major effect on an entity’s
operations and financial results when any of the following
occurs to the component (or group of components):
- Meets the criteria to be classified as held for sale
- Disposed of by sale
- Disposed of other than by sale

ASU 2014-08 – Discontinued operations
 A business or nonprofit activity that meets the held-
for-sale criteria on the date of acquisition is also
considered a discontinued operation
 Entities can adopt the guidance early for disposals
(or classifications as held for sale) that have not been
reported in previously issued financial statements
 Additional disclosures required
Effective in the first quarter of 2015 for public organizations with
calendar year ends. For most nonpublic organizations, it is effective
for annual financial statements with fiscal years beginning on or after
December 15, 2014.

Other final standards issued since last year’s
CFO conference
ASU 2013-08, Financial Services-Investment Companies
(Topic 946): Amendments to the Scope, Measurement, and
Disclosure Requirements
ASU 2013-09, Fair Value Measurement (Topic 820): Deferral
of the Effective Date of Certain Disclosures for Nonpublic
Employee Benefit Plans in Update No. 2011-04
ASU 2013-10, Derivatives and Hedging (Topic 815):
Inclusion of the Fed Funds Effective Swap Rate (or
Overnight Index Swap Rate) as a Benchmark Interest Rate
for Hedge Accounting Purposes
ASU 2013-11, Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists

Other final standards issued since last year’s
CFO conference
ASU 2014-01, Investments–Equity Method and Joint
Ventures (Topic 323): Accounting for Investments in
Qualified Affordable Housing Projects
ASU 2014-04, Receivables–Troubled Debt Restructurings
by Creditors (Subtopic 310-40): Reclassification of
Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure
ASU 2014-05, Service Concession Arrangements (Topic
853)
ASU 2014-06, Technical Corrections and Improvements
Related to Glossary Terms

Projects expected to be finalized in the first
half of 2014
Development Stage Entities
Repurchase Agreements and Similar Transactions
Accounting for Share-Based Payments When the
Terms of an Award Provide That a Performance Target
Could Be Achieved after the Requisite Service Period

Questions and closing remarks

McGladrey thought leadership
Financial Reporting Resource Center
www.McGladrey.com/FRRC

 Recent McGladrey accounting white papers and
summaries:
- FASB defines public business entity
- Q&A on the new public business entity definition
- Simplified accounting for private companies: Certain
interest rate swaps
- Simplified accounting for private companies: Common
control leases
- Simplified accounting for private companies: Goodwill
- FASB discusses the accounting for financial instruments
- Recent developments in the FASB’s financial instruments
project

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Contact Information
Rick Day
* rick.day@mcgladrey.com
( 563.888.4017
Brian Marshall
* brian.marshall@mcgladrey.com
( 203.312.9329

About McGladrey
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