Current & Emerging Accounting Developments presented by McGladrey - AICPA National Audit Committee Forum June 2011

Audit Committee Landscape:Current & Emerging Accounting Developments

American Institute of CPAs

Rick Day [email protected]

Rick is the National Director of Accounting for McGladrey & Pullen, 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 & Pullen in 1981 and became a partner in 1990. He recently served as Director of McGladrey & Pullen’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 [email protected]

Brian is a partner in the Accounting Standards Group of McGladrey & Pullen, LLP. His 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 and has been a member of EITF working groups.

Prior to joining McGladrey in 2007, Brian worked for more than two years 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 & Touche, LLP for over eight years in various offices in the U.S. and Europe, with his last position being a Senior Manager in the Firm’s Assurance Services Group.


Agenda

The Big PictureCertain Accounting Standards Updates (ASUs) Recently Issued / EffectiveMajor Joint FASB / IASB Projects in Progress

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The Big Picture

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People Matters

FASB• Board back to 7 members• Leslie Seidman appointed chairman• 2 new board members

- Daryl E. Buck- R. Harold Schroeder

PCAOB• New chairman and 2 new board members

- James R. Doty, Chairman- Lewis H. Ferguson- Jay D. Hanson

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When was this said?

“The latter half of the decade…was a period of unprecedented stress for the individual members and institutions of the accounting profession. Problems arising from…the development of increasingly complex and innovative business practices…[have] create[d] a wave of criticism of corporate financial reporting.”

AICPA Report of the Study on Establishment of Accounting Principles, 1972 (aka the Wheat Report)

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Blue Ribbon Panel (BRP) - Private Company Financial Reporting

In January, the BRP issued its recommendations to the Financial Accounting Foundation (FAF)Significant recommendations include:• creation of a separate private company standards board• a new standard-setting model that follows GAAP with exceptions

for private companies

In March, the FAF formed a Trustee Working Group to:• conduct outreach to stakeholders• seek input on improvements, including BRP’s recommendations

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SEC Staff IFRS Work Plan

Issued in February 2010 and addresses concerns on incorporating IFRS into US financial reporting systemProgress Report - October 2010• SEC staff observations and update on their six areas of concern

in the Work Plan

SEC Staff Paper Exploring a Possible Method of Incorporation – May 2011• US GAAP would change over time through endorsement /

incorporation of individual IFRSs into US GAAP• Would organize individual IFRSs into 3 categories for transition

purposes

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SEC Staff IFRS Work Plan

SEC Staff Paper Exploring a Possible Method of Incorporation – May 2011 (cont.)• Consistent with “Condorsement” approach discussed by SEC

staff member in December 2010• Comments requested by July 31, 2011

Future Activity• Several additional papers for public study & comment expected

to be issued- Updated study of US GAAP / IFRS differences- Detailed analysis of IFRS filings

• SEC scheduled IFRS Roundtable on July 7• Decision by SEC expected in late 2011

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Certain ASUs Recently Issued / Effective

Revenue RecognitionDisclosures about Financing Receivables and Allowance for Credit LossesGoodwill ImpairmentFair Value Measurement

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Revenue Recognition (ASU 2009-13)

Supersedes current guidance on multiple-deliverable revenue arrangementsAmends guidance on how to:• Determine the unit of accounting• Allocate consideration to each unit of accounting

Can utilize best estimate of selling price for allocation purposes in certain casesRelative selling price will be used to allocate arrangement consideration• Residual method of allocation has been eliminated

Effective for fiscal years beginning after June 15, 2010

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Revenue Recognition (ASU 2009-14)

Changes the accounting model for revenue arrangements that include both tangible products and software elements • Tangible products containing software components and non-

software components that function together to deliver the tangible product's essential functionality are no longer within the scope of the software revenue recognition guidance

• Factors provided for evaluating whether the software and non-software components function together to deliver a product's essential functionality

Same effective date and disclosure requirements as ASU 2009-13

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Disclosures about Financing Receivables and Allowance for Credit Losses (ASU 2010-20)

Rollforward schedule of the allowance for loan losses (ALL) on a portfolio segment basis, with the ending balance further disaggregated based on impairment method• For each disaggregated ending balance, the related

recorded investment in financing receivables

The nonaccrual status of financing receivables by class of financing receivablesImpaired financing receivables by class of financing receivables

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Disclosures about Financing Receivables and Allowance for Credit Losses (ASU 2010-20)

Credit quality indicators and aging of past due by class of financing receivableTroubled debt restructurings (TDRs) that occurred during the period and effect on the ALLTDRs that re-defaulted during the periodSignificant purchases and sales of financing receivables during the period, by portfolio segmentEffective dates• Balance sheet (public) – ending on or after December 15, 2010• Activity (public) – beginning on or after December 15, 2010 (other

than for TDR disclosures, which are June 15, 2011)• Nonpublic – annual periods ending on or after December 15, 2011

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Goodwill Impairment (ASU 2010-28)

Affects entities with goodwill in a reporting unit (RU) that has a zero or negative carrying amountSome entities with RUs that have zero or negative carrying amounts historically concluded that Step 1 of the test is automatically passedModifies Step 1 of the goodwill impairment test for these RUs• Required to perform Step 2 if adverse qualitative factors indicate

that goodwill impairment is more likely than not

Effective for fiscal years, and interim periods in those years, beginning after December 15, 2010 (public) / December 15, 2011 (nonpublic)

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Goodwill Impairment Proposed ASU

Issued in April with comments due in early JuneEntity could qualitatively evaluate whether it is more likely than not that the fair value of a RU is less than its carrying amount prior to performing step oneQualitative factors to consider are included and replace existing guidanceCarryforward of RU’s prior year fair value would no longer be allowedEffective for annual and interim impairment tests performed for fiscal years beginning after December 15, 2011, with earlier adoption permitted

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Fair Value Measurement (ASU 2011-04)Blockage discounts prohibited for all fair value measurementsOther discounts or premiums (for non-Level 1 measurements) may be applied if consistent with unit of account and would be considered by a market participantConcepts of “highest and best use” and “valuation premise” apply only to nonfinancial assetsException to fair value requirements provided for financial instruments managed in a portfolio

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Fair Value Measurement (ASU 2011-04)Principal market – determined based on market with greatest volume and level of activity the Company can accessFair value of instrument classified in equity measured from perspective of market participant that holds instrument as an assetAdditional disclosures requiredEffective dates• Public – interim and annual periods beginning after December

15, 2011• Nonpublic - annual periods beginning after December 15, 2011

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Major Joint FASB / IASB Projects in Progress

FASB / IASB Progress Report – April ’11Timetable for Selected Joint ProjectsRevenue Recognition ProjectLeases Project

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FASB / IASB Progress Report – April ‘11

Joint standards on Statement of Comprehensive Income & Fair Value Measurement expected & subsequently issued in Q2 Priority projects• Revenue Recognition• Leases• Financial Instruments

Timetable extended for priority projects from 2Q to 2H 2011Effective dates will allow sufficient time for changes

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Revenue Recognition and Leases Projects• Boards’ timetables are in sync for both projects• Final redeliberations are in progress• Consider whether re-exposure is necessary• Even without re-exposure, draft standards will be made

available for review• Boards will then determine whether to proceed to finalize the

standards

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Financial Instruments Project• Various Board sub-projects

1.Balance Sheet – Offsetting- Boards’ timetables are in sync

2.Classification and Measurement- FASB expects to complete in 2H 2011 and consider

whether re-exposure is necessary- IASB completed in 2010

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Financial Instruments Project• Various Board sub-projects

3.Impairment- Boards’ timetables are in sync- Basic impairment approach to be determined by end of

2H 2011- Consider whether re-exposure is necessary

4.Hedge Accounting- IASB plans to finalize in 2H 2011- FASB timing unclear

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Insurance Project• Different Board timetables:

- IASB expects to issue final document by end of 2011- FASB expects to issue an ED in 2H 2011 and final standard

in 2012

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Timetable for Selected Joint Projects

Press Tab 1x to create the orange shield bullet Use a hard return to create an additional orange shield bullet• Press Tab 2x to create the bullet• Use a hard Return to create an additional bullet

- Press Tab 3x to create the dash- Use a hard Return to create an additional dash

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Joint Project 2Q 2011 2H 2011 2012 & Beyond

Revenue Recognition ED F

Leases F

Financial Instruments F

Insurance ED F

Fair Value Measurements Issued

Statement of Comprehensive Income Issued

Consolidation ED F

Reporting Discontinued Operations ED F

Emissions Trading Schemes ED, F

Financial Instruments with Characteristics of Equity

ED, F

Financial Statement Presentation ED, F


Revenue Recognition Project

ScopeSteps in applying the model1. Identify the contract with a customer2. Identify the separate performance obligations in the contract3. Determine the transaction price4. Allocate the transaction price to the separate performance

obligations5. Recognize revenue when each separate performance obligation

is satisfied

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1. Identify the contract with a customer• Contract is an enforceable agreement between parties• Can be written, verbal or implied• Contract combination

- Required for contracts entered into at or near the same time if certain other criteria are met

2. Identify the separate performance obligations• Account for performance obligations separately if the good or

service has a distinct function and is transferred at a different time from other promised goods or services

• However, a bundle of promised goods or services is accounted for as one performance obligation if the entity provides a service of integrating those goods or services into a single item

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3. Determine the transaction price• Estimated amount of consideration to which the entity will be

entitled- If price is variable (e.g.; contingencies, rebates, royalties),

estimate based on probability-weighted or most-likely amount

- Time value of money - Fair value of noncash consideration

• Collectibility is not considered

4. Allocate the transaction price• Based on relative standalone selling price of goods or services• Subsequent changes to transaction price generally allocated to

all performance obligations unless certain criteria are met

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5. Recognize revenue• Recognition limited to cumulative revenue the entity is

reasonably assured of being entitled to receive• Recognize revenue as goods or services are transferred• Determine whether separate performance obligations are goods

or services- Goods – recognize revenue when customer obtains control- Services – recognize revenue as the entity provides service

if performance obligation is satisfied continuously - Select a method for service revenue recognition that

faithfully depicts the entity’s performance

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Leases Project

Perceived problems with current model• Similar transactions can have different accounting• Structuring opportunities• Complex, rules-based• Assets and liabilities not recognized on balance sheets

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Leases Project

Lease definitionShort-term leasesLease termAgreements with lease and non-lease componentsLease payments

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Leases Project

Classification• Finance or other-than-finance

- Decision reversed at May meeting- Conclusion: all leases have a financing element

• Reversal means leases will be accounted for in manner illustrated in Exposure Draft

- Expense will be front loaded

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McGladrey Thought Leadership

More Accounting Changes ComingFASB Tentatively Decides to Significantly Revise Proposed Revenue Recognition Standardhttp://mcgladrey.com/Assurance/Accounting-Resourceshttp://mcgladrey.com/Publications/Publication-Subscription

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http://mcgladrey.com/Publications/Publication-Subscription�

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QUESTIONS?

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Business

Current & Emerging Accounting Developments presented by McGladrey - AICPA National Audit Committee Forum June 2011