2016 Private Company Audit & Accounting Updateblogs.elon.edu/cpe/files/2016/09/Auditing-Accounting-Updates_John... · 2016 Private Company Audit & Accounting Update. ... •Classification

John Nicolson

Smith Leonard PLLC

2016 Private Company

Audit & Accounting

Update

FASB

Accounting

Standards

Updates

Leases (Topic 842)

ASU 2016-02

• Lessor accounting largely unchanged

• For lessees - two categories of leases:

• Finance lease – similar to old capital lease

• Operating lease

Leases (Topic 842)

ASU 2016-02

• Classification as finance (lessee) or sales-type

lease (lessor) criteria:

• Transfer ownership to lessee

• Purchase option reasonably certain to be exercised

• Lease term major portion asset’s life

• PV payments plus residual > substantially all FV of

asset

• Specialized nature – no alternate use

Leases (Topic 842)

ASU 2016-02(continued)

• Lessee accounting for finance leases substantially

unchanged

• For operating leases, lessee required to recognize:

• A lease liability - obligation to make lease payments,

measured on a discounted basis

• A right-of-use asset

• Alternate accounting policy election – lease term less

than 12 months

Leases (Topic 842)


• Accounting for operating leases:

• Split lease payments between interest and principal

• Expense right of use asset straight line as lease expense

• New provisions for optional extensions

• Include renewal periods that are reasonably certain

Leases (Topic 842)


• Following included in lease payment at the

commencement date:

• Fixed payments less incentives payable to lessee

• Variable payments based on index or other rate

• Exercise price of an option if reasonably certain to be

exercised

• Payments for penalties for terminating a lease if

reflects exercise of lessee option

• Certain fees paid by the lessee to the owners of a

special purpose entity for structuring the lease

• For lessee only, amounts probable of being owed

under residual value guarantees

Leases (Topic 842)


• Lease payments specifically exclude the

following:

• Certain other variable lease payments

• Any guarantee by the lessee of the lessor’s debt

• Certain amounts allocated to non-lease

components

• Reassessment of the lease term and purchase

options, and subsequent re-measurement by

either the lessee or lessor, is limited to certain

specified conditions

Leases (Topic 842)

ASU 2016-02(concluded)

• Results in simplified accounting for sale and

leasebacks

• No longer opportunity for off-balance sheet financing

• Generally modified retrospective transition approach

• Effective calendar year 2020 for nonpublic entities

• Early application permitted

Update - Revenue from Contracts with Customers

(Topic 606)

• May 2014 ASU 2014-09 FASB issued Revenue from

Contracts with Customers (Topic 606)

• Applies to all entities

• Previously scattered guidance:

• Topic 605

• 900 Series Topics

• SAB 104


(Topic 606)(continued)

• Topic 606 replaces all U.S. GAAP guidance with a

single model

• Five-step process

1. Identify contracts with customers

2. Identify separate performance obligations within

contract

3. Determine transaction price

4. Allocate transaction price to performance obligations

5. Recognize revenue when performance obligations

satisfied



• Does not apply to contracts with customers within

scope of:

• ASC 840, Leases

• ASC 944, Financial Services—Insurance

• *Caution* Five-step process has appearance of

mirroring previous guidance, but in practice,

measurement may be different



• ASU 2015-14 – deferral of effective date – calendar

2019 for nonpublic companies

• Nonpublic companies may early adopt beginning 2017

• ASU 2016-08 - clarifications principal versus agent

assessment (gross vs. net presentation)

• Focus – does principal obtain control of goods


(Topic 606) (continued)

• ASU 2016-10 - guidance on accounting for:

• Licenses of intellectual property

• Certain shipping and handling costs

• ASU 2016-12 - main provisions include:

• Clarify the collectability criterion

• May exclude amounts collected for sales taxes from

transaction price

• Guidance measurement of noncash consideration


(Topic 606) (concluded)

• Practical guidance from AICPA’s Revenue

Recognition Task Force

• Sixteen (16) industry task forces

• Develop Accounting Guide on Revenue Recognition

• Expected 2017

• Google “AICPA Revenue Recognition”

Not-for-Profit Entities (Topic 958)

Presentation of Financial Statements of Not-for-Profit

Entities (ASU 2016-14)

• Replaces three classes of net assets with two:

• Net assets with donor restrictions

• Net assets without donor restrictions

• Cash flows - use either the direct or indirect method

• No requirement indirect

method reconciliation



Entities (ASU 2016-14)(continued)

• Increased disclosures including:

• Governing board designations, appropriations

• Composition of net assets with donor restrictions

• How liquid resources managed

• Availability financial assets for cash needs

• Expenses disclosed by both natural classification and

functional classification

• Methods used to allocate costs among program

and support functions

• Underwater endowment funds



Entities (ASU 2016-14)(concluded)

• Investment return reported net of external and direct

internal investment expenses

• No longer require disclosure of those netted expenses

• Applied retrospectively

• Effective for calendar year 2018

• Early adoption permitted

Income Statement - Extraordinary or Unusual Items

(Subtopic 255-20)

• Concept of extraordinary item eliminated

• Part of initiative to reduce complexity

• More closely align U.S. GAAP with IFRS

• Effective for years beginning after December 15,

2015

• May apply amendments prospectively or

retrospectively to all prior periods

• Early adoption allowed

Intangibles - Goodwill and Other (Topic 350)

Accounting for Goodwill (ASU 2014-02)

• Elections are for nonpublic entities

• Allows for amortization of goodwill over 10 years

• Shorter period if appropriate

• Allows optional simplified impairment model

• Test for impairment when a triggering event occurs


Accounting for Goodwill (ASU 2014-02)(concluded)

• Required to make an accounting policy election

• Test for impairment at either the entity or the reporting

unit level

• Effective date – immediate

Business Combinations (Topic 805)

Accounting for Identifiable Intangible Assets in a

Business Combination (ASU 2014-18)

• Allows a private company to elect an accounting

alternative for the recognition of certain intangibles

acquired in a business combination

• Following should not be separated from goodwill:

• Customer-related intangible assets unless they can be

sold or licensed independently

• Non-competes


Accounting for Identifiable Intangible Assets in a

Business Combination (ASU 2014-18)(concluded)

• Decision to adopt must be made upon first

transaction within scope

• If adopt – required to adopt ASU 2014-02

• Effective immediately



Consolidation (Topic 810)

Derivatives and Hedging (Topic 815)

Effective Date and Transition Guidance - A Consensus of the

Private Company Council (ASU 2016-03)

• Effective dates made immediate for several ASUs

applicable to nonpublic entities

• Extends transition guidance in those updates


Simplifying the Accounting for Measurement-Period

Adjustments (ASU 2015-16)

• Eliminates requirement to retrospectively account for

adjustments to provisional amounts

• Recognize in the reporting period in which

adjustments are determined, changes in:

• Depreciation

• Amortization

• Other income effects


Simplifying the Accounting for Measurement-Period

Adjustments (ASU 2015-16)(concluded)

• Show impact on earnings as if had been recorded in

previous periods

• On the face of the income statement or

• In the notes (by income statement line)



Investments - Equity Method and Joint Ventures (Topic

323)

Simplifying the Transition to the Equity Method of

Accounting (ASU 2016-07)

• Increase in level of ownership or influence –

investee may qualify for equity method accounting

• Eliminates requirement to adjust retroactively on

step-by-step basis

• Adopt equity method as of the

date the investment qualifies

Investments - Equity Method and Joint Ventures (Topic

323)

Simplifying the Transition to the Equity Method of

Accounting (ASU 2016-07)(concluded)

• Add cost of additional investment to basis

• Available for sale investment becomes

qualified for equity accounting

• Realize unrealized holding gains / losses

through earnings

• Applied prospectively

• Effective calendar year 2017



Amendments to the Consolidation Analysis (ASU

2015-02)

• Improves consolidation guidance for entities,

including limited partnerships, limited liability

corporations, and securitization structures

• Places more emphasis on risk of loss when

determining a controlling financial interest

• Changing consolidation conclusions in industries

that make use of limited partnerships or VIEs


Amendments to the Consolidation Analysis (ASU

2015-02)(concluded)

• Effective for calendar 2017 for nonpublic entities

• Early adoption is permitted

• May apply retrospectively in previously issued

financial statements for one or more years in

cumulative-effect adjustment to retained earnings

Intangibles - Goodwill and Other - Internal-Use

Software (Subtopic 350-40)

Customer's Accounting for Fees Paid in a Cloud

Computing Arrangement (ASU 2015-05)

• Relates to fees paid by a customer in a cloud

computing arrangement

• May include:

• Software as a service

• Other hosting arrangements

• Software license included – account for that

element consistent with acquisition of other

software licenses

Intangibles - Goodwill and Other - Internal-Use

Software (Subtopic 350-40)

Customer's Accounting for Fees Paid in a Cloud

Computing Arrangement (ASU 2015-05)(concluded)

• If no license, account for as a service contract

• Likely to impact more entities in future as more

large systems are offered in the cloud

• Can adopt either prospectively or retrospectively

• Effective calendar year 2016 for nonpublic

entities


Presentation of Financial Statements (Topic 205)

Property, Plant and Equipment (Topic (360)

Reporting Discontinued Operations and Disclosures of

Disposals of Components of an Entity (ASU 2014-08)

• Currently too many disposals, small groups of

assets or recurring in nature qualify for discop

treatment

• Now a discop only if:

• Disposal represents a strategic shift with a major

effect on operations and financial results

• Component classified as held for sale, disposed or

abandoned

Presentation of Financial Statements (Topic 205)

Property, Plant and Equipment (Topic (360)

Reporting Discontinued Operations and Disclosures of

Disposals of Components of an Entity (ASU 2014-08)(concluded)

• Expanded disclosures

• Effective prospectively – calendar 2015 for

nonpublic entities

Presentation of Financial Statements - Going Concern

(Subtopic 205-40)

• GAAP lacked guidance regarding management’s

responsibility

• Management and auditors previously looked to audit

rules

• Makes management responsible

• Requires projections for 12 months from report

issuance date

Presentation of Financial Statements - Going Concern

(Subtopic 205-40)(concluded)

• Intended to reduce diversity in timing and content

of disclosures

• Provides for expanded footnote disclosures

• Effective for periods ending after December 15,

2016

• Early application is permitted

Income Taxes (Topic 740) - Balance Sheet

Classification of Deferred Taxes (ASU 2015-17)

• Classify all deferred taxes assets or liabilities as

noncurrent

• Need to consider impact on debt covenants



• Applied prospectively or retrospectively for all

periods presented

Interest - Imputation of Interest (Subtopic 835-30)

Presentation & Subsequent Measurement of Debt Issuance

Costs Associated with Line-of-Credit Arrangements (ASU 2015-

15)

Simplifying the Presentation of Debt Issuance Costs (ASU

2015-03)

• Debt issuance costs related to liability - reduction

from the carrying amount of debt

• More closely aligns with IFRS

• For line of credit, may recognize as an asset

Interest - Imputation of Interest (Subtopic 835-30)

Presentation & Subsequent Measurement of Debt Issuance

Costs Associated with Line-of-Credit Arrangements (ASU 2015-

15)

Simplifying the Presentation of Debt Issuance Costs (ASU

2015-03)(concluded)

• Need to consider impact to debt covenants

• Effective calendar 2016 for nonpublic entities


Inventory (Topic 330)

Simplifying the Measurement of Inventory (ASU

2015-11)

• ASU does not apply to LIFO or retail methods

• Previously measurement at

lower of cost or market

• Market could be:

• Replacement

• Net realizable value

• Net realizable value less normal profit margin

Inventory (Topic 330)

Simplifying the Measurement of Inventory (ASU

2015-11)(concluded)

• Now only lower of cost and net realizable value allowed

• More closely aligns U.S. practice with IFRS

• Effective calendar year 2017 for nonpublic companies

• Applied prospectively


Financial Instruments - Overall (Subtopic 825-10)

Recognition and Measurement of Financial Assets and

Financial Liabilities (ASU 2016-01)

• Guidance to improve measurement of financial

instruments

• Equity investments to be measured at fair value

• Unrealized gain or loss now only flows through income

• If no readily determinable fair value – measure at

cost less impairment

• Eliminates distinction between trading and available-

for-sale securities



Financial Liabilities (ASU 2016-01)(continued)

• Does not apply to:

• Equity method investees

• Consolidated entities

• Significant changes in disclosures

• Debt securities continue to be classified in three categories

• Trading

• Available-for-sale

• Hold to maturity



Financial Liabilities (ASU 2016-01)(concluded)


• May adopt early beginning calendar 2018

Fair Value Measurements (Topic 820)

Disclosures for Investments in Certain Entities that

Calculate Net Asset Value per Share (ASU 2015-

07)

• Remove requirements to:• Categorize within fair value hierarchy investments for which fair

value is measured using the net asset value per share practical

expedient

• For nonpublic entities, effective for calendar 2017

• Earlier application permitted

Liabilities - Extinguishments of Liabilities (Subtopic

405-20)

Recognition of Breakage for Certain Prepaid Store-

value Products (ASU 2016-04)

• ASU applies to prepaid stored value products• Example prepaid gift cards

• Generally wait until legally released before remove

liability

• “Breakage” accounted for consistent with guidance

in Topic 606• Remove liability proportionate

to amounts not expected to be

redeemed


405-20)


value Products (ASU 2016-04)(continued)

• Not applicable if liability subject to unclaimed

property taxes• Example – consumer debit cards

• Applied using either:• modified retrospective transition method - cumulative-effect

adjustment to retained earnings

• retrospectively to each period presented


405-20)


value Products (ASU 2016-04)(concluded)




Effect of Derivative Contract Novations on Existing

Hedge Accounting Relationships (ASU 2016-05)

• Applies when change in counterparty to a derivative

designated as a hedge

• Does not require de-designation

• Provided that other hedge accounting criteria are still

met


Effect of Derivative Contract Novations on Existing

Hedge Accounting Relationships (ASU 2016-05)(concluded)

• May be applied prospectively or on a modified

retrospective basis




Contingent Put and Call Options in Debt Instruments

(ASU 2016-06)

• Applies to issuers or investors in debt instruments

• Embedded derivatives are separated from host

contract and accounted for separately if certain

criteria met

• Clarifies what steps are required when assessing the

“clearly and closely related” criterion


Contingent Put and Call Options in Debt Instruments

(ASU 2016-06)(concluded)


companies


Compensation - Retirement Benefits (Topic 715)

Practical Expedient for the Measurement Date of a

Defined Benefit Obligation on Plan Assets (ASU

2015-04)

• Rules clean up for entities with a fiscal year end that

does not coincide with a month end

• Plan and employer year ends will be different

• Entity measures plan assets and obligations using

the month end that is closest to the entity’s fiscal

year end

Compensation - Retirement Benefits (Topic 715)

Practical Expedient for the Measurement Date of a

Defined Benefit Obligation on Plan Assets (ASU

2015-04)(concluded)

• Amendments apply prospectively


• Early adoption is permitted

Compensation - Stock Compensation (Topic 718)

Improvements to Employee Share-Based Payment

Accounting (ASU 2016-09)

• Aspects of accounting for share-based payment

awards simplified, including:

• Income tax consequences;

• Classification of awards as either equity or liabilities

• Classification on statement of cash flows



Accounting (ASU 2016-09)(continued)

• The amendments also simplify areas for private

companies:

• Practical expedient for expected term

• One-time option to measure liability-classified awards at

intrinsic instead of fair value

• Intrinsic option previously allowed but missed by some

private companies



Accounting (ASU 2016-09)(concluded)


companies


Financial Instruments - Credit Losses (Topic 326)

Measurement of Credit Losses on Financial Instruments

(ASU 2016-13)

• Primarily affects financial institutions

• Generally requires financial assets measured at

amortized cost be presented at the net amount

expected to be collected

• Losses recognized earlier

Financial Instruments - Credit Losses (Topic 326)

Measurement of Credit Losses on Financial Instruments

(ASU 2016-13)(concluded)

• Previous criterion probable. Now use reasonable

and supportable forecasts


• Early adoption permitted beginning calendar 2019

Statement of Cash Flows (Topic 230)

Classification of Certain Cash Receipts and Cash

Payments (ASU 2016-15)

• Statement addresses diversity in practice


• Should be applied retrospectively


Statement of Cash Flows (Topic 230)

Classification of Certain Cash Receipts and Cash

Payments (ASU 2016-15)(concluded)

• Specific cash flow issues addressed:

• Debt prepayment or debt extinguishment costs

• Settlement of zero or insignificant rate coupon debt

• Contingent consideration payments made after a

business combination

• Proceeds from insurance claims

• Proceeds from life insurance policies

• Distributions from equity method investees

• Beneficial interests in securitization transactions

• Separately identifiable cash flows and application of

the predominance principle

AICPA

Updates

An Audit of Internal Control Over Financial Reporting

That is Integrated With an Audit of Financial Statements

(SAS 130)

• Requirement to “Examine and report directly on the

effectiveness of internal control over financial

reporting”

• Removes option to “Examine and report on

management’s assertion about the effectiveness of

internal control over financial reporting”

An Audit of Internal Control Over Financial Reporting

That is Integrated With an Audit of Financial Statements

(SAS 130)(concluded)

• Revisions of the terms – significant account or

disclosure

• Now significant class of transactions, account

balance or disclosure

Amendment to Statement on Auditing Standards No.

122 Section 700, "Forming an Opinion and Reporting

on Financial Statements” (SAS 131)

• Clarifies jurisdictional issues in auditor reporting

requirements

Statements on Standards for Accounting and Review

Services: Clarification and Recodification (SSARS 21)

• Revises and restates standards for reviews,

compilation and preparation engagements

• Engagement letter now a requirement

• Changed language in accountant’s report

Statements on Standards for Accounting and Review

Services: Clarification and Recodification (SSARS 21)

• Allows preparation engagements, which do not

require an accountant’s report

• Effective for engagements for periods ending on or

after December 15, 2015

Questions?

Contact Information

John Nicolson

Smith Leonard PLLC

4035 Premier Drive, Suite 300

High Point, NC 27265

336-883-0181

[email protected]

HIGH POINT | LEXINGTON | WINSTON-SALEM

www.smith-leonard.com

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Documents

2016 Private Company Audit & Accounting Updateblogs.elon.edu/cpe/files/2016/09/Auditing-Accounting-Updates_John... · 2016 Private Company Audit & Accounting Update. ... •Classification