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Accounting Standards for
Private Enterprises
Accounting Standards for Private Enterprises
Brian Drayton Greg Edwards
Partner Principal
Meyers Norris Penny Accounting Standards Board
Presented by
Background
Focus on general purpose financial statements
Different user needs
Lenders vs. equity investors
Ability to request more information
Preparers/auditors often have less accounting resources
Different cost/benefit
3
Private Enterprises – What We Heard
Preparers
Most of current Handbook is fine
Concerns: specific issues and disclosure overload
Limit to how much change can be handled
Change urgently needed
Users
Like current Handbook – incl. disclosures
Recognize preparer issues
Would prefer more GAAP statements
4
Private Enterprises – What We Did
Extensive ongoing consultation
Advisory Committee
Started with existing Handbook
Focused changes on key issues
Eliminated EIC Abstracts
Some material included in standards
Eliminated unnecessary material
5
Exposure Draft
Comment letter deadline July 31, 09
180 responses
Overall the response to the ED was extremely
positive
AcSB met August 25 and Sept 22-23, 09
Standards issued mid December 2009
6
Disclosures
Focus on needs of users in PE market
Most frequent user – creditors
Sufficient information so users can
determine whether they need more -
expectation they can get more on request
Re-examined all disclosures
Significant reduction in disclosure
requirements
7
Disclosures
Two new disclosures included in Exposure Draft in response to user requests
Compensation of key management (as a group)
Amounts payable for government remittances plus any amounts in arrears
Final standards do not include management compensation or government remittances in arrears
Amounts payable for government remittances at year end still required
8
Disclosures
Disclosure Supplement provides all
disclosures in one place
Disclosures are minimum disclosures
Section 1400 fair presentation requirements
may lead to additional disclosures
Not required to disclose information that is
not material
9
Key Problem Areas
Financial Instruments
Employee future benefits
Intangible assets
Goodwill impairment
Stock-based compensation
Asset retirement obligations
Income taxes
Investments
Callable debt
Leases 10
Financial Instruments
Single standard (3856) addresses all financial instruments
Measure at amortized cost, except fair value for Equity securities quoted in an active market Free standing derivatives (that are not a hedge)
Fair value option
No OCI All gains and losses through net income
11
Financial Instruments
One impairment model - write down to higher of PV of expected cash flows from holding the asset
Net amount from selling the asset
Net proceeds from collateral
Preferred shares in tax planning arrangements classified as equity
Convertible debt – conversion option can be measured at zero
Transaction costs expensed if measure at FV
Simplified (but restricted) hedge accounting
12
Employee Future Benefits
Issue: DB accounting is complex, costly
New accounting policy choice
Use funding valuation as basis for
measurement
Immediate recognition - no smoothing
Can still use existing Section 3461
accounting
Must apply same policy to all plans
13
Internally-generated Intangible Assets
Issue: capitalizing development costs
Accounting policy choice
Expense all costs of internally-generated
intangibles; or
Capitalize in accordance with existing
Section 3064
Same policy for all intangibles
14
Impairment of Goodwill and Indefinite Life Intangibles
Issue: Is impairment test required each year?
Retain events and circumstances approach
Issue: Complexity of Goodwill impairment
Simplify test
Goodwill impairment is amount by which BV of
reporting unit > FV
Eliminates need to fair value individual assets
and liabilities
15
Stock-based Compensation
Issue: Seen as complex, not useful
Retain – compensation is an expense
Eliminate minimum value method
Simplification – estimate volatility using
industry index (calculated value method)
Default to broad index if cannot identify
suitable industry index
16
Asset Retirement Obligations
Issue: Fair value of ARO can be complex
to calculate
Simplification – measure at management’s
best estimate
Eliminates complexities of fair value
IAS 37 approach
17
Income Taxes
Issue: Future income taxes are complex,
users often ignore
Retain choice of future taxes or taxes
payable
Disclosures accompanying the taxes payable
method retained
Example provided
18
Subsidiaries, Affiliates, Joint Ventures
Issue: Consolidation, equity accounting are complex, users often want non-consolidated statements
Existing differential treatments in Sections 1590, 3051 and 3055 retained
Choice of methods -- consolidation, cost or equity
AcG-15 retained, pending new global consolidation standard, but can be avoided through non-consolidation policy choice
19
Considered but No Change
Callable loan classification
Users see high value
Display example provided
Leases
Users see high value in capital lease
accounting
20
EIC Abstracts
Not retained in current form
Too rules oriented
Material from 29 Abstracts embedded in proposed standards, primarily:
Financial instruments
Income taxes
Leases
Related parties
Revenues
21
Timing
Effective for fiscal periods beginning on or after January 1, 2011
Early adoption permitted (starting in 2009)
Calendar year-end adoption in 2011
2011 Financial Statements include 2010 comparatives
Prepare opening balance sheet at January 1, 2010
22
Transition Issues
First-time adoption, Section 1500
General approach is retrospective
Optional exemptions (to retrospective application)
Mandatory exceptions (to retrospective
application)
Disclosure
23
Transition Issues
First-time adoption
Optional exemptions (to retrospective application)
business combinations
fair value
employee future benefits
cumulative translation differences
financial instruments
share-based payment transactions
asset retirement obligations
related party transactions
24
Transition Issues
First-time adoption
Mandatory exceptions (to retrospective application)
derecognition (of financial assets & liabilities)
hedge accounting
estimates
non-controlling interests
25
Transition Issues
First-time adoption
Disclosure Requirements
changes to retained earnings resulting from
transition
net income reconciliation for comparative year
explanation of material adjustments to cash flow
statement
26
Why would a private company adopt IFRSs?
PE standards is simpler and requires less change
Consider IFRSs if
Possible IPO in next few years
Parent company uses IFRSs
Large number of subsidiaries use IFRSs
Users want your company to report on same basis as public companies
Other reasons?
27
Transition Issues
What now?
Decide: Private Enterprise standards or IFRS
Identify significant changes to your accounting
policies
Consider first-time adoption alternatives
Consider timing
Consider resources to affect the change
28
Impact of new standards on other areas
Contracts: eg., debt covenants
HR: bonus and other incentive schemes
Taxation: effect of GAAP on taxable
income
IT and other data systems
Internal controls
29
Keeping up-to-date
30
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Questions? Comments?
Questions and Answers