EY Q1 2014 financial reporting update

EY Q1 2014 financial reporting update

Page 2 EY Q1 2014 financial reporting update

Today’s agenda

► Final standards

► Q1 matters to consider

► Other developments


Today’s agenda

► Final standards




Definition of a public business entity (PBE)

► Currently, does not change whether an entity is considered public or nonpublic for previously existing US GAAP requirements

► Broader than other definitions of public entity and publicly traded company that exist in US GAAP

► Determines whether an entity can use:► Private company council (PCC) accounting alternatives► Other “private” company relief (e.g., disclosure, transition,

effective date differences) in new standard-setting

Private companies should consider whether they might become a PBE when deciding whether to elect

the PCC alternatives because the FASB and the SEC have not provided transition guidance.


Definition of a public business entity (PBE)Entities that meet the definition

Criterion Entities that meet the criteriona) Has financial statements or financial

information furnished to or filed with the SEC, or included in an SEC filing

► Significant acquirees (Rule 3-05) ► Significant equity method investees

(Rule 3-09, 4-08(g))b) Required by the 1934 Act to file

financial statements with a regulator other than the SEC

► Some financial institutions and insurance companies

c) Required to file financial statements with a foreign or domestic regulator to issue securities

► Entities that file US GAAP financial statements with a foreign regulator

d) Has securities on an exchange or an over-the-counter (OTC) market

► Depends on facts and circumstances

e) Has securities not subject to contractual transfer restrictions and required to prepare US GAAP financial statements and make them publicly available

► Depends on facts and circumstances


Opinion check

Do you expect your company to be affected by the new definition of a public business entity?

A. YesB. NoC. UnsureD. Does not apply (EY, faculty, other)


Standards effective in 2014Presentation of unrecognized tax benefits (ASU 2013-11)

► Disclosure of deferred tax assets likely changes as a result ► Not expected to change:

► Disclosure of uncertain tax positions► Income tax provision

Effective dates of ASU 2013-11 for calendar year-endsTransition method Public Private Early adoption?

Prospective Q1 2014 2015 Yes

► Net settlement is required or expected

► Net settlement is not required or expected

Gross presentationNet presentation

► Balance sheet presentation standard► Liabilities for unrecognized tax benefits are offset against

deferred tax assets (for net operating losses, similar tax losses or tax credit carryforwards)


Today’s agenda

► Final standards




Proxy remindersSEC focus areas

► Compensation discussion and analysis► Clear description of all factors in assessing performance and

the weight attached to each► Quantitative and qualitative discussion of targets► Comparison of actual compensation to targets► Explanation of how and why compensation committee used

discretion

Example SEC Staff comment letterPlease tell us the specific performance targets for each named executive officer as well as the actual results achieved and how you evaluated the results to reach the actual payouts. Please provide more detail regarding the “discretion” the committee applied towards your performance metrics.


Proxy trendsSay-on-pay (SOP) and audit committee disclosures

► SOP trends – high investor support► Average support is > 90% for Russell 3000 companies

► Audit committee disclosures – increased voluntarily in response to shareholder requests

Triennial companies will have second SOP votes in 2014

Audit committee (AC) disclosures% of Fortune 100

2012 2013Auditor selection is in best interest of shareholders 4% 23%

AC is involved in lead audit partner selection 1% 17%

AC is responsible for fee negotiations 1% 9%

AC is responsible for auditor appointment, oversight and compensation 37% 50%

AC considered impact of auditor rotation 3% 15%


Proxy trendsOther shareholder proposals

► Top trends► Lobbying activities► Sustainability reports► Greenhouse gas emissions► Eliminate classified board► Executive pay practices

► Emerging trends► Cybersecurity ► Corporate tax strategies► Limit interim vote access► Director tenure and

independence► Human rights risk

assessment

Company-investor engagement has increased

over the last year2013 2014

15%

17%

19%

Withdrawn proposals


Estimated annual effective tax rate (EAETR)

► Make best estimate of the annual effective tax rate for full fiscal year at end of each interim period

► Use EAETR to record tax on current year-to-date basis► Project year-end temporary differences and valuation

allowance► Exclude benefits of expired provisions

► Package of business “tax extenders” expired again on 31 December 2013

► Recognize the income tax effect of tax law change in the interim period of enactment ► Cumulative effect of change is recognized as a discrete

item in continuing operations► Spreading to earlier periods prohibited, even if retroactive


Estimated annual effective tax rate (EAETR)

► Changes to indefinite reinvestment assertion► Record in the interim period the change in assertion occurs► Record tax effects related to prior year undistributed

earnings – discrete► Record tax effects related to current year undistributed

earnings – adjust EAETR► Discontinued operations

► Revise EAETR applied to income from continuing operations in current and subsequent interim periods of current fiscal year

► Recast income taxes related to prior interim periods (as applicable) between continuing and discontinued operations


Adopting 2013 COSO framework

► Transition activities► Map existing controls and related activities to 17 principles► Evaluate whether 1) each of the 17 principles are present

and functioning and 2) five components are integrated ► Other significant changes

► Financial reporting fraud ► Information quality (e.g., in management review controls)► Outsourced service providers► Deficiency evaluation

Common questions► How much effort will the transition take?► What documentation will external auditors expect?► Does the expansion of the framework to include nonfinancial

reporting and internal reporting affect management’s assessment or integrated audit?


Fact check

Has your company started the transition to the 2013 COSO framework?

A. YesB. NoC. Does not apply (EY, faculty, other)


Other SEC remindersConflict minerals

► Rule upheld by a US district court in July 2013► Currently under appeal

► Companies may need to file Form SD, conflict minerals report and obtain independent private sector audit (IPSA)

► For the first two years the conflict minerals report may be unaudited if products are “conflict undeterminable”

► An IPSA provides assurance on whether the:► Design of the due diligence framework used conforms with a

recognized framework► Company performed due diligence described in its conflict

minerals report

Initial disclosures on Form SD are due 2 June 2014


Other SEC remindersCybersecurity and data protection

► Increased attention from regulators, lawmakers and shareholders► SEC recently hosted a cybersecurity roundtable

► Disclose significant specific risks associated with cyberattacks► Refer to Corporation Finance Disclosure Guidance: Topic

No. 2, Cybersecurity ► Do not refer to cybersecurity risk factors in hypothetical

terms if a cyberattack has occurred► State known and potential costs and other financial and

nonfinancial consequences of cyberattacks


Mandatory firm rotation

► EU provisional agreement for Public Interest Entities (PIEs)► PIEs generally include companies listed in the EU, banks and

other financial institutions (e.g., investment firms)► Mandatory firm rotation: maximum of 10 years (certain

exceptions for joint audits and retenders)► Restrictions on non-audit services

► India► Similar to EU provisions but applies to most companies

incorporated in India (including subsidiaries and private companies), pending final rule-making and interpretation

► United States► Not being considered; focus on changes to auditor’s report

Multinationals should consider the effects


Today’s agenda

► Final standards




Status of selected FASB projectsFirst half 2014 Second half 2014

Revenue recognition Final standard

Leases Redeliberations

Insurance contracts Redeliberations

Financial instruments

Classification and measurement Redeliberations Final standard

Impairment Redeliberations Final standard

Hedging FASB staff research

Goodwill for public business entities Deliberations To be determined

Consolidation (principal – agency) Redeliberations

Going concern Redeliberations

Disclosure framework (board process) Exposure draft Comment period

Disclosure framework (entity process) Summarizing results from field testing

Discontinued operations Final standard


Reporting discontinued operations Summary of significant changes in criteria

Current Proposed standard

Threshold for item held for sale or disposed of

Component

Component AND major strategic shift having a

major effect on financial results

Held for sale on acquisition

Asset group AND certain held for sale criteria met

Business AND all held for sale criteria met

Significant ongoing involvement Prohibited Allowed

Scope exceptions (e.g., equity method investments)

Yes, variousLimited to oil and gas properties using the full

cost method


Reporting discontinued operations Summary of changes in presentation and disclosure► Assets/liabilities must be classified as held for sale in the

period the criteria are met and all prior periods presented► New disclosures for discontinued operations:

► Major components of pretax income or loss► Details of the major assets and liabilities► Operating and investing cash flows OR depreciation,

amortization, capital expenditures and significant noncash items

► Quantitative information about continuing involvement ► Disclose pretax profit or loss for individually material

disposals not meeting discontinued operations criteria

Final standard expected in second quarter


Financial instrumentsClassification and measurement► FASB decided not to pursue the proposed cash flow

characteristics test and business model assessment

► FASB plans to evaluate definition of “security” to address practice issues

Final standard expected in second half of 2014

► Bifurcation of embedded derivative features► Classification and measurement models for

loans and debt securities

Same (as current US GAAP)

► Equity instruments measured at fair value through net income (no remeasurement through other comprehensive income)

Changing (from current US GAAP)


Financial instruments Impairment for debt instruments

Yes

Measured at amortized costMeasured at fair value (FV)

through other comprehensive income (OCI)

Apply proposed “current expected credit loss” model

to measure credit losses

Is fair value less than amortized cost?

No allowance

Yes*

No

* Allowance for credit losses on debt instruments measured at FV-OCI would be limited to the difference between FV and amortized cost

Debt instruments


Leases

► Lessee accounting – most leases on balance sheet► IASB – all leases would be classified as Type A► FASB – dual lease classification (Type A and Type B) based

on current IFRS principles (like US GAAP but no bright-lines)► Lessor accounting – Both Boards support using existing

IFRS classification principles (similar to current US GAAP)► Differ on recognition of initial selling profit, if any, for certain

Type A leases (i.e., sales-type leases)► Other tentative decisions reached

► Lease term, short-term lease exception, other simplifications

???Final standard

Q1 2014Beginredeliberations

2011 - 2013Redeliberations and 2nd ED

Q3 2010Exposure draft (ED)


Accounting for goodwillPublic business entities (PBEs) and not-for-profits

► PBEs expressed concerns about the cost and complexity of the annual goodwill impairment test

► The FASB is evaluating three potential alternatives► Direct write-off► Simplified impairment► Amortization

► Timing of a potential exposure draft is uncertain► FASB to consider feedback on the IASB’s ongoing post-

implementation review of IFRS 3(R), Business Combinations


Opinion check

Which approach to accounting for goodwill would you prefer for public business entities?

A. Direct write-offB. Simplified impairmentC. AmortizationD. Other


EITF update – selected projects

No. Issue addressed Status12-F Recognition of new accounting basis (pushdown) in

certain circumstancesConsensus for

exposure12-G Measuring the financial assets and financial liabilities

of a consolidated collateralized financing entity Discussions

13-B Accounting for investments in qualified affordable housing projects Final ASU issued

13-D Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period

Final consensus

13-F Accounting for the effect of a Federal Housing Administration guarantee

Comment letter period

13-G Determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity

Discussions


EITF update – Issue 12-FRecognition of new accounting basis (pushdown)

► Applies to SEC registrants► Allowed when an entity

becomes substantially wholly owned (> 80% acquired)

► Required when 95% or more of an entity is acquired

► Considers group of investors that effectively acts as one investor (collaborative group)

► Applies to all entities ► Allowed when an entity

becomes controlled by a new party

► Optional► Does not consider

collaborative groups► Requires new disclosures

Current SEC requirements Consensus-for-exposure

Pushdown accounting: reflecting acquirer’s new basis at fair value in stand-alone financial statements of acquired entity

SEC Staff has not stated if it will change its guidance


Disclosure reform

► FASB disclosure framework project► Exposure draft proposes a new chapter to the conceptual

framework to improve the FASB’s process for establishing disclosure requirements

► SEC Staff study of Regulation S-K ► Recommends a comprehensive review of SEC disclosures

Comment period ends 14 July 2014

Principles-based

Technology used to enhance readability

Presentation, delivery and

frequency of filings

Considerations for review

Scaled requirements


SEC proposalsCrowdfunding and Regulation A+► Provide private companies access to capital by making

certain public offerings exempt from registration

Provision CrowdfundingRegulation A+

Tier 1 Tier 2Maximum in 12 months $1 million $5 million $50 millionIndividual investor limitations Yes No Yes

Subject to state securities laws and registration No Yes No

Audit of financial statements required

Yes, offering > $500K No Yes

Ongoing reporting and filing deadline

Yes (120 days after year-end) No

Yes (120 days after year-end; 90 days

after half-year)Number of years of financial statements Two years


Private company council (PCC) updateProject status

No. Alternatives under US GAAP Status13-01A Accounting for identifiable intangible

assets in a business combinationProposed ASU

(research in progress)

13-01B Accounting for goodwill subsequent toa business combination

ASU issued

13-02 Applying variable interest entity guidance to common control leasing arrangements

ASU issued

13-03A Accounting for certain receive-variable, pay-fixed interest rate swaps – simplified hedge accounting approach

ASU issued

13-03B Accounting for certain receive-variable, pay-fixed interest rate swaps – combined instruments approach

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EY Q1 2014 financial reporting update