FASB and IASB Convergence Efforts. © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

FASB and IASB Convergence Efforts

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2

Agenda

Background and past developments

Current thinking of SEC

Joint Revenue Recognition Project

Joint Leasing Project

Background and past developments


4

Accounting Convergence

What is Convergence?

Accounting standards based

on the sameconcepts

and principles

Accounting outcome

will be the sameregardless

whetherIFRS or U.S. GAAP

v

v


5

Norwalk Agreement (September 2002)

– FASB and IASB pledged to make their existing financial reporting standards fully compatible and coordinate future work programs to ensure compatibility is maintained

Memorandum of Understanding between FASB and IASB (February 2006)

– Commitment to achieve convergence

– Sets guidelines on how to approach the task

– Presents standard-setting goals to be accomplished by the end of 2008

Updated Memorandum of Understanding (September 2008)

– Presents standard setting goals to be accomplished by the end of 2011

Convergence Plan


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Discussions by the FASB and the IASB regarding their approach to the convergence program indicated agreement on the following guidelines:

• Convergence of accounting standards can best be achieved through the development of high quality, common standards over time

• Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources—instead, a new common standard should be developed that improves the financial information reported to investors

• Serving the needs of investors means that the boards should seek to converge by replacing weaker standards with stronger standards

Report of IASB and FASB to G20 Finance Ministers, February 2013:

• Most of the short-term projects and several of the longer-term projects have been completed or are nearing completion

• In 2012 the boards made significant progress on the remaining joint projects and they continue to appreciate the importance of developing converged accounting standards

The 2006 MoU


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MoU Projects and Status According to FASB/IASB Update

Major Projects Reported Status Additional Information

Business Combinations CompletedMostly converged standards issued

2007/2008

Consolidations Completed Not fully converged

Fair Value Measurement Guidance CompletedMostly converged

standards issued 2011

Liabilities and equity distinctionsReassessed as a lower

priority projectNo longer on active

agenda

Performance Reporting/Financial Statement Presentation

CompletedOnly with respect to

reporting comprehensive income

Post-retirement Benefits CompletedStandards not converged

in several important respects

Revenue Recognition Complete Converged, but . . .

Derecognition CompletedSimilar disclosures, but

derecognition models not converged


8

MoU Projects and Status According to FASB/IASB Update

Major Projects Reported StatusAdditional

Information

Financial Instruments In process

IASB project completed, FASB

expected to complete in 2015 but not

converged

Intangible Assets Not a priority

Leases In process2015 target, but not

fully converged

Insurance Contracts ED issued in July 2013

Several key differences.

“Obstacles to finding a converged solution

may be difficult to overcome”

Investment EntitiesIASB issued standard

2012; FASB issued standard in 2014

“The boards’ final requirements are

similar but not identical”


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FASB-IASB Status of Higher Priority Joint Projects (Status May 2015)

Areas Issues

Revenue Recognition Final standard ASU 2014-09 and IFRS 15 issued in May 2014Originally effective 2017 with earlier application permitted only under IFRS but not US GAAP

Leasing Re-exposed Q2 2013; final standard expected in 2015

Financial Instruments Final standard IFRS 9 issued in July 2014-Classification and measurement-Impairment-Hedge accountingEffective 1/1/2018 with earlier application permitted

Converged, but…….

Not Converged

Not Converged


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SEC’s Evaluation of International Accounting Standards 1973-2007

1973SEC supported the involvement of the

AICPA in the creation

of the International Accounting Standards

Committee (IASC)

1999

SEC took leading role in

reforming the IASC

2000

SEC played leading role in the decision by IOSCO to endorse the

IASC coreprinciples for cross-

border listings

2007

SEC allows ForeignPrivate Issuers tofile IFRS financial

statements


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Developments regarding potential U.S. move to IFRS2010 - 2012

SEC issued Work Plan to potentially

incorporate IFRS into the U.S. Financial Reporting SystemFebruary 2010

“The Commission has consistently

promoted the development of a single set of high-

quality globally accepted accounting

standards. I, too, support this goal…”

SEC Staff Final Reporton IFRS Work Plan

July 2012

Report to the Trusteesof the IFRS FoundationAnalysis of SEC Final

Staff ReportOctober 2012


12

SEC concerns in regards to potentially incorporating IFRS for domestic issuers

.

Global Application and Enforcement

Development of IFRS

U.S. GAAP reference in laws, contracts etc.

Conversion costs

Current thinking of SEC


14

SEC Strategic Plan 2014-2018

“The SEC will continue to promote the establishment of high-quality accounting standards in order to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider, among other things, whether a single set of high-quality global accounting standards is achievable.”


15

SEC Chair Speech May 2014

“……..it is a priority for the Commission to position itself to make a further statement on the incorporation of IFRS in the U.S. for domestic issuers…”


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SEC Chief Accountant Speech December 2014

Many U.S. constituents are not supportive of full adoption of IFRS for a variety of reasons, including legal issues and cost-benefit concerns

Continued uncertainty around IFRS in the U.S. would result in uneasiness for investors across the globe

Suggested a new alternative approach


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Would permit voluntary additional IFRS financial information which could range from a complete set of IFRS financial statements to selected IFRS based financial data

Potential change to SEC Regulation S-K Item 10e and Regulation G in regards to Non-GAAP measures (i.e., no reconciliation to US GAAP financial information)?

Audit and/or assurance-related implications?

Legal and regulatory (e.g., banking) issues?

New Alternative Approach


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Potential approaches to incorporate IFRS into the U.S. financial reporting system considered by the SEC for domestic issuers:

Retain U.S. GAAP with continued convergence/endorsement

Full adoption of IFRS on a specified date(without any endorsement mechanism)

Full adoption of IFRS following staged transition

Optional adoption of IFRS for certain issuers

very unlikely

very unlikely

Still possible

Convergence appears to end after completion of major MoU projects

Voluntary Disclosure of IFRS financial information

Possibly proposed in 2015


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James SchnurrSEC Chief Accountant

IFRS in the United States

Next steps and timing?

Mary Jo WhiteSEC Chairwoman

Implementing the new revenue recognition standard


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Timeline of issuance

Joint FASB/IASB revenue standard issued in May 2014

Standard setting activities continue post issuance

Q2 2015

May 2014

Jul 2014

Oct 2014

Jan 2015

Feb 2015

Mar 2015

Apr 2015

Converged Standard Issued

TRG Meeting

TRG Meeting

TRG Meeting

Joint FASB/IASB

Board Meeting

Joint FASB/IASB

Board Meeting

TRG Meeting

FASB agrees to issue Exposure

Drafts on clarifications

FASB to released proposed deferral date?

IASB expected to

issue Exposure

Draft?


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Transition Resource Group (TRG)

How often do they meet?

What do they do?

How were they formed?

Who are they?


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AICPA task force updates

The AICPA Process

16 Industry Taskforces

Publish industry guides

Help preparers apply the

standard to common

fact patters

Scope of the standard


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Scope of the standard

Standard does not apply to:

Lease contracts

Insurance contracts issued by insurance entities within the scope of ASC 944

Financial instruments and other contractual rights or obligations (e.g., receivables, debt and equity securities, liabilities, debt, derivatives, transfers and servicing, etc.)

Guarantees (other than product or service warranties)

Non-monetary exchanges between entities in same line of business to facilitate sales to customers

Contract

Entity Customer

Goods and services

Consideration


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Contracts may be partially in scope

Is the contract fully in the scope of other accounting guidance?

Is the contract partially in the scope of other accounting guidance?

Apply ASC Topic 606 to the contract (or the part of the contract in its scope)

Exclude the amount initially measured under that guidance from the

transaction price

Apply that guidance to separate and/or initially measure the contract

Apply guidance in ASC Topic 606 to separate

and/or initially measure the contract

Apply that other guidance

Does that Codification Topic/Subtopic have separation and/or initial measurement guidance that

applies?

Yes

Yes

YesNo

No

No


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De-recognition of non-financial assets for transactions with non-customers

Single nonfinancial

asset

Subsidiary or group of assets

Revenue guidance for contract existence, measurement and recognition

Does it constitute a business or nonprofit activity?

Does it constitute an in-substance nonfinancial asset?

Deconsolidation guidance

Other U.S. GAAP

Yes

No

NoYes

The five step model


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The core principle and the five-step model

An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Core Principle

Identify the contract(s) with a customer1

Identify the performance obligations in the contract 2

Determine the transaction price3

Allocate the transaction price to the performance obligations in the contract4

Recognize revenue when (or as) the entity satisfies a performance obligation5


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Where’s the FASB today?

If Proposals are Finalized, No Longer Converged with IFRS

■ FASB and IASB will issue separate exposure drafts for issues they decide to clarify

■ FASB’s proposed clarifications for licenses and performance obligations are different from the IASB’s clarifications

Ongoing Outreach and Research

■ Gross versus net revenue presentation

Practical Expedients

■ Presentation of sales taxes

■ Shipping and handling

■ Transition when a long-term contract has been modified prior to the effective date - Use of Hindsight (FASB & IASB)

■ Completed Contract expedient for retrospective approach (IASB only)

■ Impact of adopting the standard using retrospective transition

Other Proposals

■ Noncash consideration

■ Collectibility

■ On April 1 the FASB agreed to propose a one-year deferral of the effective date of its revenue recognition standard. The FASB is expected to issue an exposure draft on the deferral during the second quarter of 2015.

Joint FASB/IASB Leases Project


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Project Status*

Objectives:

Require lessees to recognize all leases on-balance sheet

Eliminate arbitrary accounting distinctions for transactions that are economically similar

Reduce complexity in lease accounting

Develop converged lease accounting requirements

JANUARY2018

JULY 2006

Discussion Paper Issued

Second Exposure Draft

Issued

Project added to Boards’ agendas

Final standard expected

H2 2015

MARCH 2009

MAY 2013

?

AUGUST 2010

First Exposure Draft Issued

Earliest likely effective date

ü

* This presentation reflects the Boards’ decisions through March 31, 2015.


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Lease Definition

Within scope

Short-term leases (lease term ≤ 12 months)

Small-ticket leases (IASB only)

Scope with exceptions Outside scope

Contracts that meet the definition of a lease:

A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Definition focuses on control over the use of an identified asset.

Leases of assets

Long leases of land

Sale-leasebacks

Subleases

In-substance purchases / sales

Leases of inventory

Leases of:Intangibles (other

than ROU assets)Natural resources

and explorationBiological assets


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Lease Term

Non-cancelable period

Optional renewal periods if lessee reasonably certain to exercise

Periods after optional termination date if lessee reasonably certain

not to exercise

Lease Term


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Lease Payments

PV of future lease payments over lease term – includes:

Purchase options

Fixed payments

Termination penalties

RV guarantees

Variable lease payments (VLPs)

Discount rate

Exercise price of purchase options included if lessee is reasonably certain to exercise VLPs included only if based on a rate or index, or in-substance fixed Residual value guarantees (RVGs):

– Lessee includes amount expected to be payable

– Lessor excludes unless represent lease payments structured as RVGs Nonpublic business entities may make an accounting policy election to use a risk-free discount rate

(FASB only)


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Lease Classification Test

Ownership transfers at end of lease?

Bargain purchase option? Type A

Type B

Transfer substantially all risk and rewards of ownership?

No

No

No

Yes

Yes

Yes

• Assessment criteria similar to current IAS 17 classification test

• Lease classification test is not applicable for lessees applying IFRS

Lessee Accounting


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Lessees – Recognition

Lessor Lessee

ROU assetRight to use

underlying asset during lease term

Lease liabilityObligation to make

future lease payments

Right to use underlying

asset

Lease payments


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ROU Asset – Initial and Subsequent Measurement

Initially measured as the sum of:

Lease liability

Initial direct costs*

Lease incentives received

Prepaid lease

payments

Subsequent measurement:

Type A Leases Amortized, generally on a straight-line basis, over shorter of lease term or economic life of ROU asset

Together with interest expense results in a front-loaded pattern of total expense ASC 360 impairment testing

Type B Leases (FASB only) Amortized as a plug amount to produce straight-line total expense when combined with interest on lease liability

Not amortized when straight-line total expense would be less than interest on lease liability ASC 360 impairment testing

* Only incremental costs to obtain the lease qualify – no allocation of internal fixed costs permitted.


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Lease Payments – Reassessments (Lessees only)

Construction of significant leasehold improvements

Making significant modifications or customizations of the underlying asset

Subleasing the underlying asset for a period beyond the exercise date of a renewal option in the lease

Reassessment Triggers

Change in variable lease payments (VLPs) based on an index or rate (IASB only)


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Reassessment of lease payments due to increase in lessee’s right-of-use

Reassessment of lease payments due to decrease in lessee’s right-of-use

Changes in carrying amount of lease liability resulting from:

Adjust ROU asset Recognize in P&L

Amortized cost using the effective interest method; no fair value option

Lease Liability – Subsequent Measurement and Reassessments

Discount rate is revised only when the reassessment relates to whether a lease term or purchase option is reasonably certain to be exercised

Lessor Accounting


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Lessors – Type A Leases

Lessor Type A Model

Lessee


asset

Lease payments

Residual asset Right to return of underlying asset at end of lease

term

Lease receivable

Right to receive future lease payments

Up-front profit recognized (if any) includes profit related to residual interest The lessor’s lease receivable is amortized on the effective interest method Interest income is recognized on both the residual asset and the lease receivable (i.e., the

residual asset is accreted)


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Lessors – Type B Leases

Lessor Type B Model Lessee


asset

Lease payments

Underlying asset

No derecognition of underlying

asset

Lease income recognized generally on a straight-line basis Underlying asset remains on the lessor’s balance sheet and continues to be depreciated

Summary of Key Differences Between the FASB and IASB Proposals


46

Topic FASB IASB

Lessee accounting

■ Dual lease accounting model (Type A and Type B) – most leases treated as executory contracts in P&L

■ Most cash flows presented as operating

■ Single lease accounting model (Type A only) – all leases treated as purchase of ROU asset on a financed basis (balance sheet and P&L)

■ Most cash flows presented as financing

Lessor accounting

■ Recognition of selling profit spread over lease term if the lease does not qualify as Type A without involvement by third parties

■ No restriction of recognition of selling profit for Type A leases

Small-ticket leases

■ No exemption for small leases ■ Exemption for small leases, even if material in aggregate

Lessee reassessment of VLPs

■ Reassessment required only when lease payments are remeasured for other reasons

■ Reassessment required when there is a contractual change and when lease payments are remeasured for other reasons

Subleases ■ Classification of sublease by sublessor based on the underlying asset

■ Classification of sublease by sublessor based on ROU asset

Key Differences Between FASB and IASB Proposals


47

Topic FASB IASB

Sale-leaseback transactions

■ No sale accounting if Type A leaseback

■ Gain on sale based on the entire underlying asset

■ Sale accounting permitted for Type A leaseback

■ Gain on sale restricted to residual interest in the underlying asset

Related party transactions

■ Account for related party leases based on legally enforceable terms and conditions, even if different from substance

■ N/A, not addressed in its proposals

Lessee Disclosures

■ List of qualitative disclosure requirements

■ Quantitative disclosure requirements generally segregated by Type A and Type B leases

■ No specific presentation requirement for lessees’ quantitative disclosures

■ No list of qualitative disclosure requirements

■ Quantitative disclosure requirements link to other IFRS requirements in some cases

■ Present quantitative disclosures in a tabular format, unless another format is more appropriate

Key Differences Between FASB and IASB Proposals (Continued)


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Topic FASB IASB

Transition Lessees and lessors: Apply a modified retrospective

transition approach Full retrospective transition approach

prohibited

Lessees: Option to apply either a fully retrospective or

modified retrospective transition approach

Lessors: Apply existing accounting for any ongoing

leases at date of initial application, except for intermediate lessors in sublease

Key Differences Between FASB and IASB Proposals (Continued)

QUESTIONS?

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FASB and IASB Convergence Efforts. © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent