Financial Statement Trends and Updates Presented by:Presented by:

Aracely Rios, CPAAracely Rios, CPASara Dempsey, CPASara Dempsey, CPA

Intro to Weaver

• Founded in 1950 in Fort Worth

• Approximately 450 people in 7 offices across Texas

• Largest firm Headquartered in Texas, a Top 40 accounting firm nationally

• Approximately 100 personnel working not-for-profit and government engagements

Speaker

Aracely Rios, CPAA manager in Weaver and Tidwell’s (dba Weaver) Assurance Services practice,

Aracely works with nonprofit institutions, higher education, privately-held business enterprises, and local governments. She specializes in audit engagements. Aracely has extensive experience applying nonprofit GAAP including the application of UPMIFA and fair value measurements.

Sara Dempsey, CPAA manager in Weaver and Tidwell’s (dba Weaver) Assurance Services practice,

Sara works with nonprofit institutions and local governments. She specializes in audit engagements. Sara has extensive experience applying nonprofit GAAP including the application of UPMIFA, accounting for mergers, acquisitions and fair value measurements.

Objective

• What updates you need to know and how will the changes impact you?

Content of Updates

• Lease accounting– Timeline– Current recognition criteria– Proposed lease accounting– Current status and where will we end up

• Other relevant upcoming changes to GAAP– Fair value measurements– Revenue recognition– Financial statement preparation

• Questions???

Lease Accounting

Current Recognition• Operating or Capital– 4 criteria for evaluation• Lease conveys ownership to the lessee at some point• The lessee has an option to purchase the asset at a

bargain price • Term of the lease is 75% or more of the useful life of the

asset • Present value of the minimum lease payments equals or

exceeds 90% of the fair value

Lease Accounting

Proposed lease accounting changes• All leases to appear on the balance sheet.– Right to use asset and liability for lease obligation

• Reevaluated each reporting period.• Leverage ratios and capital ratios could be negatively

impacted.• Favorable impact on earnings before interest, taxes and

depreciation.

Lease Accounting

• Right to use approach• Initial Measurement– Asset and liability recorded at commencement– Present value methodology (lessee’s incremental

borrowing rate)– Asset same as obligation (plus any recoverable initial

direct costs)– Lease term defined as “longest possible term that is

more likely than not to occur”

Lease Accounting

• Lease Term– Defined as “longest possible term that is more likely than

not to occur”.– Will require probability analysis for assessing renewal

options.• Lease Payments– Expected outcome approach “the present value of the

probability-weighted average of the cash flows for a reasonable number of outcomes.

– Includes contingent rents, termination penalties and residual value guarantees.

Lease Accounting

• Subsequent Measurement – Asset amortized over useful life.– Interest expense recorded on obligation.– Reassess for changes in facts and circumstances.

• Other items of note– Exposure draft does not address lease incentives.– Certain leases outside the scope: intangible assets,

mineral rights and biological assets.– Month to month leases would be in the scope of the

lease term.

Lease Accounting

Lease Term: 5 yearsRenewal Options: two 2-year optionsPayments: 1,000 per mth

2nd 1st No 2 year 2 year renewal

Lease term 9 7 5Probablility 35% 45% 20%Cumulative Probablity 35% 80% 100%

PV of Future Payments $68,453 (Based on incremental borrowing rate of 6%)

Initial Measurement DR CRRight-to-use asset 68,453$

Lease Obligation 68,453$ Subsequent Measurement

Cash 1,000$ Lease Obligation 658$ Interest Expense 342$

Depreciation Expense 815$ Accumulated Depreciation 815$

Lease Accounting

• Presentation:– Right to use asset reported in PP&E separate from

other non-leased assets.– Amortization of right-to-use asset and interest

expense on liability reported from other amortization separately, either on the financial statements or notes.

– Cash payments on lease reported as financing activities (previously operating).

Lease Accounting

• Lessor accounting– Either performance obligation or derecognition

approach.– Performance obligation approach• Right to receive lease payments asset and lease liability.

– Same as valuation of right to use asset.– Derecognition approach• Right to receive lease payments asset.• Derecognize portion of asset leased and recognize income

and expense upon lease commencement.

Lease Accounting

WHAT WILL BE THE POTENTIAL AFFECTS OF THE PROPOSED CHANGES • Practically every organization will be affected as most organizations have real estate or

equipment/vehicle leases currently being reported as operating leases.• Balance sheets will inflate significantly as a result of recording the lease obligations

and corresponding right to use assets.• Organizations will appear more highly leveraged which could affect existing debt

covenants and cause debt covenant violations. Organizations should be cognizant of this and consider starting discussions early with lenders to address the potential impact on debt covenants, etc.

• Organizations will have to deal with increased administrative burden to collect and input substantial data and perform complex calculations to determine amounts to be capitalized.

• Organizations will start considering the options and benefits of buying verses leasing since the asset and liability will be recorded on the balance sheet anyway (especially when the financial markets recover).

Lease Accounting

Current status and where will we end up• FASB and IASB acknowledge that all leases not created

equal.• Agree to consider “finance” or “other-than-finance”

contracts.• More than 780 comments on exposure draft.• Where will we end up????

Other relevantchanges to GAAP

FASB Technical Plan and Project Update:

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220137074

Other relevant changes to GAAP

Fair Value Measurements• The Board tentatively decided that the amendments to Topic 820 will

require nonpublic entities to disclose the following:– The current use when a nonfinancial asset is measured subsequently at fair value

and the highest and best use of the asset differs from its current use as well as the reasons why the asset is being used in a manner that differs from its highest and best use. The Boards also tentatively decided to require that disclosure only when the asset is recognized at fair value in the statement of financial position, not when the fair value is disclosed.

• For assets and liabilities categorized within Level 3 of the fair value hierarchy that are measured at fair value in the statement of financial position on a recurring basis after initial recognition:– A quantitative disclosure of the unobservable inputs and assumptions used in the

measurement.– A description of the valuation processes in place.

Other relevant changes to GAAP

Fair Value Measurements• The Board also tentatively decided that, as a result of the

amendments to Topic 820, nonpublic entities will now be required to disclose the following:– The level in which a fair value measurement would be categorized

within the fair value hierarchy for assets and liabilities not recognized at fair value but for which disclosure of fair value is required .

– Transfers between Levels 1 and 2 of the fair value hierarchy.– A qualitative discussion about the sensitivity of a Level 3 fair value

measurement to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement.

Other relevant changes to GAAP

Revenue recognition• Single comprehensive revenue recognition criteria.– Minimize the number of standards to reference to

• Address revenue recognition for the following:– Goods – Services– Goods and services (Multiple deliverables)

• The Boards expect to issue a final revenue standard in 2011.

Financial statement presentation• The purpose of this joint project is to establish a standard that will guide the

organization and presentation of information in the financial statements. The results of this project will directly affect how the management of an entity communicates financial statement information to users of financial statements, such as present and potential equity investors, lenders, and other creditors. The boards’ goal is to improve the usefulness of the information provided in an entity’s financial statements to help users make decisions in their capacity as capital providers.

• In their Phase B discussions, the Boards developed two core principles for financial statement presentation based on the objectives of financial reporting and the input the boards received from users of financial statements and from members of their advisory groups. Those proposed principles state that information should be presented in the financial statements in a manner that:– Disaggregates information so that it is useful in predicting an entity’s future cash flows.

Disaggregation means separating resources by the activity in which they are used and by their economic characteristics.

– Portrays a cohesive financial picture of an entity’s activities. A cohesive financial picture means that the relationship between items across financial statements is clear and that an entity’s financial statements complement each other as much as possible.

Other relevant changes to GAAP

Financial statement presentation• Statement of financial position

– Assets and liabilities by major activity• Operating, investing and financing

• Statement of comprehensive income– Consistent with reporting of assets and liabilities

• Statement of cash flows– Direct method (no reconciliation of the indirect method)

• Notes to Financial Statements – Rationale for classifications

• Board expected to evaluate project in June 2011

Other relevant changes to GAAP

QuestionsQuestions