OACUBO Professional Development Conference April 18, 2011 Ohio Northern University, Ada, Ohio

GAAP UpdateOACUBO Professional Development ConferenceApril 18, 2011Ohio Northern University, Ada, Ohio

Presenters

David M. Andrews, CPA

Partner

Cleveland, Ohio

216.522.1191

[email protected]

Lori A. Kalic, CPA

Director

Cleveland, Ohio

216.522.1478

[email protected]

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Agenda

What are the Standard Setters Up To?

Revisiting Recently Issued Standards FASB

GASB

What is On the Horizon?

Other Standards

Q&A

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What are the Standard Setters Up To?

International Convergence Principle-based vs. Rule-based Focus is on publically traded companies Fallout is inevitable – we see it in proposed standards

Financial Accounting Foundation Blue Ribbon Panel – Trustee Working Group Made two key recommendations

1. GAAP should have exceptions and modifications for private companies

2. Exceptions should be determined by a separate private company accounting standards board

– It did not recommend separate GAAP– Next step is for the TWG to perform assessment

FASB Not-for-Profit Advisory Panel Codification

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Revisiting Recently Issued Standards

Accounting Standards Update 2010-07 “NFP Mergers and Acquisitions”

Accounting Standards Update 2009-12

“Fair Value Measurements and Disclosures – Using NAV”

Accounting Standards Update 2010-06

“Fair Value Measurements – Improving Disclosures and Measurements”

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Accounting Standards Update 2010-07 “Not-for-Profit Entities: Mergers and Acquisitions”

Issued April 2009 Formerly known as FAS 164 Effective for mergers on or after the beginning of the

initial reporting period beginning on or after December 15, 2009

Effective for acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009

Objective of the Statement is to improve relevance, representational faithfulness, and comparability of the information that an NFP entity provides in its financial reports about a combination with one or more NFPs, businesses, or nonprofit activities

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Established principles and requirements for how a NFP: Determines whether a combination is a merger or

an acquisition Applies the carryover method in accounting for a

merger Applies the acquisition method in accounting for

an acquisition, including determining which of the combining entities is the acquirer

Determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or acquisition

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Merger

Governing bodies of two or more NFPs cede control to form a NEW NFP entity

Carryover method used

Need not be a new legal entity

Acquisition

NFP acquirer obtains control of one or more nonprofit activities or businesses (SOP 94-3)

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Disclosures – Merger and Acquisitions Very robust disclosures for both types of

transactions and additional disclosures for “public entities”

Refer to the ASC when dealing with a merger or acquisition under the new rules

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Accounting Standards Update 2009-12 “Investments in Certain Entities that Calculate Net Asset Value per Share”

Issued in September 2009 – Effective periods ending after December 15, 2009

Guidance on how entities should estimate FV of certain alternative investments.

If investments are within scope of the guidance – Net Asset Value (NAV) can be used as a practical expedient to determine FV if the NAV is as of the measurement date

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Investments within the scope: There is no readily determinable FV

An entity that has the following attributes:

– Primary activity is investing

– Ownership is represented by units of ownership (i.e. partner interests or shares of stock)

– The funds within the investment are pooled

– The entity is a primary reporting entity

An investment that does not possess one or more of these attributes but it is industry practice to issue financials on FV basis

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ASU permits use of NAV as a practical expedient – Subject to any pending sales (on an investment by investment basis)

Expands disclosures “by major category” to include the following: Nature of any redemption frequency and any

restrictions

Unfunded commitments

Investment strategies of the investees

** The expanded disclosure is required for alternative investments regardless of whether NAV is used.

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Impact to Fair Value Disclosure If entity can redeem investment at NAV on the

measurement date – Level 2

If entity can never redeem its investment at NAV – Level 3

If redeemable at an unknown time in the future – Judgment is required

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Accounting Standards Update 2010-06 “Fair Value Measurements and Disclosures”

ASU 2010-06 – issued in January 2010

Topic 820 changes – “Improving Disclosures about Fair Value Measurements”

Effective for interim and annual periods beginning after December 15, 2009, except for:

The disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 15, 2010.

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New Disclosures Significant transfers in and out of Level 1, 2 and

Level 3 should be separately disclosed as well as the reasons for the transfers

– Transfers in should be separate from transfers out

– Required to disclose policy about the timing of recognizing a transfers (i.e. beginning of period, end of period, or date of event creating the transfer)

For Level 3 activity, a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross (vs. net) basis. (Years beginning after 12/15/10)

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Existing Disclosures “Clarified” Level of disaggregation for each “class” of assets

and liabilities carried at fair value based on judgment

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3 items

Conforming amendments for employers’ disclosures related to postretirement benefit plans

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Examples of Disaggregation Equity securities by industry

– i.e. real estate, healthcare, consumables

Debt securities by grade or type– i.e. commercial, residential, US treasury, corporate

ratings

Hedge fund investments by position– i.e. long/short, global vs. domestic, distressed debt

Other important point The fair value disclosure by class should

reconcile back to the line items in the statement of financial position (balance sheet)

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Example Disclosure

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Level 1 Level 2 Level 3 TotalCommon stock

Basic industry 1,520,383$ -$ -$ 1,520,383$ Capital goods 1,970,054 - - 1,970,054 Consumer staples 2,488,723 - - 2,488,723 Energy/utilities 2,291,755 - - 2,291,755 Financial 2,192,241 - - 2,192,241 Technology 2,784,575 - - 2,784,575

Bonds:U.S. Government - 23,254,991 - 23,254,991 Corporate (1) - 8,312,778 - 8,312,778 Foreign (1) - 2,297,523 - 2,297,523

Mutual funds - Equity index funds -

Small-cap growth funds 456,600 456,600 Small-cap value funds 1,555,999 1,555,999 Mid-cap growth funds 2,333,699 2,333,699 Foreign large-cap value funds 501,725 501,725

Fixed income bond funds - Short-term bonds 800,050 800,050 Intermediate-term bonds 6,000,871 6,000,871

International equity 326,362 1,246,950 - 1,573,312 Domestic (2) 119,730 2,411,707 - 2,531,437

Benefical interests in perpetual trusts - - 891,955 891,955 Alternative investments - 17,421 203,661 221,082

25,342,767$ 37,541,370$ 1,095,616$ 63,979,753 Cash and cash equivalents 11,009,926 Accrued interest 269,307

75,258,986$


Why? To meet the needs of users of the statements

More transparency with disaggregated information

The reasons behind changes in Level 3 items (vs. net information that leaves them guessing)

Also feel information about transfers in and out of the Levels (1, 2, and 3) and the reasons for them would be “helpful”

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Government Accounting Standard No. 51“Accounting and Financial Reporting for Intangible Assets”

Effective Date: For periods beginning after June 15, 2009

Why? Establish consistency in financial reporting derecognition,

initial measurement, and amortization

Applicable to intangible assets, as defined in GASB 34

Capitalization is required for eligible tangible assets i.e. identifiable

Specific guidance regarding internally generated computer software

Provides guidance surrounding amortization

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Government Accounting Standard No. 53 “Accounting and Financial Reporting for Derivative Financial Instruments”

Effective date: For periods beginning after June 15, 2009

Recognition, measurement and disclosure associated with derivative instruments

Requires fair value reporting (limited exceptions)

Investment derivative instruments vs. hedging derivative instruments

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Government Accounting Standard No. 55“The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments”

Effective upon issuance

Incorporate GAAP hierarchy into GASB authoritative literature

Result: improve financial reporting

Codification

No real change to existing practice

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Government Accounting Standard No. 56 “Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards”

Effective upon issuance

Purpose: To incorporate into GASB literature financial reporting guidance surrounding: Related party transactions

Going concern considerations

Subsequent events

Does NOT establish new standard but incorporates existing guidance

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Government Accounting Standard No. 58 “Accounting and Financial Reporting for Chapter 9 Bankruptcies”

Effective date: For periods beginning after June 15, 2009.

Retroactive application is required for all prior periods presented during which a government was in bankruptcy.

Accounting and financial reporting guidance for governments that have petitioned for protection from creditors by filing for bankruptcy under Chapter 9 of the United States Bankruptcy Code.

It requires governments to remeasure liabilities that are adjusted in bankruptcy when the bankruptcy court confirms (that is, approves) a new payment plan

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What is On the Horizon?

Leases (2nd Quarter 2011**)

Revenue recognition (2nd Quarter 2011**)

Financial Instruments (3rd Quarter 2011**)

Fair Value Measurements (2nd Quarter 2011)

Consolidation (2nd and 3rd Quarter 2011)

Financial Statement Presentation (Undefined)

** FASB will issue amendments for comment prior to finalizing standards

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Lease Accounting – Status

FASB issued Proposed Accounting Standards Update for Leases (Topic 840) on August 17, 2010

Comment period expired on December 15, 2010

The proposed ASU has garnered much attention at this stage

Insiders say it is a given that these changes are coming

Most existing leases are not grandfathered

Target date is Q2 – 2011

Effective date – yet to be determined – 2013/14?

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Lease Accounting – General Provisions

With few exceptions, operating leases are going away.

“Right-of-use” model: Lessee would recognize an asset for its “right to

use” the underlying asset for the lease term and recognize a liability to make lease payments.

Lessor would recognize an asset representing its “right to receive” lease payments and depending on certain factors would either recognize a lease liability for its performance obligation, or derecognize the rights in the underlying assets that it transfers but continue to carry a residual asset at the end of the lease term.

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Lease Accounting – Lessee Accounting

Initial measurement Asset = PV of lease payments plus direct costs

Obligation = PV of lease payments discounted at lessee’s incremental borrowing rate

Subsequent measurement Asset – amortized cost – straight line method

Obligation – amortized cost – effective interest method

Required to consider impairment

Assess carrying amount of liability as warranted28

Lease Accounting – Lessor Accounting

Performance Obligation vs. Derecognition Approach Performance Obligation- Lessor retains exposure

to significant risks and benefits

Derecognition Approach – Lessor does not retain exposure

– Asset = PV of lease payments plus direct costs

– Obligation = PV of lease payments discounted at lessee’s incremental borrowing rate

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Performance Obligation Initial measurement

– Determine lease payment using expected outcomes approach

– Discount using rate lessor charges the lessee– Include contingent/option payments (be conservative)

Subsequent measurement– Amortize asset – interest method– Amortize performance obligation – systematic approach

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Derecognition Approach Initial measurement

– Considered to have sold a right to use asset– Derecognize a portion of the underlying asset– Recognize an asset for the residual benefit not

transferred– Recognize a lease receivable, revenue and COGS

Subsequent measurement– Residual asset is not remeasured unless lease term

changes or becomes impaired– If lease term increases – residual asset will decrease

and vice versa

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Lease term assumes the longest possible term that is more likely than not to occur (options)

Expected outcome technique to reflect the lease payments including contingent rentals, term option penalties and residual guarantees

Assets/liabilities updated in the period when there is a significant change to the relevant factors such that there is significant economic incentive to exercise or terminate the lease

Service component of the lease excluded in evaluating the payments to be made


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Simplified requirements for leases of 12 months or less

Enhanced disclosures around these assumptions

Biggest change to lease accounting in 34 years

Still considerable debate on the following: Expense recognition pattern for lessees

Lease term and options

Contingent payments

Lessor accounting


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Discussion/Issues the Standard Creates Obligation now in the financials vs. notes for operating

leases

Bank covenant issues

Estimation process for lease term extensions, contingent rentals, effective interest rates, etc.

Adoption issues

Evaluation of impairment of the asset

Payments on the obligation will be reflected as financing activities in the SOCF.

Performance obligation vs. derecognition approach

Lease Accounting – Proposed Update (Cont.)

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Revenue Recognition

Objective is to provide one common revenue recognition policy (simplification)

4 step model: Identify contract Identify performance obligations Allocate transaction price Recognize revenue as obligation is satisfied

Performance obligations would be separated from goods and services

Variable and contingent fees would be included in transaction price

Initial estimate of uncollectible amounts would reduce revenue

Allocation of transaction price to multiple performance obligations

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Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments Requires organization to present amortized cost and

FV about financial instruments held for collection or payment of cash flows

Exception if <50% of assets are measured at FV – Will not help higher education

Potential Impact to Higher Education Loans receivable (amortized cost) Debt Split interest liabilities

Continues deliberation

Once effective – non publics with < $1B in assets will have additional 4 years to adopt

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Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments

Financial Instruments Use of equity method would be restricted; otherwise equity

investments would be carried at FV

Classification of financial assets based on business strategy

– FV-NI – Fair Value, Net Income

• Strategy is trading or holding for sale

– FV-OCI – Fair Value, Other Comprehensive Income

• Strategy is managing risk and maximizing total return

– FV-AC – Fair Value, Amortized Cost

• Strategy is collection of contractual cash flows

– Reclassifications would be prohibited

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Fair Value Measurements - Amendments

Objective is to clarify meaning of FV between international and GAAP standards

Clarify definitions related to measuring FV Highest and best use and valuation premise

Measuring FV of an instrument in net assets

Measuring the FV of financial instruments in a portfolio

Application of blockage factors and other discounts and premiums in a FV measurement

Additional disclosures38

Consolidation

Objective is to provide comprehensive guidance.

Basis for consolidation will be “control” Power to direct the activities of another entity

Ability to benefit from that power

Power exists if ability to direct activities impacts the entities returns

Can also have contractual control (i.e. voting rights)

Investment companies are excluded39

Financial Statement Presentation

Operating, investing and financing for all statements

Disaggregating information into material classes of useful information

Direct method cash flow statement

Substantial disclosure for remeasurements in the financials.

Provide segment disclosures

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Government Accounting Standards

Statement No. 59“Financial Instruments Omnibus”Effective: Periods beginning after June 15, 2010

Objective: Update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice

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Statement No. 60“Accounting and Financial Reporting for Service Concession Arrangements” Effective Date: Periods beginning after December 15, 2011

Reporting service concession arrangements (SCA) i.e. an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which

the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a “facility”) in exchange for significant consideration and

the operator collects and is compensated by fees from third parties.

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Statement No. 61“The Financial Reporting Entity: Omnibus—an amendment of GASB Statements No. 14 and No. 34”

Effective Date: Periods beginning after June 15, 2012 Earlier application is encouraged

Modifies certain requirements for inclusion of component units in the financial reporting entity

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Statement No. 62“Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements”

Effective Date: Periods beginning after December 15, 2011.

Established to incorporate into the GASB’s authoritative literature certain accounting and financial reporting guidance that is included in certain FASB and AICPA pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements.

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Questions?

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Documents

OACUBO Professional Development Conference April 18, 2011 Ohio Northern University, Ada, Ohio