SEC Matters. © 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated

SEC Matters

© 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

Disclosure Best Practices

Known trends and uncertainties

• Disclosures required by Item 303 of Regulation S-K are “among the most important disclosures in the MD&A”- Keith Higgins.

• Disclose trends and uncertainties that have had or are likely to have an impact on performance.

Critical Accounting Estimates

• Not a repeat of the financial statement footnotes.• Address the variability/sensitivity of the

underlying estimates/judgments.• Identify the material assumptions/uncertainties

and related expectations.• Discuss likelihood of change and how

management forms its judgments about future events.

Reevaluate Existing Disclosures

• Make changes for SEC’s recommendations for improvement.

• Changes do not automatically result in a comment letter.

• Eliminate disclosures that are no longer relevant.

• Cross-reference information within the filing.• Eliminate boilerplate disclosures


3

Division of Corporation Finance Areas of Focus

Income Taxes

Foreign Taxes

Fair Value Measurements

and Disclosures

Significant Operations in

Venezuela

Reorganization

Transactions

Acquired Businesses and Equity Method Investments

IPO Financial Statement

Requirements

Oil and Gas Industry

Disclosures


4

Proposed Rule: Disclosure about Certain Hedging Activities by Directors, Officers, and Other Employees

The SEC Staff proposed amendments would implement Section 955 of the Dodd-Frank Act to require a public company to disclose in proxy and information statements for election of directors:

– Whether directors, officers, other employees, or any of their designees are permitted to purchase a financial instrument to hedge or offset a decrease in market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.

– Transactions with economic consequences comparable to the purchase of the specified financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds).

– Which categories of transactions are permitted and which categories of transactions are prohibited.

– Which categories of persons are permitted to hedge and those who are not.

The proposed rule would cover all transactions that establish downside price protection (whether by purchasing or selling a security or derivative security) and would apply to:

– Companies subject to federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies

– All types of hedging activities

– Any equity security issued by the company, any parent company, any subsidiary, or any subsidiary of any parent of the company that is registered under Section 12 of the Exchange Act.


5

CAQ SEC Regulatory Committee Meeting – March 31, 2015

The Committee has developed a list of SEC reporting questions for the Staff’s consideration on the Revenue Recognition Standard including:

– Impact of adopting the standard via the full retrospective approach on areas such as:

significance testing; and

financial statement presentation requirements in connection with new or amended registration statements/proxy statements;

– MD&A presentation; and

– Specific impacts on emerging growth companies.

Certain issues related to the new Consolidation Standard as it relates to SEC reporting

Carve-Out and Predecessor Financial Statements

Application of Regulation S-X Rule 3-14 in an Initial Registration Statement

Applicability of Item 302(a) Of Regulation S-K, Selected Quarterly Financial Data, in a non-IPO form S-1 Registration Statement

FASB Update


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Agenda

Revenue Recognition (ASC 605) – Munter to Provide

Lease Accounting (ED) – Munter to Provide

FASB’s New Consolidation Guidance (ASU 2015-02)

Insurance Contacts

Transfers and Servicing: Repurchase Agreements and Similar Transactions (ASU 2014-11)

Conceptual Framework

Disclosure Framework

Other

Revenue Recognition (ASC 605)

Lease Accounting (ED)

FASB’s New Consolidation Guidance (ASU 2015-02)


11

Overview of Consolidation Guidance Changes

Variable Interest Entities (VIEs)

• Fees paid to decision makers or service providers.• Impact of related parties.• Limited partnerships and similar entities.• Entities not similar to limited partnerships.

Investment entities

Effective date and transition


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Fees Paid to Decision Makers or Service Providers

Fees paid to a decision maker or service provider do not represent a variable interest if:

• Decision maker’s compensation is commensurate with the services provided• Arrangement includes only terms, conditions, or amounts that are customarily

present in arrangements for similar services negotiated on an arm’s-length basis; and

• Decision maker does not hold other interests in the VIE (including interests held through related parties) that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s variability

In the primary beneficiary evaluation, fees are excluded from the “potentially significant variable interest” determination if:

• Decision maker’s compensation is commensurate with the services provided; and • Arrangement includes only terms, conditions, or amounts that are customarily

present in arrangements for similar services negotiated on an arm’s-length basis


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Impact of Related Parties

Does the decision maker or service provider hold an interest in the

related party?

Exclude any interest held by the related party (including those under

common control)

Is the decision maker or service provider and the related party under

common control?

Consider interests held by the related party in their entirety

Consider interests held by the related party on a proportionate basis

No

Yes

No

YesScenario: decision maker holds 10% of related party’s equity; related party holds 20% of VIE’s equity. Decision maker’s indirect interest equals:

Common Control Proportionate20% (100% × 20%) 2% (10% ×

20%)

The following decision tree highlights how related parties are considered: In evaluating whether fees paid to a decision maker or service provider

represent a variable interest In determining whether the decision maker or service provider meets the

“potentially significant variable interest” primary beneficiary criterion


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Impact of Related Parties

Is power shared between two or more related parties that collectively meet

the PB criteria?Perform the related party tiebreaker test to determine which party in the related party group is most closely

associated with, and should consolidate, the VIE

Is there a group of related parties under common control that

collectively meet the PB criteria?

Is there a single decision maker and do substantially all activities of the

VIE either involve or are they conducted on behalf of a single

variable interest holder (excluding the single decision maker) in the

related party group?

Yes

No

Yes

No

Yes

Party for which substantially all VIE’s activities either involve or are conducted (excluding single

decision maker) is the primary beneficiary and consolidates the VIE

No

Stop consolidation analysis

Does a single variable interest holder meet the primary beneficiary criteria?

That variable interest holder consolidates the VIE Yes

No


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Limited Partnerships and Similar Entities

VIEs unless a simple majority or lower threshold of limited partners with equity at risk is able to exercise substantive kick-out rights or participating rights

• Voting interests held by the general partner, entities under common control with the general partner and parties acting on behalf of the general partner are excluded from the evaluation

Limited partnerships and similar entities that are not VIEs are evaluated for consolidation under the guidance that applies to corporations

• Guidance previously in EITF 04-5 is eliminated, including the presumption that the general partner should consolidate a limited partnership

• Any limited partnership consolidated by the general partner is a VIE


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Limited Partnership Example

Limited Partnership

Debt Securities

General Partner

(GP)

Various 3rd party obligors

1% equity interest (not at-risk);

management fees

Limited Partners(99 LPs)

99% equity interest;

participating rights

Facts:

Limited Partnership holds a portfolio of asset-backed securities

Limited partners are unrelated third parties; no LP holds a majority of the LP interests

GP’s equity interest does not qualify to be considered at-risk equity; Limited Partnership has no other characteristics of a VIE

Limited partners have simple majority substantive participating rights

Current guidance: Limited Partnership is a VIE; GP likely consolidates

ASU 2015-02: Limited Partnership is not a VIE; neither GP nor LPs consolidate


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Entities Not Similar to Limited Partnerships

Step 1 - Do equity at-risk holders have power through voting rights over the

activities that most significantly impact the entity’s economic

performance? Entity is not a VIE if no other

VIE characteristics

are metStep 2 - If decision maker has power through contractual arrangement and fee is a variable interest, do equity at-risk holders have substantive kick-out

rights or participating rights?

Entity is a VIE

Yes

No

Yes

No

Simple majority

voting rights

considered

Only single

unilateral voting

rights included

Two-step approach applies

to all

legal entities


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Investment Entities

Money market funds required to comply with Rule 2a-7 of the Investment Company Act of 1940 (or that operate in accordance with similar requirements) are exempt from consolidation

Consolidation model based on majority exposure to variability is eliminated for reporting enterprises with interests in certain investment companies and similar entities

Series funds required to comply with Investment Company Act of 1940 for registered mutual funds meet the definition of a legal entity and therefore the VIE analysis is performed at the series fund level

Investment funds other than series funds required to comply with Investment Company Act of 1940 for registered mutual funds = legal entity?


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Effective Date and Transition

Public Business Entities• Annual and interim periods in fiscal years beginning after December

15, 2015.

Other Entities• Annual periods beginning after December 15, 2016 and interim

periods in fiscal years beginning after December 15, 2017.

Early Adoption Permitted

• Permitted in an interim period

Transition

• Modified retrospective or full retrospective approach

Insurance Contacts


21

FASB Developments

FASB changes direction and scope of Insurance Project

■ Scope limited to insurance entities, consistent with current U.S. GAAP ‒ Contracts written by non-insurers may be added back as project progresses

■ Project direction limited to targeted improvements to current U.S. GAAP■ Reinsurance accounting will not be addressed ■ Change likely to lead to further non-convergence with IASB


22

FASB Developments

Short-Duration Contracts

(Decisions Reached)

Long-Duration Contracts

(Beginning)

Focus efforts on targeted improvements

to disclosures

No change to current U.S. GAAP model for

recognition and measurement

Focus efforts on targeted improvements to current U.S. GAAP

Evaluate how improvements compare

to building block approach as

determined by IASB (Unclear if this is still

planned)

Transfers and Servicing: Repurchase Agreements and Similar Transactions (ASU 2014-11)


24

Repurchase Agreements and Similar Transactions

Repos-to-maturity will be accounted for as secured borrowings rather than sales of assets with separate forward repurchase or resale commitments

Repurchase Financings - Transfers of financial assets executed with a contemporaneous repo will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts, rather the repurchase financing will be a secured borrowing

New disclosures for * Transactions similar to repos in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets; and * The nature of collateral pledged in repos that are accounted for as secured borrowings



26


Objective of Project

Improve the existing FASB framework to provide a foundation for developing future standards

Framework will guide the FASB in developing standards that are principles based and will drive consistency in accounting standard development

Background of Project

2004 – the FASB and IASB began a joint project to develop a common conceptual framework

2010 – the FASB and IASB issued two chapters to revise the existing framework as part of Concepts Statement No. 8

– Chapter 1, The Objective of General Purpose Financial Reporting

– Chapter 3, Qualitative Characteristics for Useful Financial Information

2010 – the joint project was suspended to focus on other efforts

2014 – FASB restarts the conceptual framework project (no longer a joint effort)


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There are currently three active topics and two inactive topics related to the conceptual framework project:

Active Topics

Measurement

Presentation

Disclosure (discussed separately)

Inactive Topics

Elements and Recognition

Reporting Entity


28

Conceptual Framework - Measurement

The Board discussed developing concepts related to measurement, including:

– Agreeing on the meanings of key terms and what the objectives and qualitative characteristics imply for measurement

– Identifying appropriate types of measurements

– Determining which measurements to use in specific circumstances

The Board discussed the following general categories of measurement methods:

– Prices in transactions in which the entity participated

– Current prices observed or estimated by the entity

– Discounted or undiscounted estimates of future cash flows other than estimates of market prices

– Other adjustments to carrying amount: accruals, systematic allocations, and allowances for impairments

Recently, the Board discussed a concept for determining initial carrying amounts of assets and liabilities

– No decisions were reached

– Next step of the project is to be determined


29

Conceptual Framework - Presentation

The Board has focused on the development of two presentation concepts:

– Grouping information into homogenous groups

– Presentation of the association between changes in assets, liabilities, and equity instruments (the items that have changed should be apparent in the financial statements)

The Board decided what the primary factor is in identifying useful subtotals when establishing standards for aggregating information into line items:

– For the income statement – the activity from which (or within which) the recognized item resulted

– For the balance sheet – the timing of realization or settlement

The Board decided to postpone discussions about other comprehensive income until further discussions in the financial performance reporting project (research project)

Disclosure Framework


31

Disclosure Framework - Overview

Objective is to improve the effectiveness of disclosures in notes to financial statements by clearly communicating information that is most important to users of financial statements

– Limiting or reducing volume is not objective but desired outcome

Requires development of framework promoting consistent decisions about disclosure requirements by the Board and appropriate exercise of discretion by reporting entities

– Board’s Decision Process is separate from Entity’s Decision Process

Four disclosure areas are currently being evaluated as part of Disclosure Framework


32

Disclosure Framework - Overview

Applies to public and nonpublic entities

Applies only to notes to financial statements and does not extend outside the financial statements (i.e., MD&A)

Fundamental principles underlying the project:

– Based on the objective of financial reporting, which is to provide financial information that is useful for making investment and credit decisions

– Investment and credit decisions are based on assessments of prospects for (probabilities, timing, and amounts of) cash flows to the capital provider

Users of financial statement disclosures:

– Expected to have information about general business risks, general economic conditions, and similar items

– Expected to be aware of U.S. GAAP, pricing models, and SEC reporting requirements


33

Disclosure Framework – Board’s Decision Process

To aid the Board in determining what information should be included in required disclosures

Foundation of approach is the “prospect of cash flows” assessment

Includes a series of Yes/No questions to consider, grouped into two broad categories

– Information about line items in the financial statements

Sixteen questions covering descriptions, impact on prospect for cash flows, how they are accounted for, underlying detail, and explanations of period-to-period changes

– Information about other past events and current conditions and circumstances that can affect an entity’s cash flows

Three questions covering nature, effect on cash flow, probabilities of occurrence, and uncertainties


34

Disclosure Framework – Board’s Decision Process

Focus is on process to enable entities to determine appropriate disclosure in a selective/flexible environment

Basic criterion behind decision process is based on:

– Information should be disclosed if it has the potential to make a difference in users’ decisions about providing resources to the entity

– A disclosure has the potential to make a difference if it affects the assessment of prospects for cash flows

– Users’ decisions are subject to change if their assessment of cash flow prospects change materially

Approach to determine appropriate disclosures:

– First form an initial expectation about prospects for cash flows based on information on the face of the financial statements

– Next consider how information (qualitatively or quantitatively) that might be disclosed affects that baseline assessment

– Finally, if it would change the assessment in a material way, it should be disclosed


35

Disclosure Framework – Activity Since Exposure Draft

Redeliberations began in November 2014

Board decided that the disclosure section in a Topic:

– Would state an entity should provide the disclosures to the extent material

– Would not include language that limits the use of discretion

– Would refer to Topic 235, Notes to Financial Statements, for additional guidance on applying materiality to note disclosures

Revisions made to materiality:

– Aligned with existing Supreme Court decision

– Materiality continues to be an entity-specific judgment

– Although materiality is a legal concept that varies by jurisdiction, the guidance would not explicitly acknowledge those variances

When setting disclosure requirements, the Board would not distinguish between a minimum and expanded set of disclosures


36

Disclosure Framework – Activity Since Exposure Draft

Objectives for disclosures within each Topic would be developed using the decision questions from the proposed concepts

Four disclosure areas currently evaluated:

– Income taxes - review of disclosures focused first on disclosures related to undistributed foreign earnings. Tentative decisions were made

– Fair value measurements - tentative decisions were made to remove or modify certain existing disclosure requirements and to add one disclosure requirement

– Inventory and Defined Benefit Plans disclosure reviews – limited activity

Other


38

Troubled Debt Restructurings – Subsequent Restructurings

In October 2014, the federal banking agencies issued supplemental instructions for regulatory reporting. The instructions noted that the agencies would not object if, following a subsequent restructuring of a TDR, a financial institution no longer treats the loan as a TDR provided that:

(1) the borrower is not experiencing financial difficulties at the time of the

subsequent restructuring, and

(2) a concession is not granted to the borrower as part of that restructuring

Subsequent restructuring agreement must specify market terms, including a contractual interest rate that is not less than a market interest rate for new debt with similar credit risk characteristics and other terms that are no less favorable than those the institution would offer for new debt

When assessing whether a concession has been granted, any principal forgiveness on a cumulative basis is considered to be a continuing concession and, therefore, the loan would continue to be treated as a TDR.

If a subsequent restructuring meets all of the necessary conditions, the loan no longer would be measured for impairment as a TDR under FASB ASC Subtopic 310-10, Receivables – Overall, but instead would be measured for impairment under FASB ASC Subtopic 450-20, Contingencies – Loss Contingences.


39

Dodd-Frank – Risk Retention Final Rules

Final Rule Effective December 24, 2016

Securitization Risk Retention – 5% “Vertical or Horizontal Slice”

CLO’s, other Structures

GAAP Consolidation

ASU – 2015 - 02


40

Loan vs. Security

A loan is a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position

A security is a share, participation, or other interest that has all of the following characteristics:

– Represented by an instrument issued in bearer or registered form

– Commonly dealt in on securities exchanges or markets or, when represented by an instrument, commonly recognized in any area in which it is issued or dealt in as a medium for investment

– Either one of a class or series or by its terms is divisible into a class or series


41

Low Income Housing Tax Credit Structures

The Low Income Housing Tax Credit (LIHTC) program was designed to encourage investments in the construction and rehabilitation of low income housing projects. LIHTC investors receive tax credits over 10 years but are subject to a 15-year recapture period

Low income housing projects typically generate (and pass along to investors) pre-tax losses after considering the effects of depreciation, but the associated tax benefits of those losses, when considered together with the credits, generally result in a positive return to investors

Previously, investors were allowed to apply the effective yield method if certain conditions were met.

– Investors applying the effective yield method reported a constant yield on their LIHTC investments entirely through income tax expense over the tax credit period.

– Those that did not meet the criteria generally applied the equity method of accounting for the investment.

– Investors applying the equity method reported their share of the project’s pre-tax operating losses in pre-tax income and the tax credits and the tax effect of the operating losses in income tax expense.


42

Low Income Housing Tax Credit Structures

FASB Accounting Standards Update (ASU) No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects allows investors in low income housing tax credit entities that meet certain conditions account for the investments entirely in income tax expense

– Investors can elect to record the income statement effects of certain investments in LIHTC entities entirely in income tax expense

– The effective yield method is replaced with the proportional amortization method

More investors will be allowed to account for the income statement effects of their investments entirely in income tax expense

Because proportionate amortization of the investor’s cost and the tax benefits are recognized in current income tax expense when the tax benefits are reflected on the tax return, no deferred taxes will be recognized on the basis difference of the investment.

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