FASB UpdateNick CappielloSupervising Project Manager, FASB

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March 7, 2016

Expressions of individual views by members of the FASB and staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are reached only after extensive due process and deliberation.

FASB Staff Disclaimer

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• Accounting for Financial Instrumentso Hedgingo Impairment

• Business Combinationso Accounting for Identifiable Intangible

Assets

• Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

• Disclosure Framework

Topic Summary

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• Goodwill

• Conceptual Framework

• Government Assistance

• Simplifying the Equity Method of Accounting

• Accounting for Income Taxes EITF Issue 16-A: Restricted Cash

• PCC Agenda Decision No. 15-02: “Applying Variable Interest Entity Guidance to Entities under Common Control”

Accounting for Financial Instruments (AFI): Hedging

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“Highly effective”

Nonfinancial gets “thrown out”

Component hedging allowed for financial instruments

Cash flow hedges divided into “effective” and “ineffective” portions

Hedge ineffectiveness reported in earnings

Hedge Accounting – Current GAAP

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Nonfinancial hedging:- Qualifying threshold of current GAAP will be

retained- Separately recording “ineffectiveness” will be

effectively eliminated - May designate a contractually specified

component linked to an index as the hedged item

Hedged Item Designation

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AFI: Impairment

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Impairment . . . CECL Overview 8

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Allowance = Cash flows not expected to be collected

Model more forward-looking

Provides enhanced disclosures

Impairment . . . Summary of Board Decisions

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Loans Debt Securities

Held for Investment CECL Held to Maturity CECL

Held for Sale Lower of cost or market

Available for Sale New creditloss model

Trading FV-NI

Accounting for Identifiable Intangible Assets in a Business Combination

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Intangibles – Alternatives 11

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View A – No intangibles

View B – No intangibles except those capable of being sold or licensed

View C – No change to GAAP

Goodwill and Intangibles for Public Business Entities and Not-for-Profit Entities

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Project Approach

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Phase 1 • Simplify the impairment test

Phase 2 • Work concurrently with IASB to address any additional concerns

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

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• Present service cost with other compensation costs

• Service cost eligible for capitalization

Overview

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Disclosure Framework

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Improving the effectiveness of notes requires both:

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Disclosure Framework: Two Components

Appropriate exercise of discretion by reporting entities when assessing disclosure requirements

Phase II: Entity’s Decision Process

Consistent considerations by the Board in each standard-setting activity

Phase I: Board’s Decision Process

Purpose of notes

General limitations• Relevance• Costs• Some information oriented toward the

future

Information that could be appropriate for inclusion in notes

Considerations for interim reporting

Board’s Decision Process

Issues Addressed in EDComment period ended July 14, 2014

18Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.

Effectiveness of notes after applying two discretion criteria Materiality Entity-specific Relevance

Effectiveness of different criteria in removing disclosure that are not decision useful

Constraints of reporting system on entity’s ability to exercise discretion• Audit• Regulatory• Legal

Entity’s Decision Process

Field Study Provided Insights on

19Copyright 2015 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational/academic purposes only.

Promote Discretion

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Changes to the Codification

“Provide to the extent material”

Eliminate language that limits discretion

Add guidance on applying materiality

Promoting Discretion (cont’d)

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US Supreme Court’s description

Omission not an accounting error

Applied individually and in the aggregate

Quantitative and qualitative

Guidance on Applying Materiality

Promote Discretion (cont’d)

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Applied individually and in the aggregate

Legal concept

Quantitative and qualitative

Omission not an accounting error

Guidance on Applying Materiality

Fair Value Measurement

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Disclosures provide information about:• Ways an entity arrives at fair value• The effects on financial statements• Uncertainty in measurement • Measurement change period to

period

Objectives based on proposed framework

Fair Value Measurement - Disclosure Updates

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“Sensitivity” Information

Possible Changes Forward-looking

Information

Process and Policies

Gains and LossesRollforwards

Defined Benefit Plans – Disclosure review

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Possible Additions

General characteristics

Interest crediting rate of

cash plansNAV disclosures

Reasons for significant

gains/losses

Defined Benefit Plans – Disclosure review (cont’d)

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Possible Removals

Amount in AOCI expected to be

recognized

Plan assets expected to be

returned

L3 plan asset rollforward

(nonpublic only)ABO

Income Taxes - Disclosure Review

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Disaggregation of Indefinitely Reinvested Earnings

Possible Changes to Unremitted Foreign

EarningsDomestic Tax

on Foreign Earnings

Changes in Circumstances

Disaggregation of Income Before

Tax

Income Taxes - Disclosure Review (cont’d)

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Change in next 12 months

Possible Changes to Unrecognized Tax Benefits

Enhance tabular reconciliation

Income Taxes - Disclosure Review (cont’d)

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Explanation of valuation allowance

Possible Changes to Other Income Tax Disclosures

Carryforwards

Domestic/foreign tax paid

Rate reconciliation

Change in tax law

Inventory Disclosures

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Scope and objectives

• Use decision questions from proposed framework to determine potential disclosures

• Evaluate alternatives for private companies based on PCDMF

Possible changes

• Incorporate SEC / AICPA guidance into GAAP

• Additional cost/measurement basis disclosures

• Disclosures of certain rights and obligations• Disclosures around changes in

value/quality/utility

Next steps• Small group meetings with FASB• Outreach with PCC members• User and preparer outreach

Defined Benefit Plans

Fair Value Measurement

Income Taxes

Inventory

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Exposure Drafts- Income Taxes- Inventory

Redeliberate Proposed Concepts in the Disclosure Framework

Redeliberate Entity’s Decision Process

Roundtable in 2nd half of 2016

Next Steps

Conceptual Framework

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Not a new conceptual framework- Try to address deficiencies- Try to clarify and improve understanding- Make amendments that experience in application have

suggested are necessary

Structure of the joint project was the same as the structure of the FASB and IASB Frameworks

Project Objective

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Joint financial statement presentation

Address deficiencies in Concept Statement 5 related to presentation- How should individual items be included in line items?- How should line items be grouped?

Research project on performance reporting added in July 2014

Overview of Past and Current Presentation Efforts

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Concept 1: Information should be combined into reasonably homogeneous groups

Concept 2: The association between different items that changed should be made apparent

Concepts

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Measurement – What does it mean?

Does measurement apply to revenues, expenses, gains, losses, or to cash flows?

For assets and liabilities:- Is systematic allocation measurement?- Is accrual of interest measurement?- Is adjusting to a market price measurement?- Is adjusting to a (discounted or undiscounted) amount of

estimated cash flows measurement?

Measurement

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What is a value?- Value to whom?- Is there an inherent worth that is (a) unchanging except for

consumption or deterioration and (b) independent of market changes?

What is a price? How is it different from value?

What is a cost? How is it different from a price or a value?

Value, cost, and price

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Government Assistance Disclosures

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Enable user to access:

Nature of assistance and related accounting policies

Significant terms/conditions of the agreement

Effect on organization’s financial statements

Assistance not recognized in the financial statements, but may have an effect on the financial statements in future periods

Objectives

Annual Disclosures

Nature of the assistance and the related accounting policies

Reflect a description of how the policies relate to nature of the agreements

Should include:- Nature of the assistance- Accounting policy- Presentation location

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Annual Disclosures Amounts not recognized in company’s financial statements, but

that affect cash flows in current period

Significant terms and conditions of the agreement, including:- The duration/period of the contract, the tax rate, or interest rate- Commitments made by both the reporting entity and the

government - Provisions, if any, for recapturing government assistance,

including the conditions under which recapture is allowed- Other contingencies

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Simplifying the Equity Method of Accounting

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Current equity accounting GAAP requires: - Difference between cost and equity- Determine the FV in the same manner as Business

Combinations- Presented as a single line item

Subsequent measurement requires recognition of proportionate share of: - Investee income/loss- Amortization or accretion of basis difference, - Other-than-temporary impairment

Background

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Costly and complex:- The information may be difficult to obtain- Increased cost when 3rd-party valuations are necessary- Ongoing tracking is time consuming

Generally not decision useful

Issues

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Remove concept

Transition method: modified prospective- Freeze any basis and apply the new guidance.

Transition disclosures

Board Decision - Basis

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Accounting for Income TaxesSimplification Initiative Project

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Balance Sheet Classification of Deferred Taxes

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Current GAAP requirement: Presented in balance sheet as:

- Current deferred tax asset and liability- Noncurrent deferred tax asset and liability

Classification:- Based on related asset or liability- Generally not based on when temporary differences will reverse

Proposed GAAP:

Classify all deferred tax asset and liability as noncurrent

Intra-Entity Asset Transfers

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Current GAAP requirement: Defer the recognition until the assets have been sold to an outside

third party

Exception for comprehensive recognition of income taxes

Proposed GAAP:

Eliminate the exception

Require recognition when the transfer occurs

EITF Issue 16-A, “Restricted Cash”

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Overview

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• Significant diversity in practice exists with respect to the classification of certain cash receipts and payments

• This diversity may exist because of a lack of specific accounting guidance

Project topics

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Three subissues being examined:1. Definition of restricted cash2. Classification of changes in restricted cash3. Presentation of cash payments and cash receipts that directly affect restricted cash

PCC Agenda Decision No. 15-02: “Applying Variable Interest Entity Guidance to Entities under Common Control”

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Overview

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Diversity in practice exists in application of the VIE consolidation guidance to entities under common control