FASB Update

August 14, 2012

Rahul Gupta, Practice Fellow, FASB

The views expressed in this presentation are my own and not the positions of the Financial Accounting Standards Board (FASB).

Positions of the FASB are arrived at only after extensive due process and deliberations.

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Agenda

• Recently completed FASB standards

• Convergence efforts and FASB project plan

• Private Company Financial Reporting

• Update on joint projects

• Update on FASB only projects

• Emerging Issues Task Force (EITF) agenda

• Questions & Answer Session

Recently completed FASB standards and

implementation issues

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Recently issued standards

• Presentation of Comprehensive income

– ASU 2011-05: Presentation of Comprehensive Income

– ASU 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05

• Goodwill Impairment

– ASU 2011-08: Testing Goodwill for Impairment

• Impairment of indefinite-lived intangible assets

– ASU 2012-02: Testing Indefinite-Lived Intangible Assets for Impairment

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Presentation of Comprehensive Income

• ASU 2011-05: Objective was to increase prominence of Comprehensive Income

– Eliminated the option to report OCI and its components in the statement of changes in stockholder’s equity

– Required to present comprehensive income and its components in either a single continuous statement or in two separate but consecutive statements

– Components of OCI and reclassifications to net income to be reported on the face of the financial statements

• ASU 2011-12: Deferred the requirement to present effects of reclassifications of AOCI on components of net income

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Goodwill Impairment (ASU 2011-08)

• Objective is to simplify impairment assessment of goodwill

• Entities can choose to qualitatively assess goodwill before performing Step 1

– If more likely than not that the carrying value (CV) of goodwill exceeds its fair value (FV), then proceed to Step 1

– Otherwise, no further analysis is required

• Option to carry forward detailed calculation of a reporting unit’s fair value from prior period is no longer allowed

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Goodwill Impairment (ASU 2011-08)

• Standard includes examples of facts and circumstances to consider in performing qualitative assessment

• Quantitative disclosures no longer required for significant unobservable inputs used to measure goodwill impairment

• High-quality documentation will be important to support judgments supplemented by policies and controls

• Effective date: January 1, 2012, for calendar year-end filers. Early adoption permitted

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Impairment of Indefinite-Lived Intangible Assets (ASU 2012-02)

• Objective is to simplify impairment assessment of indefinite-lived intangible assets, other than goodwill

• Entities would have the option to first assess qualitative factors to determine if it is more likely than not that an impairment exists

– No further action if the entity concludes it is not more likely than not that impairment exists

– Quantitative test would be performed otherwise

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Impairment of Indefinite-Lived Intangible Assets (ASU 2012-02)

• Qualitative assessment will focus on factors that impact significant inputs to the asset’s fair value calculation, including asset level indicators

• Exempts nonpublic entities from disclosing quantitative information about significant unobservable inputs used to measure the fair value in case an impairment is recorded

• Standard would apply to all entities, both public and nonpublic

Convergence efforts and project plan

Expected Date

Project

2012 2012 2013

3Q 4Q 1H

Accounting for Financial Instruments (Joint):

- Classification and Measurement E

- Impairment E

- Liquidity and Interest Rate Risk Disclosures (FASB Only) C

- Hedging

Consolidation: Policy and Procedures (Joint) F

Investment Companies (Joint); Investment Property Entities (FASB Only) F

Revenue Recognition (Joint) F

Leases (Joint) E

Insurance Contracts (Joint) E

E Exposure Draft F Final Document C Comment Deadline R Roundtable Discussion

FASB Project Plan (as of July 2012)

Expected Date

Project

2012 2012 2013

3Q 4Q 1H

Liquidation Basis of Accounting C

Going Concern E

Disclosure Framework C

Impairment of Indefinite-Live Intangible Assets F

Not-for-Profit Financial Reporting: Financial Statements

Presentation of Comprehensive Income: Reclassifications Out of Accumulated Other Comprehensive Income

E

Definition of a Nonpublic Entity D

Transfers and Servicing: Repurchase Agreements and Similar Transactions E

Technical Corrections and Improvements F

E Exposure Draft F Final Document C Comment Deadline D Discussion Paper

FASB Project Plan (as of July 2012)

Private Company Financial Reporting

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The Private Company Council

Responsibilities

• Based on criteria agreed on with FASB, PCC identifies, deliberates and votes on proposed modifications to existing U.S. GAAP for private companies

– Recommendation subject to FASB process

• PCC is primary advisory body to FASB on private companies for active technical agenda issues

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The Private Company Council

Membership and Terms

• 9-12 members, including chair, appointed by FAF

• Chair is not FASB member

• Initial 3-year term

• Members & chair to have considerable experience with private company issues

• Serve without compensation

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The Private Company Council

Meetings and Agenda

• Agenda set by supermajority vote of PCC

• PCC to meet at least five times annually

• Most meetings to be held in Norwalk

• Two meetings per year may be held elsewhere

• All deliberative meetings open to public

• FASB expected to attend

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The Private Company Council

Endorsement Process and Voting

• PCC uses agreed upon criteria to identify, deliberate and vote on GAAP exceptions

• Two-thirds (supermajority) vote required

• FASB endorsement process for PCC recommendations by simple majority

• FASB expected to act within 60 days

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The Private Company Council

Endorsement Process and Voting

• If FASB endorses:

• Public comment/due process

• PCC redeliberates and votes – supermajority

• FASB makes final endorsement – simple majority

• FASB issues Accounting Standards Update

• If FASB does not endorse:

• FASB chair to provide PCC with written notice

• FASB to outline changes that could result in endorsement

Definition of Nonpublic Business Entity

Tentative Decisions Reached To Date

• The Board has tentatively decided that the following types of entities should not be included in the definition of a private company for financial reporting purposes:

• Entities that are required to file or furnish financial statements for purposes of issuing securities to be traded in a public market

• For-profit entities that are conduit bond obligors for conduit debt securities that are traded in a public market

• Employee benefit plans.

• The Board has tentatively decided that a company that otherwise meets the characteristics of a private company as defined in this project would be deemed a private company for financial reporting purposes if:

• It is a privately held financial institution

• It is a consolidated subsidiary of an entity that is a public company

• One of its controlled and consolidated subsidiaries is a public company.

Definition of Nonpublic Business Entity

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Private Company Decision Making Framework

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Private Company Decision Making Framework Structure of Framework

Update on joint projects

Expected Date

Project

2012 2012 2013

3Q 4Q 1H

Accounting for Financial Instruments (Joint):

- Classification and Measurement E

- Impairment E

- Liquidity and Interest Rate Risk Disclosures (FASB Only) C

- Hedging

Consolidation: Policy and Procedures (Joint) F

Investment Companies (Joint); Investment Property Entities (FASB Only) F

Revenue Recognition (Joint) F

Leases (Joint) E

Insurance Contracts (Joint) E

E Exposure Draft F Final Document C Comment Deadline R Roundtable Discussion

FASB Project Plan (as of July 2012)

Leases

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Agenda

• Why a leases project?

• Right-of-use model

• Lessee accounting model

• Lessor accounting model

• Classification of leases

• Where we are

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Why a leases project?

• Existing lease accounting does not meet users’ needs

– accounting depends on classification– contractual rights and obligations (assets and liabilities)

are off balance sheet– many users adjust financial statements

• Structuring opportunities– current lease classification often based on bright lines – significant difference in accounting on either side of

operating/finance lease line

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Proposed right-of-use model

• A lease contract is one in which the right to control the use of an asset (for a period of time) is transferred to the lessee.

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Lessor LesseeRight of use

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Redeliberations—lessee model 29

Balance sheet Income statement

1 Measured at present value of lease payments2 Initially measured at same amount as liability, plus initial direct costs

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The rationale (lessee) 30

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Redeliberations—lessor model 31

Lessor accounting approach

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The rationale (lessor) 32

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Receivable and residual approach 33

Balance Sheet Income Statement

Right to receive lease payments1

X Profit on transfer of right-of-use (gross or net based on business model)

X

Residual asset2 X Interest income—on receivable and residual3

X

1 Present value of lease payments, plus initial direct costs2 Measured at an allocation of carrying amount of leased asset3 Interest on residual based on estimated residual value—any profit on the residual asset is not recognised until asset sold or re-leased at end of lease term

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Lessor approach similar to current operating lease accounting

1 Lessor measures leased asset (eg property) at fair value (IFRS) or cost

2 Rental income recognised on a straight-line basis or another systematic basis, if more representative of pattern of earning rentals

3 If property measured at cost, rental income plus depreciation recognised

4 If property measured at fair value, rental income plus fair value changes recognised

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Balance Sheet Income Statement

Leased asset1 X Rental income2 X

Depreciation3, or (X)

Fair value changes4 X/(X)

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Classification of leases* 35

* Both lessee and lessor

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Classification of leases—examples 36

InsignificantMore than insignificantCar (3yrs)4

Vessel (20yrs)1 Truck (4yrs)3

Airplane (8yrs)2

Vessel (5yrs)1

Comm. property (30yrs)1

Comm. property (10yrs)1

Assumed economic life of: 1 40 years2 25 years3 10 years4 6 years

Where we are

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2010 2012 TBD

August 2010Exposure DraftLeases

Q4 2012Second Exposure DraftLeases

TBDFinal StandardLeases

Comment period 4 months

786 comment letters received

Contained proposals for both lessees and lessors

Re-expose proposals

Comment period 120 days

Focus on revisions to 2010 proposals

Will contain proposals for both lessees and lessors

Effective date: TBDWill contain guidance for both lessees and lessors

2012/2013

Consultation

Outreach

Working group meetings

Redeliberations

Update on FASB only projects

Expected Date

Project

2012 2012 2013

3Q 4Q 1H

Liquidation Basis of Accounting C

Going Concern E

Disclosure Framework C

Not-for-Profit Financial Reporting: Financial Statements

Presentation of Comprehensive Income: Reclassifications Out of Accumulated Other Comprehensive Income

E

Definition of a Nonpublic Entity D

Transfers and Servicing: Repurchase Agreements and Similar Transactions E

Technical Corrections and Improvements F

E Exposure Draft F Final Document C Comment Deadline D Discussion Paper

FASB Project Plan (as of July 2012)

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The Liquidation Basis of Accounting

• Requires use when liquidation is “imminent,” that a plan for liquidation

– is approved and the likelihood is remote that its execution will be blocked by other parties or

– is imposed by other forces and the likelihood of return from liquidation is remote

• For limited life entities, liquidation is imminent when significant management decisions are substantially limited to carry out a plan for liquidation other than the plan specified at inception

• Financial statements to reflect the amount of cash that the entity expects to collect or pay during liquidation

• Comment period on Exposure Draft ends October 1, 2012

Emerging Issues Task Force Update

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EITF UpdateIssue Current Status

11-A: Parent's Accounting for the Cumulative Translation Adjustment upon the Sale or Transfer of a Group of Assets That Is a Nonprofit Activity or a Business within a Consolidated Foreign Entity

Consensus Exposed in December 2011. Will be discussed at a future EITF meeting

12-A: Not-for-Profit Entities: Classification of the Sale of Donated Securities in the Statement of Cash Flows

Consensus Exposed (Comment period ended: July 16, 2012)

12-B: Not-for-Profit Entities: Personnel Services Received from an Affiliate for Which the Affiliate Does Not Seek Compensation

Consensus Exposed (Comment period ends: September 20, 2012)

12-C: Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution

Consensus Exposed (Comment period ended: July 16, 2012)

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EITF UpdateIssue Current Status

12-D: Accounting for Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date

Consensus Exposed (Comment period ends: September 20, 2012)

12-E: Entertainment—Films: Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs

Consensus Exposed (Comment period ended: July 16, 2012)

12-F: Recognition of New Accounting Basis (Pushdown) in Certain Circumstances

Will be discussed at a future meeting

12-G: Accounting for the Excess in the Fair Value of Assets over Liabilities of a Consolidated Collateralized Financing Entity

Will be discussed at a future meeting

Question & Answer Session