EY Q1 2014 financial
reporting update
Today’s agenda
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Final standards
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Q1 matters to consider
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Other developments
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EY Q1 2014 financial reporting update
Today’s agenda
►
Final standards
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Q1 matters to consider
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Other developments
Page 3
EY Q1 2014 financial reporting update
Definition of a public business entity (PBE)
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Currently, does not change whether an entity is
considered public or nonpublic for previously existing US
GAAP requirements
Broader than other definitions of public entity and publicly
traded company that exist in US GAAP
Determines whether an entity can use:
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Private company council (PCC) accounting alternatives
Other “private” company relief (e.g., disclosure, transition,
effective date differences) in new standard-setting
Private companies should consider whether they
might become a PBE when deciding whether to elect
the PCC alternatives because the FASB and the
SEC have not provided transition guidance.
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EY Q1 2014 financial reporting update
Definition of a public business entity (PBE)
Entities that meet the definition
Criterion
Entities that meet the criterion
a) Has financial statements or financial
information furnished to or filed with the
SEC, or included in an SEC filing
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b) Required by the 1934 Act to file
financial statements with a regulator
other than the SEC
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Some financial institutions and
insurance companies
c) Required to file financial statements
with a foreign or domestic regulator to
issue securities
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Entities that file US GAAP financial
statements with a foreign regulator
d) Has securities on an exchange or an
over-the-counter (OTC) market
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Depends on facts and circumstances
e) Has securities not subject to contractual
transfer restrictions and required to
prepare US GAAP financial statements
and make them publicly available
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Depends on facts and circumstances
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EY Q1 2014 financial reporting update
Significant acquirees (Rule 3-05)
Significant equity method investees
(Rule 3-09, 4-08(g))
Opinion check
Do you expect your company to be affected by the
new definition of a public business entity?
A.
Yes
B.
No
C.
Unsure
D.
Does not apply (EY, faculty, other)
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EY Q1 2014 financial reporting update
Standards effective in 2014
Presentation of unrecognized tax benefits (ASU 2013-11)
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Balance sheet presentation standard
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Liabilities for unrecognized tax benefits are offset against
deferred tax assets (for net operating losses, similar tax
losses or tax credit carryforwards)
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Net presentation
Net settlement is
required or expected
Gross presentation
► Net settlement is not
required or expected
Disclosure of deferred tax assets likely changes as a result
Not expected to change:
Disclosure of uncertain tax positions
► Income tax provision
Effective dates of ASU 2013-11 for calendar year-ends
Transition method
Public
Private
Early adoption?
Prospective
Q1 2014
2015
Yes
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EY Q1 2014 financial reporting update
Today’s agenda
►
Final standards
►
Q1 matters to consider
►
Other developments
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EY Q1 2014 financial reporting update
Proxy reminders
SEC focus areas
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Compensation discussion and analysis
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Clear description of all factors in assessing performance and
the weight attached to each
Quantitative and qualitative discussion of targets
Comparison of actual compensation to targets
Explanation of how and why compensation committee used
discretion
Example SEC Staff comment letter
Please tell us the specific performance targets for each named
executive officer as well as the actual results achieved and how
you evaluated the results to reach the actual payouts. Please
provide more detail regarding the “discretion” the committee
applied towards your performance metrics.
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EY Q1 2014 financial reporting update
Proxy trends
Say-on-pay (SOP) and audit committee disclosures
Triennial companies will have second SOP votes in 2014
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SOP trends – high investor support
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Average support is > 90% for Russell 3000 companies
Audit committee disclosures – increased voluntarily in
response to shareholder requests
Audit committee (AC) disclosures
% of Fortune 100
2012
2013
Auditor selection is in best interest of shareholders
4%
23%
AC is involved in lead audit partner selection
1%
17%
AC is responsible for fee negotiations
1%
9%
AC is responsible for auditor appointment, oversight and
compensation
37%
50%
AC considered impact of auditor rotation
3%
15%
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EY Q1 2014 financial reporting update
Proxy trends
Other shareholder proposals
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Top trends
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Lobbying activities
Sustainability reports
Greenhouse gas emissions
Eliminate classified board
Executive pay practices
Emerging trends
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Cybersecurity
Corporate tax strategies
Limit interim vote access
Director tenure and
independence
Human rights risk
assessment
Withdrawn proposals
Company-investor
engagement has increased
over the last year
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EY Q1 2014 financial reporting update
19%
17%
15%
2013
2014
Estimated annual effective tax rate (EAETR)
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Make best estimate of the annual effective tax rate for
full fiscal year at end of each interim period
Use EAETR to record tax on current year-to-date basis
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Project year-end temporary differences and valuation
allowance
Exclude benefits of expired provisions
Package of business “tax extenders” expired again on
31 December 2013
Recognize the income tax effect of tax law change in
the interim period of enactment
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Cumulative effect of change is recognized as a discrete
item in continuing operations
Spreading to earlier periods prohibited, even if retroactive
EY Q1 2014 financial reporting update
Estimated annual effective tax rate (EAETR)
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Changes to indefinite reinvestment assertion
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Record in the interim period the change in assertion occurs
Record tax effects related to prior year undistributed
earnings – discrete
Record tax effects related to current year undistributed
earnings – adjust EAETR
Discontinued operations
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Revise EAETR applied to income from continuing
operations in current and subsequent interim periods of
current fiscal year
Recast income taxes related to prior interim periods (as
applicable) between continuing and discontinued operations
EY Q1 2014 financial reporting update
Adopting 2013 COSO framework
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Transition activities
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Map existing controls and related activities to 17 principles
Evaluate whether 1) each of the 17 principles are present
and functioning and 2) five components are integrated
Other significant changes
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Financial reporting fraud
Information quality (e.g., in management review controls)
Outsourced service providers
Deficiency evaluation
Common questions
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How much effort will the transition take?
What documentation will external auditors expect?
Does the expansion of the framework to include nonfinancial
reporting and internal reporting affect management’s
assessment or integrated audit?
EY Q1 2014 financial reporting update
Fact check
Has your company started the transition to the
2013 COSO framework?
A.
Yes
B.
No
C.
Does not apply (EY, faculty, other)
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EY Q1 2014 financial reporting update
Other SEC reminders
Conflict minerals
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Rule upheld by a US district court in July 2013
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Currently under appeal
Companies may need to file Form SD, conflict minerals
report and obtain independent private sector audit (IPSA)
For the first two years the conflict minerals report may be
unaudited if products are “conflict undeterminable”
An IPSA provides assurance on whether the:
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Design of the due diligence framework used conforms with a
recognized framework
Company performed due diligence described in its conflict
minerals report
Initial disclosures on Form SD are due 2 June 2014
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EY Q1 2014 financial reporting update
Other SEC reminders
Cybersecurity and data protection
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Increased attention from regulators, lawmakers and
shareholders
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SEC recently hosted a cybersecurity roundtable
Disclose significant specific risks associated with
cyberattacks
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Refer to Corporation Finance Disclosure Guidance: Topic
No. 2, Cybersecurity
Do not refer to cybersecurity risk factors in hypothetical
terms if a cyberattack has occurred
State known and potential costs and other financial and
nonfinancial consequences of cyberattacks
EY Q1 2014 financial reporting update
Mandatory firm rotation
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EU provisional agreement for Public Interest Entities (PIEs)
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India
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PIEs generally include companies listed in the EU, banks and
other financial institutions (e.g., investment firms)
Mandatory firm rotation: maximum of 10 years (certain
exceptions for joint audits and retenders)
Restrictions on non-audit services
Similar to EU provisions but applies to most companies
incorporated in India (including subsidiaries and private
companies), pending final rule-making and interpretation
United States
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Not being considered; focus on changes to auditor’s report
Multinationals should consider the effects
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EY Q1 2014 financial reporting update
Today’s agenda
►
Final standards
►
Q1 matters to consider
►
Other developments
Page 19
EY Q1 2014 financial reporting update
Status of selected FASB projects
First half 2014
Revenue recognition
Second half 2014
Final standard
Leases
Redeliberations
Insurance contracts
Redeliberations
Financial instruments
Classification and measurement
Redeliberations
Final standard
Impairment
Redeliberations
Final standard
Hedging
FASB staff research
Goodwill for public business entities
Deliberations
To be determined
Consolidation (principal – agency)
Redeliberations
Going concern
Redeliberations
Disclosure framework (board process)
Disclosure framework (entity process)
Discontinued operations
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Exposure draft
Comment period
Summarizing results from field testing
Final standard
EY Q1 2014 financial reporting update
Reporting discontinued operations
Summary of significant changes in criteria
Current
Proposed standard
Threshold for item
held for sale or
disposed of
Component
Component AND major
strategic shift having a
major effect on financial
results
Held for sale on
acquisition
Asset group
AND certain
held for sale
criteria met
Business AND all held for
sale criteria met
Prohibited
Allowed
Yes, various
Limited to oil and gas
properties using the full
cost method
Significant ongoing
involvement
Scope exceptions
(e.g., equity method
investments)
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EY Q1 2014 financial reporting update
Reporting discontinued operations
Summary of changes in presentation and disclosure
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Assets/liabilities must be classified as held for sale in the
period the criteria are met and all prior periods presented
New disclosures for discontinued operations:
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Major components of pretax income or loss
Details of the major assets and liabilities
Operating and investing cash flows OR depreciation,
amortization, capital expenditures and significant
noncash items
Quantitative information about continuing involvement
Disclose pretax profit or loss for individually material
disposals not meeting discontinued operations criteria
Final standard expected in second quarter
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EY Q1 2014 financial reporting update
Financial instruments
Classification and measurement
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FASB decided not to pursue the proposed cash flow
characteristics test and business model assessment
Same
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(as current
US GAAP)
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Changing
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(from current
US GAAP)
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Bifurcation of embedded derivative features
Classification and measurement models for
loans and debt securities
Equity instruments measured at fair value
through net income (no remeasurement
through other comprehensive income)
FASB plans to evaluate definition of “security” to address
practice issues
Final standard expected in second half of 2014
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EY Q1 2014 financial reporting update
Financial instruments
Impairment for debt instruments
Debt instruments
Measured at fair value (FV)
through other comprehensive
income (OCI)
Is fair value less than
amortized cost?
Yes
Measured at amortized cost
Yes*
No
Apply proposed “current
expected credit loss” model
to measure credit losses
No allowance
* Allowance for credit losses on debt instruments measured at FV-OCI would be
limited to the difference between FV and amortized cost
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EY Q1 2014 financial reporting update
Leases
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Lessee accounting – most leases on balance sheet
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Lessor accounting – Both Boards support using existing
IFRS classification principles (similar to current US GAAP)
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IASB – all leases would be classified as Type A
FASB – dual lease classification (Type A and Type B) based
on current IFRS principles (like US GAAP but no bright-lines)
Differ on recognition of initial selling profit, if any, for certain
Type A leases (i.e., sales-type leases)
Other tentative decisions reached
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Lease term, short-term lease exception, other simplifications
Q3 2010
2011 - 2013
Q1 2014
???
Exposure
draft (ED)
Redeliberations
and 2nd ED
Begin
redeliberations
Final
standard
Page 25
EY Q1 2014 financial reporting update
Accounting for goodwill
Public business entities (PBEs) and not-for-profits
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PBEs expressed concerns about the cost and complexity
of the annual goodwill impairment test
The FASB is evaluating three potential alternatives
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Direct write-off
Simplified impairment
Amortization
Timing of a potential exposure draft is uncertain
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FASB to consider feedback on the IASB’s ongoing postimplementation review of IFRS 3(R), Business Combinations
EY Q1 2014 financial reporting update
Opinion check
Which approach to accounting for goodwill would
you prefer for public business entities?
A.
Direct write-off
B.
Simplified impairment
C.
Amortization
D.
Other
Page 27
EY Q1 2014 financial reporting update
EITF update – selected projects
No.
Issue addressed
Status
12-F
Recognition of new accounting basis (pushdown) in
certain circumstances
Consensus for
exposure
12-G
Measuring the financial assets and financial liabilities
of a consolidated collateralized financing entity
Discussions
13-B
Accounting for investments in qualified affordable
housing projects
Final ASU issued
13-D
Accounting for share-based payments when the terms
of an award provide that a performance target could
be achieved after the requisite service period
Final consensus
13-F
Accounting for the effect of a Federal Housing
Administration guarantee
Comment letter
period
13-G
Determining whether the host contract in a hybrid
financial instrument issued in the form of a share is
more akin to debt or to equity
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EY Q1 2014 financial reporting update
Discussions
EITF update – Issue 12-F
Recognition of new accounting basis (pushdown)
Pushdown accounting: reflecting acquirer’s new basis at fair
value in stand-alone financial statements of acquired entity
Current SEC requirements
► Applies to SEC registrants
► Allowed when an entity
becomes substantially wholly
owned (> 80% acquired)
► Required when 95% or more
of an entity is acquired
► Considers group of investors
that effectively acts as one
investor (collaborative group)
Consensus-for-exposure
► Applies to all entities
► Allowed when an entity
becomes controlled by a
new party
► Optional
► Does not consider
collaborative groups
► Requires new disclosures
SEC Staff has not stated if it will change its guidance
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EY Q1 2014 financial reporting update
Disclosure reform
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FASB disclosure framework project
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Exposure draft proposes a new chapter to the conceptual
framework to improve the FASB’s process for establishing
disclosure requirements
Comment period ends 14 July 2014
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SEC Staff study of Regulation S-K
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Recommends a comprehensive review of SEC disclosures
Principles-based
Presentation,
delivery and
frequency of filings
Considerations
for review
Scaled requirements
Page 30
EY Q1 2014 financial reporting update
Technology used
to enhance
readability
SEC proposals
Crowdfunding and Regulation A+
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Provide private companies access to capital by making
certain public offerings exempt from registration
Provision
Crowdfunding
Maximum in 12 months
$1 million
Individual investor
Yes
limitations
Subject to state securities
No
laws and registration
Audit of financial
Yes, offering >
statements required
$500K
Ongoing reporting and
filing deadline
Yes (120 days
after year-end)
Number of years of
financial statements
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Regulation A+
Tier 1
Tier 2
$5 million
$50 million
No
Yes
Yes
No
No
Yes
No
Yes (120 days after
year-end; 90 days
after half-year)
Two years
EY Q1 2014 financial reporting update
Private company council (PCC) update
Project status
No.
Alternatives under US GAAP
13-01A Accounting for identifiable intangible
assets in a business combination
Status
Proposed ASU
(research in
progress)
13-01B Accounting for goodwill subsequent to
ASU issued
a business combination
13-02
Applying variable interest entity
ASU issued
guidance to common control leasing
arrangements
13-03A Accounting for certain receive-variable,
ASU issued
pay-fixed interest rate swaps –
simplified hedge accounting approach
13-03B Accounting for certain receive-variable, Removed from
pay-fixed interest rate swaps –
agenda
combined instruments approach
Page 32
EY Q1 2014 financial reporting update
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EY Q1 2014 financial reporting update