Accounting Trends 2016

Accounting Trends 2016

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Description: The word “cyberattack” is used regularly as an umbrella term for any kind of attempt by hackers to gain access to IT systems, infrastructure, and equipment for malicious intent. Cyber-attacks can range from installing spyware to attempts to destroy the infrastructure of entire nations.

 
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Contents:
Welcome to
Accounting Trends
2016

Update on Diocesan
Finances

10 Minute Break

Client Service Team

Cecil Bostany
Cecil Bostany joined Warren Averett as a
Member in the Tax Division in 2002. He is a
former partner with Ernst & Young and has over
34 years of experience working with privatelyowned, venture-backed and publicly-held
companies. Cecil has extensive experience in
mergers & acquisitions, due-diligence,
transaction structuring and financing and is
taxation planning specialist. He is also a leader
within the Life Sciences & Technology Practice
Group. Cecil serves clients in a variety of
industries including technology, venture capital,
manufacturing and automotive.

Let’s Make a Deal:
Merger & Acquisition
Trends and Financial
Implications

5

Life Cycle of a Deal

6

Preparing To Go To Market


Financial Review
o
o
o
o
o
o

o
o
o

Have financial statements prepared by a third party (audit, review, QoE)
Ensure statements are in accordance with GAAP (revenue recognition, A/R, accruals)
Remove excess cash from the balance sheet
Move undesired assets out of the Company
Assess “discretionary” expenses
Prepare adjustments to EBITDA (excess salaries, non-recurring items, employee
bonuses)
Manage working capital levels in the year prior to sale (A/R, inventory)
Review of capitalized versus expensed items (software development)
Pension liability / Early Retirement Payments

7

Preparing To Go To Market
• Facilities
o Assess adequacy of facilities
 Age of equipment / new manufacturing technology
o M&E is in good working order prior to plant tours
o Avoid entering into long-term commitments (facility leases)
o Any significant M&E purchases planned or outstanding?
 Required upgrades or repairs?
 Capital expenditure requirements for next three years?
o Environmental compliance
 Phase I / Phase II
 Timing of Phase I / Phase II during a process

8

Preparing To Go To Market
• Organization
o Organize the Company to reduce transitional risk to the buyer (e.g.,
partnership, SH’s agreement)
o Consider dependence on any single customer or supplier (diversify
revenue streams)
o Binding contractual agreements with key lenders, vendors and customers
o Employment contracts for key personnel
 Employment contracts in place for key employees (President/CEO,
CFO)?
 “Double-edged sword”
 Potential need for deal bonus?
 SARs?
 Ability or willingness to stay on with the business post-Transaction?
o Non-competes for employees?

5

Preparing To Go To Market
• Tax / Structuring
o
o
o
o

Assess optimal transaction structure
C-Corp  stock sale w/ wo/338 vs. asset sale
S-Corp  stock sale w/ wo/338(h)(10) or 336(e) vs. asset sale
NEXUS (international and domestic tax exposure)

• Legal
o
o
o
o
o

Outstanding litigation or filings
Assess need for resolution of legal proceedings prior to sale
Patent filings / royalty agreements in place
Assess any required legal restructuring prior to sale
Shareholder Buy/Sell Agreement

10

Preparing To Go To Market
• Assembling the Right Deal Team
o Sellers should assemble a deal team well in advance of a sale (6-9 months)
o Can address tax, legal, and deal structuring points prior to a market launch
o Remember “You get what you pay for”
 Investment Banker – choose a firm that has deal execution experience
within the Company’s size range and Industry
 Sale process, deal structuring & negotiation, due diligence
 Choose a reputable law firm and an attorney with relevant experience
 SPA preparation, disclosure schedules & due diligence
 Tax and accounting Advisors
 Provide assistance in the preparation of financials, due diligence and
deal structuring
o Check references and make sure to choose an advisor you are comfortable
with and who is aligned with your objectives

11

Letter of Intent (“LOI”)

8

Due Diligence

13

9

Structure

14

10

Stock vs. Asset Transactions
Benefits/Disadvantages to Buyer and Seller
Tax Implication to target with asset sale:

If T is C corporation, asset sale results in double taxation

C Corps seldom sell assets, unless they have sufficient
NOLs to offset the gain

Double tax occurs when sale proceeds distributed to
shareholders either in liquidation or as a distribution

If T is pass-through entity, gain may not all be capital gain

Potential retention of liabilities issues (legal issue)
Tax Implication to buyer with asset purchase:
• Buyer receives step-up in basis of assets purchased
• Option to purchase some or all of seller’s assets
• Limited successor liability
Other Considerations:
• Stock sale
• Simple everyone understands this transaction
• Practical when selling less than the full business
• Possible Sales and transfer taxes
• Legal considerations: Transfer taxes, legal titles have to be
transferred and perfected
• Contractual matters: Seller may have contracts that are difficult
to novate to buyer

Target
shareholde
r
Cash or Stock

Or
Cash

Buyer

Target
Target’s
assets

Mixing Stock &
Asset

15

11

Rollover Equity

16

12

F Reorganization
Initial Structure

Tax implications to Target
New
Holdco

Target
Shareholder

T shareholders form H Holdco
and contribute T shares to H Holdco
T immediately converts to an LLC
or makes Q-sub election

Target

Final Structure
Target
Shareholder
Shares
of T LLC
Target

Buyer
Cash

• Formation of New Holdco and transfer of T to New
Holdco is generally tax-free F reorganization
• Once complete, transfer of T units or shares to new
Holdco
Tax implications to buyer:
• Buyer receives step-up in basis of assets purchased
Considerations:

• Buyer can be any type of entity
• Buyer can acquire less than 100% of T and still receive
step-up
• Potential to allow seller and/or management to continue
as minority shareholders
• Be wary of anti-churning concerns under Sec. 197
• Useful primarily in a context where Sec. 338(h)(10) would
work, but for 80% purchase requirement
• Limited usefulness in a pure C corporation environment
due to potential double taxation
• Useful when contracts cannot be transferred

Target
LLC

17

13

Tax Basis Step Up Transactions –
338, 336, 754
• Asset purchase
• Forward cash merger
• Purchase of single-member LLC interest
• Sec. 338(g) transaction
• Sec. 338(h)(10) election
• Sec. 336(e) transaction
• Sec. 368(a)(1)(F) reorganization
• Partnership acquisitions with a Sec. 754 election
• Evaluating the alternatives

18

Common Issues:

Understanding Target’s accounting
Methods

19

15

Common Issues:
20

Purchase Accounting and Deferred Taxes

20

16

Common Issues:

Deferred Revenue – GAAP vs. Tax

21

17

Common Issues:

Clearly defining working capital &
related purchase price adjustments

22

18

Common Issues:

Transaction Costs

23

19

Common Issues:
24

State income, sales, and use taxes

24

20

Common Issues:

Make Whole Payments

25

21

Compensation Issues
• “Golden Parachute” compliance issue
• Section 409A
• Employment Agreements
• Stock Options
• Non-competes
• Earn-outs

26

22

Does the Purchase Agreement
reflect what you think the deal is
given the LOl and later
negotiations?

27

23

After Closing
• Short period “stub” returns and who will sign?
• Working capital and any other true-up provisions
• Escrow issues
• Earn-outs

28

24

Questions

29

25

Client Service Team

Lisa Kianoff

Lisa Kianoff serves as Vice President of
Software Services for Warren Averett
Technology Group. She has over 33 years
of technology and public accounting
experience, 30 of which were at Kianoff &
Associates prior to merging with Warren
Averett. Lisa’s primary responsibilities
include business development and building
relationships.

30

June 8, 2016

Technology Best
Practices
Presented by:

Lisa Kianoff, CPA.CITP, CGMA
Vice President
Warren Averett Technology Group

TECHNOLOGY GROUP

Technology
• Becoming ubiquitous
• Consumerization bleeds over to
business
• It is a tool not the end game
• Treat it with care and attention
• Our technology is connecting us

TECHNOLOGY GROUP

The Internet of Things (IoT)

TECHNOLOGY GROUP

Internet of Things (IoT)
The Internet of Things (IoT) is
the network of physical
objects—devices, vehicles,
buildings and other items—
embedded with electronics,
software, sensors, and network
connectivity that enables these

objects to collect and exchange
data.
TECHNOLOGY GROUP

Internet of Things
Is your Smartphone connected to the Wifi?
• 10 of you have been on Twitter in the last hour
• 7 have logged into their Bank Account in the last hour

• 3 have sent a picture to someone
• 12 have been on the Amazon app in the last 24 Hours
• Someone needed red sandals
• A few people bought batteries
• Someone downloaded/watched Titanic

TECHNOLOGY GROUP

IoT – Where Is It Taking Us?
“Anything that can be connected, will be connected.”


Your 6am alarm also starts your coffee brewing.



Your car connects to your calendar & suggests the best route to get to
your appointment and when to get going.



In heavy traffic your car sends a text notifying your appointment that
you will be late.



Your office equipment automatically re-orders supplies when it is
running low.

TECHNOLOGY GROUP

36

IoT – Where Is It Taking Us?
“Anything that can be connected, will be connected.”
• What if your car could have access to your calendar and
already know the best route to take.
• If the traffic is heavy your car might send a text to the other
party notifying them that you will be late.
• What if your alarm clock wakes up you at 6 a.m. and then
notifies your coffee maker to start brewing coffee for you?
• What if your office equipment knew when it was running low
on supplies and automatically re-ordered more?
• Gartner estimates that by 2020 there will be over 26 billion
connected devices. Others estimate as many as 100 billion).
• The IoT is a giant network of connected “things”

TECHNOLOGY GROUP

Real Life Uses for IoT Devices
• Automation (home and building)
• Access control, light and temperature control
• Smart Cities
• e-Meters, smart street lights, leak detections, traffic
control
• Manufacturing
• Real time inventory, asset tracking, employee safety
• Wearables
• Health, location and tracking and entertainment
• Health Care
• Remote monitoring, drug tracking, hospital asset
tracking
• Automotive
• Wire/bulb replacement, predictive maintenance, Car
to Car
TexasInstruments
TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

IoT and Education








Automate access to information
Special Needs Students
Increased Efficiency
Cut energy costs
Digital learning
School Security
Mobile Learning

TECHNOLOGY GROUP

Internet of Things Impact
• Lots of Data
Need ways to effectively use the data
• Importance of safeguarding data
Need to minimize risk through security

TECHNOLOGY GROUP

Access To
Information

TECHNOLOGY GROUP

Access To Information
• Reporting
– Financial
– Operational

• Dashboards
– Metrics
– Analysis

TECHNOLOGY GROUP

Financial Reporting
• Foundation is your COA (Chart of
Accounts)
• Review COA every few years
• Flexibility with segments or dimensions
• Incorporate non financial metrics
• Include multiple data sources
• Be creative with reports
• Budgeting
• Intercompany
TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

3 Month Comparisons

TECHNOLOGY GROUP

TECHNOLOGY GROUP

50

© 2002

TECHNOLOGY GROUP

ROLLING YEAR FORECAST

TECHNOLOGY GROUP

Operational Reporting

TECHNOLOGY GROUP

Mix in Non-Financial Information

TECHNOLOGY GROUP

Analyze Expenditures by Fund

TECHNOLOGY GROUP

TECHNOLOGY GROUP

Utility Analysis

TECHNOLOGY GROUP

Management Report

TECHNOLOGY GROUP

Dashbaords

TECHNOLOGY GROUP

Determine What KPIs To Analyze
• Net Tuition By Student FTE
• Net Tuition Dependency Ratio (Net Tuition /
Total Revenue including investments)
• Revenue per Employee
• Cost per Student
• Expenses Per Square Footage
• Cost per service
• Average Gift Amount

TECHNOLOGY GROUP

Financial Dashboard

TECHNOLOGY GROUP

TECHNOLOGY GROUP

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TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

TECHNOLOGY GROUP

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TECHNOLOGY GROUP

TECHNOLOGY GROUP

Security And
Your Data

TECHNOLOGY GROUP

Understanding Risk

TECHNOLOGY GROUP

Information at Risk
Personal Identifiable Information of Students/Donors/Supporters/Consumers
• Credit cards, debit cards, payment info
• Social Security #s, ITIN’s (Individual Tax Identification Numbers), taxpayer records
• Protected Healthcare Information (PHI), e.g. medical records, test results
• Drivers License / passport details
• Non-PII, like email addresses, phone lists, address

PII
Employee Information
(Personal Identifiable Information)
• Employers have at least some of the above information
on all of their employees
PHI
Corporate Confidential Information
(Protected Health Information)
• Sub-contractors and Independent Contractors
• Information received from commercial clients as a part of commercial transactions or services
• B2B exposures like projections, forecasts, M&A activity, trade secrets, financial statements

Many people think that without credit cards or PHI, they don’t have a data breach risk.
However…
Can you think of any business without any of the above kinds of information?

TECHNOLOGY GROUP

Causes of Data Loss
• Hacking
• Virus, malware
• Phishing
• Spear phishing
• Network intrusion

• Lost laptops
• Improper
disposal of
backup tapes
• Accidental
release
• Broken business
practices
• Un-shredded
documents

64% of breaches are
accidental
Negligent release

Source: 2013 Cost of Data Breach Study: Global Analysis, Ponemon Institute, May 2013

TECHNOLOGY GROUP

Technology Is Not For Everyone

TECHNOLOGY GROUP

TECHNOLOGY GROUP

78

Where Attacks Can Come
From

Phishing Attempts
Email, IM, Comment, or Text
Message that appears to come
from a legitimate, popular
company, bank, school, or
institution
Email Methods:
• Deceptive Subject Line
• Forged Sender’s Address
• Genuine Looking Content
• Disguised Hyperlinks
Website Methods:
• Genuine Looking Content
• Form – Collection of Information
• Incorrect URL, not disguised

TECHNOLOGY GROUP

Spyware/Malware
Malicious software that can collect personal information, change the
configuration of your computer, and/or cause your computer to slow down or
crash

TECHNOLOGY GROUP

Viruses/Keylogging
Computer viruses are small programs or scripts that can negatively affect the
health of your computer.
Keylogging is the
practice of using a
software program or
hardware device to
record all keystrokes on
a computer keyboard.

TECHNOLOGY GROUP

Ransomware






Often begins with Phishing email
Triggered with clicking a link or opening an attachment
Encrypts all files
Usually want $500-$1500
FBI suggests you pay

TECHNOLOGY GROUP

Hacking/Breach
Unauthorized access to data in electronic form containing personal information.

TECHNOLOGY GROUP

What Is A Cyber-Attack…
The word “cyberattack” is used regularly as an
umbrella term for any kind of attempt by hackers to
gain access to IT systems, infrastructure and
equipment for malicious intent.
Cyber-attacks can range from installing spyware to
attempts to destroy the infrastructure of entire nations.
Cyber Attacks can also target applications and
databases.
TECHNOLOGY GROUP

Cyber Security

TECHNOLOGY GROUP

Real Time Cyber Attack Maps

https://www.checkpoint.com/ThreatPortal
map.norsecorp.com
TECHNOLOGY GROUP

TECHNOLOGY GROUP

87

Consequences of Breaches

What Is A Breach?
• An incident that results in unauthorized access of data, applications,
services, networks and/or devices by bypassing their underlying
security mechanisms.
• Security breaches happen when the security policy, procedures
and/or system are violated.
• Depending on the nature of the incident, a security breach can be
anything from low-risk to highly critical.

TECHNOLOGY GROUP

88

Breach Consequences
Southeastern closely held business


$1.7M loss



Email Phishing Scam

Montgomery based professional services firm


$70K loss



Keylogger Virus
National restaurant franchise


TECHNOLOGY GROUP

Breaches in 10+ locations

Auburn
• April 2015
• Over 364,000 current, former, and prospective
students information exposed on Internet between
9/1/14 and 3/2/15
• Data included names, postal and email addresses,
dates of birth, Social Security numbers, and students’
academic information
• Exposure happened after a broken server was
repaired
• 2 years of credit monitoring
CAUSE: Human error

TECHNOLOGY GROUP

In The News

TECHNOLOGY GROUP

Loss of Trust

TECHNOLOGY GROUP

Consequences Of Poor Breach
Response
• Reputational
• Financial

TECHNOLOGY GROUP

Why Accountants Should Care
• Evaluating Information Systems is more and more a
part of our compliance work
• Independent Review of Internal Controls is becoming
more important
• Complexities in systems demand more expertise, so
need for oversite increases
• Your constituents require a higher level of due diligence
from you

TECHNOLOGY GROUP

Why is IT Important to Auditors/Accountants?
AU-C Section 315 - Understanding the Entity and Its Environment
Para. 19 - The information system, including the related business
processes relevant to financial reporting and communication. The
auditor should obtain an understanding of the information system,
including the related business processes relevant to financial
reporting
Internal Control Components
The Information System, Including the Related Business
Processes Relevant to Financial Reporting and Communication
An information system consists of infrastructure (physical and
hardware components), software, people, procedures, and data.
Many information systems make extensive use of IT.

TECHNOLOGY GROUP

Why is IT Important to Auditors/Accountants?
PPC Form ASB-CX 5.5 – Entity Level Controls for General Computer
Controls
• Objective: The entity has an IT strategic planning and risk management
process in place to support its financial reporting requirements.
• Objective: The entity maintains reliable systems that include appropriate
data backup and recovery processes.
• Objective: Physical security and access to programs and data are
appropriately controlled to prevent unauthorized use, disclosure,
modification, damage, or loss of data.
• Objective: Program changes (including report development) and systems
acquisition and development are appropriately managed to ensure that
the application software and reports adequately support internal control
and financial reporting objectives.

TECHNOLOGY GROUP

Your Copier Is A Computer – Treat It As One

TECHNOLOGY GROUP

Prevention Best
Practices

TECHNOLOGY GROUP

MINIMIZING
IT SECURITY RISK

TECHNOLOGY GROUP

Risk And Risk Management
Credit Card
Transaction
Processing
Personnel Records

Operations Management
Systems and Processes

TECHNOLOGY GROUP

Financial Risk

Cyber Security Risk

Regulatory & Compliance Risk
Legal Risk
Credit Risk
Market Risk

All of these can put

Competitive
Changing Technology Risk
Liquidity Risk
Risk
Business Interruption
TECHNOLOGY GROUP Risk

Human Capital Risk
101

Non-compliance Risks

Examples:
• Payment Card Industry (PCI)
• Health Insurance Portability and Accountability
Act (HIPAA)
• Information Privacy Laws (ePHI)
• Banking
• Insurance
• Federal Acquisition Regulations (FAR) for
Government Contractors
Consequences Of Non-compliance
• Fines/Penalties
• Reputational Damage
• Suspension of Work or Status
• Considerable Remediation Fees
(PROACTIVE is less expensive than REACTIVE)
• Increased Insurance Premiums

TECHNOLOGY GROUP

Why Risk Management?
• Risk management protects the long-term viability of a business.
• Just thinking about risk improves decision-making and business
effectiveness.
• Good risk management allows companies to anticipate problems
and minimize the impact of catastrophic events.
• Risk management ensures an optimal allocation of resources
and capital.
• Risk management can significantly improve strategic planning
and opportunity prioritization.

TECHNOLOGY GROUP

Health Insurance Portability and Accountability Act

Standards Of Compliance
• HIPAA – heard this until you’re “blue in the face”?
• The HIPAA Security Rule requires covered entities, business
associates, and their subcontractors to implement safeguards to
protect electronic protected health information (ePHI).
• Three (3) key areas to ensure the confidentiality, integrity, and
availability of ePHI:
• Administrative
• Physical
• Technical
• NOTE: Most violations of the HIPAA Security Rule result from
businesses not following policies and procedures to safeguard
ePHI.

TECHNOLOGY GROUP


EuroPay, Mastercard, and Visa (EMV)

EMV Compliance
• Deadline: October 2015
• How does it work? Unlike magnetic-stripe cards, every time an EMV card
is used for payment, the card chip creates a unique transaction code that
cannot be used again.
• If a hacker stole the chip information from one specific point of sale, typical
card duplication would never work "because the stolen transaction number
created in that instance wouldn't be usable again.


Issuers and merchants using non-EMV compliant devices
that choose to accept transactions made with EMVcompliant cards assume liability for any and all
transactions that are found to be fraudulent.
EMV technology will not prevent data breaches from
occurring, but it will make it much harder for criminals to
successfully profit from what they steal.

TECHNOLOGY GROUP

IT Compliance

TECHNOLOGY GROUP

Payment Card Industry

Standards Of Compliance


The PAYMENT CARD INDUSTRY (PCI) consists of all the organizations which
store, process, and transmit cardholder data, most notably for debit cards and
credit cards.



The PCI’s security standards are managed and maintained by the PAYMENT
CARD INDUSTRY STANDARDS COUNCIL (PCI SSC). The PCI SSC is
responsible for the development, enhancement, storage, dissemination, and
implementation of security standards for account data protection.



Credit card processing follows a set of rules called DATA SECURITY STANDARDS
(DSS). These data security standards are refreshed every 3 years. We are currently
governed by DSS v3.1 which became effective January 1, 2014.

TECHNOLOGY GROUP

Factors of Study With PCI Self Assessment

TECHNOLOGY GROUP

Warren Averett Technology Group

MAXIMIZING
TECHNOLOGY

TECHNOLOGY GROUP

IT Security Risk assessment






Vulnerability Scanning
Penetration Testing
Remediation Report
Infrastructure Roadmap
Incidence Response Plan

TECHNOLOGY GROUP

IT General Controls
Key Risk Areas

Financial

Operations

Information
Systems

Sample Risk Assessment Types

Financial
Risk
Assessment

Fraud Risk
Assessment

Cyber Risk
Assessment

Customer and
Credit Risk
Assessment

TECHNOLOGY GROUP

Compliance
Risk
Assessment
Supply
Chain Risk
Assessment

Product Risk
Assessment

Strategic
Risk
Assessment

Additional Tools








Central Antivirus and Anti-Malware
Regular Monitoring
Endpoint Management
Disaster Recovery Preparedness
Cyber Liability Coverage
Positive Pay
Password and Access Controls

TECHNOLOGY GROUP

112

A coverage by any other name…
Data Security
Insurance

Internet Liability
Privacy Risk Insurance

CyberSecurity
Insurance

Cyber Liability
Hacker
Liability

eCommerce Liability

Multi-Media Liability

Cyber Risk

Data Breach Coverage

Cloud Computing Liability
TECHNOLOGY GROUP

Positive Pay
• An automated fraud detection tool offered by the Cash
Management Department of most banks.
• Matches the account number, check number and dollar
amount of each check presented for payment against a list of
checks previously authorized and issued by the company.
• All three components of the check must match exactly or it will
not pay.

TECHNOLOGY GROUP

114

Access and Passwords
Access Controls: Unique Accounts and Strong
Password Enforcement
• Unique login credentials
• Strong Passwords (8 or more characters,
combination of upper/lower case alpha, numeric
and special characters)
• Forced password changes a minimum of every
90 days
• Account lockout following a series of incorrect
login attempts (often 5)
• Account logging and security event monitoring

TECHNOLOGY GROUP

Two Step Authentication

TECHNOLOGY GROUP

A Password Is Like The Key
To Your Home
Survey respondents results:








40% experienced security incidents in the past year
8 in 10 are worried about their online security
7 in 10 no longer trust passwords to protect accounts
47% use passwords that are at least 5 years old
54% use five or fewer passwords in their own online lives
68% want an extra layer of Internet security
86% who use two-factor authentication feel more secure
Source: Telesign's 2015 Consumer Account Security Report

TECHNOLOGY GROUP

Proper Planning Is Essential

An incident response plan includes a policy that
defines, in specific terms, what constitutes an incident
and provides a step-by-step process that should be
followed when an incident occurs. This plan should be
reviewed annually.

TECHNOLOGY GROUP

Where Is Technology Taking Us

“We live in a society exquisitely
dependent on science and
technology, in which hardly anyone
knows anything about science and
technology.”
TECHNOLOGY GROUP

120

Carl Sagan

Q&A

Lisa.Kianoff@warrenaverett.com
www.watechgroup.com
TECHNOLOGY GROUP

121

10 Minute Break

TECHNOLOGY GROUP

Lunch Break

Client Service Team

Michelle Sanchez
Michelle Sanchez has been practicing in the
public accounting profession in the Tampa Bay
area since 1994. She is a leader of our Not-forprofit Industry Service Team. She is also a
member of our Manufacturing and Distribution
Industry Services Team. Michelle is primarily
responsible for audits, reviews and compilations
for a broad-based clientele including nonprofit
organizations, manufacturing firms, distribution
companies and various service industry
companies. Michelle also has experience with
various annual and quarterly filings of the
Securities and Exchange Commission, initial and
secondary public stock offerings, reverse
acquisitions and private placement
memorandums.

Client Service Team

Eric Johanson
Eric Johanson is a Member of the Firm and has
more than 20 years of accounting experience,
primarily in public accounting. He is a Member of
the Firm’s SEC Practice Division, and is
primarily responsible for audits, reviews and
compilations for a broad based clientele
including biotechnology, technology transfer,
manufacturing firms, distribution companies and
various service industry companies. Eric also
has more than 13 years of experience with
various annual and quarterly filings of the
Securities and Exchange Commission, private
placement memorandums and mergers and
acquisitions.

A&A Update








Updates on Revenue Recognition
Principles – Focus on activities of FASB
Transition Resource Group
Lease Accounting and Overview –
Focus on Lessee and Lessor Accounting
Models in ASU 2016-02
Simplification Initiative - activity of
Private Company Council (PCC)
Using Data Analytics and Visualization
Techniques to Detect Fraud

Revenue:
Updates on Revenue
Recognition Principles

Revenue from Contracts
with Customers
FASB Final ASUs




Principal vs Agent (Gross vs Net)
Performance Obligations and Licenses
Narrow-Scope Improvements

Transition Resource Group


Last meeting April 18, 2016

BDO Resource Webpage
https://www.bdo.com/services/assurance/revenuerecognition/overview

REVENUE RECOGNITION - IMPLEMENTATION


The SEC staff continues to emphasize timely implementation efforts:
• Revenue is one of the single most important measures used by investors
• The Transition Resource Group (TRG) is addressing implementation questions
• 75% of companies indicated they have not completed an initial assessment, according to
a recent survey
• Industry specific efforts should be elevated to the TRG, as necessary
• Companies should invest in appropriate resources (human and financial)





Remarks of Wesley R. Bricker, Deputy Chief Accountant
http://www.sec.gov/news/speech/bricker-remarks-2015-aicpa-conference-sec-pcaobdevelopments.html
https://www.sec.gov/news/speech/speech-bricker-05-05-16.html




Remarks of James V. Schnurr, Chief Accountant
https://www.sec.gov/news/speech/schnurr-remarks-12th-life-sciences-accounting-congress.html

ASU 2016-08, PRINCIPAL VERSUS AGENT
CONSIDERATIONS (REPORTING REVENUE GROSS
VERSUS NET)





Does not change core principle of new revenue standard
Clarifies principal vs. agent implementation guidance:
• Determination for each distinct good or service (or a distinct bundle)
• Application of control principle to goods, services, or rights to services
• Clarified purpose and application of control indicators
• Revised and new examples
Same effective date and transition provisions as Topic 606



BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(6)

REVENUE FROM CONTRACTS WITH CUSTOMERS
ASU 2016-10, Identifying Performance Obligations and Licensing
• Does not change core principle of new revenue standard
• Same effective date and transition provisions as Topic 606
• Identifying promised goods/services – immaterial promises do not need to be
evaluated
• Distinct in context of contract
- Define “separately identifiable”
- Revise the separation criteria to focus on bundles of goods/services
- Add illustrative guidance

• Shipping & handling services
-

Clarify S&H occurring before transfer of control = fulfillment costs
Allow policy election to treat S&H occurring after control transfers as fulfillment costs

ASU 2016-12, NARROW-SCOPE IMPROVEMENTS
AND PRACTICAL EXPEDIENTS (TOPIC 606)


Assessing collectability



Must expect to collect “substantially all” of consideration
Does contract represent a substantive transaction? Consider:







When contract criteria not met, addresses when revenue is recognized

Presentation of sales taxes


Option to exclude from transaction price all taxes which are:






Customer ability and intent to pay
Entity’s exposure to credit risk and ability to mitigate credit risk

Assessed by governmental authority
Related to specific transaction
Collected from customer

Noncash consideration


Measure fair value of noncash consideration at inception. Subsequent changes in FV:



Due to form of the consideration (e.g., change in share price) = exclude from transaction price
Due to other factors (e.g., share option exercise price changes because of entity’s performance) = apply
variable consideration guidance

ASU 2016-12, NARROW-SCOPE IMPROVEMENTS
AND PRACTICAL EXPEDIENTS (TOPIC 606)


Contract modifications at transition – practical expedient
• Aggregate all previous modifications in prior periods to allocate transaction
price to satisfied and unsatisfied performance obligations



Completed contracts at transition
• Complete means legacy revenue has been recognized, rather than
assessing transfer of goods and services



Disclosure of accounting change in period of adoption
• Provides exception to the ASC 250 requirement to disclose current period
effect of retrospectively adopting a new accounting standard

REVENUE FROM CONTRACTS WITH CUSTOMERS
ASU 2015-14, Deferral of the Effective Date
• Public entities
• FYs beginning after 12/15/17 (and interim periods within)
• Early adoption permitted only as of FYs beginning after 12/15/16 (and
interim periods within)



Nonpublic entities
• FYs beginning after 12/15/18 (and interim periods within FYs beginning
after 12/15/19)
• Early adoption permitted as of either:





FYs beginning after 12/15/16 (and interim periods within), or
FYs beginning after 12/15/16 and interim periods within FYs beginning one
year after the annual period in which an entity first applies the new standard.

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-august-2015-(1)

Lease Accounting and
Overview

INTRODUCTION
• ASU 2016-02, Leases (Topic 842) issued February 2016
• Dual approach for lessees and lessors
Effective dates (early adoption permitted):
Public Business Entities

All Other Entities

FYs beginning after 12/15/18
(and interim periods within)

FYs beginning after 12/15/19
(interim periods within FYs beginning after
12/15/20)

INTRODUCTION
• Lessees
• Right of use model – recognize ROU asset and lease liability at
inception for all leases
• Optional exemption for leases with terms < 12 months

• Classify all leases as finance or operating (5 criteria)
• Finance lease – lessee effectively obtains control of underlying
asset
• Operating lease – lessee does not effectively obtain control of
underlying asset

• Similar balance sheet impact; different income statement and
cash flow results

INTRODUCTION
• Lessors
• Classify all leases as sales-type, direct finance, or operating (similar to
existing U.S. GAAP) based on same criteria as lessees, plus a few
others
• Sales-type lease - transfers all risks and rewards, plus control of
underlying asset, to lessee
• Direct financing – transfers risks and rewards but not control
• Operating – does not transfer risks and rewards or control
• Subsequent accounting is consistent with existing U.S. GAAP*
• Control principle aligned with new revenue standard
* Leveraged lease treatment no longer available for new leases

SCOPE
• Applies to all leases and subleases, except:
– Leases of intangible assets (Topic 350)
– Leases for exploration or use of certain natural resources (Topics 930
& 932)
– Leases of biological assets (Topic 905)
– Leases of inventory (Topic 330)
– Leases of assets under construction (Topic 360)

• Scope exception for short-term leases (term less than 12
months)
• Separation of non-lease components

IDENTIFYING A LEASE
Lease - A contract, or part of a contract, that conveys the right to control
the use of identified property, plant, or equipment (an identified asset) for a
period of time in exchange for consideration



Determine at inception based upon:
• Whether contract fulfillment depends on use of an identified
asset**
• Whether contract conveys right to control use of identified asset
for consideration for a time period



** Consider whether supplier has substantive right of substitution

IDENTIFYING A LEASE
Right to control use of the identified asset depends upon:
• Right to obtain economic benefits from the use of the identified asset
(e.g., through using, holding, or subleasing the asset).
− “Economic benefits” is fairly broad
− Consider within defined scope of customer’s contractual right to use the
asset

• Right to direct the use of an identified asset. This exists when customer
has the right to direct how and for what purpose the asset is used,
including the right to change how and for what purpose the asset is
used, throughout the period of use.

IDENTIFYING A LEASE: FIBER OPTIC CABLES


Customer enters into a 15-year contract with a utilities company
(Supplier) for the right to use three specified, physically distinct dark
fibers within a larger cable connecting New York to London.



Customer makes all of the decisions about the use of the fibers by
connecting each end of the fibers to its electronics equipment (i.e.
Customer ‘lights’ the fibers).



The arrangement contains a lease.

IDENTIFYING A LEASE: FIBER OPTIC CABLES


Customer enters into a 15-year contract with Supplier for the right to
use a specified amount of capacity within a cable connecting New
York to London.



The specified amount is equivalent to Customer having the use of the
full capacity of three fiber strands within the cable (the cable contains
15 fibers with similar capacities).



The arrangement does NOT contain a lease.

MULTIPLE ARRANGEMENTS




Contract combinations: multiple contracts should be combined when
entered into with the same counterparty if:
• The contracts are negotiated as a package
• The price in one depends on the other
• Underlying assets conveyed by the contracts are a single lease
component
Non-lease components: if an arrangement contains both lease and
non-lease components, they must be accounted for separately
• Lessees can elect a practical expedient to combine and account for
as one lease

Our Firm at a Glance

LEASE CLASSIFICATION
5 CRITERIA FOR FINANCE LEASE
(Lessee) / Sales-type lease (Lessor)

1. Transfer of ownership of underlying asset to lessee by end of lease term
2. Option to purchase underlying asset that lessee is reasonably certain to
exercise
3. Lease term = major part of remaining economic life of underlying asset
4. Sum of PV lease payments and PV any residual value guaranteed by
lessee ≥ substantially all of the FV of underlying asset
5. Underlying asset is of such a specialized nature that it is expected to
have no alternative use to lessor at end of lease term
If one or more of the above are met, classify as finance/sales-type lease.

LEASE CLASSIFICATION
When none of the first five criteria are met, two other criteria for direct
financing classification should be evaluated (lessor):
1. PV of lease payments + residual value guarantee by third party
equals or exceeds substantially all of underlying asset FV.
2. It is probable that lessor will collect lease payments plus residual
value guarantee.
Both of the above criteria must be met for a lessor to classify as direct
financing. Otherwise, classify as an operating lease.

SHORT-TERM LEASES
TWO CRITERIA FOR SHORT-TERM LEASES:
1. Lease term of 12 months or less
2. No option to purchase underlying asset that lessee is reasonably certain to
exercise



If short-term lease, lessee can elect not to apply recognition
requirements (no balance sheet gross-up for ROU asset and related
lease liability)




Recognize lease payments in P&L on straight-line basis
Recognize variable lease payments as they are incurred



Accounting policy must be made by class of underlying asset and be
disclosed

LEASE TERM AND PAYMENTS
TWO ELEMENTS FORM BASIS FOR PV OF LEASE PAYMENTS:
LEASE TERM







Estimated as the non-cancellable
period of the lease
Include periods under option to
extend IF lessee is reasonably
certain to exercise option
Include periods under option to
terminate IF lessee has is
reasonably certain NOT to
exercise option
Same analysis for purchase
options

LEASE PAYMENTS (Rentals)











Fixed lease payments (less
incentives to be paid by lessor)
Variable payments tied to an index
Variable payments which are insubstance fixed payments
Residual value guarantees
(probable amount)
Exercise price of purchase option
IF lessee is reasonably certain to
exercise option
Termination penalties IF lease
term reflects lessee exercising
option
Fees paid to structure an SPE

LEASE TERM
• Reasonably certain is a high threshold substantially the same as
reasonably assured in existing U.S. GAAP.
• Includes assessment of economic incentives.

• Reassess the lease term only upon the occurrence of a significant event
or change in circumstances that are within the control of the lessee.

LEASE PAYMENTS
• Variable payments:



Day 1 - include index-based payments (e.g., CPI escalator) measurement
based on the rate at commencement.
Day 2 - only reassess when the lease liability is reassessed for other
reasons (e.g., contract modification). Otherwise, changes in the index are
period expenses.

• In-substance fixed payments are included in Day 1 lease liability,
consistent with current practice.
• Discount rate - use the rate implicit in the lease if determinable,
otherwise use incremental borrowing rate.


Nonpublic entities – policy election to use risk-free rate

LEASE TERM AND PAYMENTS: RETAIL STORE


Retailer enters into a 5-year lease agreement with a mall operator that
includes three 5-year renewal options. Rent payments are
$5,000/month plus 1% of sales during the initial term, with base rent
growing 10% in each renewal period.



Retailer incurs costs of $100,000 installing leasehold improvements to
customize space to its brand requirements. LHI has a useful life of 8
years.

LEASE TERM AND PAYMENTS: RETAIL STORE


The existence of significant leasehold improvements with a useful live
longer than the base lease term indicates that Retailer would incur an
economic loss from not exercising the first renewal option.

− Lease term is 10 years, base term plus one renewal period.


Percentage rent is variable, and thus is not included in lease payments.
Instead expensed as incurred.

− Lease payments total $126,000 ($60k for base + $66k for renewal).

INITIAL DIRECT COSTS
INCLUDE
• Commissions
• Payments made to an existing tenant as an incentive to terminate its lease

DO NOT INCLUDE costs to negotiate or arrange a lease that would have been
incurred regardless of whether the lease was obtained, such as:
• General overhead costs
− Examples: depreciation, occupancy and equipment costs, unsuccessful origination
efforts, and idle time

• Costs related to activities performed by the lessor for advertising, soliciting
potential lessees, servicing existing leases, or other ancillary activities
• Costs related to activities that occur before the lease is obtained


Examples: costs of obtaining tax or legal advice, negotiating lease terms and
conditions, or evaluating a prospective lessee’s financial condition

LESSEE ACCOUNTING
Initial
measurement

Right-of-use asset
• Present value (PV) of lease payments + lessee’s initial direct costs
• Initial direct costs: Incremental costs directly attributable to negotiating and arranging
a lease
• Recognize lease incentives as a reduction in the right-of-use asset

Lease liability (LL)



Subsequent
measurement

PV of lease payments
Private company practical expedient - use risk-free rate to measure LL

Right-of-use asset


Amortized cost: Method of amortization depends on lease classification (finance or
operating)



Impairment: Refer to existing standards (ASC 360)

Lease liability
• Amortized cost: Use the effective interest method
• Private company practical expedient - use risk-free rate to measure LL

LESSEE ACCOUNTING
PRESENTATION FOR LESSEES:
BALANCE SHEET
All leases:
Present separately* or within
similar classes of assets and
liabilities with proper disclosure
*No co-mingling of finance and
operating leases

INCOME STATEMENT
Finance: Display interest on
lease liability and amortization
of ROU asset consistently
with other interest and
amortization expenses
(combine or separate)
Operating: Display interest on
lease liability together with
amortization of ROU asset,
within income from continuing
operations

LESSEE ACCOUNTING
PRESENTATION FOR LESSEES:


STATEMENT OF CASH FLOWS
– Operating activities
• Interest on lease liability arising from finance leases*
• Payments arising from operating leases
• Variable lease payments and S/T lease payments not included in lease
liability

– Financing activities
• Principal repayments on finance leases
*the requirement is to present consistent with Topic 230, which generally will result in
operating classification

LESSEE ACCOUNTING EXAMPLE
FACTS
•10-year lease, option to extend 5 years
•LP = $50K/year (initial term); $55K/year (optional period)
•Not reasonably certain to exercise option to extend, therefore,
lease term = 10 years
•Payments due at beginning of each year
•Initial direct costs (IDC) = $15K
•Lessee’s incremental borrowing rate = 5.87%
•PV of remaining LP after payment of 1st year rental & IDC =
$342,017

LESSEE ACCOUNTING EXAMPLE (CONTINUED)
JOURNAL ENTRY TO RECORD LEASE ASSETS & LIABILITIES AT
COMMENCEMENT
Right-of-use asset
Lease liability

407,017
342,017

Cash (lease payment for year 1)

50,000

Cash (initial direct costs)

15,000

LESSEE ACCOUNTING EXAMPLE (CONTINUED)
JOURNAL ENTRY TO RECOGNIZE LEASE EXPENSE DURING 1st
YEAR, IF FINANCE:
Interest expense

20,076 1

Lease liability
Amortization expense
Right-of-use asset
1.
2.

Calculated as (5.87% × 342,017)
Calculated as (407,017 ÷ 10)

20,076
40,702 2
40,702

LESSEE ACCOUNTING EXAMPLE (CONTINUED)
JOURNAL ENTRY TO RECOGNIZE LEASE EXPENSE DURING 1ST
YEAR, IF OPERATING:
Lease expense

51,500 1

Lease liability
Right-of-use asset
1.
2.
3.

20,076 2
31,424 3

Calculated as [(500,000+15,000) ÷ 10]
Calculated as (5.87% × 342,017)
Calculated as (51,500-20,076)

LESSEE ACCOUNTING EXAMPLE (CONTINUED)
TOTAL LEASE EXPENSE RECOGNIZED OVER LIFE OF LEASE –
FINANCE vs. OPERATING (in $000s, approximate)
70
60
50
40

Finance
Operating

30
20
10
0
Year 1

Year 9

LEASE MODIFICATION
• Any change to contractual terms and conditions of a lease that was not
part of the original terms and conditions of a lease
• New lease: additional right of use priced on a standalone basis
− Generally require adjustment to lease asset and liability without affecting P&L
− Exception is a reduction of the lease’s scope which would reduce lease asset and
liability proportionately, with any difference recognized in P&L

• Modified lease: change in terms with no additional right of use or additional
right of use not consistent with standalone value
− Reassess classification as of date of modification

LEASE MODIFICATION: OFFICE SPACE


A company leases one floor of an office building, which it uses to house its
headquarters. The lease commences on 1/1/2016, has a term of 10 years,
and a price of $70/ft2.



The company experiences tremendous growth, so that on 1/1/2018, it
modifies the lease to include an additional 6,000 ft2 on a second floor of the
building. The price for the new space is $80/ft2, the then current market
price. The term remains unchanged.
The modification results in a new lease. Recognize new ROU asset and lease
liability.

LEASE MODIFICATION: OFFICE SPACE


Same facts as last example, except that the lease was modified to reprice the entire space (existing floor plus new 6,000 ft2) at $75/ ft2, and
the term of the combined lease was extended for an additional five
years.



The modification results in a modified lease. Re-measure lease liability on
1/1/2018 based on the new terms. Recognize difference between remeasured lease liability and carrying value of existing lease liability as
adjustment to ROU asset. Operating or finance classification should also be
reassessed.

LESSOR ACCOUNTING
SALES-TYPE LEASE
Initial
measurement

Net investment in the lease
• Lease receivable + unguaranteed residual asset
Selling Profit (Loss)
• Difference between fair value of the underlying asset and its book value
Initial Direct Costs
• Expense immediately if underlying asset’s FV does not equal book value
• Defer if underlying asset’s FV equals book value
The underlying asset is derecognized

Subsequent
measurement

Net Investment
• Reduced by payments received, net of interest and accretion.
• Assessed for impairment under ASC 310.
Other, as applicable
• Variable lease payments
• Impairment of net investment

LESSOR ACCOUNTING
DIRECT FINANCING LEASE
Initial
measurement

Net investment in the lease
• Lease receivable + unguaranteed residual asset – deferred selling profit
Selling Loss (if applicable)
• Difference between fair value of the underlying asset and its book value
• Note: selling profit and IDCs are deferred
The underlying asset is derecognized

Subsequent
measurement

Net Investment
• Reduced by payments received, net of interest and accretion.
• Assessed for impairment under ASC 310.
Other, as applicable
• Variable lease payments
• Impairment of net investment

LESSOR ACCOUNTING
OPERATING LEASE
Initial
measurement

Underlying asset
• Continue to recognize underlying asset
Initial direct costs
• Expensed over the lease term on the same basis as lease income

Subsequent
measurement

Underlying asset
• Impairment: refer to ASC 360 guidance
Lease Income
• Recognized on a straight line basis unless another systematic basis is more
representative

LEASE RECEIVABLE
A lessor’s right to receive lease payments arising from a sales-type lease or a direct
financing lease plus any amount that a lessor expects to derive from the underlying
asset following the end of the lease term to the extent that it is guaranteed by the lessee
or any other third party unrelated to the lessor, measured on a discounted basis.

Measure at present value, discounted using rate implicit in lease:
1. Future lease payments, and
2. Amount lessor expects to derive from residual asset guarantee

COLLECTABILITY NOT ASSURED AT
COMMENCEMENT
• Sales-type lease
− Do not derecognize underlying asset
− Defer selling profit

• Direct financing lease
− Treat as operating lease

• Operating Lease
− Lesser of straight line or lease payments collected

VARIABLE LEASE PAYMENTS
• Lessee and lessor accounting model is consistent



Day 1 - include index-based payments (e.g., CPI escalator)
measurement based on the rate at commencement.
Day 2 - only reassess when the lease liability is reassessed for other
reasons (e.g., contract modification). Otherwise, changes in the
index are period expenses.

OTHER CONSIDERATIONS







Impairment of net investment
Modifications – change in lease type
Components
Sale/leasebacks
Leveraged leases
Alignment of principles with Topic 606

LESSEE DISCLOSURES










Contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments*
Information about significant leases that have not yet commenced
Information about lease liabilities separately for operating and finance leases:
• Maturity analyses of undiscounted lease payments
• Weighted-average remaining lease term
• Weighted-average discount rate
• Cash flows and supplemental noncash information
Amounts related to lease cost (including any amounts capitalized) and related cash flows, separately
for operating and finance leases
If practical expedients related to short-term leases and separation of lease and non-lease
components elected, disclose that fact and related details
No specific format required; ASU provides tabular example
Judgment required to determine level of aggregation or disaggregation
* Also disclose this information about subleases if applicable

LESSOR DISCLOSURES
• Contractual details (lease term, contingent rentals, options, etc.) and
related accounting judgments
• Narrative disclosures about leases (including information about variable
lease payments and options)
• Tabular presentation of:
− Profit or loss at commencement (sales-type and direct financing)
− Interest income on receivables and residual assets (sales-type and direct
financing)
− Lease income (operating)

• Maturity analysis of lease receivables (sales-type and direct financing) or
lease payments (operating)
• Narrative disclosure about risk management for residual assets

TRANSITION


Lessee & lessor transition



Modified retrospective approach with hindsight allowed for evaluating renewal
and purchase options on existing leases. No option for full retrospective.
Significant relief provisions allowed as a policy election – No reassessment of:







Whether any expired or existing contracts are or contain leases
Classification for any expired or existing leases
Initial direct costs for expired or existing leases



Leveraged lease treatment grandfathered



Sale-leaseback transition




No reassessment of initial sale/leaseback conclusions
Specific transition for deferred gains (or losses) related to capital or operating
leases

TRANSITION CONSIDERATIONS


Developing a plan to transition, including impacts on:
– ICFR
– Planning and budgeting
– Taxes
– Compensation arrangements
– Debt covenants and other contracts
– Internal and external communication
– IT systems/data management
– Lease structure strategy

FASB PROJECT /
SIMPLIFICATION
INITIATIVE UPDATE

17

FINANCIAL INSTRUMENTS
STATUS
• Classification and measurement – final guidance issued January
2016
• Impairment
− Final ASU expected by mid 2016
− Transition Resource Group for Credit Losses established
early 2016

• Hedging - Proposed ASU expected in 2016

ASU 2016-01, FINANCIAL INSTRUMENTS
Targeted amendments to recognition, measurement, presentation and
disclosure of financial instruments:
− Measure equity investments at FVPL, with certain exceptions
− Present in OCI the changes in instrument-specific credit risk for
financial liabilities measured using the FV option
− Present financial assets and financial liabilities by measurement
category and form of financial asset
− Assess the need for a valuation allowance on deferred tax
assets related to unrealized losses of AFS debt securities in
combination with other deferred tax assets

ASU 2016-01, FINANCIAL INSTRUMENTS
(CONTINUED)


Effective Date
Public Business Entities

All Other Entities

FYs beginning after 12/15/17
(and interim periods within)

FYs beginning after 12/15/18
(interim periods within FYs beginning after 12/15/19)

• Early adoption permitted for specified provisions only.
• Private entities may early adopt as of public company effective date.
• Certain transition provisions apply.


BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2016

DEFINITION OF A BUSINESS (PROPOSED)
Proposed ASU (November 2015):
• Revises the definition of a business:
− Input + substantive process = ability to create outputs
− Adds framework for identifying input and substantive process; organized
workforce is key element
− Narrows definition of outputs (consistent with Topic 606)
− Caveat: if substantially all of the FV of gross assets acquired is
concentrated in a single identifiable asset (or group of similar identifiable
assets), then it’s not a business

• The result, if finalized?
− Fewer business combinations, more asset purchases.
− Impacts sale vs. deconsolidation analysis for transferor

MANUFACTURING EXAMPLE
CASE FACTS


ABC Co. designs, develops, manufactures and sells SIM cards for use in
mobile devices. ABC Co. purchases the inputs and most of the processes,
but not the outputs of TXY’s SIM card production operations. The
manufacturing process and the associated employees used in producing
TXY’s SIM cards are not specialized and are routinely used in the
production of most SIM cards; thus a market participant would possess or
have access to such processes and employees.
− Inputs — long-lived assets, intangible assets (including customer
relationships) and intellectual property
− Processes — strategic, marketing and other operational processes
− Outputs — none

MANUFACTURING EXAMPLE
ANALYSIS UNDER CURRENT GAAP


The acquired set alone is not able to generate a return for its
owners because it is missing the manufacturing process. However,
as the manufacturing process is not specialized and is routinely
used in the industry, it is determined that a market participant would
possess the manufacturing process and associated employees
necessary to produce the SIM cards. Thus, a market participant
could operate the acquired set in order to generate a return by
combining the acquired set with its production process or with a
readily obtainable production process.



The acquired set is likely considered a business under ASC 805.

MANUFACTURING EXAMPLE
ANALYSIS UNDER PROPOSED GAAP
1. ABC considers whether substantially all of the fair value of the gross assets acquired is
concentrated in a single identifiable asset or group of similar identifiable assets. The longlived assets versus the intangible assets and IP are not considered similar assets
because they are different major classes of nonfinancial assets. ABC determines there is
significant FV in each class of assets acquired, and thus, concludes that substantially all
of the FV of the gross assets acquired is not concentrated in a single asset or group of
similar assets.
2. Because the set does not have outputs, ABC must determine whether the set includes an
input and a substantive process. The set does not include an organized workforce that
has the necessary skills, knowledge, or experience to perform an acquired process that,
when applied to another acquired input or inputs, is critical to the ability to develop or
convert that acquired input or inputs into outputs. Thus, it does not include a substantive
process.
The acquired set is likely NOT considered a business under the proposed definition of a
business.

PARTIAL SALES OF NONFINANCIAL ASSETS
(FORMERLY PHASE 2 – CLARIFYING DEF.N OF A BUSINESS)


Seeks to clarify the scope of partial sales of nonfinancial assets under ASC
610-20



Transactions in which an equity interest in the asset or buyer is in scope, as
opposed to other GAAP.
Sales of businesses are excluded from ASC 610-20
Any retained interest will be measured at fair value.
If transfer doesn’t qualify as a sale, then:
− Reflect as equity transaction if the entity is still consolidated
− Reflect a contract liability if the revenue criteria in 610-20-40-1 are not
met.







Exposure Draft coming soon

ASU 2016-03,
EFFECTIVE DATE AND TRANSITION GUIDANCE OF
PRIVATE COMPANY ALTERNATIVES
• Removes effective dates of:
− ASU 2014-02, Intangibles - Goodwill and Other (Topic 350): Accounting for
Goodwill
− ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain
Receive- Variable, Pay Fixed Interest Rate Swaps – Simplified Hedge
Accounting Approach
− ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities
Guidance to Common Control Leasing Arrangements
− ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable
Intangible Assets in a Business Combination

• Allows a private company to forgo a prefer ability assessment the
first time it elects the accounting alternative(s)
• Extends certain favorable transition guidance in those alternatives


BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(1)

ASU 2013-12
DEFINITION OF A PUBLIC BUSINESS ENTITY
The following are public business entities:
A. Broker dealers
B. Equity method investees whose financial statements are including in a
filing under Rule 3-09 of Regulation S-X
C. Equity method investees whose financial information is included in a
filing under Rule 4-08(g) of Regulation S-X
D. An acquired business whose financial statements are included in a
filing under Rule 3-05 of Regulation S-X
E. Entities whose securities trade on an over-the-counter (OTC) market,
such as OTC Markets Group Inc., OTC Pink Markets or the OTC
Bulletin Board.

PCC CONSIDERATIONS
PUBLIC COMPANIES
• Acquisition of private entities
• Equity method investments in private entities
• Emerging Growth Companies are considered PBEs, and thus
are not eligible to apply PCC alternatives

ASU 2015-11
MEASUREMENT OF INVENTORY




Inventory within the scope (e.g. FIFO or average cost) – measured at
lower of cost and net realizable value
Inventory excluded from the scope (i.e. LIFO or retail inventory method)
– measured at lower of cost or market
Effective date: (early adoption permitted)
Public Business Entities
FYs beginning after 12/15/16
(and interim periods within)




All Other Entities
FYs beginning after 12/15/16
(interim periods within FYs beginning after 12/15/17)

Transition: Prospective
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-july-2015

ASU 2015-12
EMPLOYEE BENEFIT PLANS






Part I. Fully Benefit-Responsive Investment Contracts*
• Contract value is the only required measure
• Eliminates requirement to measure, present and disclose at fair value
Part II. Plan Investment Disclosures**
• Eliminates certain disclosure requirements
• Reduces disclosures required specifically for investments using the NAV per share
practical expedient
• Requires investments to be grouped only by general type
Part III. Measurement Date Practical Expedient**
‐ Allows plans to measure investments and investment-related accounts as of a month-end
date that is closest to the plan’s fiscal year-end.
*Applies to entities within the scope of Topics 962 (Defined Contribution Pension Plans) and 965
(Health and Welfare Benefit Plans)
**Apply to reporting entities that follow the requirements of Topics 960 (Defined Benefit Pension
Plans), 962 (Defined Contribution Pension Plans) and 965 (Health and Welfare Benefit Plans)

ASU 2015-12
EMPLOYEE BENEFIT PLANS


Effective date:
• FYs beginning after 12/15/15
• Early adoption is permitted for all 3 parts individually or in the aggregate



Transition:
• Parts I and II should be applied retrospectively
• Part III should be applied prospectively



BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-reportaugust-2015

ASU 2015-03
SIMPLIFYING THE PRESENTATION OF DEBT ISSUANCE COSTS




Debt issuance costs to be reported in the B/S as a direct deduction from the face amount
of the related liability (rather than as an asset)
Does not address debt issuance costs incurred before an associated liability is recognized
(no change to current practice)
Effective date (early adoption is permitted):
Public Business Entities
FYs beginning after 12/15/15
(and interim periods within)





All Other Entities
FYs beginning after 12/15/15
(interim periods within FYs beginning after 12/15/16)

Transition: Retrospective
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2015-(1)
SEC staff announcement: won’t object when debt issuance costs related to a revolving
debt arrangement are presented as an asset regardless of whether there is an outstanding
balance on the revolving debt arrangement

ASU 2015-15
DEBT ISSUANCE COSTS RELATED TO LINEOF-CREDIT ARRANGEMENTS


SEC staff announcement: won’t object when debt issuance costs related to a revolving
debt arrangement are presented as an asset regardless of whether there is an
outstanding balance on the revolving debt arrangement



ASU codifies the SEC staff announcement



Effective date: Upon issuance



BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-september2015-(1)

ASU 2015-16
SIMPLIFYING THE ACCOUNTING FOR
MEASUREMENT-PERIOD ADJUSTMENTS


Eliminates the requirement to account for measurement-period
adjustments retrospectively
• Measurement-period adjustments, including cumulative effect of
changes in depreciation, amortization, or other income effects =
recognize in current-period financial statements
• Incremental disclosures:
• Nature and amount of measurement-period adjustments recognized
in current period
• Amount of adjustment to current-period income statement, by line
item, relating to income effects as a result of the change to the
provisional amounts

ASU 2015-16
SIMPLIFYING THE ACCOUNTING FOR
MEASUREMENT-PERIOD ADJUSTMENTS


Effective date:
Public Business Entities
FYs beginning after 12/15/15
(and interim periods within)



All Other Entities
FYs beginning after 12/15/16
(interim periods within FYs beginning after 12/15/17)



Transition: Prospectively to measurement-period adjustments that
occur after the effective date of this Update
Early adoption is permitted



BDO Flash report: https://www.bdo.com/insights/assurance/fasb/fasb-flash-reportoctober-2015

ASU 2015-17
BALANCE SHEET CLASSIFICATION OF
DEFERRED TAXES
• Requires presentation of deferred taxes as a single noncurrent
amount in the balance sheet:
• Assets and liabilities of the same tax jurisdiction or tax filing group
• Any related valuation allowance

• Effective date: (early adoption permitted)
Public Business Entities

All Other Entities

FYs beginning after 12/15/16
(and interim periods within)

FYs beginning after 12/15/17
(interim periods within FYs beginning after 12/15/18)

• Transition: Prospective or retrospective


BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-reportdecember-2015

ASU 2016-04
RECOGNITION OF BREAKAGE FOR CERTAIN
PREPAID STORED-VALUE PRODUCTS







Exempts gift cards and other prepaid stored-value products from guidance on
extinguishing financial liabilities
Only applies if amounts are not subject to unclaimed property rules
Requires recognition of breakage for those products consistent with breakage
guidance in new revenue standard
• Expected breakage: derecognize the amount of the liability in proportion to the
pattern of rights expected to be exercised by the product holder
• Otherwise recognize when exercise of rights becomes remote
Effective Date (early adoption permitted)

Public Business Entities

All Other Entities

FYs beginning after 12/15/17
(and interim periods within)

FYs beginning after 12/15/18
(interim periods within FYs beginning after 12/15/19)



Transition: retrospective or modified retrospective



BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(2)

ASU 2016-05
EFFECT OF DERIVATIVE CONTRACT NOVATIONS ON
EXISTING HEDGE ACCOUNTING RELATIONSHIPS





Novation: replacing one of the parties to a derivative instrument with a new party
Novation of a derivative designated as the hedging instrument does not, in and of
itself, result in termination or change in critical terms requiring discontinuation of the
designated hedging relationship
Effective date (early adoption permitted):

Public Business Entities

All Other Entities

FYs beginning after 12/15/16
(and interim periods within)

FYs beginning after 12/15/17
(interim periods within FYs beginning after 12/15/18)




Transition: prospective or modified retrospective

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016(3)

ASU 2016-06
CONTINGENT PUT AND CALL OPTIONS IN DEBT
INSTRUMENTS
• Clarifies how to assess whether contingent call (put) options that can
accelerate the payment on debt instruments are clearly and closely related
to their debt hosts
• Entities are required to assess embedded call (put) options solely in accordance with a fourstep decision sequence in ASC 815-15-25-42
• Entities are not also required to assess whether the contingency for exercising the option(s)
is indexed to interest rates or credit risk, e.g., a change-in-control trigger

• Effective date (early adoption permitted):
Public Business Entities

All Other Entities

FYs beginning after 12/15/16
(and interim periods within)

FYs beginning after 12/15/17
(interim periods within FYs beginning after 12/15/18)



Transition: modified retrospective



BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(4)

ASU 2016-07
SIMPLIFYING THE TRANSITION TO THE EQUITY METHOD
OF ACCOUNTING
• Eliminates requirement to retroactively adopt equity method upon initial
qualification of an investment
• Board still considering “basis differences” as separate project

• Instead, investor would apply equity method prospectively, with
unrealized holding gains/losses through net income (if previously AFS)
• Effective date: (early adoption permitted)
Public Business Entities

All Other Entities

FYs beginning after 12/15/16
(and interim periods within)

FYs beginning after 12/15/16
(and interim periods within)

• Transition: prospective


BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2016-(5)

ASU 2016-09
IMPROVEMENTS TO EMPLOYEE SHARE-BASED
PAYMENT ACCOUNTING
• Income tax effects recognized through income tax expense (no longer
through APIC)
− Eliminates need to track the APIC “pool” of excess tax benefits
− Impacts basic and diluted EPS
• Net operating losses from excess tax benefits recognized on the balance
sheet (no longer off balance sheet)
• Excess tax benefits included in operating cash flow (no longer in financing
cash flow)
• Equity-classification maintained if withholding tax based on highest
statutory rate in applicable jurisdiction (no longer based on a minimum
statutory rate)
• Withholding tax paid through shares withholding included in financing cash
flow (all other withholding tax included in operating cash flow)

ASU 2016-09
IMPROVEMENTS TO EMPLOYEE SHARE-BASED
PAYMENT ACCOUNTING (CONTINUED)
• Entity-level accounting policy election to estimate forfeitures or
recognize forfeitures when they occur
• Key changes affecting only private entities:
− Practical expedient to estimate expected term in all awards with performance
and/or service conditions
− One-time option to elect intrinsic value measurement for all liability-classified
awards (must be elected in the period of adoption)

• Effective date (early adoption permitted):
Public Business Entities

All Other Entities

FYs beginning after 12/15/16
(and interim periods within)

FYs beginning after 12/15/17
(interim periods within FYs beginning after 12/15/18)

• Transition methods vary based on specific amendment


BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2016

ASU 2015-02
AMENDMENTS TO THE CONSOLIDATION ANALYSIS


Eliminates investment company deferral (ASU 2010-10)
− Permanently excludes certain money market funds from consolidation model



Amends evaluation of decision-maker or service-provider fee
arrangements
− Eliminates 3 of 6 conditions for evaluating whether a fee paid to a decision maker or
a service provider represents a variable interest
− Introduces concept of “indirect” interest
− Excludes fees paid to decision maker from primary beneficiary (PB) determination if
certain criteria met



Eliminates presumption that General Partner (GP) should consolidate
Limited Partnership (LP)
− Treats a partnership as a VIE unless simple majority kick-out rights exist
− Amends requirements for evaluating whether a GP controls a LP that is not a VIE

Page 202

ASU 2015-02
AMENDMENTS TO THE CONSOLIDATION ANALYSIS


Revised 2-step assessment for VIE status of entities other than LPs
− Corporations and certain LLCs



Amends evaluation of related parties in PB determination
− Tie breaker test – single decision maker or another member of common control
group
− If neither single decision maker or another member of common control group
consolidates, consider whether VIE activity conducted on behalf of single VI holder



Effective date





Public business entities - FYs, and interim periods within, beginning after 12/15/15
All other – FYs beginning after 12/15/16; interim periods beginning after 12/15/17
Early adoption permitted
Full or modified retrospective transition

ASU 2015-02
EVALUATING FEES PAID TO A DECISION MAKER


The ASU eliminates three of six criteria (para 810-10-55-37):

a)

The fees are compensation for services provided and are commensurate with the level of effort
required to provide those services.
The decision maker or service provider does not hold other interests in the VIE that individually, or in
the aggregate, would absorb more than an insignificant amount of the entity’s expected losses or
receive more than an insignificant amount of the entity’s expected residual returns.
The service arrangement includes only terms, conditions, or amounts that are customarily present in
arrangements for similar services negotiated at arm’s length.

b)

c)

ASU 2015-02
EVALUATING FEES PAID TO A DECISION MAKER


Consider also service provider’s exposure to “principal” risk of loss, e.g.:
− Guarantees on value of VIE assets or liabilities
− Obligation to fund losses
− Payments triggered by written put options



Impact:
− Greater emphasis on risk of loss when identifying a controlling financial interest
− Decision maker precluded from consolidating a VIE solely on the basis of its fee
interest if all three conditions in para 55-37 are satisfied and there is no principal
risk of loss.

ASU 2015-02
EVALUATING FEES PAID TO A DECISION MAKER
• When evaluating the criteria in paragraph 55-37, the decision maker should
consider:
• Any interests held by a related party on a proportionate basis if the related
party is not under common control;
• Any interests held by a related party in their entirety if the related party is
under common control.
• If the decision maker does not hold an interest in the related party, it would
not include such interests, unless (for parties under common control) the
structure was designed to avoid consolidation. [Based on December 2015
SEC staff speech]

ASU 2015-02
RELATED PARTY NOT UNDER COMMON CONTROL

Example:





A fund manager (FM) owns
20% interest in a related
party (RP).
RP owns 40% interest in VIE
being evaluated.
Thus, FM’s indirect interest is
calculated as 20% x 40%, or
8%, for purposes of
“economics” test.

40%

20%
8%

ASU 2015-02
RELATED PARTY UNDER COMMON CONTROL

Example:





A fund manager (FM)
owns 20% interest in a
related party (RP).
RP owns 40% interest in
VIE being evaluated.
Thus, FM’s must consider
the 40% interest for
purposes of the
“economics” test.

40%

ASU 2015-02
LIMITED PARTNERSHIPS & SIMILAR LEGAL ENTITIES







Eliminates presumption that general
partner (GP) consolidates LP
New 2-step test to determine whether
LP is a VIE:
1. Substantive kick-out rights
2. Participating rights
If limited partners lack both conditions,
LP is a VIE
− Identify primary beneficiary based
on power & economics principle
If one or both conditions present, LP is
a voting entity
− Single limited partner may
consolidate
− Assumes no other VIE conditions
are present

General
Partner

Limited
Partnership

No substantive
kick-out OR
participating
rights =
partnership is a
VIE

Limited
Partners

LPs hold
substantive kickout OR
participating
rights =
partnership is not
a VIE

ASU 2015-02
LIMITED PARTNERSHIPS: KICK-OUT RIGHTS
When evaluating the two factors to determine whether an LP* is a VIE,
their voting interest entity definitions apply:
• Kick-Out Rights: The rights underlying the limited partner’s or partners’
ability to dissolve (liquidate) the limited partnership or otherwise remove
the general partners without cause
• Participating Rights: Participating rights allow the limited partners or
non-controlling shareholders to block or participate in certain significant
financial and operating decisions of the limited partnership or
corporation that are made in the ordinary course of business.
Participating rights do not require the holders of such rights to have the
ability to initiate actions.
* For entities other than LPs (e.g., C-corporations), and for primary beneficiary
analysis purposes, the VIE definitions apply

ASU 2015-02
ENTITIES OTHER THAN LPS
New test to determine whether an entity other than LP (e.g., corporation) is a VIE:

1. Do equity holders as a
group have rights to direct
activities that most
significantly impact
economic performance?

Yes

No

Not a VIE, skip #2

2. Single equity holder at risk
– kickout or participating
rights over decision maker?

*assumes no other VIE conditions are met

Yes

Not a VIE*

No

VIE

ASU 2015-02
ENTITIES OTHER THAN LPS / EXAMPLE
Scenario:
• 5 equity investors form XYZ Inc. that owns a shopping mall. Each
investor appoints one director; board decisions are by simple majority
vote.
• Entity M is the Manager and operates the mall; Board only has
protective rights over operations
• The board decides the compensation of Entity M and has simple
majority kick out rights over Entity M.

Assessment:
• As a group, the equity at risk investors has power through the simple
majority voting rights exercised by its appointed board of directors.

STEP 4: CHANGES TO RELATED PARTY
TIEBREAKER
Does reporting entity (RE), on a direct basis, have power and the obligation to absorb losses
or the rights to receive benefits that could potentially be significant to the VIE?
YES
NO
Is there a single decision maker or is power shared?

Consolidate entity.

Single decision maker

YES
Does RE, on a direct and indirect basis, have power and the obligation to absorb losses or the
right to receive benefits that could potentially be significant to the VIE?
NO
Are one or more related parties under common control with the single decision maker and, as
a group, do they have power and the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE?
NO
Are substantially all of the activities of the VIE conducted on behalf of a single
related party variable interest holder (not the decision maker)?

EITF AND PCC
UPDATE

EITF UPDATE
EITF meeting – March 2016
• Consensus-for-exposure: Issue 16-A, Restricted Cash
− Would require restricted cash to be included with cash and
cash equivalents in the statement of cash flows
− Would require reconciliation of the total of cash, cash
equivalents and restricted cash per SOCF to related
captions on B/S
− Would require disclosure of the nature of restricted cash held
by an entity
− Exposure Draft – comments due June 26, 2016
• Next EITF meeting - June 10, 2016

EITF UPDATE
EITF meeting – November 2015
Consensus-for-exposure:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Issue 15-F: Statement of Cash Flows: Classification of Certain Cash Receipts and
Cash Payments
Debt prepayment or extinguishment costs
Settlement of zero-coupon bonds
Contingent consideration payments made after a business combination
Restricted cash transactions
Proceeds from the settlement of insurance claims
Proceeds from the settlement of company-owned life insurance (COLI)
Distributions received from equity method investees
Beneficial interests in securitization transactions
Application of the predominance principle

Comment period ended in March 2016

PCC UPDATE
April 12, 2016 meeting agenda:
1.
2.
3.
4.
5.
6.

The FASB’s project on Disclosures by Business Entities about Government
Assistance
The FASB’s project on Nonemployee Share-Based Payment Accounting
Improvements
EITF Issue No. 16-A, "Restricted Cash"
PCC Issue 15-02, “Applying Variable Interest Entity Guidance to Entities under
Common Control”
The FASB’s project on Improving the Equity Method of Accounting
The FASB’s projects on Disclosure Framework: Disclosure Review—Income
Taxes, Inventory, Defined Benefit Plans, and Fair Value.

Next meeting – July 19, 2016

QUESTIONS?

21

Thank you!

21