Accounting Update: Financial Reporting Hot Topics George Mensah, Deloitte & Touche LLP Rae Stewart, Deloitte & Touche LLP May 12, 2016

Copyright © 2016 Deloitte Development LLC. All rights reserved. 1.FASB update 2.Employee Benefit Plans update 3.Leases 4.Revenue 5.Question and answer Agenda

2016 FASB Agenda priorities

Copyright © 2016 Deloitte Development LLC. All rights reserved. FASB standard-setting agenda Projects (not all-inclusive) Broad projects Financial Instruments: Impairment (nearly completed) – Q Financial Instruments: Hedging - Q Narrow projects Balance sheet classification of debt Definition of a business (two projects) Improving the equity method of accounting Income taxes: intra-entity transfers of assets Goodwill impairment - Q Goodwill: subsequent accounting Liabilities and equity: targeted improvements (instruments with down round features) Improving the presentation of net periodic benefit cost Interest income on purchased callable debt securities Identifiable intangible assets in a business combination (public entities) Nonemployee share-based payment accounting improvements

Copyright © 2016 Deloitte Development LLC. All rights reserved. FASB standard-setting agenda (cont’d) Projects (not all-inclusive) Disclosure projects Disclosure Framework: Entity’s decision process Disclosure reviews: ̶ Fair value measurement ̶ Defined benefit plans ̶ Income taxes ̶ Inventory ̶ Interim reporting Disclosures by business entities about government assistance Simplifying the Balance Sheet Classification of Debt – Q3 2016

Copyright © 2015 Deloitte Development LLC. All rights reserved. Project Name Financial Instruments: Classification & MeasurementX Financial Instruments: ImpairmentX Financial Instruments: HedgingX Employee BenefitsTBD Major projects FASB standard-setting activities Other ongoing projects to be aware of: Disclosure framework initiatives Clarifying the definition of a business Balance sheet classification of debt Improving equity method of accounting Goodwill impairment *Chart indicates Deloitte’s expected timing

Copyright © 2015 Deloitte Development LLC. All rights reserved. Classification & Measurement –ASU was issued January 6, 2016 Most equity securities will be carried at fair value through net income. Practicability exception permitted for equity securities that do not have ‒ (1) readily determinable fair values and ‒ (2) qualify for net asset value (NAV) practical expedient –For these exceptions, adjustments are made for ‒ (1) observable price changes and ‒ (2) impairment –Other-than-temporary impairment no longer exists for equity securities. –Require public companies to use the exit price notion when measuring FV of financial instruments for disclosure purposes –Require separate presentation of financial assets and financial liabilities by form of financial asset (that is securities or loans and receivables) on the balance sheet. –Clarifies that entities should evaluate the need for a valuation allowance on deferred asset related to available for sale securities in combination with entity’s other DTAs. Status Financial instruments project

Copyright © 2015 Deloitte Development LLC. All rights reserved. Effective Dates: Public Entities: fiscal years beginning after December 15, 2017 (including interim periods) Non Public Entities: fiscal years beginning after December 15, 2018 (not including interim periods) Non Public Entities may elect to early adopt at Public Entities effective date. Main change: Recognition of unrealized gains and losses previously through OCI now goes through net income. Status Contd Financial instruments project

Copyright © 2015 Deloitte Development LLC. All rights reserved. Hedge accounting –The FASB staff is deliberating targeted improvements in hedge accounting model including: Hedges of nonfinancial items Presentation of changes in FV of highly effective hedges for both cash flow and FV Hedges (present in same line where earnings effect of hedged item is presented) Disclosure requirements. ASU expected to be issued in Q Impairment Impairment model based on expected rather than incurred losses Consider historical loss experience, current conditions, and reasonable and supportable forecasts of future conditions Modified retrospective transition for most assets Expected to be issued in second half of 2016 Status –Other Projects. Financial instruments project

Employee benefits: FASB standard setting activities

Copyright © 2015 Deloitte Development LLC. All rights reserved. Proposed changes are part of the FASB’s disclosure framework project ̶ FASB applied the guidelines in proposed concepts statement, Conceptual Framework for Financial Reporting, Chapter 8: Notes to Financial Statements, in making its tentative decisions Exposure draft issued January 26, 2016 Comment letters due April 25, 2016 Changes to the disclosure requirements for defined benefit plans (proposed ASU) New disclosure requirements added and some existing requirements eliminated Requirement to disaggregate disclosures between foreign and domestic defined benefit pension and other postretirement plans Nonpublic entities would need to disclose the effects of a one- percentage-point change of assumed health care cost trend rates Changes to Disclosures Disclosure Objectives Adds an overall objective for the disclosures Includes guidance on how an entity would consider materiality

Copyright © 2015 Deloitte Development LLC. All rights reserved. Additional disclosure requirements would include: Description of nature of the benefits provided, covered employee groups, and type of plan formula Weighted-average interest crediting rate for cash balance and similar plans Disclosures required under ASC 820 for plan assets measured using the net asset value (NAV) practical expedient Narrative description of reasons for significant gains and losses from remeasurement Disclosures proposed to be eliminated: Amount of the accumulated benefit obligation (ABO) and any excess of ABO over plan assets Information about plan assets to be returned to the entity Disclosures about transactions from amendments to the Japanese Welfare Pension Insurance Law Disclosures about (1) benefits covered by related-party insurance and annuity contracts and (2) significant transactions between the plan and related parties Amounts in AOCI expected to be recognized in net periodic benefit cost over the next year For nonpublic entities with Level 3 plan assets, a reconciliation of the opening to the closing balances Changes to the disclosure requirements for defined benefit plans (cont’d)

Copyright © 2015 Deloitte Development LLC. All rights reserved. Currently, no specific guidance in US GAAP on presenting net benefit cost in the income statement −Net benefit cost comprised of several components that reflect different aspects of an employer’s financial arrangements and the cost of benefits Proposed amendments would require an entity to −Present the current service cost component of net benefit cost with other compensation costs for the related employees −Present the remaining components of net benefit cost elsewhere in the income statement Outside of income from operations, if such a subtotal presented Disaggregation of the other components permitted, but not required Proposal would limit the portion of net benefit cost eligible for capitalization (e.g., as part of inventory) to the current service cost component Proposed ASU — Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost

Copyright © 2015 Deloitte Development LLC. All rights reserved. Tentative decisions on transition: −Retrospective application for the change in the income statement presentation −Prospective application for requirement to capitalize only the current service cost component Comments on the proposed ASU due by April 25, 2016 Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost (cont’d)

New standard on leases

Copyright © 2016 Deloitte Development LLC. All rights reserved. High-level considerations The “Big Picture” Most leases on balance sheet for lessees Classification will drive expense profile Lessor model largely unchanged Most changes result from alignment with ASC 606 FASB tried to make things easy Classification, reassessment, transition Effective 2019 but don’t wait to assess impact Process and systems changes may be required Potential impact on debt covenants

Copyright © 2016 Deloitte Development LLC. All rights reserved. Identifying a lease

Copyright © 2016 Deloitte Development LLC. All rights reserved. Scope What’s in and what’s out? Introducing the new standard Applies to leases of property, plant, or equipment Does not apply to:  Leases of intangible assets  Leases to explore for or use nonregenerative resources  Leases of biological assets  Leases of inventory  Leases of assets under construction

Copyright © 2016 Deloitte Development LLC. All rights reserved. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration Consideration LessorLessee Control the use of an identified asset What does the new definition look like? Definition of a lease

Copyright © 2016 Deloitte Development LLC. All rights reserved. For a contract to be, or contain, a lease it must Depend on the use of an identified asset, and Convey the right to control the use Right to obtain substantially all of the economic benefits from asset use Right to direct the use of the asset over lease term and Definition of a lease

Copyright © 2016 Deloitte Development LLC. All rights reserved. Identified asset criteria Identified asset — Overview Contract must depend on use of identified asset Asset must be explicitly or implicitly identified Physically distinct portion of a larger asset may be an identified asset Capacity portion of a larger asset is generally not an identified asset Right of substitution Would result in the asset not being deemed a specified asset Substitution would be considered substantive if... o Lessor has the practical ability to substitute the asset o Lessor would benefit from exercising its right of substitution Warranty or upgrade considerations Supplier’s right or obligation to substitute an alternative asset due to operational failure does not mean the asset is not an identified asset Supplier’s right or obligation to upgrade the asset similarly does not mean the asset is not an identified asset

Copyright © 2016 Deloitte Development LLC. All rights reserved. Benefits related to the ownership of an asset should not be included in the assessment of whether an arrangement contains a lease Can obtain economic benefits from the use of an asset directly or indirectly in many ways Economic benefits from the use of an asset include its primary output and by-products, including potential cash flows derived from these items RIGHT TO OBTAIN SUBSTANTIALLY ALL OF THE ECONOMIC BENEFITS FROM USE Convey the right to control the use Definition of a lease

Copyright © 2016 Deloitte Development LLC. All rights reserved. Key ingredients of the leases model

Copyright © 2016 Deloitte Development LLC. All rights reserved. Lease would be classified as a finance lease (lessee) or a sales-type lease (lessor) when... Lease transfers ownership of the underlying asset to lessee by the end of the lease term Lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise Lease term is for a major part of the remaining economic life of the underlying asset Present value of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset Leased asset is so specialized in nature that it is expected to have no alternative use to the lessor at the end of the lease term Overview of the criteria Lease classification CLASSIFICATION CRITERIA The standard states that the bright-line thresholds that exist under ASC 840 could be a reasonable approach to evaluate whether a lease would be classified as a finance lease

Copyright © 2016 Deloitte Development LLC. All rights reserved. Initial determination and reassessment Lease term LEASE TERM Noncancelable period, plus… Renewal options that are reasonably certain to be exercised by a lessee Termination options that are reasonably certain not to be exercised by a lessee Options to extend (or not to terminate) that are controlled by the lessor REASSESSMENT REQUIREMENTS Lessees are required to reassess lease term when A significant event or change in circumstances occurs that is in the control of the lessee A contract term obliges the lessee to exercise (or not exercise) a renewal or termination option Lessee elects to exercise or not exercise a renewal or termination option that was not previously deemed reasonably certain of being or not being exercised Would reassess when there is a modification that does not result in a separate contract Lessors would not be required to reassess lease term, unless there is a modification that does not result in a separate contract

Copyright © 2016 Deloitte Development LLC. All rights reserved. What amounts are included in lease payments? Lease payments Payments specified in the lease agreement In-substance fixed payments Fixed lease payments Payments that depend on an index or a rate Excludes payments based on usage or performance Reassessment required under certain circumstances Variable payments Lessees — amount that it is probable will be owed under the RVG at the end of the lease term Lessors — the full amount at which the residual asset is guaranteed by the lessee or third party Residual value guarantees Treated in a manner consistent with the accounting for renewal options Include options that a lessee is reasonably certain to exercise Purchase and termination options

Copyright © 2016 Deloitte Development LLC. All rights reserved. What discount rate should be used? Discount rate Lessee must use the rate the lessor charges in the lease if readily determinable or, alternatively, its incremental borrowing rate Lessor would use the rate it charges the lessee, which is known as the rate implicit in the lease Nonpublic business entities are permitted to make an accounting policy election to use the risk-free rate when measuring their lease obligations REASSESSMENT REQUIREMENTS LesseeLessor Would generally be updated when there is a remeasurement of the lease obligation Would reassess when there is a modification that does not result in a separate contract Would reassess, in certain instances, when there is a modification that does not result in a separate contract

Copyright © 2016 Deloitte Development LLC. All rights reserved. Overview of the core accounting models

Copyright © 2016 Deloitte Development LLC. All rights reserved. What does the lessee model look like? Lessee accounting model Initial Measurement Most* leases are recorded on the balance sheet using a right-of-use asset approach: Subsequent Measurement Lease obligation — PV of lease payments not yet paid ROU asset — lease obligation + initial direct costs – lease incentives + prepaid lease payments Lease obligation — amortized using the effective interest method ROU asset — depends upon lease classification Expense recognition pattern: o Finance lease — front-loaded o Operating lease — generally straight-line Short-term leases: A lessee can elect, by asset class, not to record on its balance sheet a lease with a lease term of 12 months or less and which does not include a purchase option that the lessee is reasonably certain to exercise *

Copyright © 2016 Deloitte Development LLC. All rights reserved. What does the lessor model look like? Lessor accounting model Existing lessor accounting retained with minimal changes Classification depends on an assessment of control of the underlying asset Sales-typeDirect financingOperating Lessee gains control of the underlying asset Underlying asset is derecognized Net investment in a lease is recognized Selling profit or loss recognized at lease commencement Initial direct costs recognized at lease commencement unless no selling profit or loss Lessee does not obtain control of the asset, but the lessor relinquishes control Underlying asset is derecognized Net investment in a lease is recognized Profit deferred and amortized into income over the lease term Initial direct costs deferred and amortized into income over the lease term Lessor retains control of the underlying asset Underlying asset remains on the lessor’s balance sheet Income recognized on a straight-line basis unless another systematic basis is more appropriate Initial direct costs deferred and expensed over the lease term in a manner consistent with income

Copyright © 2016 Deloitte Development LLC. All rights reserved. ROU asset Lease liability Amortization expense Interest expense Principal (Financing) Interest (Operating) ROU asset Lease liability Lease expense (single line on straight-line basis) Lease payments (Operating) Balance SheetIncome Statement Cash Flow Statement Financing Lease Operating Lease Presentation requirements Lessee model Presentation consistent with current lessor model: Balance sheet — presentation depends on lease classification Income statement — profit or loss recognized in a manner consistent with business model Cash flow statement — recognized as cash inflows from operating activities Lessor model

Copyright © 2016 Deloitte Development LLC. All rights reserved. Disclosure requirements DISCLOSURE OBJECTIVE Enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases LESSEE DISCLOSURES  Nature of its leases  Information about leases that have not yet commenced  Related-party lease transactions  Accounting policy election regarding short-term leases  Finance and operating lease costs  Short-term and variable lease costs  Sublease income  Gain or loss from sale-and-leaseback  Maturity analysis for lease obligations  Weighted-average remaining lease term  Weighted-average discount rate LESSOR DISCLOSURES  Nature of its leases  Significant assumptions and judgments used  Related-party leases transactions  Tabular disclosure of lease-related income  Components of the net investment in a lease  Information on the management of risk associated with residual asset  Maturity analysis of operating lease payments and lease receivable  Information required by ASC 360

Other provisions, effective date, and transition

Copyright © 2016 Deloitte Development LLC. All rights reserved. Seller-lessee should evaluate the transfer of the underlying asset under the requirements of ASC 606 Existence of leaseback would not prevent a conclusion that underlying asset was sold –Arrangement in which leaseback is classified as a finance lease would preclude sale accounting Substantive repurchase options would preclude sale accounting Sale-and-leaseback transactions Entire gain resulting from the sale recognized immediately Special considerations for off-market terms Gain recognition Account for leaseback in a manner consistent with other leases Seller-lessee applies lessee model; buyer-lessor applies lessor model Leaseback accounting A “failed sale” will be accounted for as a financing arrangement by both parties “Failed” sale- leaseback

Copyright © 2016 Deloitte Development LLC. All rights reserved. Effective date Public business entities — effective for calendar periods beginning on January 1, 2019 and interim periods therein All other entities — effective for calendar periods beginning on January 1, 2020, and interim periods thereafter Early adoption will be permitted Lessees and lessors are required to use a modified retrospective transition method for all existing leases Would apply the new model for the earliest year presented in the financial statements Application of approach linked to current lease classification and new lease classification An entity can use hindsight when evaluating lease term Effective date and transition Transition TRANSITION RELIEF PACKAGE Lessees and lessors are not required to reassess the following upon transition: Whether any expired or existing contracts are leases or contain leases The lease classification for any expired or existing leases Initial direct costs for any existing leases

Revenue

Copyright © 2016 Deloitte Development LLC. All rights reserved. New revenue guidance Effective date Background On May 28, 2014, the FASB and International Accounting Standards Board (IASB) issued a converged standard on revenue from contracts with customers. The FASB’s final standard has been codified as ASC 606. The boards believe that the standard will improve the consistency of requirements, comparability of revenue recognition practices, and usefulness of disclosures. The new revenue standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017 (FY18), for public entities. The effective date for nonpublic entities is annual reporting periods beginning after December 15, 2018 (FY19), and interim reporting periods within annual reporting periods beginning after December 15, Early application is permitted

Copyright © 2016 Deloitte Development LLC. All rights reserved. Full Retrospective Approach Restate prior periods in compliance with ASC 250 Optional practical expedients Modified Retrospective Approach Apply revenue standard to contracts not completed as of effective date and record cumulative catch up Required disclosures Amount of each F/S line item affected in current period Explanation of significant changes Transition options New revenue guidance

Copyright © 2016 Deloitte Development LLC. All rights reserved. Identify the contract with a customer (Step 1) Identify the performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to performance obligations (Step 4) Recognize revenue when (or as) the entity satisfies a performance obligation (Step 5) Overview New revenue guidance Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services This revenue recognition model is based on a control approach which differs from the risks and rewards approach applied under current U.S. GAAP

Copyright © 2016 Deloitte Development LLC. All rights reserved. A legally enforceable contract (oral or implied), but must meet all of the following requirements : A contract will not be in the scope if: AND Step 1: Identifying the contract New revenue guidance The contract has commercial substance The parties have approved the contract and are committed to perform The entity can identify each party’s rights regarding goods or services The entity can identify the payment terms for the goods or services to be transferred The contract is wholly unperformed Each party can unilaterally terminate the contract without compensation Step 1Step 2Step 3Step 4Step 5 It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer Collectibility threshold

Copyright © 2016 Deloitte Development LLC. All rights reserved. Step 2: Identifying performance obligations New revenue guidance Step 1Step 2Step 3Step 4Step 5 Identify all (explicit or implicit) promised goods and services in the contract Are promised goods and services distinct from other goods and services in the contract? Can the customer benefit from the good or service on its own or together with other readily available resources? Is the good or service separately identifiable from other promises in the contract? AND Account for as a performance obligation Combine 2 or more promised goods or services & reevaluate YES NO CAPABLE OF BEING DISTINCT DISTINCT WITHIN CONTEXT OF CONTRACT The ASU defines a performance obligation as a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct

Copyright © 2016 Deloitte Development LLC. All rights reserved. Transaction price shall include… Fixed and variable consideration Noncash consideration Adjustments for significant financing component Adjustments for consideration payable to customer Transaction price does NOT include… Effects of customer credit risk When accounting for variable consideration an entity shall… Estimate using expected value (probability weighted) or most likely amount methods Step 3: Determine the transaction price New revenue guidance Step 1Step 2Step 3Step 4Step 5

Copyright © 2016 Deloitte Development LLC. All rights reserved. Apply the following “constraint”: −Include some or all of the amount of variable consideration in the transaction price to the extent that it is probable that a subsequent change in the estimate would not result in a significant revenue reversal −Consider the following factors in assessing whether the estimated transaction price is subject to significant revenue reversal: ◦Highly susceptible to factors outside entity’s influence ◦Uncertainty not expected to be resolved for a long time ◦Entity’s experience is limited ◦Entity typically offers broad range of price concessions/payment terms ◦Large number of broad range possible outcomes Step 3: Determine the transaction price New revenue guidance Exception for sales or usage based royalties of IP

Copyright © 2016 Deloitte Development LLC. All rights reserved. Allocate transaction price on a relative standalone selling price basis (estimate standalone selling price if not observable) The expected cost-plus margin method, adjusted market assessment method, or residual method (only if price is highly variable or uncertain) are acceptable Allocate consideration (and changes) in the transaction price to all performance obligations (based on initial allocation) unless a portion of (or changes in) the transaction price relate entirely to one (or more) obligations and certain criteria are met Do not reallocate for changes in standalone selling prices If certain criteria are met, a discount or variable consideration may be allocated to one or more, but not all, of the performance obligations in a contract. New revenue guidance Step 4: Allocate the transaction price Step 1Step 2Step 3Step 4Step 5

Copyright © 2016 Deloitte Development LLC. All rights reserved. Evaluate if control of good or service transfers over time, if not then transfers at a point in time An entity satisfies a performance obligation over time if… OR Measure progress toward completion using input/output methods Step 5: Recognizing revenue New revenue guidance Performance does not create an asset with an alternative use and the entity has both an enforceable right to payment for performance completed to date and expects to fulfil contract as promised Performance creates or enhances a customer controlled asset (e.g., home addition) The customer receives and consumes the benefit as the entity performs (e.g., cleaning service) Step 1Step 2Step 3Step 4Step 5

Copyright © 2016 Deloitte Development LLC. All rights reserved. For performance obligations satisfied at a point in time, indicators that control transfers include, but are not limited to, the following: Step 5: Recognizing revenue New revenue guidance The entity has a present right to payment The customer has legal title The entity has transferred physical possession The customer has the significant risks and rewards of ownership The customer has accepted the asset

Copyright © 2016 Deloitte Development LLC. All rights reserved. Disclosures – FASB only New revenue guidance Disaggregation of revenue Information about contract balances Contract costs Information about performance obligations Description of significant judgments Policy decisions – time value of money & costs to obtain a contract Transaction price, allocation methods and assumptions Remaining performance obligations Disclosures About Contracts with Customers Disclosures about Significant Judgments and Estimates Other Required Disclosures ASC 270, Interim Reporting Interim Only Disclosures

Copyright © 2016 Deloitte Development LLC. All rights reserved. ASC 606 update Revenue Principal versus Agent Final ASU On March 17, 2016, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which was originally proposed on August 31, The ASU clarifies that: −An entity should determine whether it is a principal or an agent for each specified good or service promised to the customer. −A principal obtains control of (a) a good or asset that it transfers to the customer; (b) a right to a service, which it directs another party to provide to the customer; or (c) a good or service that it combines with other goods or services for the customer. The ASU amends existing examples and provides additional examples to illustrate the new guidance.

Copyright © 2016 Deloitte Development LLC. All rights reserved. ASC 606 update Revenue Additional proposed accounting standard updates: Narrow scope improvements and practical expedients Identifying performance obligations and licensing Both final ASUs expected to be issued during the second quarter of 2016 Additional revenue project: The FASB added a technical corrections and improvements project to its agenda, and has completed initial deliberations, with a proposed ASU expected to be issued in the second quarter of 2016

Question and answer

Copyright © 2016 Deloitte Development LLC. All rights reserved. Contact info George Mensah Senior Manager, Deloitte & Touche LLP Rae Stewart Manger, Deloitte & Touche LLP

Copyright © 2016 Deloitte Development LLC. All rights reserved. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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