A&A UPDATE NSAC Far West Chapter 63rd Annual Conference May 23, 2019 Presented by J. Edward Grossman, CPA, CFE, CMA, CGMA

Topics to be Discussed FASB Accounting Standards Updates (ASUs) Recently Effective * Upcoming Effective Dates * FASB Pipeline Projects Assurance Standards Changes Auditing Standards Statements on Standards for Accounting & Review Services * Effective dates for Nonpublic Entities

Income Taxes ASU 2015-17: Balance Sheet Classification of Deferred Taxes Requires that all deferred tax assets and deferred tax liabilities be classified as noncurrent in a classified balance sheet Effective for annual periods beginning after Dec 15, 2017 Apply either prospectively or retrospectively Certain disclosures required

Derivatives and Hedging ASU 2016-05: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Clarifies that a change in the counterparty to a derivative instrument designated as a hedging instrument does not, of itself, require discontinuance of the existing hedge accounting ASU 2016-06: Contingent Put and Call Options in Debt Instruments Clarifies the analysis required for evaluating whether the economic characteristics and risks are clearly and closely related to the economic characteristics of the debt hosts

Stock Compensation ASU 2016-09: Improvements to Employee Share-Based Payment Accounting Simplifies various aspects of accounting for share-based payment arrangements ASU 2017-09: Compensation: Stock Compensation Provides guidance on the circumstances when modification accounting should be applied

Not-for-Profit Entities ASU 2016-14: Presentation of Financial Statements of Not-for-Profit Entities Amends financial statements of not-for-profit entities, and requires additional information to be disclosed concerning a not-for-profit entity's liquidity and allocation of resources, and the effects of underwater endowment funds

Soon to be Effective ASUs Early Implementation Permitted Unless Otherwise Noted

Revenue Recognition ASU 2014-09: Revenue from Contracts with Customers Effective for years beginning after Dec. 15, 2018 IMPLEMENTATION DETAILS TO BE COVERED IN A LATER SESSION

Leases ASU 2016-02: Leases Amended guidance for the treatment of leases Affects all industries Lessee will be required to recognize a right-of-use asset and lease liability for substantially all operating and finance leases Lessor accounting will remain relatively unchanged Changes the accounting for sale and leaseback transactions Enhanced disclosures for lessees and lessors Effective for years beginning after Dec. 15, 2019

Leases – Subsequent Developments ASU 2018-01: Land Easement Practical Expedient ASU 2018-10: Codification Improvements to Topic 842 ASU 2018-11: Targeted Improvements ASU 2018-20: Narrow-Scope Improvements for Lessors ASU 2019-01: Codification Improvements to Topic 842

What is a 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.

Scope and Scope Exceptions Scope: All leases, including subleases (Head lease and sublease accounted for separately) Topic 842 does not apply to: Leases of intangible assets (Topic 350) Leases of assets under construction (Topic 360) Leases of biological assets (Topic 905) Leases to explore for or use nonregenerative resources (Topics 930 and 932) Leases of inventory (Topic 330) 12

Is it a Lease Under the New Rules? Right-of-use model Scope: Lease contracts in the scope of Topic 842 involve: An identified asset That is explicitly or implicitly specified Supplier has no practical ability to substitute and would not economically benefit from substituting the asset The right to control the use of that asset during the lease term Decision-making authority over the use of the asset The ability to obtain substantially all economic benefits from the use of the asset Refer to ASC 842-10-55-1 flowchart

Lessee Accounting Model Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payment Single lease expense on a straight-line basis Cash paid for lease payment Balance Sheet Income Statement Cash Flow Statement Finance Operating Classification criteria substantially similar to that in previous lease guidance Private companies may use risk-free rates when measuring present value of lease liabilities Effect of leases on the statements of income and cash flows largely unchanged

Lessor Accounting Model Net investment in the lease Interest income and any selling profit on lease Cash received for lease payments Continue to recognize the underlying asset Lease income Balance Sheet Income Statement Cash Flow Statement Sales-type & Direct Financing Operating Lessor accounting is largely unchanged Classification criteria substantially similar to that in previous lease guidance

Lease Classification Finance lease if ANY of the following 5 conditions are met: Transfer of ownership Option to purchase that is reasonably certain to be exercised (not just bargain purchases!) Lease term is a major part of the economic life Present value of lease payments is substantially all of the fair value of the underlying asset The underlying asset is of a specialized nature If none of the above are met, the lease is operating Transfer of ownership IS met in situations where the lessee is required to pay a nominal amount in connection with the transfer of ownership Transfer of ownership IS NOT met if there is a provision that the transfer of the underlying asset is not transferred if the lessee elects not to pay the specified fee to complete the option. That is an option to purchase rather than transfer of ownership Reasonable approach to assessing “major part” and “substantially all” criteria: 75% or more of remaining economic life of the underlying asset is a major part of the remaining economic life A commencement date that falls at or near the end of the economic useful life of the underlying asset refers to a commencement date that falls within the last 25% of the total economic life of the underlying asset 90% or more of the fair value of the underlying asset amounts to substantially all of the fair value of the underlying asset

Lease Term Slightly new definition Noncancellable period for which lessee has right to use the underlying asset, plus periods covered by; Option if lessee reasonably certain to extend Option to terminate if lessee is reasonably certain not to exercise Option to extend (or not terminate) controlled by lessor When assessing the length of the noncancellable period of a lease, an entity should apply the definition of a contract and determine the period for which the contract is enforceable A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty Definition of lease term from the guidance:   The non-cancellable period for which a lessee has the right to use an underlying asset, together with all of the following: a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. In determining whether it is reasonably certain that a renewal option (or termination option) will be exercised, a company must consider “all relevant factors that create an economic incentive for the lessee …” to exercise the option, including contract-, asset-, entity- and market-based factors. Examples of such factors identified in the new lease standard include: • Contractual terms and conditions for the optional periods compared with current market rates. • Leasehold improvements that are expected to have significant value to the lessee when the option becomes exercisable. • Costs related to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, etc. • The importance of the underlying asset to the lessee’s operations. Enforceable – ASC

Short-term Lease Exception As an accounting policy election a lessee may elect not to apply the recognition requirements to short-term leases Applies to a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise Election is made by class of underlying asset

ASC Topic 815: Derivatives and Hedging Current ASC Topic 815 is a summarization of FAS 133 (issued in 1998), subsequent amendments (FASs, FINs, and ASUs) and interpretative implementation guidance provided by the Derivatives Implementation Group (“DIG”, a FASB Task Force) Concerns Expressed about this Guidance: Difficult to apply hedge accounting Limitations for hedging both nonfinancial and financial risks Financial reporting didn’t always closely reflect the entity’s risk management activities

ASU 2014-03 – PCC Simplified Hedge Accounting Many private companies entered into interest rate swap arrangements, but lacked the expertise to comply with the complex requirements to apply hedge accounting By electing ASU 2014-03 for qualifying arrangements Documentation requirements are relaxed Can assume no ineffectiveness Swap agreement can be measured at settlement value rather than fair value Can be applied on a swap-by-swap basis Swap is not considered to be a derivative instrument in determining if certain FV disclosures under ASC 825 are required

Targeted Improvements to Hedge Accounting Originally a part of the FASB and IASB convergence project addressing Financial Instruments 2 FASB Exposure Drafts (2008 and 2010) issued proposing broad-based changes to hedging model Project was put on hold in 2010 and reactivated in 2014 to focus on targeted improvements ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, issued August 2017

ASU 2017-12 Effective Dates Public Business Entities Fiscal years beginning after December 15, 2018 Including interim periods within those fiscal years All Other Entities Fiscal years beginning after December 15, 2019 Interim periods for fiscal years beginning after Dec. 15, 2020 Early application permitted for all entities in any period after issuance

Significant Changes in ASU 2017-12 Expands the risk components that are eligible for hedge accounting by: Eliminating the requirement to designate only the overall variability in cash flows or variability due to foreign currency risk as the hedged risk for cash flow hedges of a forecasted purchase or sale of a nonfinancial asset Eliminating the concept of benchmark interest rates and the requirement to designate only the overall variability in cash flows as the hedged risk for cash flow hedges of variable-rate financial instruments Adding the Securities Industry and Financial Markets Association (SIFMA) municipal swap rate to the allowable benchmarks for fair value hedges of interest rate risk

Significant Changes in ASU 2017-12 Ease the requirements for testing hedge effectiveness by: Expanding the items that can be excluded from the assessment to include the change in fair value of a current swap due to a cross-currency basis spread. Allowing, in certain situations, qualitative subsequent effectiveness assessments to be performed after the initial quantitative assessment. Allowing entities using the critical terms match method to assume that the hedging derivative matures at the same time as the forecasted transaction if both occur within the same 31-day (or fiscal month) period.

Significant Changes in ASU 2017-12 Ease the requirements for testing hedge effectiveness by: Allowing the initial prospective quantitative assessment of hedge effectiveness to be performed anytime before the first quarterly effectiveness testing date. Allowing nonpublic entities (except financial institutions and certain nonprofit organizations) to select the method of hedge effectiveness testing and perform the initial quantitative and subsequent quarterly assessments before the date the next interim or annual financial statements are available for issuance. Allowing entities, in certain situations, to use the long-haul method for assessing effectiveness when it determines the short cut method was not or is no longer appropriate

Significant Changes in ASU 2017-12 For fair value hedges of interest rate risk, remove certain limitations for designating and measuring changes in fair value Require the presentation of the earnings effect of the hedging instrument in the same line item in the income statement as the earnings effect of the hedged item Change disclosure requirements by requiring the effect of fair value and cash flow hedges on the income statement to be disclosed in a table, and eliminating the requirement to disclose the ineffective portion of the change in fair value of hedging instruments

Derivatives and Hedging – Other Issues ASU 2018-16: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes Adds the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate eligible for hedge accounting purposes Intended to assist with the transition from LIBOR Effective date for nonpublic entities: calendar-year 2020. Early adoption permitted if ASU 2017-12 has been adopted

Financial Instruments: Recognition and Measurement ASU 2016-01 issued January 5, 2016 Partial completion of a joint project the FASB and the IASB began in 2008 Preceded by Exposure Drafts in May 2010 and February 2013 Objective was to reduce the complexity in accounting for financial instruments Retains current GAAP with targeted improvements to classification and measurement of equity instruments, fair value option for liabilities, and disclosures for financial instruments

Accounting for Equity Investments: ASU 2016-01 Equity Investments – New ASC Topic 321 Most equity investments are required to be measured each reporting period at fair value (FV) with changes in FV recognized in net income, except for Equity method investments, including those that result in consolidation of the investee Equity investments without a readily determinable FV An entity may elect to measure at cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer Election not available to investments that qualify for the NAV practical expedient

Statement of Cash Flows: ASU 2016-15 Provides cash flow statement classification guidance for: Debt prepayment or debt extinguishment costs Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing Contingent consideration payments made after a business combination Proceeds from the settlement of insurance claims Proceeds from the settlement of corporate-owned life insurance policies Distributions received from equity method investees Beneficial interests in securitization transactions Separately identifiable cash flows and application of the predominance principle Effective: Public business entities – fiscal years beginning after Dec. 15, 2017 Other entities – fiscal years beginning after Dec. 15, 2018 Early adoption is permitted

Statement of Cash Flows: ASU 2016-18 Restricted Cash Requires that the statement of cash flows explain the changes in the total of cash, cash equivalents, and amounts described as restricted cash and restricted cash equivalents Restricted cash and restricted cash equivalents are not defined Effective: Public business entities – fiscal years beginning after Dec. 15, 2017 Other entities – fiscal years beginning after Dec. 15, 2018 Early adoption is permitted

Clarifying the Definition of a Business: ASU 2017-01 Clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses Provides an initial screen to determine if the inputs and processes constitute a business Early adoption permitted in certain circumstances Required for annual periods beginning after Dec. 15, 2018

Simplifying the Test for Goodwill Impairment: ASU 2017-04 Impacts companies having goodwill on their balance sheet and have not adopted the private company alternative Eliminates Step 2 of the goodwill impairment model Goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit Early adoption permitted Required for annual periods beginning after Dec. 15, 2021

Income Taxes ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Provides an option to allow the reclassification to retained earnings of the income tax effects of items remaining within accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 Effective for calendar 2019 with early implementation permitted

Variable Interest Entities ASU 2018-17: Consolidation- Targeted Improvements to Related Party Guidance for Variable Interest Entities Makes targeted improvements to variable interest guidance concerning an expanded accounting alternative under which a private company may elect not to apply variable interest entity (VIE) guidance to legal entities under common control, and indirect interests held through related parties under common control when determining whether fees paid to decision makers represent variable interests.

FASB Pipeline Projects

FASB Pipeline Projects Simplifying the Balance Sheet Classification of Debt Revised Exposure Draft Expected 2019 Q2 Simplifications to Accounting for Income Taxes Exposure Draft (ED) comment period ends June 28 Disclosure Framework: Disclosure Review Income Taxes- ED comment period ends May 31 Inventory – ED redeliberations in progress

Assurance Standard Changes

Auditing Standards Board SAS No. 134: Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements Creates new AU-C Section 701, Communicating Key Audit Matters in the Independent Auditor’s Report Required only when the terms of the engagement call for such communications Largely conforms U.S. reporting model with the IAASB Effective for audits of financial statements covering periods ending on or after December 15, 2020 Early implementation NOT permitted

Accounting and Review Services Committee SSARS 24: Omnibus Statement – 2018 Adds new section Special Considerations- International Reporting Issues In a review engagement, requires additional procedures concerning going concern assessment and inclusion of EOM paragraph in the accountant’s review report Revises requirements regarding reference to work of other accountants in a review report Effective for periods ending on or after June 15, 2019

Questions ??? For more information contact: J. Edward Grossman, CPA, CFE, CMA, CGMA ed.grossman@CLAconnect.com