FASB Update – Private Company The views expressed in this presentation are of the presenter. Official positions of the PCC and the FASB are reached only after extensive due process & deliberations. Wichita State University Michael Cheng FASB Project Manager, PCC Coordinator WSU Accounting & Auditing ConferenceMay 20, 2014

What We Will Discuss Today 2 The Private Company Council Private Company Decision-Making Framework Definition of a Public Business Entity PCC Activities to Date

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FASB creates Private Company Financial Reporting Committee (PCFRC ) FAF works with AICPA & NASBA to create Blue-Ribbon Panel FAF seeks public comment on plan to create PCSIC FAF undertakes nationwide “listening tour ” Blue-Ribbon Panel submits report to FAF Trustees FAF establishes the Private Company Council (PCC) Private Company Key Events 4 FAF creates Standard-Setting Process Oversight Committee Jan. 2011Oct May 2012 FAF appoints Trustees and staff to “Working Group”

5 Private Company Council (PCC)... Structure 5 FAF oversight Identifies, deliberates & votes on proposed GAAP alternatives for private companies Advisory body to FASB Private company practitioners (4), users (3), preparers (3)

PCC… Agenda Process Identification of potential GAAP alternatives Pre-agenda research on potential modification Staff analysis - Private Company Decision Making Framework PCC vote on agenda topics (Super- majority) 6

PCC… Process 7 PCC Agenda Decision Deliberation of staff analysis and vote FASB endorsement Exposure Draft PCC re-deliberates FASB final endorsement FASB issues final Standards

Endorsement Process and Voting  PCC proposes GAAP alternatives -Two-thirds vote required  FASB endorsement by simple majority -FASB act within 60 days -If FASB does not endorse, must provide written notification to PCC indicating changes that would result in endorsement 8

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10 Private Company Decision-Making Framework 10 ID & provide alternatives based on differential factors  Number of users and access to management  Investment strategies of primary users  Ownership & capital structure  Accounting resources  Learning about new guidance Tool for PCC and FASB

11 Private Company Decision-Making Framework 11 Where guidance differ between public & private (modules)  Recognition & Measurement  Display (Presentation)  Disclosures  Effective Date  Transition Method Tool for PCC and FASB Apply to PCC look-back projects & ongoing FASB projects

PCDMF…Fundamentals 12 Reduce cost & complexity, but not adversely affecting reporting of relevant information Fundamental approach retains or improves information relevant to typical users Intended to facilitate decisions & drive consistency Assist in user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework

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14 Public Business Entity…Current GAAP 14 Files or furnishes financial statements with the SEC (or is included in a filing) Securities Exchange Act of 1934 required to file or furnish financial statements with a regulatory agency, other than the SEC Required to file financial statements with a foreign or domestic regulatory agency for the sale of securities that are not subject to contractual restrictions on transfer Has issued, or is a conduit obligor for, securities that are traded, quoted, or listed on an exchange or an over-the-counter market.

15 Public Business Entity…New to GAAP 15 It has one or more securities that are not subject to contractual restrictions on transfer, and it is required to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis.

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PCC…Meetings 17 Previous Meetings 12/6/12 2/12/13 5/6/13 7/15/13 9/30/13-10/1/13 11/12/13 1/28/14 4/29/14 Upcoming meetings 7/15/14 9/16/14 12/11/14

PCC…Specific Projects 18 Goodwill (completed) Interest Rate Swaps (completed) Common Control Leases (completed) Identifiable Intangible Assets (in process) Pre-agenda research areas Advising the FASB

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20 Goodwill... Problem? 20 Limited benefits to users Users disregard goodwill & impairment losses in financial condition & operating performance Cost & complexity of current goodwill impairment test

Goodwill... Solution 21  Do not amortize goodwill  Test for impairment at least annually or more frequently  Goodwill impairment test -At reporting unit level -Two-step test -Optional qualitative assessment  Amortize goodwill  Test for impairment upon occurrence of triggering event  Goodwill impairment test -At entity level or reporting unit level -One-step test -Optional qualitative assessment Final Alternative Current U.S. GAAP

Goodwill… Solution 22  Amortize existing goodwill prospectively over 10 years or less if the private company can demonstrate that another useful life is more appropriate. Transition  Applied prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted. Effective Date

Goodwill... Benefits of Alternative Significant cost savings for many private companies that carry goodwill on their balance sheets Amortization reduces likelihood of impairments, private companies will test goodwill for impairment less frequently 23

24 Difficult to obtain fixed-rate borrowing Must enter into swaps to economically convert variable- rate to fixed-rate borrowing Lack expertise to comply with hedge accounting Question relevance/cost of determining & presenting fair value of swap for converting to fixed-rate borrowing Interest Rate Swaps... Problem? 24

Impact of interest rate swap Current GAAPPCC Alternative No hedge accounting Hedge accounting Combined instruments (Not Finalized) Simplified hedge accounting (Final) Income statementVolatility in interest expense as result of changes in FV Interest expense approximates fixed rate debt Balance sheetAsset or liability at fair value Only disclosure of settlement value Asset or liability at settlement value (or FV) Other comprehensive income No impactIncludes changes in fair value of effective portion of hedge No impactIncludes changes in settlement value (or FV) of the swap Interest Rate Swaps 25

Interest Rate Swaps – Simplified Hedge Accounting 26  Private companies may apply either the modified retrospective approach or the full retrospective approach upon adoption.  Existing swaps as of the date of adoption may qualify for the simplified hedge accounting approach. Transition  Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Early application is permitted. Effective Date

Common-Control Leasing... Arrangements Typical private company arrangement: Owner Manufacturing Company Leasing Company 100% Interest Pays Rent Leases Land & Building Bank Mortgage Bank Debt 27

28  Lessees may elect alternative not to apply VIE guidance when certain conditions are met.  Not require VIE disclosures – instead require specific information on Lessor entity. Common Control Leasing… Solution 28 Important Note – Not meeting the criteria above does not automatically result in consolidation.

Common Control Leasing… Solution 29  Full retrospective approach. Transition  Effective for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter.  Early application is permitted. Effective Date

Common-Control Leasing... Solution Reducing costs & complexity for private company lessees that apply VIE guidance Useful lessor-related information for users of private company financial statements The “VIE Alternative”... 30

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32 Business Combination  Some question that the requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful information  Cost & complexity: -estimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships Identifiable Intangible Assets... Problem? 32

33  At April 29 meeting, PCC discussed various alternatives, including: ‒ Recognizing & measuring only intangible assets capable of being sold or licensed independently ‒ Principle-based vs rules-based approach  Directed staff to perform more analysis and outreach Identifiable Intangible Assets... Solution? 33 Next Steps

34 Concerns  Codification includes 5 definitions of a nonpublic entity, 3 definitions of a public entity, and 2 definitions of a publicly traded company -Resulting in a total of 7 unique definitions  Could be confusing to identify scope Definition of Public Business Entity (Phase 2)... Problem? 34

35 Results of April 29, 2014 Meeting:  Added definition of a public business entity to the PCC agenda. Definition of Public Business Entity (Phase 2)... Solution? 35

PCC... Other Issues  Uncertain Tax Positions  Development stage entities -Prior research resulted in FASB standard currently being issued  Stock-based compensation -Research on valuation concerns 36

PCC… Advising on FASB Projects  Revenue Recognition  Leases  Accounting for Financial Instruments  Going Concern  Disclosure Framework  Government Assistance  Reporting Discontinued Operations 37

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Staying in Touch... Providing Input 39  Submit comment letters on proposals  PCC on issues affecting you:  Outreach meetings  Attend/watch upcoming PCC and FASB meetings. Next PCC mtgs: 7/15, 9/16, 12/11  Subscribe to the FASB Outlook —

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