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

2. 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

3. Income Taxes
ASU : 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

4. Derivatives and Hedging
ASU : 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 : 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

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

6. Not-for-Profit Entities
ASU : 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

7. Soon to be Effective ASUs
Early Implementation Permitted Unless Otherwise Noted

8. 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

9. Leases
ASU : 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

10. Leases – Subsequent Developments
ASU : Land Easement Practical Expedient
ASU : Codification Improvements to Topic 842
ASU : Targeted Improvements
ASU : Narrow-Scope Improvements for Lessors
ASU : Codification Improvements to Topic 842

11. 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.

12. 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

13. 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 flowchart

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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 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

21. 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 , Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, issued August 2017

22. 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

23. 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

24. 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.

25. 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

26. 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

27. Derivatives and Hedging – Other Issues
ASU : 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 Early adoption permitted if ASU has been adopted

28. Financial Instruments: Recognition and Measurement
ASU 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. Income Taxes
ASU : 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

35. Variable Interest Entities
ASU : 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.

36. FASB Pipeline Projects

37. 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

38. Assurance Standard Changes

39. 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

40. 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

41. Questions ??? For more information contact:
J. Edward Grossman, CPA, CFE, CMA, CGMA