MHM Executive Education Series: 2013 Third Quarter Accounting Update

Presented by: James Comito, Mike Loritz

and Mark Winiarski

September 26, 2013

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.

External participants will receive their CPE certificate via email immediately following the webinar.

CPE Credit

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The information in this Executive Education Series

course is a brief summary and may not include all the details relevant to your situation.

Please contact your MHM service provider to further

discuss the impact on your financial statements.

Disclaimer

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Today’s Presenters

James Comito, CPA Shareholder 858.795.2029 | jcomito@cbiz.com A member of MHM’s Professional Standards Group, James has expertise in all aspects of revenue recognition, business combinations, impairment of goodwill and other intangible assets, accounting for stock-based compensation, accounting for equity and debt instruments and other accounting issues. Additionally, he has significant experience with a variety of other regulatory and corporate governance issues pertaining to publicly traded companies, including all aspects of internal control. In addition, James frequently speaks on accounting and auditing matters at various events for MHM.

Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

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Today’s Presenters

Mark Winiarski, CPA 913.234.1656 | mwiniarski@cbiz.com Mark has 11 years of experience in an audit and advisory function and is located in our Kansas City office. In addition to serving his clients which are primarily in the manufacturing, retail and distribution industries, Mark supports our Professional Standards Group by consulting with clients and engagement teams across the country on accounting and auditing issues in areas including revenue recognition, consolidations and business combinations.

PRIVATE COMPANY

FINANCIAL REPORTING

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On August 7, 2013, the FASB issued an exposure draft to propose a definition for a public business entity.

The reason for doing this was twofold:

1. To create a consistent definition within U.S. GAAP on what a public and non-public business is

2. Identify the types of businesses that are excluded from the scope of the Private Company Decision-Making Framework

Defining what is not a Private Company

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The FASB proposed five criteria, a business meeting any one of the following is considered public: 1. Those required by the SEC to file or furnish financial

statements or those that file or furnish financial statements with the SEC and those who’s financial statements are required to be or are included in a filling with the SEC.

2. Those whose financial statements are required to be furnished with a regulatory agency under the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the act.

3. Those required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for the purposes of issuing securities.

Defining what is not a Private Company

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Five criteria continued: 4. Those that have unrestricted securities that are traded or

can be traded on an exchange or an over-the-counter market, or is a conduit bond obligor for such securities

5. Those with securities that are unrestricted, and are required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.

It excludes not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting.

Defining what is not a Private Company

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U.S. Versus IFRS

How is the U.S. approach to private companies different from IFRS?

IFRS

Two frameworks IFRS IFRS for Small and

Medium-Sized Entities

Application of the frameworks based on public accountability

U.S. GAAP One set of standards for

both public and private companies

Alternatives for accounting and reporting for public and private companies based on a cost-benefit analysis

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Under IFRS a small and medium-sized entity is one that: Does not have public accountability Publishes general purpose financial statements for

external users.

Public accountability exists when a business: Files, or is in the process of filing, its financial statements with a

securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market

Holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (i.e. banks, credit unions, insurance companies, etc.)

IFRS

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Private Company Council

The PCC has two principal responsibilities: 1. The PCC will determine whether exceptions or

modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.

2. The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

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Private Company Council

New activities July 1, 2013 – three proposals were issued as exposure

drafts Accounting for intangible assets in a business combination Accounting for goodwill subsequent to a business combination Accounting for certain interest rate swaps

August 22, 2013 – a fourth proposal was issued as an exposure draft Applying variable interest entity guidance to common control

leasing arrangements

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PCC Issue No. 13-01A, Accounting for Identified Intangible Assets in a Business Combination The PCC is attempting to reduce the number of intangible

assets that are recognized. Only intangible assets that arise from either a non

cancelable contract or legal right will be subject to recognition.

Private companies will measure the value of an asset that originates from a non-cancelable contract by considering only the contract’s remaining non-cancelable term.

Private Company Council

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PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination In a return to “the past,” goodwill will once again be

amortized over an estimated useful life, which cannot exceed ten years.

Goodwill will not longer be subject to an annual impairment test, rather, a “triggering event” model will be used. Impairment testing would be required when an event or circumstances occur that indicate that it is more likely than not the fair value of the entity is below its carrying value.

The goodwill impairment test will be performed at the entity level.

Private Company Council

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PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination The requirement to perform a hypothetical “purchase price

allocation” is removed. The amount of impairment recognized is simply the difference between the fair value of the entity and its carrying value.

Private Company Council

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PCC Issue No. 13-03, Accounting for Certain Receivable-Variable, Pay-Fixed Interest Rate Swaps The intent is to simplify the accounting for certain

derivative transactions involving an interest rate swap where variable rate debt is converted to fixed rate debt. If certain criteria are met, the swap is combined with the

related debt instrument which effectively results in a fixed rate borrowing.

Derivative accounting is not required. A “simplified short-cut method” is also available that

makes it easier to apply hedge accounting. Certain criteria must be met.

Private Company Council

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PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements The intent is to simplify the accounting for certain

commonly controlled entities that may require consolidation under current U.S. GAAP.

If certain conditions are met then a private company can elect to not evaluate certain commonly controlled entities under the variable interest entity model.

It does not provide relief for relationships for related parties or entities that do not meet the specific criteria.

Private Company Council

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The criteria in order to elect to not apply the variable interest entity guidance are that the entity meets all of the following: The legal entity is under common control The reporting entity and legal entity have a leasing

arrangement Substantially all the activities between the reporting

entity and the legal entity are related to leasing

If a leasing company were deconsolidated under PCC Issue 13-02 then the entity would be deconsolidated retrospectively.

Private Company Council

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So what is common control? Not defined in current U.S. GAAP The SEC staff concluded it exists when:

An individual or enterprise holds more than 50 percent of the voting ownership of each entity

A group of shareholders holds more than 50 percent of the voting ownership of each entity and have contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists

Immediate family members (i.e. married couples and their children, but not their grandchildren) hold more than 50 percent of the voting ownership interest of each entity…and there is no evidence those family members will not vote their shares in concert.

Common control may also exist among living siblings and their children.

Private Company Council

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FASB Endorsement While the FASB did raise questions pertaining to the

proposed alternatives, it unanimously endorsed each of the accounting alternatives approved by the PPC.

The proposed alternatives have been exposed for public comment.

The comment period for all of the issues, except PCC 13-02 on Variable Interest Entities has ended.

Subsequent to the public comment process, the PCC will redeliberate the accounting alternatives.

PCC accounting alternatives will be subject to “final endorsement” by the FASB.

Private Company Council

PCAOB/SEC MATTERS

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Changes to the Auditor Reporting Model In August, the PCAOB issued for public comment a

new auditing standard, The Auditor’s Report on an Audit of Financial Statements When an Auditor Expresses an Unqualified Opinion (the “proposed standard”).

The proposed standard which is a follow up to the PCAOB’s 2011 Concept Release, represents a significant change to the auditor’s report which has remained largely unchanged for almost 70 years

PCAOB – Auditor’s Reporting Model

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The proposed standard retains the existing pass/fail model (and the basic structure and wording of the existing auditor’s report), but significantly expands the amount of audit related information pertaining to the audit that must be disclosed by the auditor in the audit report itself.

PCAOB – Auditor’s Reporting Model

Changes to the Auditor Reporting Model

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Communicating Critical Audit Matters At the heart of the PCAOB proposal is the requirement for

the auditor to disclose critical audit matters. Critical audit matters are those that the auditor

addresses during the audit that: Involve the most difficult, subjective or complex

judgment by the auditor. Pose the most difficulty to the auditor in obtaining

sufficient and appropriate audit evidence. Pose the most difficulty to the auditor in forming an

opinion on the financial statements.

PCAOB – Auditor’s Reporting Model

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Communicating Critical Audit Matters The proposed standard provides the auditor factors to

consider in identifying the critical audit matters. The severity of control deficiencies identified that are

relevant to the critical audit matter, (if any). The nature and significance, quantitatively or

qualitatively, or corrected and accumulated uncorrected misstatements related to the matter, (if any).

The proposed standard provides a separate section of the audit report for the critical audit matters.

PCAOB – Auditor’s Reporting Model

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Proposed Effective Date and Comment Period The proposed standard would be effective for audits of

financial statements for fiscal years beginning on or after December 15, 2015.

Comments on the proposed standard are due December 11, 2013.

PCAOB – Auditor’s Reporting Model

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In August, the PCAOB issued for public comment a new auditing standard, The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report (the “proposed standard”).

The proposed standard clarifies the auditors responsibilities with respect to other information in a company’s annual report filed with the SEC pursuant to the Securities Exchange Act of 1934.

PCAOB – New Standard on Other Information

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The proposed standard requires the auditor to determine whether the other information contains: A material inconsistency, or A material misstatement of fact

PCAOB – New Standard on Other Information

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Based on reading the other information, consideration of evidence obtained during the audit and the conclusions reached during the audit engagement, the auditor is required to evaluate: The consistency of the amounts included in other

information and the manner of their presentation compared to the amounts presented in the financial statements (supported by relevant audit evidence), when such other information is intended to be the same as that presented in the financial statements or to provide greater detail.

PCAOB – New Standard on Other Information

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Consistency of qualitative statements appearing in other information, and the manner of its presentation with the financial statements (supported by relevant audit evidence).

Other information not directly related to the financial statements as compared to audit evidence and the conclusions reached during the audit.

Amounts included in other information that are computed using amounts presented in other information, the financial statements; or relevant audit evidence by proving the mathematical accuracy of the amounts.

PCAOB – New Standard on Other Information

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Reporting Format The proposed standard provides for a separate section in

the audit report titled “The Auditor’s Responsibly Regarding Other Information.”

Proposed Effective Date and Comment Period The proposed standard would be effective for audits of

financial statements for fiscal years beginning on or after December 15, 2015.

Comments on the proposed standard are due December 11, 2013.

PCAOB – New Standard on Other Information

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SEC Rule on Conflict Minerals is Upheld The SEC prevailed in district court which upheld the SEC

rule on disclosing the use of conflict minerals. The possibility of an appeal still exists, however, the initial required filing date of May 31, 2014, (for calendar year 2013) remains in effect as a result of the ruling.

SEC - Conflict Mineral Rule

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Rule 17(a)-5 – Brokers & Dealers

On July 31, 2013, the SEC adopted new rules to amend the broker-dealer reporting rule (Rule 17a-5) and the broker-dealer notification rule (Rule 17a-11) under the Securities Exchange Act of 1934. Broker-dealers must file new quarterly reports (Form Custody) on

December 31, 2013. Broker-dealer annual reports must be filed with SIPC for fiscal

years ending on or after December 31, 2013. New annual compliance reports will be required to be filed with the

SEC beginning in June 2014. http://www.sec.gov/rules/final/2013/34-70073.pdf

SEC also adopted amendments to the net capital, customer protection, books and records, and notification rules for brokers and dealers.

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Rule 17(a)-5 – Brokers & Dealers

Under the new rules: A broker-dealer that has custody of customers’ assets must

file a “compliance report” with the SEC to verify they are adhering to broker-dealer capital requirements, protecting customer assets they hold, and periodically sending account statements to customers.

A broker-dealer that does not have custody of its customers’ assets must file an “exemption report” with the SEC citing its exemption from requirements applicable to carrying broker-dealers.

The broker-dealer must also engage a PCAOB registered firm to report on each of the reports above.

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Rule 17(a)-5 – Brokers & Dealers

Under the SEC rule amendments to 17a-5: PCAOB audit standards are applicable for audits of years ending on or after June 1, 2014.

In response to the SEC’s proposed amendments to Rule 17a-5, in July 2011, the PCAOB proposed three standards: Two attestation standards relating to compliance reports

required in the SEC’s proposal One audit standard relating to supplemental information,

which would apply to, among other things, supporting schedules of broker-dealer’s required by Rule 17a-5

FINANCIAL ACCOUNTING UPDATE

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FASB – New Chairman

VISION “Achieving and preserving more comparable and

converged global accounting standards will remain a critically important goal, but the methods we use to

accomplish that objective will change.” Membership on Accounting Standards Advisory Forum (ASAF) Represent US interests Work with other National Standard Setters Continue process of improve and converge

We have a goal to converge “yet ensure that we address the pressing concerns of those who invest in the US capital markets.”

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FASB – New Chairman

VISION Agenda Prioritization – FASAC survey

COMPLETE CONVERGENCE PROJECTS (AND ADDRESS IMPLEMENTATION ISSUES)

Private Company Council

Codification Improvements

Objective of term – leave FASB and US financial reporting system: More transparent for investors Less complex for preparers More relevant to private companies AND have U.S. GAAP and IFRS closer than today

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FASB Technical Projects - Update

FASB Projects Financial Instruments Insurance Contracts Leases Revenue Recognition Going Concern Consolidations (Principal vs. Agent) Disclosure Framework Private Company Issues Definition of a Public Company Reporting Discontinued Operations

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FASB Project - Insurance Contracts

Exposure Draft – Issued in June 2013 Changes the accounting and financial reporting for insurance

(and reinsurance) contracts issued and held Applies to all contracts meeting the definition of an insurance

contract, including entities that are not an insurance company. Represents a change from current GAAP Other contracts that could potentially be considered

insurance contracts include Product warranties issued by third parties Some financial guarantees Standby letters of credit Other

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FASB Project - Insurance Contracts

Measurement Building Block Approach

Applies to most life, annuity and long-term health contracts and is based on a current fulfillment value

Premium Allocation Approach The coverage period of the insurance contract is one year

or less; or At contract inception, it is unlikely that there will be

significant variability in the expected value of the net cash flows required to fulfill a contract before a claim is incurred.

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FASB Project - Insurance Contracts

Comments due October 25, 2013.

Retrospective adoption will be required.

No proposed effective date. IASB Exposure Draft provides for a three-year period (2017–2018)

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During June 2013, the FASB Issued a proposed Accounting Standards Update, Disclosure of Uncertainties about an Entity’s Going Concern Presumption. Final comments were due September 24, 2013. Main Provisions:

The proposed ASU would provide guidance in U.S. GAAP about management’s responsibilities in evaluating an entity’s going concern uncertainties, and about the timing and content of related footnote disclosures.

An entity would evaluate going concern uncertainties by assessing the likelihood that an entity would be unable to meets its obligations as they become due with 24 months after the financial statement date.

FASB Proposed ASU – Going Concern

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Threshold Guidance An entity would evaluate going concern uncertainties at

each annual and interim reporting period and start providing footnote disclosure when it is either: More likely than not that the entity will be unable to meet

its obligations within 12 months after the financial statement date without taking actions outside the ordinary course of business.

Known or probable that the entity will be unable to meet its obligations with 24 months after the financial statement date without taking actions outside the ordinary course of business.

FASB Proposed ASU – Going Concern

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Substantial Doubt The proposed amendments would require an entity that is

an SEC filer to evaluate whether there is substantial doubt about its going concern presumption.

An entity that is not an SEC filer would not be required to evaluate or disclose whether there is substantial doubt about its going concern presumption but would be required to apply all of the other disclosure requirements within the proposed amendments.

FASB Proposed ASU – Going Concern

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FASB expects to issue the final standard in the fourth quarter. Although it has taken a bit longer than anticipated, it appears

that the FASB and IASB are preparing to issue the final standard on revenue recognition.

Revenue Recognition Update

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The new exposure draft was issued on May 16, 2013.

The new standard continues to be controversial. The FASB has received over 500 comment letters.

The FASB Investor-Advisory Panel was concerned that the changes were to complicated and burdensome.

The FASB is responding and continuing to work on the standard. The FASB is holding round table sessions to receive additional

feedback on the exposure draft.

The goal is to issue a final rule in 2014.

Leasing Update

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Questions?

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