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FASB Update

Duquesne University Palumbo-Donahue School of Business Accounting Conference. FASB Update. Susan Cosper – FASB Technical Director November 15, 2018. The views expressed in this presentation are those of the presenter.

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FASB Update

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  1. Duquesne University Palumbo-Donahue School of Business Accounting Conference FASB Update Susan Cosper – FASB Technical Director November 15, 2018 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations

  2. Agenda • Changes at the FASB • Revenue Recognition • Leases – New reliefs • Debt Classification • Cloud Computing • Consolidation Alternative for Private Companies • Goodwill and Intangibles of NFPs and PBEs • NFP Financial Statements

  3. FASB Leadership Board members Russ Golden Chairman (2020) Jim Kroeker Vice Chairman (2024) ? Hal Schroeder (2021) Christine Botosan (2021) * Marsha Hunt (2022) * Gary Buesser (2023) * * Eligible for reappointment for a second 5-year term

  4. Final Standards . . . Effective Dates Beginning of fiscal year: NOT FOR PROFIT FINANCIAL STATEMENTS • All Entities within scope REVENUE • Non-Public Business Entities* (Annual Periods Only) • Non-Public Business Entities* (Annual and Interim Periods) • Public Business Entities (Annual and Interim) LEASES • Public Business Entities (Annual and Interim) • Non-Public Business Entities* (Annual and Interim Periods) • Non-Public Business Entities* (Annual Periods Only) Early adoption permitted CREDIT LOSSES • Public Business Entities that are not SEC Filers (Annual and Interim) • Public Business Entities that are SEC Filers • (Annual and Interim) • Non-Public Business Entities* (Annual and Interim) • Non-Public Business Entities* (Annual Periods only) Early adoption permitted • *Includes not-for-profit entities and employee benefit plans

  5. Revenue Recognition

  6. Overview of Revenue Recognition Model Core Principle: 5. Recognize revenue when (or as) a performance obligation is satisfied Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 3. Determine the transaction price 4. Allocate the transaction price 2. Identify the performance obligations 1. Identify the contract(s) with the customer Steps to apply the core principle: • Variable consideration • Significant financing • Noncash consideration • Consideration payable to customer • Unit of account • Distinct criteria • Relative standalone selling price • Discounts and contingent amounts • Over time criteria • Point in time indicators • Criteria for identifying a contract • Combinations • Modifications

  7. Key Takeaways • Get Started! • Contract reviews • Don’t underestimate the disclosure requirements • Pick a transition method • Many resources available….make sure you use them

  8. Resources to Help with Implementation

  9. FASB Implementation Web Portal www.fasb.org/implementation

  10. Recent Inquiries/Implementation Guidance • Identify the Contract - An agreement between two or more parties that creates enforceable rights and obligations • Does not require a legal review! • Out of pocket expenses - Potentially variable consideration; constrained to the amount it is probable that a significant reversal will not occur • Material Right - Defer revenue; recognized when fulfilled • Short Cycle Manufacturing - Criteria is met (i.e., no alternative use and enforceable right to payment); requires over time recognition • Initial Franchise Fee – Evaluate the arrangement!

  11. Grants and Contracts ASU (NFP)

  12. Project added to FASB’s Technical Agenda to improve and clarify existing guidance • Long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities • ASU 2014-09, Revenue from Contracts with Customers, including related disclosures, heightened the issue • Raised question as to whether grants and contracts are in scope of that guidance (reciprocal or nonreciprocal) Grants and Contracts to NFPs (ASU 2018-08)– Background • Issue 2: Conditional Versus Unconditional • Issue 1: Reciprocal Versus Nonreciprocal 12

  13. Exchange Issue 1: Reciprocal (Exchange) vs. Nonreciprocal (Nonexchange/Contribution) TransactionsWho Receives the Benefit? CURRENT PRACTICE • Exchange • Non-Exchange • Direct Commensurate Value to Resource Provider • Specified Third Parties • General Public CLARIFICATION • General Public • Direct Commensurate Value to Resource Provider • Specified Third Parties • Government/Resource • Provider is a 3rd Party • Payer on Behalf of an • identified Customer* • Others, including groups of beneficiaries with eligibility criteria Follow Topic 958-605 Follow Topic 606 (or other, such as Leases) *to an existing exchange transaction. The revenue recognized would actually be the underlying contract’s patient service revenue, tuition revenue, etc. 13

  14. Issue 2: Conditional vs. Unconditional ContributionsFor a Donor-Imposed Condition to Exist: ASU 2018-18 Alternative Rejected • A right of return/release must exist; and • The agreement must include a barrier • Indicators and examples to help in determination • A right of return/release must exist. • Would have required a probability assessment about whether it is likely a recipient NFP will fulfill the stipulations. 14

  15. NFP Revenue Recognition Decision Process Yes Reciprocal Transaction:Apply Revenue Recognition (Topic 606) or other guidance Each party directly receives commensurate value? * No Nonreciprocal transaction: Apply contribution (non-exchange) guidance Restrictions present (e.g. limited purpose or timing)? Conditions Present (e.g. right of return/release and barrier)? No No Yes When Condition is Met Unconditional and restricted Unconditional and without restrictions (unrestricted) Yes Conditional: Recognize revenue when condition is met Resource providers would apply a similar decision-making process for recognizing expenses. • *Includes third-party payments on behalf of identified customers. These do not create new revenue.

  16. Likely Reporting Impact on Funding from… Government Agencies Individuals & Corporations Foundations 16

  17. Effective Date A B New agreements Transition Approacheffective date generally aligned with Rev. Rec. for recipients • Modified Prospective • Apply to all agreements: • Existing at the effective date (only apply to the portion of existing agreements not previously recognized) • Entered into after the effective date • No restatement of prior amounts recognized • Retrospective Application Permitted Existing Agreements 17

  18. Leases Implementation—Update

  19. Technical Inquiries: Top 3 Categories

  20. Leases . . . Implementation Activities • Board and staff stand ready to assist stakeholders • Board meetings held to-date on Topic 842 implementation: • November 2016 (leases implementation update) • May 2017 (leases implementation update) • June 2017 (technical corrections) • August 2017 (land easements) • November 2017 (land easements and targeted improvements) • January 2018 (technical corrections) • March 2018 (transition method and practical expedient) • July 2018 (narrow-scope improvements) • Standard setting activities: • Land easements ASU 2018-01 (issued in January, 2018) • Codification Improvements ASU 2018-10 (issued in July, 2018) • Targeted Improvements ASU 2018-11 (issued in July, 2018) • Narrow-Scope Improvements proposed ASU (issued in August, 2018)

  21. Update 2018-11 Additional Transition Method • Transition method in Lease Standard required retrospective application with cumulative-effect adjustment as of the beginning of the earliest period presented (comparatives required to be in accordance with Topic 842) • Update 2018-11 provides an additional (and optional) method: • Entities can adopt Topic 842 with a cumulative-effect adjustment to retained earnings in the period of adoption (no comparative periods required to be in accordance with Topic 842). • Topic 840 disclosures are required for comparative periods.

  22. Update 2018-11. . . Transition Methods Available to Calendar-Year Entity Adopting Topic 842 on 1/1/19 Cumulative-Effect Adj. 1/1/17 Cumulative-Effect Adj. 1/1/19

  23. Update 2018-11. . . Lessor Practical Expedient • For Lessors, combine each separate lease component and the associated nonlease components into single component if certain criteria are met: • The timing and pattern of transfer of the lease and nonlease components are the same • Lease component alone would be an operating lease • Nonlease component would have been accounted for under Topic 606 • Accounting policy election by class of underlying asset • Lessees have similar practical expedient

  24. Narrow Scope Improvements #1 . . . Sales and Other Similar Taxes Proposed Accounting Policy Election • Exclude all qualifying taxes from: • Consideration in the contract • Variable payments not included in the consideration in the contract • Thus, no revenue and corresponding expense recognized • All taxes assessed by a governmental authority that are both • Imposed on and concurrent with a specific lease revenue-producing transaction • Collected by the lessor from a lessee • Examples: Sales, use, value added, some excise taxes • Not in scope of this expedient: • Taxes on Lessor’s total gross receipt (e.g. general income tax) • Taxes assessed on Lessor as the owner of the asset (e.g. general property tax)

  25. Narrow Scope Improvements #2 . . . Lessor Costs paid Directly to 3rd Party by Lessee • Lessor required to report “lessor costs” paid/reimbursed by lessee as revenue and expense under Topic 842 • Board decided to exclude all payments made directly to 3rd party by lessee on behalf of lessor from variable payments • Extension of a revenue concept - no revenue recognized when the uncertainty of the variable payment is not expected to ultimately be resolved • Result would be no amounts recognized as lease revenue and corresponding expense • However, lessee-reimbursed costs are considered lessor costs and should be accounted for as variable payments

  26. Narrow Scope Improvements #3 . . . Allocating Variable Payments to Lease and Nonlease Components • Clarifies accounting for variable payments with both lease and nonlease components • Variable payments not estimated/ recognized before the occurrence of changes in facts and circumstances on which the variable payment is based • When changes occur, allocate amounts to lease and nonlease components (based on allocation percentages established at lease commencement) • Nonlease component recognized in accordance with other Topics (e.g. Topic 606). Lease component in accordance with Topic 842

  27. Lessor Practical Expedient(ASU 2018-11, Issue 2) • “Predominant” based on Lessor’s reasonable expectation of what component Lessee would ascribe more value to • If nonlease component is predominant • Combined component is accounted for as a single performance obligation under Topic 606 • Measure of progress to be used is same as “pattern of transfer” • Use variable consideration guidance in Topic 606 • If nonlease component is NOT predominant • Combined lease component is accounted for as an operating lease under Topic 842 • Use variable payment guidance in Topic 842

  28. Contract Same timing and pattern of transfer Nonlease Component Would be Under Topic 606 Lease Component Would be Operating Lease If nonlease component is predominant Single Combined Component (Nonlease) Single performance obligation under Topic 606 Use variable consideration guidance in Topic 606 If nonlease component is NOT predominant Single Combined Component (Lease) Operating lease under Topic 842 Use variable payment guidance in Topic 842 Revenue recognized as “lease revenue”

  29. Simplifying the Balance Sheet Classification of Debt 29

  30. Classification Principle * The scope also includes liability-classified mandatorily redeemable financial instruments, debt with conversion options, and lease liabilities. • The issuance of equity instruments does not constitute settlement. • An unused long-term financing arrangement in place at the balance sheet date (for example, an unused long-term line of credit) should be disregarded in determining the classification of debt.

  31. Other Key Board Decisions 31

  32. Other Key Board Decisions Subjective Acceleration Clause (SAC) The SAC would affect classification of debt only when it is triggered (no probability assessment). 32

  33. Transition and Effective Dates • Prospective transition • Public business entities: Fiscal years beginning after December 15, 2020, and interim periods within those fiscal years • All other entities: Fiscal years beginning after December 15, 2021,and interim periods within fiscal years beginning after December 15, 2022 • Early adoption permitted.

  34. Consolidations

  35. Consolidations: Private Company Alternative

  36. Consolidations – Private Company Disclosures In addition to existing related party disclosures, disclose the following: • Nature and risks associated with legal entity under common control. • How does legal entity affect the reporting entity’s balance sheet, financial performance, and cash flows. • Assets and liabilities on the reporting entity’s balance sheet resulting from its involvement with the legal entity • The reporting entity’s maximum exposure to loss related to the legal entity. • If the entity’s maximum exposure to loss exceeds assets and liabilities as described in (c), the reporting entity shall provide information to allow users of financial statements to understand the excess exposure. Consider both explicit and implicit arrangements

  37. Effective Date • Calendar-Year End Private Companies -> 2021 • Early adoption permitted

  38. Customer’s Accounting for a Cloud Computing Arrangement That Is Considered a Service Contract

  39. Today’s Accounting EITF Issue addresses

  40. Final Standard • Implementation costs of CCAs that are service contracts would be accounted for in accordance with the guidance in Subtopic 350-40 • The amortization period of the costs would be the term of the arrangement, including periods covered by renewal options of the CCA that are reasonably certain to be exercised • The amortization of the costs would be recorded in the same line item on the income statement as the fees for the CCA Results in consistent capitalization of implementation costs across platforms, but not consistent accounting for the software component

  41. Final Standard • Require existing disclosures in paragraph 350-40-50-1 for implementation costs of a hosting arrangement that is a service contract, supplemented with description of hosting arrangement • Transition Method Options • Prospectively to arrangements entered into, renewed, or materially modified after the effective date • Retrospectively • Effective Date • Public Business Entity - interim periods and annual periods beginning after December 15, 2019 • Everyone else - Annual periods beginning after December 15, 2020

  42. Goodwill and Intangible Assets

  43. History of Goodwill Accounting 43

  44. Goodwill and Intangible AssetsRelevant Accounting Standard Updates

  45. Board Decisions (10/24/18) • To add a project to technical agenda for NFPs and draft an Exposure Draft (ED) • Extend the Private Company Accounting Alternatives as a package • ED expected to be issued around year-end, for 60-day comment period • To add a project to the technical agenda and draft an Invitation to Comment (ITC) • Scope and Optionality • Goodwill amortization period • Impairment testing upon a triggering event (rather than annually) and at an entity level (alternative to reporting unit) • Subsuming certain identifiable intangible assets into goodwill and amortizing • Potential double-step transition for NFPs and private companies • ITC expected to be issued in 1H 2019; comment period TBD 45

  46. NFP Financial Statements

  47. NFP Financial Statements –Key Provisions of ASU No. 2016-14Effective CY 2018 (FY 2018-19) 47

  48. Unrestricted Temp. Restricted Perm. Restricted Net Assets Current GAAP Revised GAAP + Disclosures * NFPs may choose to disaggregate further, even on the face of the statements ** New disclosure requirement

  49. Liquidity and Availability of Resources * Many NFPs already provide at least some of this info in the notes ** Healthcare NFPs, in particular, already provide some of this info on the balance sheet (thru classified balance sheet, segregation of assets whose use is limited)

  50. Report expenses, either on the face of financial statements or in the notes, by: Expense Reporting • Analysis • (disaggregate function by nature) Function* Natural classification ** • * currently required in GAAP • ** most healthcare NFPs currently report this on the face of their statements and relegate function to the notes

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