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KPMG LLP

FASB Update. KPMG LLP. Presented by: John Lathrop, Partner KPMG LLP September 15, 2009 American Public Power Association 2009 Business & Financial Conference. John Lathrop – Résumé. Agenda. Welcome and Introduction

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KPMG LLP

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  1. FASB Update KPMG LLP Presented by:John Lathrop, Partner KPMG LLP September 15, 2009American Public Power Association2009 Business & Financial Conference

  2. John Lathrop – Résumé

  3. Agenda • Welcome and Introduction • FAS 141R – Business Combinations andFAS 160 – Noncontrolling Interests • FASB Projects (Shorter Term) – Guidance Expected Within the Next Year • FASB Projects (Longer Term) – Guidance Expected After One Year • Recent Accounting Developments • FAS 157 – Fair Value Measurements • Impairments • Update on IFRS

  4. Overview of Changes in Accounting for Business Combinationsand Noncontrolling Interests:The Implications of FASB No.141Rand FASB No. 160

  5. Significant Changes to Current Accounting

  6. Significant Changes to Current Accounting (Cont.)

  7. Significant Changes to Current Accounting (Cont.)

  8. Significant Changes to Current Accounting (Cont.)

  9. Significant Changes to Current Accounting (Cont.)

  10. FASB FAS 160 Scope Project • FASB project evolved from the EITF’s Issue 08-10, Selected Statement 160 Implementation Issues • Proposed scope: • Decreases in ownership apply to the following: • A subsidiary that is a business or nonprofit activity and is not in-substance real estate (Issue 1 of EITF 08-10) • A subsidiary that is a business or nonprofit activity and is not in-substance real estate that is transferred to an equity method investee or joint venture (Issue 2 and 3 from EITF 08-10) • An exchange of a group of assets that constitute a business or nonprofit activity that is not in-substance real estate for a noncontrolling interest in an entity • When an entity has a controlling financial interest in a subsidiary, apply the provisions of FAS 160 for any increases in ownership regardless of whether the subsidiary is a business, nonprofit activity, or in-substance real estate (i.e., adjustment of equity) • Effective for periods beginning after December 15, 2009, but applied retrospectively to the date FAS 160 first adopted

  11. Guidance Expected in the Next Year

  12. Going Concern Accounting requirements previously in auditing standards (AU Section 341) Management is responsible for going concern assessment Better alignment with IFRS (IAS 1) Comparison to existing auditing literature Consistencies—definition of going concern, example conditions and events that may indicate that there is substantial doubt, example considerations relating to management’s plans, and disclosure requirements Changes—time period for which the assessment is required, additional requirement for disclosure if FS not prepared on a going-concern basis No reference to “not to exceed one year beyond FS date” Time frame beyond one year is limited to a “practical time thereafter” Status – Original effective date was for interim and annual periods ending after June 15, 2009 FASB currently discussing potential change to clarify the term “substantial doubt”—could cause re-exposure of standard No estimated effective date for final standard—goal is 2009 11

  13. Proposed Statement – Disclosure of Certain Loss Contingencies • Exposure Draft issued June 2008 • Would expand the disclosure requirements for certain loss contingencies within the scope of Statements 5 and 141R by • Expanding the population of loss contingencies that are required to be disclosed • Requiring disclosure of specific quantitative and qualitative information • Requiring a tabular reconciliation of recognized loss contingencies • Providing an exemption from disclosing certain required information if “prejudicial” to an entity’s position in dispute • No disclosures would be required for loss contingencies that are assessed as remote • Would be effective no sooner than for fiscal years ending after December 15, 2009

  14. FSP FAS 144–d, Amending the Criteria for Reporting a Discontinued Operation Discontinued operation defined as: An operating segment (per Statement 131) that has been disposed of or classified as held for sale, or A business as defined by Statement 141R, that meets criteria to be classified as held for sale on acquisition This would be the only criteria for determining whether a component is reported as discontinued operations 13

  15. FSP FAS 144–d, Amending the Criteria for Reporting a Discontinued Operation Disclosures Objective: Enable users to assess effect of disposal Achieved by: Disclosures required by Statement 144 paras. 47 & 48 (as amended), and Incremental disclosures as required by the FSP Required regardless of whether component disposed of or classified as held for sale is reported in disc ops or continuing ops Effective for financial statements issued for FY beginning after December 15, 2009 Retrospective application Early application permitted 14

  16. FSP FAS 144–d, Amending the Criteria for Reporting a Discontinued Operation • Recent FASB Webcast • Agreed that disc ops should continue to be presented on the face (users surveyed said they use the face to identify further analysis on their part) • Leaning toward defining a disc op as a component of the business (separable cash flows) and including a qualitative overlay that the component disposal represents a strategic shift and an effect on trends • Did not like the notion of operating segment as it was too broad, and it would lead to very few disc ops being reported • Assuming the board can get the right level of presentation on the face, it will lead to less disclosure

  17. FASB/IASB Joint Project on Revenue Recognition

  18. Background and Timetable • Joint project between the FASB and the IASB • Objective of project: • Develop a single, principles-based standard to deal with all types of contracts and business sectors • Converge IFRS and U.S. GAAP • Single revenue recognition standard would replace the ~180 pieces of U.S. GAAP revenue recognition literature and IFRS revenue-related standards

  19. Scope • All contracts with customers • Contract – an agreement between two or more parties that creates enforceable rights and obligations, not necessarily in writing • Customer – the party that has contracted with an entity to obtain a good or a service that represents an output of the entity’s ordinary activities • Areas potentially considered for exclusion but no decisions yet • Financial instruments and some nonfinancial instrument contracts under scope of IAS 39 and related U.S. GAAP (e.g., FAS 133) • Insurance contracts • Leasing contracts

  20. Summary of Potential Changes to Current Practice • “All” performance obligations identified • Postdelivery services separated, e.g., warranty • Sales incentives separated • Potentially other customer “rights,” e.g. right of return, upgrade rights, right to purchase at a discount • Segmentation of a construction contract not required • More estimates • Allocation to “all” performance obligations • VSOE or other third-party evidence is not required – EITF 00-21 and SOP 97-2

  21. Summary of Potential Changes to Current Practice • Long-term Contract Accounting – SOP 81-1 • Recognition of revenue during the construction phase may not be accepted in many cases • Cost-to-cost method and single margin recognition may not be acceptable • Costs are expensed unless capitalizable in accordance with other standards • Revenue standards would be superseded; cost capitalization guidance could be eliminated • Currently accepted analogies to other standards that allow for cost capitalization (e.g., FAS 91) may not be permitted • Contract origination costs would be expensed as incurred

  22. Summary of Potential Changes to Current Practice • Collectibility • Consideration of collectibility would not be a criterion for recognition • Collectibility would be considered in the measurement of rights under the contract • Effect on measurement of rights is under discussion • No revenue in the absence of a contract • E.g., biological assets at fair value – SOP 85-3 • Precious minerals – ARB 43

  23. FASB/IASB Joint Project on Leases

  24. Leases • Joint FASB/IASB Discussion Paper issued in March • Standard expected to be exposed in first half of 2010, with final issuance mid-2011 • Unlikely that accounting for existing leases would be grandfathered • Focuses on lessee accounting • Proposed changes to current practice: • Right to use the leased property and obligations incurred by a lessee meet the definitions of assets and liabilities • Lease finance liability to be measured at present value of the most likely amounts to be paid over the lease term using incremental borrowing rate • Offsetting amount for right-of-use asset, plus any upfront payments • Initial measurement of uncertain cash flows for: • Contingent lease payments at present value of the most likely amounts to be paid over the most likely lease term • The two boards have reached different conclusions on the measurement of contingencies

  25. Leases (continued) • Proposed changes to current practice, continued: • Reassessment each reporting period of most likely lease term and uncertain cash flows • Most likely lease term • No agreement on whether discount rate should change • Remeasurement offset against right-of-use asset • No immediate effect on the income statement • Uncertain cash flows • Boards have differing views when adjustments occur due to updated expectations • FASB view that adjustments recognized in P&L • IASB view that adjustments to liability recorded with offset against right-of-use asset

  26. Leases (continued) • Proposed changes to current practice, continued: • Subsequent accounting • Right-of-use asset amortized over the shorter of most-likely lease term or the economic life of the asset • Lease payments apportioned between interest expense and the obligation • Presentation • Liability included as financial liability on balance sheet • Differing views on whether presented separately • Right-of-use asset separately stated based upon nature (e.g., PP&E, land) • Amortization expense classified in P&L based upon nature

  27. Leases (continued) • Lessor-accounting issues when applying the right-to-use model • Two approaches mentioned in Discussion Paper: • Finance lease • Performance-obligation approach • Discussion paper does not address: • Sale-leaseback transactions • Subleases • Impairment model for right-of-use assets • Accounting for payments of services within the lease payments • Whether initial direct costs of lease should be capitalized • Disclosure requirements

  28. Recent Accounting Developments

  29. What is the Codification? • The Codification brings together and organizes all GAAP previously in Levels A through D of GAAP Hierarchy that was issued by a standard-setter • SFAS 168 (issued June 29, 2009) designates the Codification as the single source of authoritative U.S. GAAP for nongovernmental entities • Effective for interim and annual periods ending after September 15, 2009 • SFAS 168 eliminates the previous GAAP hierarchy and designates GAAP into two levels – authoritative and nonauthoritative • Codification intended to retain existing U.S. GAAP without changing it 28

  30. Standard-Setting After Codification is Effective • New standards issued after the Codification’s release will serve to update the Codification (no longer authoritative themselves) • Will be referred to as “Accounting Standards Updates” (ASUs) • ASUs will be subject to same due process procedures currently in place for new accounting pronouncements • ASUs will consist of a standard, a basis for conclusions, and Codification update instructions • ASUs will be identified by year of issuance and sequence of guidance within that year • For example, the first update in 2010 would be referred to as “Accounting Standards Update No. 2010-01” 29

  31. References in Financial Statements • Financial statements for interim and annual periods ending after September 15, 2009 should use Codification references, not “legacy” GAAP references • Financial statements issued before may use legacy GAAP references • Grandfathered guidance not included in the Codification would continue to be referenced to legacy GAAP • Acceptable referencing alternatives when those financial statements are issued after Codification is effective: • Dual-references to Codification and legacy GAAP, or • Codification references only • Registrants should not use Codification references for SEC content • Refer to applicable SEC rule or regulation (for example, Regulation S-X or a Staff Accounting Bulletin)

  32. SFAS 165 Subsequent Events SFAS 165 incorporated the related requirements from auditing literature into the accounting literature without significant modification Responsibility on management; not only on auditors Companies will be required to disclose the date through which subsequent events have been evaluated Evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users Effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively 31

  33. Overview of Statement 166 • Amends Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities • Statement 166 eliminated the following: • Qualifying Special Purpose Entity (QSPE) concept and criteria • Exemption from consolidation of QSPEs in the transferor’s financial statements • Impact • All former QSPEs are subject to consolidation • Most are expected to be consolidated by transferor, servicer, or guarantor

  34. Overview of Statement 167 Amends FIN 46R, Consolidation of Variable Interest Entities Major Changes Eliminates QSPE-related scope exceptions Provides new criteria for determining the primary beneficiary (PB) of a variable interest entity (VIE) Adds a reconsideration event for determining whether an entity is a VIE Increases frequency of required reassessments to determine the PB of a VIE Requires additional interim and annual disclosures Objectives Address concerns raised as a result of current market conditions (e.g., primary beneficiary determination and reconsideration events) Improve financial reporting by entities involved with VIEs 33

  35. Statements 166 and 167 • Effective as of the beginning of the first fiscal year that begins after November 15, 2009, and for interim and annual reporting periods thereafter • January 1, 2010 for calendar-year-end companies • Early application is prohibited • Former QSPEs will need to be evaluated for consolidation

  36. Fair ValueMeasurements

  37. Statement 157, Fair Value Measurements • Historical context • SFAS 157, Fair Value Measurements, issued in September 2006 • Defines fair value • Establishes a framework for measuring fair value • Expands disclosures • Statement 157 did not require any new fair value measurements • Common fair value applications – nonfinancial • SFAS 107, SFAS 115, SFAS 133, SFAS 140, SFAS 141R, SFAS 142, SFAS 143, SFAS 144, SFAS 146

  38. Expiration of FSP FAS 157-2 Deferral • FASB previously granted a one-year deferral to non-recurring measurements of nonfinancial assets and liabilities • SFAS 157 is applicable to those fair value measurements for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years • Accordingly, the deferral has now expired for many entities, including those with a calendar year-end

  39. Definition of Fair Value • The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) • Price in hypothetical transaction to sell an asset or transfer a liability (exit price) • NOT price in actual transaction to acquire an asset or assume a liability (entry price) • NOT adjusted for transaction costs • This definition applies regardless of the type of asset that is being measured at fair value, including nonfinancial items

  40. FSP FAS 157-4 – Scope and Overview Scope Fair value measurements under Statement 157 Does not change requirements on the use of Level 1 inputs Provides additional guidance related to: The use of judgment in evaluating the relevance of inputs like transaction prices Estimating fair value when the volume and level of activity for the asset or liability have significantly decreased Identifying transactions that are not orderly Reaffirms that the measurement objective is fair value as defined in Statement 157 The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions

  41. Proposed FSP FAS 157-f, Measuring Liabilities under SFAS 157 • Scope • Fair value measurements of liabilities • Comment period ended 6/1/09 • Proposed Effective Date • First reporting period (including interim periods) beginning after issuance • Redeliberations • Proposed Transition • Prospective application • Changes resulting from guidance should be accounted for as a change in accounting estimate

  42. Proposed FSP FAS 157-f, Measuring Liabilities under SFAS 157 • Liabilities are rarely “transferred” in the marketplace; however, they may be traded as assets • If a quoted price in an active market for an identical liability is not available, use one of following approaches: • Quoted price of identical liabilities traded as assets in active markets (Level 1 measurements) • Quoted price of identical liabilities (or identical liabilities traded as assets) in inactive markets • Quoted price of similar liabilities (or similar liabilities traded as assets) in active markets • Another valuation technique consistent with SFAS 157’s principles • Should not adjust for a restriction on transfer for the liability

  43. FAS 141 vs. 141R

  44. FAS 141 vs. 141R (continued)

  45. FAS 141 vs. 141R (continued)

  46. Impairment Considerations

  47. Annual Goodwill Impairment Test – Step #1 Multiple reporting units – • Various valuation techniques may be used • Market capitalization, if RU is publicly traded • Income approach • Market approach • Combination • Implications of current environment: • Appropriate assumptions and sensitivity of changes in assumptions • Decline in projected cash flows compared to previous years (or year end) • Increase in discount rate to give effect to increased risk and uncertaintiesof economy, industry, business • Consider implications of restructuring plans, closures, sales of businesson goodwill allocation to RUs • Reconciliation of adjusted market capitalization to aggregate of FV of RUs

  48. Annual Goodwill Impairment Test – Step #2 • Compare the implied FV of the reporting unit goodwill with the carrying amount of that reporting unit • Measurement of residual goodwill as a result of Bus Com purchase price allocation • Items with an effect on amount of implied goodwill • Unrecognized intangibles • Fair value of long-lived assets where carrying value is > than fair value, but passes undiscounted cash flows of test • Unrecorded liabilities

  49. Current Valuation Trends • Calculating fair value of RU and intangible assets more frequently, not necessarily just on an annual basis • FAS 144 – Step 2 • FAS 142 – Step 2 • Increasing discount rates • Higher cost of equity • Higher cost of debt • Lower long-term growth rates

  50. Long-Lived Assets • Trigger-based test – examples: • Significant decrease in market price of a LL asset • Significant adverse change in extent or manner in which LL asset is being used or in physical condition • Significant adverse change in legal factors, business climate or adverse action by regulator • Significant costs in excess of amount originally expected for acquisition or construction of LL asset • Current and historical cash flow losses or projection of continuing losses associated with use of LL asset • More likely than not expectation that LL asset will be sold or disposed of significantly before end of its useful life

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