MHM Executive Education Series: 2013 Second Quarter Accounting Update

Presented by: James Comito and Keith Peterka

June 20, 2013

2 ‹#›

To view this webinar in full screen mode, click on view options in the upper right hand corner.

Click the Support tab for technical assistance.

If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.

Before We Get Started…

3 ‹#›

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

4

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

5 ‹#›

Today’s Presenters

Keith Peterka, CPA Shareholder 610.866.2274 | kpeterka@cbiz.com With more than 20 years of experience in public accounting, Keith performs national firm responsibilities for IFRS, fair value accounting and auditing, revenue recognition and business combinations. He is a member of the MHM SEC taskforce in charge of updating the Firm’s SEC Audit Methodology. Additionally, he is a subject matter expert for IFRS, SEC reporting and fair value accounting in MHM’s Professional Standards Group. He also is a member on the IFRS Foundation's Small & Medium-sized Entities (SMEs) Implementation Group.

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.

6

Today’s Agenda

1

2

Private Company Council Progress Report

AICPA Financial Reporting Framework for SMEs – FRF for SMEs

FASB Disclosure Draft Discontinued Operations 3

COSO Internal Control-Integrated Framework Updated

4

FASB Deferral of ASU 2011-04 5

PRIVATE COMPANY COUNCIL ACTIVITIES

8

Creation of Private Company Council (PCC) The Financial Accounting Foundation’s Board of

Trustees approved the establishment of the Private Company Council (PCC), a new body to improve the process of setting accounting standards for private companies. The final plan was issued May 30, 2012.

Private Company Council

9

The PCC has two principal responsibilities: Private Company Council

To 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.

To 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.

10

May 2013 meeting of the PCC The PCC submitted its initial proposal to the

FASB that provides for alternative accounting for certain existing U.S. GAAP. The alternatives are directed at certain transaction involving business combinations and interest rate swaps.

The proposed alternatives simplify existing U.S. GAAP and should result in reduced cost related to the accounting for the transactions impacted by the proposed PCC guidance.

Private Company Council

11

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

12

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

13

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

14

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

15

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 are expected to be exposed for public comment where FASB’s questions may be addressed.

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

AICPA FINANCIAL REPORTING FRAMEWORK FOR SMES —

FRF FOR SMES

17

AICPA Framework for SMEs

A less complicated and less costly system of accounting for SMEs that are not required to produce U.S. GAAP-based financial statements.

A cost-beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny.

Principles-based framework is intended to be responsive to the issues and concerns stakeholders currently encounter when preparing financial statements for SMEs.

18

AICPA Framework for SMEs

The FRF for SMEs draws upon a blend of traditional methods of accounting with some accrual income tax methods.

The framework was developed by a working group of CPA professionals and AICPA staff with experience serving smaller-to-medium-sized private entities.

19

5 6

1

2 3

4

Features of FRF for SMEs

1) Traditional accounting methods with accrual income tax methods

2) Reduced adjustments from book to tax

3) Relevant

4) Simplified/straight-forward principles

5) Stable yet nimble

6) Reduced disclosures

20

AICPA Framework for SMEs

Developed for smaller- to medium-sized, owner-managed, for-profit entities where internal or external users have direct access to the owner-manager and GAAP financial statements are not required.

The AICPA has no authority to require the use of the FRF for SMEs for any entity. Therefore: The FRF for SMEs effective upon issuance on June 10, 2013. An owner-manager can decide to use the FRF for SMEs once it is

released. An owner-manager should make that decision in conjunction

with those who may use the entity’s financial statements.

21

Does not include: Earnings per share guidance Segment reporting Other comprehensive income Interim reporting Stock compensation Many of the complex issues associated with debt/equity

Comprehensive and Relevant Framework

SIGNIFICANT CONCEPTS

23

Historical cost is the measurement basis primarily utilized

Departs from increased use of fair value for many instruments required by GAAP

Only equity securities held-for-sale measured at fair value

Reduction in Fair Value Measurements

24

No Concept of Variable Interest Entities (VIEs)

Consolidation is not appropriate when an entity has a limited right and ability to determine or influence the strategic policies of another entity but does not control it.

A holding of an interest in an entity that is not a subsidiary qualifies as an investment. Either equity method or cost basis

Subsidiaries & Consolidation

25

Recognition and Presentation Does not require consolidation An entity should make an accounting policy choice to

either: a. Consolidate its subsidiaries or b. Account for its subsidiaries using the equity method

Parent-only (unconsolidated) financial statements are permitted.

Subsidiaries & Consolidation

26

Goodwill is not tested for impairment. Goodwill should be amortized: the same period as that used for federal income tax

purposes or if not amortized for federal income tax purposes then a

period of 10 years.

Goodwill

27

Closely aligned with requirements of U.S. Income Tax Code

Criteria for capitalizing a lease for tax purposes generally matches criteria in FRF for SMEs

Evaluation of capital vs. operating leases are the same as US GAAP Retains “rules” based approach

Lease Accounting

28

Revenue

27.04 Revenue from sales and service transaction s should be recognized when the requirements regarding performance…are satisfied, provided that at the time of performance, ultimate collection is reasonably assured.

Recognition

The seller of the goods has transferred to the buyer the significant risks and rewards of ownership… Reasonable assurance exists regarding the measurement of the consideration…

Performance

29

In the case of rendering of services and long-term contracts and modifications to those contracts, performance should be determined using either the percentage of completion method or the completed contract method, whichever relates the revenue to the work accomplished.

Very limited discussion of multiple element deliverables

Limited, but similar, guidance on gross vs. net reporting of revenues

Revenue

30

Accounting Policy Election An entity should make an accounting policy election to account

for income taxes using either the taxes payable method or the deferred income taxes method

Taxes Payable Method Under the taxes payable method, only current income tax assets

and liabilities are recognized Current income taxes, to the extent unpaid or refundable, should

be recognized as a liability or asset The liability for current income taxes included in the balance

sheet is the cost (benefit) or current income taxes for current and prior periods less amounts already paid in respect of these income taxes

Income Taxes

31

When preparing financial statements, management should make an assessment of whether the going concern basis of accounting is appropriate. Management should take into account all known and

available information about the future, which is limited to twelve months from the balance sheet date.

If applicable, the entity should disclose those uncertainties along with its plans for dealing with the adverse effects of the conditions and events.

Going Concern Assessment

FASB EXPOSURE DRAFT DISCONTINUED OPERATIONS

33

Discontinued Operations Exposure Draft In April, 2013, the Financial Accounting Standards

Board issued an exposure draft related to certain changes to the accounting for discontinued operations.

The guidance is in response to concerns that current guidance is not “decision-useful” and too costly to prepare. Many believe that too many dispositions qualify as discontinued operations.

The Exposure Draft would enhance convergence with International Financial Reporting Standards (IFRS).

FASB Exposure Draft – Disc Ops

34

Discontinued Operations Exposure Draft It is likely that fewer disposals would qualify for

discontinued operations presentation because of the change in threshold to a major line of business or major geographical area of operation.

Some disposals that do not meet the criteria on an individual basis but are included in a larger corporate plan to dispose of a major line of business or major geographical area of operation would qualify as discontinued operations.

FASB Exposure Draft – Disc Ops

35

Discontinued Operations Exposure Draft Significant continuing involvement with component of a

business (subsequent to its disposal), or failing to eliminate significant operations or cash flows of a disposed component from the ongoing operations of an entity would not preclude presentation as discontinued operations as is currently the required under current guidance.

The proposed transition method is “prospective” for new disposals (and components classified as held for sale). Early adoption is permitted. The effective date has not yet been determined.

FASB Exposure Draft – Disc Ops

COSO INTERNAL CONTROL-INTEGRATED FRAMEWORK

UPDATED

37

COSO issues Updated Internal-Control Integrated Framework During May 2013, the Committee of Sponsoring

Organizations of the Treadway Commission (COSO), published an updated Internal Control-Integrated Framework and related supporting documents.

The key concepts and principles found in the original COSO framework are both fundamentally sound and widely accepted in the marketplace. Accordingly, COSO elected to update the framework rather than completely revamp it.

COSO Internal Control-Integrated Framework

38

COSO issues Updated Internal Control-Integrated Framework While the COSO Update retains the key concepts found

in the original framework, certain changes and improvements were made that: Formalizes the concepts found within the basic

principles into 17 principles. Facilitates the consideration of changes in the business

and operating environment. Expands the financial reporting objective to address

other important forms of reporting.

COSO Internal Control-Integrated Framework

39

COSO issues Updated Internal Control-Integrated Framework Transition

COSO will continue to make the original framework available during the transition period (to December 15, 2014).

After December 15, 2014, the original framework will be considered superseded.

COSO has stated that while the continued use of the original framework during the transition is appropriate, users of the original framework should transition their applications and documentation as soon as possible. Disclosure of which framework is in use should be disclosed.

COSO Internal Control-Integrated Framework

FASB INDEFINITELY DEFERS CERTAIN DISCLOSURES

FOR NONPUBLIC EMPLOYEE BENEFIT PLANS

41

Deferral of ASU 2011-04 The Financial Accounting Standards Board (FASB)

today voted to indefinitely defer certain disclosures about investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic equity securities. The FASB will issue an Accounting Standards Update, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, in the next few weeks.

FASB Deferral of ASU 2011-04

42

The indefinite deferral applies to disclosures of certain quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for investments held by certain employee benefit plans.

The deferral applies specifically to employee benefit plans—other than those plans that are subject to Securities and Exchange Commission filing requirements—that hold investments in their plan sponsors’ own nonpublic entity equity securities, including equity securities of their nonpublic affiliated entities.

FASB Deferral of ASU 2011-04

43 ‹#› #MHMWebinar

Questions?

44

If You Enjoyed This Webinar…

Join us for these related EES courses: July 16: Is a Simpler Accounting Framework in the Future for

Private Companies? Aug. 22: Private Company Framework – AICPA versus IFRS? Aug. 29: Third Quarter Accounting and Financial Issues

Update

Read these related MHM Messengers: 6-13: AICPA's Special-Purpose Framework Proves

Controversial MHM Messenger 5-13: Progress on Standard-Setting for

Private Companies

45 ‹#› #MHMWebinar

Connect with Mayer Hoffman McCann

linkedin.com/company/ mayer-hoffman-mccann-p.c.

@mhm_pc

youtube.com/ mayerhoffmanmccann

gplus.to/mhmpc

blog.mhm-pc.com

slideshare.net/mhmpc

facebook.com/mhmpc