Course 102 FASB Issues - CACUBO

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					 Course 102 FASB Issues
            Presented by:
Len Eschbach, Partner - Accounting &
 Auditing Director - St. Louis/Decatur
Alternative Investments &
Other Fair Value Issues
 ASU 2009-12 (FAS 157-g)
   Fair value practical expedient for alternative
   Examples

 Other FAS 157 (ASC 820) matters for
ASU 2009-12
 Formerly FSP FAS 157-g
 NAV as practical expedient for fair value
 FV hierarchy guidance
 Additional disclosure requirements
 Issued 9/30/09
ASU 2009-12
 Steps to apply
   Scope  of applicability
   NAV – practical expedient

   FAS 157 hierarchy

   Disclosure requirements
ASU 2009-12
 Transition
   Effectiveperiods ending after 12/15/09
   Early adoption permitted if financials not yet
     • May early adopt NAV practical expedient & FAS
       157 classification without also early adopting
   Disclose any changes in valuation technique
    & quantify, if applicable
ASU 2009-12
 Scope
   You’re out, unless you’re in
   2 criteria to get in
    • Investment does not have readily determinable
      market value
    • Investment in entity that follows investment
      companies A&A Guide or similar industry practice
ASU 2009-12
 Practical expedient for FV
   NAV   may generally be used
   NAV   at other than measurement date
     • Client must evaluate variance
     • Audit for reasonableness
   Investment   by investment basis
   Exception   – probable sale at other than NAV
ASU 2009-12
 Practical expedient for FV
   Criteria   for probable sale
     • Management commits to plan
     • Actively trying to sell
     • Investment currently available for sale
     • Unlikely plans will be changed
     probable sale, practical expedient may not
   If
    be used
ASU 2009-12
 FAS 157 hierarchy
   If can be redeemed currently at NAV, Level 2
   If never redeemable at NAV, Level 3

   Everything else, either Level 2 or 3
     • Entity doesn’t know when it will be able to redeem
       at NAV – Level 3
     • No ability to redeem in near term at NAV – Level 3
         – In near term – generally within one year
ASU 2009-12
 Disclosure requirements
   Apply   whether practical expedient is applied
    or not
   Help users understand
    • Nature & risks of investments
    • Whether probable sale will occur at other than
ASU 2009-12
 Disclosure requirements
   FV  by major category
   If never redeemable but will liquidate over
    time, approximate time to liquidate
   Unfunded commitments

   Terms & conditions for redemption

   Restrictions on redemption or transferability

   Information about investments subject to
    probable sale at other than NAV
ASU 2009-12
 Sources of NAV information
   Investee   audit reports
   If different year-end, must audit NAV changes
NFP Mergers & Acquisitions –
ASC Topics 805, 954 & 958
 Mergers & acquisitions (M&A) by not-for-
  profits (NFP’s) (FASB Statement No. 164,
  ASC Topics 805, 954 & 958)
   Current  environment for M&A activity
   Accounting considerations
   Disclosures
   Subsequent accounting for goodwill &
   Noncontrolling interests
Current Environment for
M&A Activity
 Impact of financial crisis
   Dynamics    of for profits vs. NFP’s
   Financial strain on NFP’s increasing
    potential activity
   Universities  – Not very common, other than
    diversification & acquisition of subsidiaries
Current Environment for
M&A Activity
 Drivers of recent activity
   Economies    of scale
   Collaboration   vs. competition
   Access   to capital
   Streamlining provision of services to
    maintain relevance
NFP M&A: Scope
 Transaction driven
 NFP organization initially recognizes in
  its financial statements
   Another NFP
   Business

   NFP activity
NFP M&A: Scope
 Does not include
   Formation  of joint venture
   Acquisition of assets that are not business

   Combination of entities under common control

   Transaction in which NFP obtains control but
    does not consolidate
    • SOP 94-3
    • HC A&A Guide
NFP M&A: Key Decision
 Merger or acquisition
   Merger
     • Transaction or other event
     • Governing bodies of both entities cede control
        – Not same as shared control
     • New NFP entity created
        – Newly formed governing body
        – Not necessarily new legal entity
NFP M&A: Key Decision
 Merger or acquisition
   Acquisition
     • Transaction or other event
     • Acquirer obtains control of one or more NFP
       activities or businesses & initially recognizes
       their assets & liabilities in acquirer’s financial
NFP M&A: Key Decision

 Merger or acquisition
   Ceding   of control by both entities is sole
    definitive criterion for merger
   One  entity obtaining control over other is
    sole definitive criterion for acquisition
NFP M&A: Key Decision
 Merger or acquisition
   Other     factors (not definitive)
     • Process leading to combination
           – Did one entity dominate?
     • Participants to combination
           – Governance, control & financial capacity
     • Was cash paid?
           – Cashless transaction may indicate merger
   If   unclear, based on weight of evidence
Accounting for Mergers
 Carryover basis at merger date
 GAAP assets & liabilities carry over
 Carry forward classifications & elections
   Exceptions
     • Merger results in modification of contract
     • Reclassification necessary to conform accounting
Accounting for Mergers
 New entity is created
 Operations & cash flows shown from
  merger date
 Merger date is beginning of period
   Merger  itself not reflected in operations
   Operations shown from merger date through
    end of period
Disclosures for Mergers
 Identification of merging entities
 Merger date
 Primary reasons for merger
 Amounts recognized by major class of
  assets, liabilities & net assets
 Nature & amount of significant
  adjustments to prior amounts
 Additional disclosures for “public entities”
Accounting for Acquisitions
 Acquisition method
   Sameas acquisition method in FAS 141(R)
   (ASC 805)
    • Some modifications for unique NFP considerations
Accounting for Acquisitions
 Acquisition method
   Steps
    • Identify acquirer
    • Determine acquisition date
    • Recognize assets acquired & liabilities
      assumed at FV
    • Recognize & measure goodwill or contribution
Accounting for Acquisitions
 Identify acquirer
   Apply   consolidation guidance
     • NFP other than health care – SOP 94-3
     • NFP Health Care – Chapter 11 of HC A&A Guide
   Ifacquisition has occurred but above
    guidance does not clearly indicate acquirer,
    consider other factors
Accounting for Acquisitions
 Identify acquirer – other factors (not
   Who paid   cash?
   Who was    larger?
   Willone dominate management team &/or
   Who initiated   transaction?
Accounting for Acquisitions
 Determining acquisition date
   Date on which acquirer obtains control of
   Generally   closing date
Accounting for Acquisitions
 Identifiable assets acquired & liabilities
  assumed at FV
 Includes identifiable intangible assets
 Potential elections to make
                of investments as trading
   Classification

   Hedge designations
Accounting for Acquisitions
 Accounting classifications generally
  based on conditions at acquisition date
   Exception
     • Lease classification based on terms at lease
       inception, not at acquisition date

 Noncontrolling interest (formerly minority
  interest) measured at acquisition date FV
Accounting for Acquisitions
 Exceptions to recognition principle
   Donor   relationships – not recognized
   Collections   – if acquirer does not capitalize
     • Complicated – see Appendix A
   Conditional   promises to give – not recognized
Accounting for Acquisitions
 Exceptions to recognition & measurement
   Contingent   assets & liabilities
    • If acquisition date FV can be determined,
      recognized at FV
    • If acquisition date FV cannot be determined, but
      contingency is probable & can be reasonably
      estimated, should be recognized
   Incometaxes – in accordance with FAS 109
   (ASC 740)
Accounting for Acquisitions
 Exceptions to recognition & measurement
   Employee   benefits – in accordance with other
   Indemnification assets – recognized when
    related asset or liability recognized
Accounting for Acquisitions
 Exceptions to measurement principles
   Reacquired  rights – basis of remaining
   contractual term of related contract
   Assets   held for sale – FV less cost to sell
Accounting for Acquisitions
 Calculation of goodwill or inherent contribution
      Goodwill if (a) > (b) – acquisition by purchase
      Contribution if (b) > (a) – acquisition by gift
 Item (a) is aggregate of
      Consideration transferred, if any
      FV of any noncontrolling interest in acquiree
      FV of any equity interest held in acquiree
 Item (b) is net of
      Identifiable assets acquired
      Liabilities assumed
Accounting for Acquisitions
 Exception to goodwill recognition
   Acquiree  predominantly supported by
    contributions & investment return
     • Predominantly supported means contributions &
       investment return expected to be significantly
       more than total of all other revenue sources
   “Goodwill”[excess of (a) over (b)]
    recognized as separate charge in operating
Accounting for Acquisitions
 If (b) > (a), treated as contribution
   Separate  credit in operating statement as of
    acquisition date
Accounting for Acquisitions
 Other factors to consider
     Acquisitions in stages (step acquisitions)
       • Previously held equity interest remeasure at FV when
         control obtained
     Measurement period
       • Some flexibility if accounting not finalized at reporting date
     Must evaluate pre-existing relationships for
      accounting consequences
     Acquisition-related costs expensed other than debt
      issuance costs
Accounting for Acquisitions
 Financial statements of acquirer reflect
  acquisition as activity of period in which it
 Noncontrolling interests – apply FAS 160
  (ASC 810)
   Separate component of net assets
   Can go negative
Subsequent Measurement
 Goodwill & identified intangibles – follow FAS
  142 (ASC 350)
     Test for impairment
     Amortize definite lived intangibles
 Other subsequent measurement guidance
     Reacquired rights
     Contingent assets & liabilities
     Indemnification assets
     Contingent consideration
Disclosures for Acquisitions
 Numerous disclosures regarding
  (almost 4 pages in standard)
   Nature   & structure of transaction
                paid & assets/liabilities
   Consideration
   Numerous    specific details to extent
Effective Date & Transition
 Prospective application
   Mergers   for which merger date is on or after
    beginning of initial reporting period
    beginning on or after 12/15/09
   Acquisitions for which acquisition date is on
    or after beginning of first annual reporting
    period beginning on or after 12/15/09
 Earlier application prohibited
Effective Date & Transition
 Following standards applied prospectively
  in first reporting period beginning on or
  after 12/15/09
   FAS  142 (ASC 350) – subsequent accounting
    for goodwill & intangibles
   FAS   160 (ASC 810) – noncontrolling interests
   Otherstandards amendments from FAS
    141(R) & FAS 160 (ASC 805 & 810)
Effective Date & Transition
 For previously recognized goodwill
   Ifpredominantly supported by contributions &
    investment return, write-off previously
    recognized goodwill through operating
   Otherwise, assign goodwill to reporting units
    (FAS 142 or ASC 350) & evaluate for
Effective Date & Transition
 For previously recognized intangibles
  other than goodwill
   Reassess  useful lives & adjust amortization
    periods prospectively as necessary
Revisiting FSP FAS 117-1 &
 UPMIFA implementation status
 Net asset classification
 Five step program
 Common implementation questions
 Uniform Prudent Management of
  Institutional Funds Act of 2006
 Model act
   Basis   for state-by-state legislation
 Overhauls predecessor UMIFA
UPMIFA Highlights
   Investment freedom
   Costs
   Expenditure of funds
   Abolishes historic dollar value (HDV)
   Seven percent rule
   Release of restrictions for small
    institutional funds
Net Asset Classification
 Addressed in FSP FAS 117-1
 NFPs not locked into HDV
   In   practice, HDV still important concept
 Explicit donor stipulations override
 Absent explicit donor stipulations,
  judgment involved
Net Asset Classification
 GAQC/FASB webcast on September 1
          principle-based standard
   Clearly

   Room for interpretation
     • Enacted state law
     • Client circumstances
   Much   less clear cut than before
Net Asset Classification
 Areas for interpretation
   Does law require maintenance of purchasing
     • Plain vanilla UPMIFA encourages, but does not
     • Look for modifications at state level
Net Asset Classification
 Areas for interpretation
   UPMIFA   implies time restriction until funds
     • Appropriation occurs with approval for expenditure,
       unless approval for future period
     • Still may be purpose restrictions
Five Step Program
 Step I: New gift comes in for endowment,
  without explicit donor language affecting
  initial net asset classification
   Managed as 1 fund, likely unitized as part of an
    investment pool
   All (or some) classified as PRNA for financial
    reporting purposes
   Remainder (if any) is classified as TRNA

 Source: GAQC/FASB Webcast
Five Step Program
 Step II: Investment activity
     Allocated to fund based on unitization
     PRNA normally does not increase or decrease
        Exception: requirements by donor or law such as to maintain
          purchasing power
     Increase or decrease is to TRNA
         Exception: In underwater situations, TRNA cannot be
          negative so URNA would be decreased
         Very Important: That URNA “deficit” is within the endowment
          (see slide 34)

 Source: GAQC/FASB Webcast
Five Step Program
 Step III: Moneys are spent elsewhere for
  same purpose
     No effect on either the fund balance or on net asset
     A time restriction is still in place until appropriation &
      thus funds are unavailable for spending for that
     In other words, unlike with net asset classification for
      UMIFA endowments, the “deemed spent” rule does
      not apply here & there is no reclassification to URNA
      for financial reporting purposes
 Source: GAQC/FASB Webcast
Five Step Program
 Step IV: Board approves funding
  from the endowment for next year’s
     No effect on either the fund balance or net asset
      classification until next year is reached

 Source: GAQC/FASB Webcast
Five Step Program
 Step V: Next year is reached & amounts
  approved are now available for spending
     Fund balance is reduced by that amount, even if cash
      is not yet transferred: in effect cash is due to the
      corresponding non-endowment fund where it will be
      spent (operating fund, plant fund, etc.)
       • Alternative treatment: in a corresponding board-designated
         endowment fund until cash is moved
     The UPMIFA time restriction for accounting purpose
      expires because appropriation for accounting
      purposes is now deemed to be complete
 Source: GAQC/FASB Webcast
Five Step Program
 Step V, cont’d:
     If the fund has no purpose restriction (beyond being an
      endowment), there is a reclassification of those amounts from
      TRNA to URNA
       • Very important: Such net assets are no longer associated with the
         donor endowment. Remember, only URNA amounts associated
         with donor endowments are negative URNA (“deficits”) when fund is
     If fund has a purpose restriction, the reclassification would not
      occur until amounts are spent or deemed spent for that purpose
       • Without the time restriction, such amounts are now available for
         spending & deemed spent rule would apply.

 Source: GAQC/FASB Webcast
Common Implementation
 Difference between Board designated
  endowment & long-term reserve
   How is fund invested & spent?
   How is fund publicly characterized?

 If no legal obligation to restore underwater
  endowments, misleading to charge UR?
Common Implementation
 Should these be included in tabular
   Pledges   receivable
   Split-interest investments pooled with
    endowment funds
   Perpetual trusts
     • Answer to all is generally no, but judgment call
 What if institution does not maintain
  separate funds?
FASB/GASB Project Updates
 FASB website, easy to keep current

   Leases

   Postemployment   benefits
   Reporting  entity
   Service efforts & accomplishments
FASB Current Technical Plan & Project
Updates                                                         2010                  2011
JOINT FASB/IASB PROJECTS:                            1Q    2Q          3Q        4Q
Conceptual Framework Project:
     (Updated as of December 24, 2009)
Objective and Qualitative Characteristics             F
Reporting Entity                                      E                F
Measurement                                           DP
Elements and Recognition                                               DP

                                                                2010                  2011
Standards Projects:                                  1Q    2Q          3Q        4Q
Statement of Comprehensive Income
      (Updated February 5, 2010)                      E                    F
Accounting for Financial Instruments
      (Updated February 5, 2010)                      E                    R      F
Reporting Discontinued Operations
      (Updated January 7, 2010)                             E               F
Fair Value Measurement
      (Updated February 2, 2010)                            E              R,F
Consolidations: Policy and Procedures
      (Updated February 1, 2010)                            E              R      F
Financial Instruments with Characteristics of Equity
      (Updated January 28, 2010)                           E                R           F
      DP – Discussion Paper
      E – Exposure Draft
      F – Final Document
      R – Roundtable Discussion
FASB Current Technical Plan & Project
Updates (Continued)
                                             2010              2011
                                   1Q   2Q          3Q    4Q
Financial Statement Presentation
     (Updated February 1, 2010)         E           R           F
     (Updated December 30, 2009)        E            R          F
Revenue Recognition
     (Updated February 5, 2010)         E           R           F
Emissions Trading Schemes
     (Updated October 30, 2009)                      E           F
Insurance Contracts
     (Updated December 30, 2009)                    E,R         F
     DP – Discussion Paper
     E – Exposure Draft
     F – Final Document
     R – Roundtable Discussion
Project on Lease Accounting
Joint Project of FASB & IASB
 To create common standard on lease
  accounting to ensure assets & liabilities
  arising from lease contracts are
  recognized in statement of financial
 Focuses on significant components of
  accounting model for lessees
Criticisms of Existing Standards
 Failing to meet needs of users
   Assets  & liabilities under operating leases
    not being recognized
   Similar   transactions accounted differently
   Opportunities to structure transactions to
    achieve desired accounting result
   Reduced     comparability for users
Criticisms of Existing Standards
 Complexity of existing standards
   Difficultto define dividing line between
    capital & operating leases

 Conceptually flawed
   Rights & obligations not recognized under
    operating lease
Rights & Obligations
Board concluded
 Right to used leased items – asset
 Obligation to make payments – liability
 Obligation to return leased item at end of
  lease term is not liability
Initial Measurement
 Asset – At cost
   Cost = PV of lease payments discounted
    using lessee’s incremental borrowing rate

 Liability – PV of lease payments
  discounted using lessee’s incremental
  borrowing rate
Subsequent Measurement
of Obligation
 Amortized cost-based approach
 Advantages over FV measurement
   Measured    consistently with other non-
    derivative financial liabilities
   Consistent with initial measurement decision

   Simpler & less costly for preparers
Accounting for Changes in
Estimated Cash Flows
 Catch-up approach –
  Carrying amount of
  obligation to pay rentals
  (liability) is adjusted to
  PV of revised estimated
  cash flows, discounted at
  original effective interest
Subsequent Measurement of
Right-to-Use Asset
 Amortized cost-based approach
   Shorter   of lease term & economic life of
 Advantages over FV measurement
   Consistent  with treatment of other non-
    financial assets
   Consistent with initial cost basis
    measurement decision
   Easier & less costly for preparers
Right-to-Use Asset
 Decision reached during June meeting
 Follow FAS 144, Accounting for the
  Impairment or Disposal of Long-Lived
 Determine whether right-to-use assets is
  impaired & recognize loss
Leases with Options
 Term options – Right to extend/terminate
 Purchase options
Accounting Treatment for
Leases with Options
 Do not recognize options as separate
 Recording obligation to pay rentals –
  include if option is likely to be exercised
 Assessment of lease term – based on
  determination of most likely outcome
Accounting Treatment for
Leases with Options
 Determine most likely outcome
     Consider contractual, noncontractual & business
 Reassessment of option at each reporting
  period on basis of any new facts or
 Changes in obligation due to reassessment
  result in adjustment in carrying amount of
  right-to-use asset
Additional Considerations
 Contingent rentals & residual value
   Assets  & liabilities by lessee should reflect
    obligation to make contingent rental
Other Lessee Issues
 Sale & leaseback transactions
   Seller/lesseedetermine whether transaction
   qualifies as sale
   Derecognize     leased item
   Recognizeright-to-use asset & obligation to
   make rental payments for leaseback
 Recognize obligation to pay rentals &
  right-to-use asset for all outstanding
  leases at transition date
 Measured at PV of lease payments,
  discounted using lessee’s incremental
  borrowing rate on transition date
 July 17, 2009 – Discussion paper
  comment period ended
 2010 – Exposure draft of new standard
 Mid-2011 – Revised standard for lessees

            Subject to change!
GASB Postemployment Benefits
 GASB 25/27 on pensions
 GASB 43/45 on OPEBs
 Can/should existing model be improved?
   Accountability   & transparency
   Usefulness
GASB Postemployment Benefits
 Topics for discussion
   Should liability for future benefits be
     • If so, when & how?
   Should actuarial parameters be better
   Should additional disclosures be required?

 Timeline – TBD
GASB Reporting Entity
 GASB 14/39
 Can/should existing model be improved?
   Fiduciary activities
   Is determination of in/out of reporting entity
   Blending vs. discrete presentation

   Fiscal dependency criterion
GASB Reporting Entity
 Timeline
   ED  – 1Q 2010
   Final – 1Q 2011
GASB Service Efforts &
 Fairly new concept
 Controversial
 Voluntary reporting to help users
   Goals  & objectives of SLG services
   Specific nonfinancial performance measures

   Standards of, or benchmarks for, service
GASB Service Efforts &
 Timeline
   ED  – 2Q 2009
   Final – 2Q 2010
ASC 855 (FAS 165)
Subsequent Events
 Emphasize management’s responsibility
   Not   auditor’s
 Applies to all statements
 Accounting & disclosure of subsequent
  events not addressed in other GAAP
Key Terms
 Subsequent events
   Recognized subsequent events (Type I)
   Nonrecognized subsequent events (Type II)
Key Terms
 Financial statements are issued
 Financial statements are available to be
 Public entities (including FSP 126-1)
  evaluate through date financial statements
   Includes  all entities who widely distribute their
    financial statements, those with conduit debt
 All other entities evaluate through date
  financial statements are available to be
Recognition & Disclosure
 Same rules as AU 560
   Record recognized subsequent events &
   disclose nonrecognized subsequent events
New Disclosure Requirement
 Management must disclose date through
  which they have evaluated subsequent
Impact on Audit Reports
 Nonpublic companies
   Dateavailable to be issued generally same as
   report date under SAS 103
    • Report cannot be dated earlier than date available
      to be issued
    • Be careful when BOD or audit committee have
      substantive approval authority
Impact on Audit Reports
 Public companies (including FSP 126-1)
   Date   issued should be report release date
          bond obligors deemed to be public
   Conduit
Auditing Subsequent Events
 No change to auditors’ responsibility
  in AU 560
Effective Date
 Effective for periods ending on or after
A-133 Changes
Guidance Has Now Been Issued
 New chapter in December 2009 AICPA Audit Guide:
  Government Auditing Standards Circular A-133 Audits
 Made public in late January 2010
 Effective upon release
 When practical, most firms will apply to 3/31/10 year
  ends, some firms with 12/31/09 year ends
 Not a new standard, but “revised interpretation of
  existing requirements”
 Requires Internal control testing to map to COSO,
  (Committee of Sponsoring Organizations of the
  Treadway Commission)
 Sampling addressed
Audit Impact
 What your auditor may need from you may
  change or increase
 Sample sizes could increase
 More exceptions may be noted
 Don’t assume, same as last year
 Discuss with your auditors
Recovery Act, Stimulus Funding
 Recovery Act Dollars
   Generally   makes a “Type A Program” high
 May be testing more programs
 Discuss with your auditor early
Questions & Discussion

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