FSA Consortium

Accounting Standard Setting

Update
May 2015

Deloitte Foundation/Federation of Schools of Accountancy Faculty Consortium

May 2015

Agenda
Topic
Major Projects
Consolidations
Financial Instruments
Leases
Disclosure Effectiveness
Other FASB Standard-Setting Activity
Foundational Projects
Simplification Projects
New Revenue Recognition Standard

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Consolidations

Amendments to the Consolidation Analysis

ASU 2015-02 guidance
Overview
Issued February 2015
Original Plan:
Address when Decision Maker of a Variable Interest Entity is acting
as principal (controls) or agent (does not control)
The ASU reduces the likelihood that fees paid to a decision maker or service
provider will result in consolidation

Eliminate deferral for investments in certain investment funds

Additional provisions:
More entities will be Variable Interest Entities
A limited partnership would be considered a VIE unless a simple majority or lower
threshold (including a single limited partner) of the LPs have substantive kick-out
rights or participating rights

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Determining whether an entity is a VIE

Entities other than limited partnerships

The ASU clarifies that a two-step process should be used to determine
whether the equity holders have power:
Step 1: Do the equity at risk holders (as a group)
have power over the most significant activities of
the entity through their equity interests?

Yes

No a decision
maker has power
Step 2: Does a single equity holder have a kickout or participating right? Or:
Is the decision maker an agent of the equity
holders (does not own a variable interest)?

Yes

The equity
holders have
power
consider other
VIE conditions

No
The equity holders do not have power
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Who should consolidate?

Voting interest model
Limited partnerships:
A general partner will not consolidate a partnership that is not a VIE
A limited partner is required to consolidate a partnership that is not a VIE if the
limited partner has the substantive ability to unilaterally dissolve the partnership
or remove the general partner without cause

All other entities:

No change from current guidance
Ownership of more than 50 percent of the outstanding voting shares of another
entity would generally result in consolidation

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Financial instruments

Classification and
measurement

Classification and measurement

Changes to U.S. GAAP
Equity investments
Most equity securities will be carried at fair value through net income
Practicability exception will be permitted for equity securities (1) that do not
have readily determinable fair values and (2) that do not qualify for the net
asset value (NAV) practical expedient
Equity method investments (including impairment) are excluded from the
scope of the new guidance
Simplified impairment model would apply to equity securities for which the
practicability exception has been elected
Eliminates the notion of other than temporary impairment

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Classification and measurement

Changes to U.S. GAAP (contd)
Instrument-specific credit risk for fair value option liabilities
An entity would be required to separately recognize in OCI changes in fair value
attributable to instrument-specific credit risk
However, for derivative liabilities any changes in fair value attributable to
instrument-specific credit risk would continue to be presented in net income
An entity can use one of two methods to measure the change in fair value
attributable to instrument-specific credit:
The excess of total change in fair value over the change in fair value that
results from a change in a base market risk (e.g., risk-free interest rate) or
Use another method that it believes is a more faithful representation
Next steps
Effective date will be determined at a future FASB meeting
A final standard will be issued in second half of 2015

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Impairment

Impairment project
Where we are today
Drivers of impairment project
Response to global financial crisis
Opportunities to simplify guidance
Opportunities for international convergence

FASB

IASB

Expected to issue final guidance in the

second half of 2015

Issued final amendments to IFRS 9,

Financial Instruments, on July 24, 2014

Currently finalizing amendments to

impairment guidance

IFRS 9 (2014) will be effective for periods

beginning on or after January 1, 2018

Not yet deliberated effective date. Do not

expect anything sooner than January 1,
2018

Early adoption is permitted

KEY TAKEAWAY: Ready or not, here it comes!

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Impairment project
Determining which impairment model to apply
Debt instrument (in scope of the current expected credit loss model) or availablefor-sale (AFS) debt security?
HTM debt
security or loan

Current expected credit loss (CECL)

model
Purchased or
originated

Recognize Allowance
and day 1 expense for
all expected credit
losses

Purchased
credit-impaired
(PCI) assets or
certain
beneficial
interests in
scope of ASC
325-40?

AFS debt
security

ASC 320 (subject to amendments)

Gross-up approach
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Impairment project
CECL model: Expected credit losses
Topic

Considerations

Recognition

No minimum threshold for recognition of impairment losses

Credit impairment would be recognized as an allowance (or contraasset) instead of a direct write-down
In certain situations an entity can recognize zero credit losses.
However, no explicit guidance will be provided on what these situations
would be

Measurement

Estimate of expected credit losses represents all contractual cash flows

that an entity does not expect to collect over the life of the asset
Consider information about historical loss experience, current
conditions, and reasonable and supportable forecasts
Must reflect the risk of loss (best estimate not permitted)
Variety of methods to develop an estimate of current expected credit
losses are permitted (e.g., DCF, loss-rate methods, provision matrix,
etc.)

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Impairment project
CECL model: Expected credit losses (contd)
Topic

Considerations

Unit of
account

Credit losses should be evaluated on a collective (i.e., pool) basis when

similar risk characteristics are shared (including HTM securities)
When similar risk characteristics are not shared, a financial asset should
be evaluated for impairment individually

Practical
expedients

Collateral-dependent financial assets

Financial assets for which the borrower must continually adjust the
amount of securing collateral (e.g., repurchase agreements and
securities lending arrangements)

Write-offs

Consistent with current practice, an entity will write off the carrying
amount of a financial asset when the asset is deemed uncollectible

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Impairment project
Available-for-sale (AFS) debt securities
Proposed guidance
CECL Model would not apply to AFS debt securities. Instead, impairment of AFS debt
securities would continue to be accounted for under ASC 320, Investments Debt and
Equity Securities
The impairment model in ASC 320 will be revised to:
1. Require an allowance approach (vs. permanently writing down the securitys cost
basis)
2. Remove the requirement to consider duration of time fair value has been less than
amortized cost when assessing whether an impairment is OTTI
3. Removing the requirement that an entity must consider recoveries of fair value after
the balance sheet date when assessing whether a credit loss exists
Write-off guidance will apply to AFS debt securities

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Impairment project
Next steps, transition, and effective date
Next steps
Further deliberations by the FASB
Address effective date
Issue final standard

Transition

Effective date

Modified retrospective application

Not yet determined

Recognize a cumulative-effect adjustment

in the first period of adoption

Expected to be addressed near the end of

deliberations

Early adoption not permitted

Not expected to be sooner the January 1,

2018

Certain disclosures required

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Impairment project
IASBs three-bucket approach
Bucket 1: 12 months expected credit loss allowance*
All financial assets initially categorized in this bucket**
Transfer out of Bucket 1
when there has been a
significant deterioration in credit
quality since initial recognition
(except high quality assets)

Buckets 2 and 3: Lifetime expected credit loss allowance

Evaluation performed on groups of financial assets and individual financial assets
* 12 month expected credit losses = lifetime expected credit losses for financial assets for which a loss
event is expected within the next 12 months
** Except for purchased debt instruments with explicit expectation of credit losses at acquisition, and
some trade/lease receivables.
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Hedging project

Hedging project
Highlights of redeliberations
Simplify hedge accounting/ potentially permit hedge accounting for more hedging
strategies
the FASB will discuss the following issues:
Hedge effectiveness requirements
Whether the shortcut and critical-terms-match methods should be eliminated
Voluntary dedesignations of hedging relationships
Recognition of ineffectiveness for cash flow underhedges
Hedging components of nonfinancial items
Benchmark interest rates
Simplification of hedge documentation requirements
Presentation and disclosure matters

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Leases project update

Leases project
Whats in and whats out

Scope
Generally similar to current U.S. GAAP
More pressure on differentiation between leases and services
because leases will be on balance sheet!

Excludes leases to explore for/use nonregenerative resources, leases

of biological assets, and leases of intangible assets

Short-term lease

Lease term of 12 months or less (changed from ED)

Elective in nature by underlying asset class
Accounted for in a manner similar to todays operating leases

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Leases project
Definition of a lease
A contract that conveys the right to use an asset for a period of
time, in exchange for consideration

Identified
asset

Requires an identified asset

Control

Must have right to direct the use and obtain

substantially all economic benefits from use

Explicitly or implicitly specified

Substitution rights must be considered if substantive
(i.e., practical ability + economic benefit)

Direct the use should focus on the ability to direct how

and for what purpose the asset is used
Obtaining substantially all economic benefits from use
can be obtained directly or indirectly in many ways and
includes the underlying assets primary output and byproducts

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Leases project
Lessee accounting model
Overview
Leases (except short-term leases) on balance sheet
Measurement
Introduces the right-of-use asset approach under which a lessee records:
Lease Liability: PV of minimum lease payments over lease term
Excludes renewal periods unless reasonably certain of exercise
Excludes variable lease payments similar to current GAAP

ROU asset: right to use the leased asset

Initially at present value (PV) of lease payments + lessees initial direct costs
Re-measurement depends on lease classification (FASB only)

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Leases project
Lessee accounting model (contd)
Subsequent measurement
ROU asset
Boards are not converged on the subsequent measurement:
FASB approach

IASB approach

Dual-model approach a lessee would Single-model approach a lessee

apply guidance similar to IAS 17 when
would account for all leases as a
determining whether a lease should be
financed purchase of the ROU asset
classified as Type A or Type B

Type A lease
Consistent with
todays capital
leases expense
will be front-loaded

25

Type B lease
Expense will be
recorded on a
straight-line basis

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Leases project
FASB lease classification criteria
CLASSIFICATION CRITERIA
Some Type
Would
account
A lease
for as
indicators
a Type A lease when the lease
Transfers ownership by end of lease term;
Includes a purchase option that is
thereasonably
lessee is reasonably
certain of exercise;
certain to
or is major part of economic life of asset; or
exercise;
Lease term
There
is a transfer
and rewards of
PV of MLP
amount of
to substantially
substantiallyall
all of
of the
FV risks
of asset.
ownership of the asset
Otherwise the asset would be classified as a Type B lease.

Although the evaluation is similar to current U.S. GAAP, the bright-line rules in
current U.S. GAAP would be eliminated

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Leases project
Lessor accounting model
Existing lessor accounting retained with minimal changes:
Classification criteria would be similar to IAS 17
Type A lease: generally consistent with todays sales-type/direct-finance
leases
Type B lease: generally consistent with todays operating leases
Differing views on recognizing dealer profit for sales-type leases:
FASB view: up-front recognition of manufacturers profit would be precluded if
control of asset is not transferred to lessee
IASB view: manufacturers profit, if any, should be recognized up front

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Leases project
Lessee accounting model (contd)
Illustrative example:

* The straight-line expense approach only applies to the FASBs proposed approach under U.S. GAAP. In March 2014, the
IASB tentatively decided on a single-model approach that would treat all leases as the financing of the purchase of the ROU
asset whereas the FASB decided on a dual-model approach.

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Leases project
Final thoughts
Other provisions redeliberated
Presentation in Balance Sheet, Income Statement, and Cash Flow Statement
Subleases
Related-party leases
Leveraged leases
Build-to-suit transaction
Sale and leaseback accounting
Lease modifications
Disclosure requirements
Transition
Next steps
Effective date
Sweep issues
Other consequential amendments
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Other Major Projects

Whats Next?

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Disclosure Framework
Projects

Disclosure framework projects

Overall:
Board Decision Tool
Entity Decision Process

Projects:

Fair Value Disclosures

Income Tax Disclosures

Defined Benefit Plan Disclosures

Inventory Disclosures

Interim Disclosures

Other Accounting Topics

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FASB Other Projects

Background

FASB Project Structure

Focused Initiatives on Improving Standard Setting
General Standard
Setting

Simplification
Initiatives

Improve transparency through

its projects on recognition,
measurement, presentation,
and disclosure:

Short-term, targeted
improvement of existing U.S.
GAAP:

Foundational
Projects
Long term projects to improve
the core of financial
reporting:
Conceptual framework
Disclosure framework

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Definition of a Business
Insurance
Goodwill for PBE
Intangible Assets
Liabilities and Equity

Extraordinary/Unusual Items
Presentation of Debt
Issuance Costs
Measurement Date for Plan
Assets
Cloud Computing Costs
Subsequent Measurement of
Inventory
Accounting for Income Taxes
Share-Based Payment
Improvements
Balance Sheet Classification
of Debt

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FASBs Simplification Initiative

Background and Objectives

FASB simplification initiative commenced in 2014

Designed to identify limited-scope projects to simplify U.S.
GAAP in the near term

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Simplification Initiative Final Standards

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Current Simplification Projects

Notable short-term, targeted improvements to existing U.S.
GAAP:
Subsequent Measurement of Inventory
Accounting for Income Taxes
Share-Based Payment Improvements
Balance Sheet Classification of Debt

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Questions?

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