Edited by Magnus Orrell, Jonathan Margate, and Joseph Renouf, Deloitte & Touche LLP

Welcome to the May 2016 edition of Accounting Roundup. Highlights of this issue include the following:

• The FASB’s issuance of (1) an ASU that makes limited-scope amendments to the Board’s new revenue standard and provides practical expedients and (2) a proposed ASU that would simplify goodwill accounting.
• The SEC’s continuing focus on non-GAAP measures, including its recently updated C&DIs on this topic.
• The PCAOB’s reproposed auditing standard on auditors’ reports on audits of financial statements in situations in which the auditor expresses an unqualified opinion.

Be sure to monitor upcoming issues of Accounting Roundup for new developments. We value your feedback and would appreciate any comments you may have on this publication. Take a moment to tell us what you think by sending us an e-mail at accountingstandards@deloitte.com.

Accounting — New Standards and Exposure Drafts

Goodwill Accounting

FASB Proposes to Simplify Goodwill Accounting

Affects: All entities.

Summary: On May 12, 2016, the FASB issued a proposed ASU that would simplify the accounting for goodwill by removing step 2 of the current goodwill impairment test — that is, the requirement to measure the amount of any impairment loss generally as the excess of a reporting unit’s carrying amount over its implied fair value determined by using “the procedure that would be required in a purchase price allocation of an acquired business.” Instead, an entity would identify both the existence and amount of impairment loss by comparing the fair value of a reporting unit with its carrying amount. The Board is also proposing to remove the special accounting requirements for any reporting unit with a zero or negative carrying amount. All reporting units, even those with a zero or negative carrying amount, would perform the same impairment test. However, entities would be required to disclose any reporting units with a zero or negative carrying amount and the respective amounts of goodwill allocated to those reporting units.

Next Steps: Comments on the proposed ASU are due by July 11, 2016.

Other Resources: Deloitte’s May 24, 2016, Heads Up.

Rescission of SEC Guidance

FASB Issues ASU Rescinding Certain SEC Guidance

Affects: SEC registrants.

Summary: On May 3, 2016, the FASB issued ASU 2016-11, which rescinds certain SEC guidance from the FASB Accounting Standards Codification in response to announcements made by the SEC staff at the EITF’s March 3, 2016, meeting. Specifically, the ASU supersedes SEC observer comments on the following topics.

• Upon the adoption of ASU 2014-09:
  • Revenue and expense recognition for freight services in process (ASC 605-20-S99-2).
  • Accounting for shipping and handling fees and costs (ASC 605-45-S99-1).
  • Accounting for consideration given by a vendor to a customer (ASC 605-50-S99-1).
  • Accounting for gas-balancing arrangements (ASC 932-10-S99-5).
• Upon the adoption of ASU 2014-16:
  • Determining the nature of a host contract related to a hybrid financial instrument issued in the form of a share under ASC 815 (ASC 815-10-S99-3).

Revenue Recognition

FASB Proposes Technical Corrections and Improvements to New Revenue Standard

Affects: All entities.

Summary: On May 18, 2016, the FASB issued a proposed ASU that would make technical corrections (i.e., minor changes and improvements) to certain aspects of the Board’s May 2014 revenue standard, ASU 2014-09. The amendments are being proposed in response to feedback received from several sources, including the FASB-IASB joint transition resource group (TRG) for revenue recognition, and would clarify, rather than change, the new revenue standard’s core revenue recognition principles.

The proposed technical corrections would affect the following topics:

• Preproduction costs related to long-term supply arrangements.
• Contract costs — impairment testing.
• Contract costs — interaction of impairment testing with guidance in other topics.
• Provisions for losses on construction-type and production-type contracts.
• Scope of the new revenue standard.
• Disclosure of remaining performance obligations.
• A contract modification example.
• Fixed-odds wagering contracts in the casino industry.
• Cost capitalization for advisers to private and public funds.

Next Steps: Comments on the proposed ASU are due by July 2, 2016.

Other Resources: Deloitte’s May 19, 2016, journal entry.

FASB Makes Narrow-Scope Amendments to New Revenue Standard and Provides Practical Expedients

Affects: All entities.

Summary: On May 9, 2016, the FASB issued ASU 2016-12, which amends certain aspects of the Board’s new revenue standard, ASU 2014-09. The amendments, which were issued in response to feedback received by the FASB-IASB joint revenue recognition TRG, include the following:

• Collectibility — ASU 2016-12 clarifies the objective of the entity’s collectibility assessment and contains new guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectibility is not probable.
• Presentation of sales tax and other similar taxes collected from customers — Entities are permitted to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., to exclude from the transaction price sales taxes that meet certain criteria).
• Noncash consideration — An entity’s calculation of the transaction price for contracts containing noncash consideration would include the fair value of the noncash consideration to be received as of the contract inception date. Further, subsequent changes in the fair value of noncash consideration after contract inception would be subject to the variable consideration constraint only if the fair value varies for reasons other than its form.
• Contract modifications and completed contracts at transition — The ASU establishes a practical expedient for contract modifications at transition and defines completed contracts as those for which all (or substantially all) revenue was recognized under the applicable revenue guidance before the new revenue standard was initially applied.
• Transition technical correction — Entities that elect to use the full retrospective transition method to adopt the new revenue standard would no longer be required to disclose the effect of the change in accounting principle on the period of adoption (as is currently required by ASC 250-10-50-1(b)(2)); however, entities would still be required to disclose the effects on preadoption periods that were retrospectively adjusted.

Next Steps: The ASU’s effective date and transition provisions are aligned with the requirements in ASU 2014-09, which is not yet effective. For more information about these requirements, see Deloitte’s May 28, 2014, Heads Up.

Other Resources: Deloitte’s May 11, 2016, Heads Up.

Accounting — Other Key Developments

FAF

FAF Issues 2015 Annual Report

Affects: All entities.

Summary: On May 19, 2016, the FAF released its 2015 annual report, which bears the subtitle “Serving the Financial Statement User” and focuses on how the FAF, FASB, and GASB “serve the capital markets through their specific roles in the standard-setting process.” In addition to summarizing those organizations’ accomplishments over the past year, the annual report features comments by 16 financial statement users, including institutional and retail investors, municipal analysts, and data aggregators, on the importance of high-quality financial reporting standards to their work.

Other Resources: For more information, see the press release on the FAF’s Web site.

Revenue Recognition

SEC Deputy Chief Accountant Discusses Revenue Recognition at Baruch Conference

Affects: All entities.

Summary: On May 5, 2016, at the 2016 Baruch College Financial Reporting Conference in New York City, Wesley Bricker, a deputy chief accountant in the SEC’s Office of the Chief Accountant (OCA), gave a speech in which he discussed transition issues related to the FASB’s new revenue standard (ASU 2014-09). He reiterated his support for the TRG’s implementation activities, particularly given the significant judgment entities must use in applying the new revenue standard, and noted that the OCA continues to “encourage management, auditors, and others to refer interpretive issues to the TRG.”

Mr. Bricker also suggested that registrants consider consultation with the OCA, especially when faced with “unusual, complex, or innovative transactions for which no clear guidance exists” or when contemplating accounting that deviates from the accounting supported by the TRG.

In addition, Mr. Bricker emphasized the importance of providing investors with disclosures that explain the impact that new accounting standards are expected to have on an entity’s financial statements (“transition disclosures”). Such disclosures provide investors with the information necessary to determine the effects of adopting a new standard and how the adoption will affect comparability from period to period.

Further, Mr. Bricker discussed the requirement to provide revised financial statements for the first quarter in which the new revenue standard is adopted but before filing a Form S-3 registration statement, since registrants have expressed concerns about this requirement. He noted that the new revenue standard refers to current GAAP and therefore contemplates an impracticability exception to retrospective application if, “after making every reasonable effort to do so,” a registrant concludes that it is not practicable to apply the standard retrospectively to all periods required to be presented in a registration statement.

Other Resources: Deloitte’s May 9, 2016, and May 6, 2016, journal entries.

International

IFRS Foundation Releases 2015 Annual Report

Affects: Entities reporting under IFRSs.

Summary: On May 19, 2016, the IFRS Foundation published its 2015 annual report, which outlines the organization’s objectives for the future, including:

• Developing “a single set of high quality, globally enforceable accounting standards.”
• Pursuing the objective of global IFRS adoption.
• Supporting “consistent application and implementation” of IFRSs.
• Ensuring the foundation’s “continued independence, stability and accountability.”

Other Resources: For more information, see the press release on the IASB’s Web site.

IASB Confirms Decision to Amend Standard on Insurance Contracts

Affects: Entities reporting under IFRSs.

Summary: On May 17, 2016, the IASB announced that it has decided to proceed with issuing amendments to IFRS 4, the Board’s standard on insurance contracts. The purpose of the amendments is to address implementation issues related to the Board’s financial instruments standard, IFRS 9, before the effective date of IFRS 4. Specific provisions of the amendments will include:

• Entities that issue insurance contracts will have “the option to remove from profit or loss the volatility that may be caused by certain changes in the measurement of financial assets when applying IFRS 9 before the new insurance contracts Standard.”
• Entities for which the “predominant activities are insurance-related [will have] an optional temporary exemption from applying IFRS 9 until 2021.”

Other Resources: For more information, see the press release on the IASB’s Web site.

Auditing Developments

AICPA

AICPA Issues Proposal Related to Audit Data Standards

Affects: Auditors.

Summary: On May 16, 2016, the ASEC of the AICPA issued an ED of a proposed audit data standard that recommends a standard format for fields and files related to the inventory subledger frequently requested by internal and external auditors. The proposed subledger standard would “accommodate basic analysis of the inventory process [and] facilitate analysis performed as part of an audit, as well as analysis that might be performed by company staff and internal audit in order to improve internal processes.”

Next Steps: Comments on the ED are due by August 15, 2016.

AICPA Proposes Hosting Services Interpretation

Affects: AICPA members that provide hosting services.

Summary: On May 16, 2016, the PEEC of the AICPA issued an ED of a proposed independence interpretation that contains guidance on the provision of hosting services to clients (e.g., acting as a business continuity or disaster recovery provider, hosting the client’s financial system or Web site on firm servers, or keeping the client’s data or records for safekeeping). The interpretation indicates that “[w]hen a member is engaged to provide services that involve the member having custody or control of data or records that the attest client uses to conduct its operations (hosting services) the self-review and management participation threats to the member’s compliance with the [AICPA’s independence rule] would not be at an acceptable level, and could not be reduced to an acceptable level by the application of safeguards, and independence would be impaired.”

Next Steps: Comments on the proposed interpretation are due by July 18, 2016.

PCAOB

PCAOB Reproposes Changes to the Auditor’s Reporting Model

Affects: Auditors.

Summary: On May 11, 2016, the PCAOB reproposed its auditor reporting standard on auditors’ reports on audits of financial statements in which the auditor expresses an unqualified opinion. Like the original proposal, the reproposal is intended to significantly enhance the auditor’s reporting model and retain the current “pass/fail” approach while increasing the amount of other information included in auditors’ reports. The reproposal:

• Includes a new required section of the auditor’s report describing critical audit matters (CAMs).
• Narrows the definition of CAMs.
• Excludes the following from the requirements related to CAMs: broker-dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
• Calls for the addition of new elements to the auditor’s report, including statements about the requirement of auditor independence and auditor tenure.

  Editor’s Note: On May 23, 2016, the IAASB issued a publication that compares its auditor reporting standards (which were updated in January 2015) with the PCAOB’s reproposed standard. The IAASB’s publication “focuses on a comparison between the IAASB’s concept of [key audit matters], as set out in ISA 701, . . . and the PCAOB’s concept of [CAMs].”

Next Steps: Comments on the reproposal are due by August 15, 2016.

Other Resources: Deloitte’s May 27, 2016, Audit & Assurance Update and May 11, 2016, journal entry. Also see the press release and fact sheet on the PCAOB’s Web site.

SEC Approves PCAOB Rules Requiring Disclosure of Engagement Partner and Other Audit Participants

Affects: Auditors.

Summary: On May 9, 2016, the SEC issued a release approving the PCAOB’s December 2015 final rules that require audit firms to file a new form, Form AP, in which they disclose (1) the “name of the engagement partner”; (2) the “name, location, and extent of participation [as a number or within a range] of each other accounting firm participating in the audit whose work constituted at least 5% of total audit hours”; and (3) the “number and aggregate extent of participation of all other accounting firms participating in the audit whose individual participation was less than 5% of total audit hours.” The form must be filed with the PCAOB within 35 days (10 days for initial public offerings) after the date the audit report is first included in the SEC filing.

Next Steps: The requirement to disclose the engagement partner is effective for audit reports issued on or after January 31, 2017. The disclosure requirements related to other accounting firms are effective for auditors’ reports issued on or after June 30, 2017.

Regulatory and Compliance Developments

SEC

SEC Urges Companies to Take a Fresh Look at Their Non-GAAP Measures

Affects: SEC registrants.

Summary: On May 17, 2016, the SEC updated its C&DIs on non-GAAP measures in response to its increasing concerns that such measures may be misleading, more prominent than comparable GAAP measures, or inconsistently presented from period to period. The C&DIs do not prohibit companies from using non-GAAP measures that comply with the SEC’s existing rules. However, the SEC staff’s tone in the C&DIs is intentionally forceful in an effort to “send a message,” as stated by Mark Kronforst, chief accountant in the SEC’s Division of Corporation Finance, at the May 18 meeting of the PCAOB’s Standing Advisory Group. In his discussion of the SEC’s concerns about non-GAAP measures, Mr. Kronforst announced that “this next quarter will be a great opportunity for companies to self-correct.”

The months leading up to the release of the updated C&DIs have been marked by an explosion of press coverage and SEC scrutiny of non-GAAP measures in reaction to the increased use of these measures as well as the progressively larger difference between the amounts reported for GAAP measures and those reported for non-GAAP measures. For example, a study published by FactSet indicated that for 2015, 67 percent of the companies in the Dow Jones Industrial Average reported non-GAAP earnings per share and, on average, that the difference between the GAAP and non-GAAP earnings per share for these companies was approximately 30 percent, representing a significant increase from approximately 12 percent in 2014.

SEC officials have commented on the sharp rise in the use of non-GAAP measures. In a speech delivered in March of this year, SEC Chief Accountant James Schnurr noted that the “SEC staff has observed a significant and, in some respects, troubling increase . . . in the use of, and nature of adjustments within, non-GAAP measures” as well as their prominence. He further noted that non-GAAP measures are intended to “supplement . . . not supplant” the information in the financial statements. In April and May, Mr. Kronforst and Wesley Bricker, a deputy chief accountant in the SEC’s Office of the Chief Accountant, highlighted additional concerns about non-GAAP measures. Their comments focused primarily on the use of individually tailored accounting principles to calculate non-GAAP earnings, such as those used in certain adjusted revenue measures; non-GAAP per-share performance measures that appear to be liquidity measures; and the tax treatment of non-GAAP adjustments.

As reflected in its reviews and comment letters, speeches, and updated C&DIs, the SEC is urging companies to take a fresh look at their use of non-GAAP measures in earnings releases and periodic reports.

Other Resources: Deloitte’s May 19, 2016, journal entry and May 23, 2016, Heads Up.

CAQ SEC Regulations Committee Releases Highlights of March 21, 2016, Joint Meeting With SEC Staff

Affects: SEC registrants.

Summary: On May 20, 2016, the CAQ posted to its Web site highlights of the March 21, 2016, CAQ SEC Regulations Committee joint meeting with the SEC staff. Topics discussed at the meeting include:

• Current financial reporting matters:
  • Transition questions related to the FASB’s new leases standard (ASU 2016-02).
  • The lack of availability of FAST Act initial filing accommodations to registrants other than emerging growth companies (EGCs) and to SEC forms other than Forms S-1 and F-1.
  • Confirmation that the guidance on conflict minerals in the SEC staff’s April 29, 2014, public statement is still current.
  • Updates to the SEC’s FRM, particularly the changes to paragraph 11100.2 on the presentation of supplementary quarterly financial data required by Regulation S-K, Item 302, in EGC filings.
  • Status of disclosure effectiveness initiatives related to Regulation S-X and Regulation S-K.
  • Recent SEC staff remarks on non-GAAP measures.
  • Providing supplemental pro forma information in MD&A when a registrant adopts the new revenue guidance in ASC 606 on a modified retrospective basis.
• Current practice issue:
  • The application of the general instructions applicable to EGCs for Form S-1 or Form F-1 with respect to pro forma financial information for a fiscal year that a registrant reasonably believes will not be included in a registration statement at the time of a contemplated offering.

Other Resources: Deloitte’s May 20, 2016, journal entry.

SEC Publishes C&DIs and Compliance Guide Related to Crowdfunding Rules

Affects: Issuers that are eligible to undertake crowdfunding offerings.

Summary: On May 13, 2016, the SEC issued the following publications to provide guidance to help registrants understand the requirements in the Commission’s October 2015 final rule on raising capital by using crowdfunding, which became effective on May 16, 2016.

• C&DIs — Address crowdfunding exemption and requirements, disclosure requirements, advertising, and promoter compensation.
• A small-entity compliance guide for issuers — Topics covered include requirements that registrants must meet to use the “regulation crowdfunding” exemption, issuers’ disclosures, limits on advertising and promoters, restrictions on resale, exemptions from Section 12(g) of the Securities Exchange Act of 1934, and bad actor disqualification.

SEC and Other Organizations Propose Guidance on Incentive-Based Compensation Arrangements

Affects: Certain financial institutions.

Summary: On May 6, 2016, the SEC and several other government agencies, including the Federal Reserve Board, OCC, FDIC, FHFA, and NCUA, jointly issued a proposed rule on incentive-based compensation arrangements to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rule would:

• Prohibit “incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss.”
• Require “financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate Federal regulator.”

Next Steps: Comments on the proposed rule are due by July 22, 2016.

Other Resources: For more information, see the press release on the SEC’s Web site.

SEC Issues Final Rule to Implement Provisions of JOBS Act and FAST Act

Affects: SEC registrants.

Summary: On May 3, 2016, the SEC issued a final rule that (1) marks the completion of the Commission’s rulemaking mandates under the JOBS Act and (2) implements provisions of the FAST Act. Specifically, the final rule:

• Amends “Exchange Act Rules 12g-1 through 12g-4 and 12h-3 which govern the procedures relating to registration and termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d), to reflect the new thresholds established by the JOBS Act and the FAST Act.”
• Applies “the definition of ’accredited investor’ in Securities Act Rule 501(a) to determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1).”

The final rule also revises the definition of “held of record” and establishes a nonexclusive safe harbor under Exchange Act Section 12(g).

Next Steps: The final rule will become effective on June 9, 2016.

Other Resources: For more information, see the press release on the SEC’s Web site.

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Deloitte Publications

Leadership Changes

GASB: On May 18, 2016, the FAF board of trustees announced that Jeffrey J. Previdi has been appointed to the GASB for a five-year term that begins on July 1, 2016, and is renewable for an additional five years.

IFRS Foundation: On May 12, 2016, the IFRS Foundation announced that Maria Helena Santana and Lynn Wood have been reappointed as trustees to serve a second three-year term that will begin on January 1, 2017.

IFRS Interpretations Committee: On May 23, 2016, the IFRS Foundation trustees announced that Yang Zheng and Bertrand Perrin have been appointed to the IFRS Interpretations Committee for three-year terms beginning on July 1, 2016.

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