McGladrey & Pullen Presentation (Rick Day & Brian Marshall) on Current & Emerging Accounting Developments at the June 2011 AICPA National Audit Committee Forum

1. Audit Committee Landscape:
Current & Emerging Accounting Developments

2. Rick Day Biography
rick.day@mcgladrey.com
Rick is the National Director of Accounting for McGladrey & Pullen,
LLP. He has overall responsibility for the Firm’s accounting guidance,
training on all accounting topics, and leadership of McGladrey’s
Accounting Standards Group.
Rick joined McGladrey & Pullen in 1981 and became a partner in
1990. He recently served as Director of McGladrey & Pullen’s
Western Regional Professional Practice Office. In this capacity, he
had overall responsibility for all audit and accounting quality
assurance elements and procedures for this region. As a designated
SEC compliance reviewer, Rick has been responsible for assisting
many of our publicly held clients with compliance matters and
mergers and acquisitions.
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3. Brian Marshall Biography
brian.marshall@mcgladrey.com
Brian is a partner in the Accounting Standards Group of McGladrey
& Pullen, LLP. His responsibilities include consulting with clients and
engagement teams on complex accounting issues associated with
these subject matters, facilitating training events for McGladrey
professionals and external participants and writing interpretive
guidance for McGladrey publications. He is also responsible for
monitoring standard setting by the FASB and the FASB’s EITF and
has been a member of EITF working groups.
Prior to joining McGladrey in 2007, Brian worked for more than two
years as a Senior Program Manager in IBM’s Accounting Practices
Group, serving as a resource on complex technical accounting
matters for the Company’s global accounting community. Brian also
was employed by Deloitte & Touche, LLP for over eight years in
various offices in the U.S. and Europe, with his last position being a
Senior Manager in the Firm’s Assurance Services Group.
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4. Agenda
The Big Picture
Certain Accounting Standards Updates (ASUs)
Recently Issued / Effective
Major Joint FASB / IASB Projects in Progress
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5. The Big Picture
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6. People Matters
FASB
• Board back to 7 members
• Leslie Seidman appointed chairman
• 2 new board members
- Daryl E. Buck
- R. Harold Schroeder
PCAOB
• New chairman and 2 new board members
- James R. Doty, Chairman
- Lewis H. Ferguson
- Jay D. Hanson
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7. When was this said?
“The latter half of the decade…was a period of
unprecedented stress for the individual members
and institutions of the accounting
profession. Problems arising from…the
development of increasingly complex and innovative
business practices…[have] create[d] a wave of
criticism of corporate financial reporting.”
AICPA Report of the Study on Establishment of
Accounting Principles, 1972 (aka the Wheat Report)
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8. Blue Ribbon Panel (BRP) - Private Company
Financial Reporting
In January, the BRP issued its recommendations to
the Financial Accounting Foundation (FAF)
Significant recommendations include:
• creation of a separate private company standards board
• a new standard-setting model that follows GAAP with exceptions
for private companies
In March, the FAF formed a Trustee Working Group
to:
• conduct outreach to stakeholders
• seek input on improvements, including BRP’s recommendations
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9. SEC Staff IFRS Work Plan
Issued in February 2010 and addresses concerns on
incorporating IFRS into US financial reporting
system
Progress Report - October 2010
• SEC staff observations and update on their six areas of concern
in the Work Plan
SEC Staff Paper Exploring a Possible Method of
Incorporation – May 2011
• US GAAP would change over time through endorsement /
incorporation of individual IFRSs into US GAAP
• Would organize individual IFRSs into 3 categories for transition
purposes
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10. SEC Staff IFRS Work Plan
SEC Staff Paper Exploring a Possible Method of
Incorporation – May 2011 (cont.)
• Consistent with “Condorsement” approach discussed by SEC
staff member in December 2010
• Comments requested by July 31, 2011
Future Activity
• Several additional papers for public study & comment expected
to be issued
- Updated study of US GAAP / IFRS differences
- Detailed analysis of IFRS filings
• SEC scheduled IFRS Roundtable on July 7
• Decision by SEC expected in late 2011
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11. Certain ASUs Recently Issued / Effective
Revenue Recognition
Disclosures about Financing Receivables and
Allowance for Credit Losses
Goodwill Impairment
Fair Value Measurement
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12. Revenue Recognition (ASU 2009-13)
Supersedes current guidance on multiple-
deliverable revenue arrangements
Amends guidance on how to:
• Determine the unit of accounting
• Allocate consideration to each unit of accounting
Can utilize best estimate of selling price for
allocation purposes in certain cases
Relative selling price will be used to allocate
arrangement consideration
• Residual method of allocation has been eliminated
Effective for fiscal years beginning after June 15,
2010
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13. Revenue Recognition (ASU 2009-14)
Changes the accounting model for revenue
arrangements that include both tangible products
and software elements
• Tangible products containing software components and non-
software components that function together to deliver the
tangible product's essential functionality are no longer within the
scope of the software revenue recognition guidance
• Factors provided for evaluating whether the software and non-
software components function together to deliver a product's
essential functionality
Same effective date and disclosure requirements as
ASU 2009-13
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14. Disclosures about Financing Receivables and
Allowance for Credit Losses (ASU 2010-20)
Rollforward schedule of the allowance for loan
losses (ALL) on a portfolio segment basis, with
the ending balance further disaggregated based
on impairment method
• For each disaggregated ending balance, the related
recorded investment in financing receivables
The nonaccrual status of financing receivables
by class of financing receivables
Impaired financing receivables by class of
financing receivables
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15. Disclosures about Financing Receivables and
Allowance for Credit Losses (ASU 2010-20)
Credit quality indicators and aging of past due by
class of financing receivable
Troubled debt restructurings (TDRs) that occurred
during the period and effect on the ALL
TDRs that re-defaulted during the period
Significant purchases and sales of financing
receivables during the period, by portfolio segment
Effective dates
• Balance sheet (public) – ending on or after December 15, 2010
• Activity (public) – beginning on or after December 15, 2010 (other
than for TDR disclosures, which are June 15, 2011)
• Nonpublic – annual periods ending on or after December 15, 2011
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16. Goodwill Impairment (ASU 2010-28)
Affects entities with goodwill in a reporting unit
(RU) that has a zero or negative carrying amount
Some entities with RUs that have zero or negative
carrying amounts historically concluded that Step 1
of the test is automatically passed
Modifies Step 1 of the goodwill impairment test for
these RUs
• Required to perform Step 2 if adverse qualitative factors indicate
that goodwill impairment is more likely than not
Effective for fiscal years, and interim periods in
those years, beginning after December 15, 2010
(public) / December 15, 2011 (nonpublic)
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17. Goodwill Impairment Proposed ASU
Issued in April with comments due in early June
Entity could qualitatively evaluate whether it is more
likely than not that the fair value of a RU is less than
its carrying amount prior to performing step one
Qualitative factors to consider are included and
replace existing guidance
Carryforward of RU’s prior year fair value would no
longer be allowed
Effective for annual and interim impairment tests
performed for fiscal years beginning after December
15, 2011, with earlier adoption permitted
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18. Fair Value Measurement (ASU 2011-04)
Blockage discounts prohibited for all fair value
measurements
Other discounts or premiums (for non-Level 1
measurements) may be applied if consistent with
unit of account and would be considered by a market
participant
Concepts of “highest and best use” and “valuation
premise” apply only to nonfinancial assets
Exception to fair value requirements provided for
financial instruments managed in a portfolio
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19. Fair Value Measurement (ASU 2011-04)
Principal market – determined based on market with
greatest volume and level of activity the Company
can access
Fair value of instrument classified in equity
measured from perspective of market participant that
holds instrument as an asset
Additional disclosures required
Effective dates
• Public – interim and annual periods beginning after December
15, 2011
• Nonpublic - annual periods beginning after December 15, 2011
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20. Major Joint FASB / IASB Projects in Progress
FASB / IASB Progress Report – April ’11
Timetable for Selected Joint Projects
Revenue Recognition Project
Leases Project
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21. FASB / IASB Progress Report – April ‘11
Joint standards on Statement of Comprehensive
Income & Fair Value Measurement expected &
subsequently issued in Q2
Priority projects
• Revenue Recognition
• Leases
• Financial Instruments
Timetable extended for priority projects from 2Q to
2H 2011
Effective dates will allow sufficient time for changes
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22. FASB / IASB Progress Report – April ‘11
Revenue Recognition and Leases Projects
• Boards’ timetables are in sync for both projects
• Final redeliberations are in progress
• Consider whether re-exposure is necessary
• Even without re-exposure, draft standards will be made
available for review
• Boards will then determine whether to proceed to finalize the
standards
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23. FASB / IASB Progress Report – April ‘11
Financial Instruments Project
• Various Board sub-projects
1.Balance Sheet – Offsetting
- Boards’ timetables are in sync
2.Classification and Measurement
- FASB expects to complete in 2H 2011 and consider
whether re-exposure is necessary
- IASB completed in 2010
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24. FASB / IASB Progress Report – April ‘11
Financial Instruments Project
• Various Board sub-projects
3.Impairment
- Boards’ timetables are in sync
- Basic impairment approach to be determined by end of
2H 2011
- Consider whether re-exposure is necessary
4.Hedge Accounting
- IASB plans to finalize in 2H 2011
- FASB timing unclear
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25. FASB / IASB Progress Report – April ‘11
Insurance Project
• Different Board timetables:
- IASB expects to issue final document by end of 2011
- FASB expects to issue an ED in 2H 2011 and final standard
in 2012
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26. Timetable for Selected Joint Projects
Joint Project 2Q 2011 2H 2011 2012 & Beyond
Press Tab 1x
Revenue Recognition to create the orange shield bulletF
ED
Leases a hard return to create an additional orange
Use F
shield bullet
Financial Instruments F
• Press Tab 2x to create the bullet
Insurance ED F
Fair • Use a hard Return to create anIssued
Value Measurements additional bullet
Statement of Comprehensive Income the dash
- Press Tab 3x to create Issued
Consolidation a hard Return to create an additional dash
- Use ED F
Reporting Discontinued Operations ED F
Emissions Trading Schemes ED, F
Financial Instruments with ED, F
Characteristics of Equity
Financial Statement Presentation ED, F
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27. Revenue Recognition Project
Scope
Steps in applying the model
1. Identify the contract with a customer
2. Identify the separate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the separate performance
obligations
5. Recognize revenue when each separate performance obligation
is satisfied
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28. Revenue Recognition Project
1. Identify the contract with a customer
• Contract is an enforceable agreement between parties
• Can be written, verbal or implied
• Contract combination
- Required for contracts entered into at or near the same time
if certain other criteria are met
2. Identify the separate performance obligations
• Account for performance obligations separately if the good or
service has a distinct function and is transferred at a different
time from other promised goods or services
• However, a bundle of promised goods or services is accounted
for as one performance obligation if the entity provides a service
of integrating those goods or services into a single item
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29. Revenue Recognition Project
3. Determine the transaction price
• Estimated amount of consideration to which the entity will be
entitled
- If price is variable (e.g.; contingencies, rebates, royalties),
estimate based on probability-weighted or most-likely
amount
- Time value of money
- Fair value of noncash consideration
• Collectibility is not considered
4. Allocate the transaction price
• Based on relative standalone selling price of goods or services
• Subsequent changes to transaction price generally allocated to
all performance obligations unless certain criteria are met
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30. Revenue Recognition Project
5. Recognize revenue
• Recognition limited to cumulative revenue the entity is
reasonably assured of being entitled to receive
• Recognize revenue as goods or services are transferred
• Determine whether separate performance obligations are goods
or services
- Goods – recognize revenue when customer obtains control
- Services – recognize revenue as the entity provides service
if performance obligation is satisfied continuously
- Select a method for service revenue recognition that
faithfully depicts the entity’s performance
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31. Leases Project
Perceived problems with current model
• Similar transactions can have different accounting
• Structuring opportunities
• Complex, rules-based
• Assets and liabilities not recognized on balance sheets
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32. Leases Project
Lease definition
Short-term leases
Lease term
Agreements with lease and non-lease components
Lease payments
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33. Leases Project
Classification
• Finance or other-than-finance
- Decision reversed at May meeting
- Conclusion: all leases have a financing element
• Reversal means leases will be accounted for in manner
illustrated in Exposure Draft
- Expense will be front loaded
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34. McGladrey Thought Leadership
More Accounting Changes Coming
FASB Tentatively Decides to Significantly Revise
Proposed Revenue Recognition Standard
http://mcgladrey.com/Assurance/Accounting-
Resources
http://mcgladrey.com/Publications/Publication-
Subscription
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35. QUESTIONS?
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