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EY Q1 2014 financial reporting update. Today’s agenda. Final standards Q1 matters to consider Other developments. Today’s agenda. Final standards Q1 matters to consider Other developments. Definition of a public business entity (PBE).

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EY Q1 2014 financial reporting update

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    Presentation Transcript
    1. EY Q1 2014 financial reporting update

    2. Today’s agenda • Final standards • Q1 matters to consider • Other developments

    3. Today’s agenda • Final standards • Q1 matters to consider • Other developments

    4. Definition of a public business entity (PBE) • Currently, does not change whether an entity is considered public or nonpublic for previously existing US GAAP requirements • Broader than other definitions of public entity and publicly traded company that exist in US GAAP • Determines whether an entity can use: • Private company council (PCC) accounting alternatives • Other “private” company relief (e.g., disclosure, transition, effective date differences) in new standard-setting • Private companies should consider whether they might become a PBE when deciding whether to elect the PCC alternatives because the FASB and the SEC have not provided transition guidance.

    5. Definition of a public business entity (PBE)Entities that meet the definition

    6. Opinion check Do you expect your company to be affected by the new definition of a public business entity? • Yes • No • Unsure • Does not apply (EY, faculty, other)

    7. Standards effective in 2014Presentation of unrecognized tax benefits (ASU 2013-11) • Balance sheet presentation standard • Liabilities for unrecognized tax benefits are offset against deferred tax assets (for net operating losses, similar tax losses or tax credit carryforwards) • Disclosure of deferred tax assets likely changes as a result • Not expected to change: • Disclosure of uncertain tax positions • Income tax provision Net presentation Gross presentation • Net settlement is required or expected • Net settlement is not required or expected

    8. Today’s agenda • Final standards • Q1 matters to consider • Other developments

    9. Proxy remindersSEC focus areas • Compensation discussion and analysis • Clear description of all factors in assessing performance and the weight attached to each • Quantitative and qualitative discussion of targets • Comparison of actual compensation to targets • Explanation of how and why compensation committee used discretion Example SEC Staff comment letter Please tell us the specific performance targets for each named executive officer as well as the actual results achieved and how you evaluated the results to reach the actual payouts. Please provide more detail regarding the “discretion” the committee applied towards your performance metrics.

    10. Proxy trendsSay-on-pay (SOP) and audit committee disclosures • Triennial companies will have second SOP votes in 2014 • SOP trends – high investor support • Average support is > 90% for Russell 3000 companies • Audit committee disclosures–increased voluntarily in response to shareholder requests

    11. Proxy trendsOther shareholder proposals • Emerging trends • Cybersecurity • Corporate tax strategies • Limit interim vote access • Director tenure and independence • Human rights risk assessment • Top trends • Lobbying activities • Sustainability reports • Greenhouse gas emissions • Eliminate classified board • Executive pay practices Company-investor engagement has increased over the last year

    12. Estimated annual effective tax rate (EAETR) • Make best estimate of the annual effective tax rate for full fiscal year at end of each interim period • Use EAETR to record tax on current year-to-date basis • Project year-end temporary differences and valuation allowance • Exclude benefits of expired provisions • Package of business “tax extenders” expired again on 31 December 2013 • Recognize the income tax effect of tax law change in the interim period of enactment • Cumulative effect of change is recognized as a discrete item in continuing operations • Spreading to earlier periods prohibited, even if retroactive

    13. Estimated annual effective tax rate (EAETR) • Changes to indefinite reinvestment assertion • Record in the interim period the change in assertion occurs • Record tax effects related to prior year undistributed earnings – discrete • Record tax effects related to current year undistributed earnings – adjust EAETR • Discontinued operations • Revise EAETR applied to income from continuing operations in current and subsequent interim periods of current fiscal year • Recast income taxes related to prior interim periods (as applicable) between continuing and discontinued operations

    14. Adopting 2013 COSO framework • Transition activities • Map existing controls and related activities to 17 principles • Evaluate whether 1) each of the 17 principles are present and functioning and 2) five components are integrated • Other significant changes • Financial reporting fraud • Information quality (e.g., in management review controls) • Outsourced service providers • Deficiency evaluation • Common questions • How much effort will the transition take? • What documentation will external auditors expect? • Does the expansion of the framework to include nonfinancial reporting and internal reporting affect management’s assessment or integrated audit?

    15. Fact check Has your company started the transition to the 2013 COSO framework? • Yes • No • Does not apply (EY, faculty, other)

    16. Other SEC remindersConflict minerals • Rule upheld by a US district court in July 2013 • Currently under appeal • Companies may need to file Form SD, conflict minerals report and obtain independent private sector audit (IPSA) • For the first two years the conflict minerals report may be unaudited if products are “conflict undeterminable” • An IPSA provides assurance on whether the: • Design of the due diligence framework used conforms with a recognized framework • Company performed due diligence described in its conflict minerals report Initial disclosures on Form SD are due 2 June 2014

    17. Other SEC remindersCybersecurity and data protection • Increased attention from regulators, lawmakers and shareholders • SEC recently hosted a cybersecurity roundtable • Disclose significant specific risks associated with cyberattacks • Refer to Corporation Finance Disclosure Guidance: Topic No. 2, Cybersecurity • Do not refer to cybersecurity risk factors in hypothetical terms if a cyberattack has occurred • State known and potential costs and other financial and nonfinancial consequences of cyberattacks

    18. Mandatory firm rotation • EU provisional agreement for Public Interest Entities (PIEs) • PIEs generally include companies listed in the EU, banks and other financial institutions (e.g., investment firms) • Mandatory firm rotation: maximum of 10 years (certain exceptions for joint audits and retenders) • Restrictions on non-audit services • India • Similar to EU provisions but applies to most companies incorporated in India (including subsidiaries and private companies), pending final rule-making and interpretation • United States • Not being considered; focus on changes to auditor’s report • Multinationals should consider the effects

    19. Today’s agenda • Final standards • Q1 matters to consider • Other developments

    20. Status of selected FASB projects

    21. Reporting discontinued operationsSummary of significant changes in criteria

    22. Reporting discontinued operations Summary of changes in presentation and disclosure • Assets/liabilities must be classified as held for sale in the period the criteria are met and all prior periods presented • New disclosures for discontinued operations: • Major components of pretax income or loss • Details of the major assets and liabilities • Operating and investing cash flows ORdepreciation, amortization, capital expenditures and significant noncash items • Quantitative information about continuing involvement • Disclose pretax profit or loss for individually material disposals not meeting discontinued operations criteria • Final standard expected in second quarter

    23. Financial instrumentsClassification and measurement • FASB decided not to pursue the proposed cash flow characteristics test and business model assessment • FASB plans to evaluate definition of “security” to address practice issues Same (as current US GAAP) • Bifurcation of embedded derivative features • Classification and measurement models for loans and debt securities Changing (from current US GAAP) • Equity instruments measured at fair value through net income (no remeasurement through other comprehensive income) • Final standard expected in second half of 2014

    24. Financial instruments Impairment for debt instruments Debt instruments Yes Measured at fair value (FV) through other comprehensive income (OCI) Measured at amortized cost Is fair value less than amortized cost? Apply proposed “current expected credit loss” model to measure credit losses Yes* No No allowance * Allowance for credit losses on debt instruments measured at FV-OCI would be limited to the difference between FV and amortized cost

    25. Leases Q3 2010 Exposure draft (ED) 2011 - 2013 Redeliberations and 2nd ED Q1 2014 Begin redeliberations ??? Final standard • Lessee accounting – most leases on balance sheet • IASB – all leases would be classified as Type A • FASB – dual lease classification (Type A and Type B) based on current IFRS principles (like US GAAP but no bright-lines) • Lessor accounting– Both Boards support using existing IFRS classification principles (similar to current US GAAP) • Differ on recognition of initial selling profit, if any, for certain Type A leases (i.e., sales-type leases) • Other tentative decisions reached • Lease term, short-term lease exception, other simplifications

    26. Accounting for goodwillPublic business entities (PBEs) and not-for-profits • PBEs expressed concerns about the cost and complexity of the annual goodwill impairment test • The FASB is evaluating three potential alternatives • Direct write-off • Simplified impairment • Amortization • Timing of a potential exposure draft is uncertain • FASB to consider feedback on the IASB’s ongoing post-implementation review of IFRS 3(R), Business Combinations

    27. Opinion check Which approach to accounting for goodwill would you prefer for public business entities? • Direct write-off • Simplified impairment • Amortization • Other

    28. EITF update – selected projects

    29. EITF update – Issue 12-FRecognition of new accounting basis (pushdown) Pushdown accounting: reflecting acquirer’s new basis at fair value in stand-alone financial statements of acquired entity Current SEC requirements Consensus-for-exposure • Applies to SEC registrants • Allowed when an entity becomes substantially wholly owned (> 80% acquired) • Required when 95% or more of an entity is acquired • Considers group of investors that effectively acts as one investor (collaborative group) • Applies to all entities • Allowed when an entity becomes controlled by a new party • Optional • Does not consider collaborative groups • Requires new disclosures SEC Staff has not stated if it will change its guidance

    30. Disclosure reform • FASB disclosure framework project • Exposure draft proposes a new chapter to the conceptual framework to improve the FASB’s process for establishing disclosure requirements • SEC Staff study of Regulation S-K • Recommends a comprehensive review of SEC disclosures • Comment period ends 14 July 2014 Principles-based Presentation, delivery and frequency of filings Technology used to enhance readability Considerations for review Scaled requirements

    31. SEC proposalsCrowdfunding and Regulation A+ • Provide private companies access to capital by making certain public offerings exempt from registration

    32. Private company council (PCC) updateProject status

    33. AccountingLink What you need to know. When you need to know it. Because change is constant in the financial reporting world, you need the latest information, analysis and insight, first. Register free at: www.ey.com/us/accountinglink

    34. Thanks for participating.