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  1. Accounting Hot Topics – Hotter than the Summer of 2012

  2. Welcome Kyle Hansen Audit Manager Greg Steiner Audit Partner Tim Engeldinger Audit Managing Director

  3. Today’s Agenda • Proposed Revenue Recognition Standard • Disclosures about an Employer’s Participation in a Multiemployer Plan • Presentation of Comprehensive Income • Variable Interest Entities • Proposed Leasing Standard

  4. Proposed Revenue Recognition Standard • Overview • Proposed revenue recognition model • Other issues • Next steps

  5. Overview • Original exposure draft issued in June 2010 • Almost 1,000 comment letters received • Revised exposure draft issued in November 2011 • Comment period ended in March 2012 • Target date for final standard 1st half of 2013 • Effective date – TBD, but no sooner than January 1, 2015 • One year delayed effective date for private companies

  6. Overview – continued • Core principle: An entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services (ED par. 3) • Goal: Standardizing revenue recognition reporting across industries while retaining many current construction industry practices

  7. Proposed revenue recognition model5 steps to apply the core principle

  8. Proposed revenue recognition model – continuedStep 2 – Identify the separate performance obligations • Goods or services are highly interrelated and vendor provides a service of integrating the goods or services into a combined item • The vendor must significantly modify or customize the bundle of goods or services to fulfill the contract If both of the above conditions exist, the bundle of goods or services are accounted for as a single performance obligation

  9. Proposed revenue recognition model – continuedStep 3 – Determine the transaction price Transaction price: The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (ED para. 50).

  10. Proposed revenue recognition model – continuedStep 3 – Determine the transaction price • Unapproved change orders, potential incentive payments and claims • Proposed standard allows these estimates to be determined using either a probability-weighted approach or “most likely” estimates • Most construction companies will utilize “most likely” approach for these estimates Update the estimates each reporting period

  11. Proposed revenue recognition model – continued Step 5 – Recognize revenue • Recognize revenue by measuring progress toward completion • Objective is to faithfully depict the entity’s performance (that is, the pattern of transfer) • Output methods – direct measurements of customer value such as milestones reached or units produced • Input methods – based on vendor’s efforts such as costs incurred, labor hours, or time lapsed • If unable to reasonably measure progress, but expect to recover costs – recognize revenue to the extent of costs incurred

  12. Other issuesContract costs • Contract acquisition costs • Capitalize incremental costs to obtain a contract that are expected to be recovered • Practical expedient to expense costs if amortization period less than one year • Fulfillment costs (such as commissions or mobilization costs) • Recognize an asset if another standard applies OR • Directly relate to contract • Relate to future performance, AND • Expected to be recovered • Amortize the resulting asset consistent with the pattern of transfer of the related goods or services

  13. Next steps • Redeliberations ongoing through December 2012 – recent discussions on: • Identifying separate performance obligations • Satisfying performance obligations • Constraining revenue • Collectibility • Time value of money • Target date for final standard is first half of 2013 • Retrospective transition method proposed with limited practical expedients • Effective date – TBD, but no sooner than January 1, 2015 • One year delayed effective date for private companies

  14. Next steps – continuedWhat should companies be doing now? • Understand the effects of the proposed model • Discuss the effect of the model on: • Internal controls • Processes/procedures • Information systems • Metrics (debt covenants, compensation)

  15. Today’s Agenda • Proposed Revenue Recognition Standard • Disclosures about an Employer’s Participation in a Mulitemployer Plan • Presentation of Comprehensive Income • Variable Interest Entities • Proposed Leasing Standard

  16. Disclosures about an Employer’s Participation in a Multiemployer Plan (ASU 2011-09) • Purpose of the guidance: The amendments create greater transparency in financial reporting by requiring additional disclosures about an employer’s participation in a multiemployer pension plan. The additional disclosures will increase awareness about the commitments that an employer has made to a multiemployer pension plan and the potential future cash flow implications of an employer’s participation in the plan. • Guidance is effective for annual reporting periods: • Ending after December 15, 2012 for non-public entities

  17. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Guidance is to be applied retrospectively for all prior periods presented • Key elements of the Guidance: • Definition of individually significant • Information about the plan • Zone status of the plan • Information on the collective bargaining agreements • Contribution information • Comparability considerations

  18. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Definition of individually significant • Quantitative aspects • Employer’s contribution amount related to their contribution to the plan (material to Employer) • Contribution amount relative to all contributions made to the plan (material to the Plan) • Qualitative aspects • Degree of underfunding of the plan • Relevant available information about other employers that participate in the plan

  19. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Information about the plan • Plan’s legal name, employer identification number and plan number • Narrative description of the general nature of the plan • Narrative description of the employer’s participation in the plan • Explanation of how the risks of participation in multiemployer pension plans differ from single employer plans

  20. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Zone Status • Must be disclosed for each statement of financial position presented • Most recent certified status as defined by the PPA of 2006 • Plan’s year-end to which the zone status relates • Use of extended amortization provisions • If zone status is unavailable, Employer should disclose: • Less than 65% funded (red) • Between 65% and 80% funded (yellow) • Greater than 100% (green)

  21. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Information on the collective bargaining agreement (CBA) • Expiration date of the CBA requiring contributions to the plan • If there is more than 1 CBA, need to disclose: • Range of the expiration dates of the CBAs • Qualitative description that identifies the significant agreements within the range, information on their significance and when they expire

  22. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Contribution information • Amount of employer contributions for each income statement presented • Identifying those contributions that represent more than 5% of total contributions to the plan (based on the most recent Form 5500 report available and the period covered by the report) • At the end of the most recent income statement presented: • Any funding improvement or rehabilitation plans that have been implemented or are pending • Any surcharge that was paid by the employer to the plan • Description of future minimum contributions required in future periods by CBAs, statutory obligations or other agreements

  23. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Comparability considerations • Required to disclose the nature and effect of any significant changes that impact comparability of total employer contributions between periods • Examples include: • business combinations or divestitures • change in the employer contribution rate • change in the number of employees covered by the plan

  24. Disclosures about an Employer’s Participation in a Multiemployer Plan – continued • Management Action • Contact the plans you contribute to and obtain: • Most recent Form 5500 for the plan (since this is the first year of adoption you will want to receive the forms that cover 2011 and 2012) • Most recent audited financial statements for the plan • Any probable or reasonably possible withdrawal liability associated with the plan • Form 5500 information including audited financial statements can be found at www.efast.dol.gov

  25. Today’s Agenda • Proposed Revenue Recognition Standard • Disclosures about an Employer’s Participation in a Mulitemployer Plan • Presentation of Comprehensive Income • Variable Interest Entities • Proposed Leasing Standard

  26. Presentation of Comprehensive Income (ASU 2011-05) • Eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in shareholder’s equity • Allows for two presentation options of comprehensive income: • Single continuous financial statement • Two separate but consecutive financial statements • Reclassification adjustments • Must present reclassification adjustments and their effects on net income and OCI on the face of the financial statements • Adjustments would need to be reported on both consecutive statements if that presentation option was selected

  27. Presentation of Comprehensive Income – continued • Effective date • Guidance is effective for non-public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011 • For non-public entities, the guidance is effective for fiscal years ending after December 15, 2012 and for interim and annual periods thereafter

  28. Today’s Agenda • Proposed Revenue Recognition Standard • Disclosures about an Employer’s Participation in a Mulitemployer Plan • Presentation of Comprehensive Income • Variable Interest Entities • Proposed Leasing Standard

  29. Variable Interest Entities (VIEs)Key Concepts • Design and redesign • Important in applying all aspects of the VIE model • Gives clues to the ultimate conclusion • Power • Step 1: Determine the activities that most significantly impact the VIEs economic performance • Step 2: Evaluate how those activities are directed • Subordinated Financial Support • Variable interest that will absorb some or all of the VIE’s expected losses • Potential subordinated financial support • Service/management contracts • Purchase or supply contracts

  30. Variable Interest Entities – continuedVariable Interests • What is Variability? • Variability describes the economic risks and rewards of the entity • Analyze the design of the legal entity • Step 1: Analyze the nature of the risks in the legal entity • Step 2: Determine the purpose for which the legal entity was created • A contractual, ownership, or other financial interest in a VIE that change with changes in the fair value of the VIE’s net assets • Absorb portions of a VIE’s expensed losses or receive portions of VIE’s expected residual returns • May be obvious or implied • Examples: • Equity interests, leasing arrangements, purchase options, loans or debt arrangements, guarantees, etc.

  31. Variable Interest Entities – continuedVariable Interests • Considerations in identifying variable interests • Must consider design/redesign of entity • What are the terms of the interest/agreement? • Has the agreement been modified in the past or will be in the future? • Does the reporting entity have other variable interests? • What is the purpose for the interest? • What rights does the interest give the holder? • What is the relationship between the reporting entity and VIE?

  32. Variable Interest Entities – continuedVariable Interests • Identification of implicit (implied) variable interests: • Previously provided financial support to VIE • Changes to any agreements? • Are there incentives to protect the VIE? • Are there impediments/weaknesses for the Company to protect? • Examples of explicit vs. implicit variable interests: • Bank requires manufacturer to guarantee owner’s debt • Bank does NOT require manufacturer to guarantee owner’s debt

  33. Variable Interest Entities – continuedWhat is a Variable Interest Entity or VIE? ASC 810-10-15-14: A legal entity is a VIE if any of the following exist: • Entity cannot finance its activities without additional financial support • Legal entity cannot provide its holders with: • Power through voting or similar rights to direct activities • Obligation to absorb expected losses • Right to receive expected returns • Substantially all of the entity’s activities involve or are conducted on behalf of an investor with disproportionately few voting rights compared to economic interest

  34. Variable Interest Entities – continuedDetermining the Primary Beneficiary of a VIE: ASC 810-10-25-38A: An entity consolidates if it has both power and economics: • Power: the power to direct activities that most significantly impact the economic performance of a VIE • Economics: the obligation to absorb losses or receive benefits that could potentially be significant to the VIE • Must consider every possible scenario, even if remote (look at “what could happen” not “what would happen”) • Related Party Scenarios: • First, evaluate if a single related party meets BOTH characteristics of a primary beneficiary • If no one party meets both, who is the most closely associated with the VIE?

  35. Variable Interest Entities – continuedRecap of Variable Interest Entities: • If a legal entity is a VIE, it is not appropriate to look only to the voting interest model for consolidation and disclosure even if the primary beneficiary of the VIE is determined to have a majority voting interest • Primary beneficiary conclusions must be constantly reconsidered – must consolidate VIE when Company becomes primary beneficiary • VIE conclusions must be reconsidered upon a triggering event (i.e. acquisition, change in governing documents, change in equity investment, change in power, etc.) • Do no forget about the presentation and disclosure requirements • Presentation: Primary beneficiary of VIE must separately show: • consolidated VIE’s assets that can be used to settle obligations • consolidated VIE’s liabilities that creditors and interest holders lack recourse • Disclosures: must provide disclosures required under ASC 810-10-50

  36. Today’s Agenda • Proposed Revenue Recognition Standard • Disclosures about an Employer’s Participation in a Mulitemployer Plan • Presentation of Comprehensive Income • Variable Interest Entities • Proposed Leasing Standard

  37. Proposed Leasing Standard • Boards to re-expose guidance in 1H 2013 • Boards support two-model approach for both lessees and lessors • Lessee accounting • Interest and amortization model (former proposal) • Single Lease Expense (straight-line model) • Lessor accounting • “Receivable and residual” model • Apply existing operating lease model • For both lessees and lessors, approach determined by assessing whether lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term

  38. Are there any questions?Thank You!