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FASB Newsletter - March 2017

Mon, 03/13/2017 - 12:00am

Topic 606, Revenue From Contracts with Customers In 2014, the FASB issued its landmark standard, Revenue from Contracts with Customers. It is generally converged with equivalent new IFRS guidance and sets out a single and comprehensive framework for revenue recognition. It takes effect in 2018 for public companies and in 2019 for all other companies, and addresses virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. For many entities, the timing and pattern of revenue recognition will change. In some areas, the changes will be very significant and will require careful planning. BDO’s newsletter has been updated through December 2016 to reflect changes to the standard made by the subsequent ASUs and to incorporate certain consensuses reached by the TRG.

  View the Newsletter

SEC Flash Report - February 2017

Tue, 02/28/2017 - 12:00am
Dodd-Frank SEC Rules - One Nullified and Others Scrutinized  On February 14, President Trump signed a resolution passed by Congress which nullifies the SEC’s resource extraction issuer disclosure rule (Rule 13q-1).  Rule 13q-1 would have required resource extraction issuers to disclose information about certain payments made to United States and foreign governments for the commercial development of oil, natural gas, and minerals.  Originally adopted in 2012 pursuant to a Dodd-Frank Act statutory mandate, the rule was vacated after being challenged in a federal court.  In response to the federal court’s decision, the SEC rewrote the rule and adopted it in June 2016.  However, as a result of the nullification, Rule 13q-1 will not go into effect. 

In addition, Acting SEC Chairman Michael Piwowar recently issued two public statements on the following Dodd-Frank rules previously adopted by the SEC:  
  • Pay ratio rule – Adopted in August 2015, this rule will require issuers to disclose the median annual total compensation of all employees except the chief executive officer, the annual total compensation of the CEO, and the ratio of those two amounts in any annual report, proxy or registration statement that requires disclosure of executive compensation pursuant to Item 402 of Regulation S-K.   The rule is effective for fiscal years beginning on or after January 1, 2017. 

Chairman Piwowar’s statement expresses his understanding that issuers have encountered “unanticipated compliance difficulties” as they prepare to adopt the rule.  The intent of his statement is to solicit feedback in order to understand these difficulties and whether additional guidance or relief is warranted.  A link to the comment page is provided within Chairman Piwowar’s statement. 
  • Conflict minerals rule – Adopted in August 2012, Rule 13p-1 requires companies to determine and publicly disclose on an annual basis whether their products were manufactured using certain minerals, designated as “conflict minerals,” that originated in the Democratic Republic of the Congo or adjoining countries.  If so, an issuer is required to provide a report describing the measures taken to determine whether the minerals financed or benefited armed groups in the region and its conclusions.  Rule 13p-1 was also met with controversy.  In April 2014, a U.S. Court of Appeals issued a ruling which determined that a portion of the conflict minerals rule infringed upon a company’s constitutional right of free speech. In light of the ruling, the SEC staff issued a statement on how a company should comply with the aspects of the conflict minerals rule which were not impacted by the Court’s decision.  

Chairman Piwowar’s statement indicates that he directed the staff to reconsider whether the 2014 guidance is still appropriate and whether any additional relief is necessary.  He is also soliciting feedback from interested persons on all aspects of the rule and guidance.  A link to the comment page is provided within Chairman Piwowar’s statement.   

Despite these statements, these rules are currently still in effect. 
Please contact Jeff Lenz or Paula Hamric if you have any questions.

FASB Flash Report - February 2017

Fri, 02/10/2017 - 12:00am
FASB Simplifies Goodwill Impairment Test Download PDF Version
Summary The FASB recently issued ASU 2017-04[1] to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU has staggered effective dates beginning in 2020 and is available here.
  Background   Currently Topic 350[2] requires a two-step assessment to determine whether goodwill is impaired. The first step requires an entity to compare each reporting unit’s carrying value, including goodwill, and its fair value. If the carrying value exceeds the fair value, then the entity must perform the second step, which is to compare the implied fair value of goodwill to its carrying value, and record an impairment charge for any excess of carrying value over implied fair value. An entity also has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Further, private companies can elect to apply ASU 2014-02,[3] which provides a simpler and less costly alternative for the subsequent measurement of goodwill.
  Main Provisions The primary goal of ASU 2017-04 is to simplify the goodwill impairment test and provide cost savings for all entities. This is accomplished by removing the requirement to determine the fair value of individual assets and liabilities in order to calculate a reporting unit’s “implied” goodwill under current GAAP.
Specifically, the amendments in ASU 2017-04 eliminate Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses on goodwill cannot be reversed once recognized.
When measuring a goodwill impairment loss, an entity should consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit. The ASU contains an illustration of the simultaneous equations method to demonstrate this, which reflects a deferred tax benefit from reducing the carrying amount of tax-deductible goodwill relative to the tax basis.
An entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that goodwill is impaired. However, the ASU eliminates the requirement to perform a qualitative assessment for any reporting unit with zero or negative carrying amount. Therefore, the same one-step impairment assessment will apply to all reporting units. However, for a reporting unit with a zero or negative carrying amount, the ASU adds a requirement to disclose the amount of goodwill allocated to it and the reportable segment in which it is included.
BDO Observation: The ASU does not eliminate the private company accounting alternative provided in ASU 2014-02. That is, private companies still have the option to elect to amortize goodwill, and to test goodwill for impairment when a triggering event occurs using a simplified one-step test. Private companies that have already elected such a policy can voluntarily adopt the guidance in the ASU, which would result in no longer amortizing goodwill and reinstating an annual impairment test performed pursuant to the guidance in the ASU. 

However, private companies that have elected to subsume certain intangible assets into goodwill under ASU 2014-18[4] and are therefore required to amortize goodwill must demonstrate preferability prior to adopting ASU 2017-04.  Paragraph 350-20-65-3 provides specific transition guidance applicable to private entities. 
Effective Date and Transition The amendments have staggered effective dates as follows:
  • A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
  • A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
  • All other entities, including not-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.
The amendments should be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
For questions related to matters discussed above, please contact your RTD or one of the following members of National Accounting:
  Angela Newell Gautam Goswami Adam Brown     [1] Simplifying the Test for Goodwill Impairment [2] Intangibles—Goodwill and Other [3] Accounting for Goodwill (a consensus of the Private Company Council) [4] Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

BDO Comment Letter - Distinguishing Liabilities from Equity (Topic 480)

Tue, 02/07/2017 - 12:00am
Distinguishing Liabilities from Equity (Topic 480): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception (File Reference No. 2016-370)   BDO supports the proposal to reduce income statement volatility for many financial instruments, but recommends several improvements in the final standard.

Audit Committee Requirements Practice Aid

Fri, 02/03/2017 - 12:00am

Download The Practice Aid   Audit committees are critical components in the financial reporting chain and committee-work is a year-round commitment. Audit committee duties, responsibilities, and disclosures for public companies are numerous and are governed by regulation and rule-making, U.S. stock exchange listing standards, and evolving corporate governance best practices. BDO has designed a dynamic tool to assist audit committees in fulfilling their obligations and documenting their activities.

The Audit Committee Requirements Practice Aid is available in EXCEL format and is organized by six categories:
  1. Composition
  2. General Responsibilities
  3. Oversight of Risk Management and Financial Reporting
  4. Oversight of Independent Auditors
  5. Oversight of Internal Auditors
  6. Oversight of Compliance, Ethics, and Controls
The tools is comprised of four tabs:
  • Instructions For Use Tab
  • Rules & Regulations Tab - provides a summary by category of the rules, regulations and releases governing specific AC duties, responsibilities and disclosures
  • Practice Aid Tab - aligns the specific audit committee duties, responsibilities and disclosures with suggested timing and status of completion to be used as a guide in conducting periodic audit committee meetings, communicating with the various stakeholders in the financial reporting and audit cycles throughout the year, and in preparing documentation that supports the activities of the audit committee. The Practice Aid may be further customized by adding rows/columns to document additional activities that may be germane to your industry or for which your organization finds benefit.
  • Practice Aid Expanded Tab – as an alternative, this tab can be used instead of the Practice Aid as it combines content from both the Rules & Regulations Tab aligned with related audit committee activities contained within the Practice Aid Tab.
  • Additional Resources Tab – includes related BDO or external resources for your reference within each category.
Note: This practice aid will continue to evolve over time as rule-making, best practices, and resources continue to develop.

We hope you and your fellow audit committee members find this tool useful in aiding you in your oversight of the financial reporting process. 

FASB Flash Report - February 2017

Thu, 02/02/2017 - 12:00am
FASB Clarifies Consolidation Guidance for Not-for-Profit Entities  Download PDF Version
Summary The FASB recently issued ASU 2017-02[1] to clarify when a not-for-profit entity (NFP) that is a general partner or a limited partner should consolidate a for-profit limited partnership or similar legal entity once the amendments in Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis, become effective. The ASU is available here, and becomes effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period.
Background    Current generally accepted accounting principles (GAAP) require an NFP that is a general partner of a for-profit limited partnership or similar legal entity to apply the consolidation guidance in Subtopic 810-20,[2] unless that partnership interest is reported at fair value in accordance with certain other guidance.
In February 2015, the FASB issued ASU 2015-02, which amends the general consolidation guidance in Subtopic 810-10 and eliminates the guidance in Subtopic 810-20. Upon the effective date of ASU 2015-02,[3] NFPs would be required to follow the amended guidance, which presumes that an entity would first navigate through the variable interest entity (VIE) consolidation guidance before applying the general consolidation guidance. However, NFPs are generally  not  within the scope of the VIE consolidation guidance. As a result, many fewer for-profit limited partnerships would be consolidated by their NFP general partners.
ASU 2017-02 was issued to address this unintended outcome, and applies to an NFP that is a general partner or a limited partner of a for-profit limited partnership or a similar legal entity. A similar legal entity is an entity such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. In those entities, a managing member is the functional equivalent of a general partner, and a nonmanaging member is the functional equivalent of a limited partner. Throughout ASU 2017-02, any reference to a limited partnership includes limited partnerships and similar legal entities.
  Main Provisions ASU 2017-02 retains the consolidation guidance that was in Subtopic 810-20 for NFPs by moving it to Subtopic 958-810.[4] Therefore, NFPs that are general partners would continue to be presumed to have control of a for-profit limited partnership, regardless of the extent of their ownership interest, unless that presumption is overcome. The presumption would be overcome if the limited partners have either substantive kick-out rights or substantive participating rights. To be substantive, the kick-out rights must be exercisable by a simple majority vote of the limited partners’ voting interests or a lower threshold. For purposes of evaluating that threshold, the limited partners’ voting interests should exclude voting interests held by the general partners, parties under common control with the general partners, and other parties acting on behalf of the general partners.  ASU 2017-02 also adds to Subtopic 958-810 the general guidance in Subtopic 810-10 on when NFP limited partners should consolidate a limited partnership.
  Effective Date and Transition The amendments in ASU 2017-02 are effective for annual financial statements issued for  fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an NFP early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
NFPs that have not yet adopted the amendments in ASU 2015-02 are required to adopt the amendments in this Update at the same time they adopt the amendments in ASU 2015-02 and should apply the same transition method elected for the application of ASU 2015-02.
NFPs that already have adopted the amendments in ASU 2015-02 are required to apply the amendments in this Update retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments in ASU 2015-02 initially were applied.
 For questions related to matters discussed above, please contact Lee Klumpp or Tammy Ricciardella.
    [1] Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity [2] Consolidation—Control of Partnerships and Similar Entities [3] ASU 2015-02 is effective for non-public entities for fiscal years beginning after December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017. [4] Not-for-Profit Entities—Consolidation

Significant Accounting & Reporting Matters Q4 2016

Thu, 01/26/2017 - 12:00am
Issued on a quarterly basis, the Significant Accounting and Reporting Matters Guide provides a brief digest of final and proposed financial accounting standards as well as regulatory developments. This guide is designed to help audit committees, boards and financial executives keep up to date on the latest corporate governance and financial reporting developments.

Highlights include:
  • FASB Developments
  • SEC & PCAOB Highlights
  • IASB Projects
  • And more


2016 Audit Committee Round-Up: Focal Points, Tools & Resources

Wed, 01/18/2017 - 12:00am

2016 did not disappoint, and included multiple developments in a broad range of corporate governance and financial reporting areas which will impact public companies and their audit committees into the foreseeable future.
  BDO has compiled the following year-end snapshot of issues and selected resources that audit committees will find helpful in addressing their oversight responsibilities and communications with management and auditors during the year-end audit cycle and related reporting. While the following is intended as a high-level reference, additional resources are forthcoming and include BDO’s Q4 2016 Technical Update webinars and our annual newsletters: BDO Knows: FASB 2016 Accounting Year in Review and 2016 SEC Year in Review – all of which are or will be made available on BDO’s Center for Corporate Governance and Financial Reporting.

  View the Newsletter

FASB Flash Report - January 2017

Mon, 01/16/2017 - 12:00am
FASB Clarifies the Definition of a Business

The FASB recently issued ASU 2017-01[1] to clarify the definition of a business, which is fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This determination is important given the diverging accounting models used for each type of transaction. The guidance is generally expected to result in fewer transactions qualifying as business combinations. The ASU becomes effective in 2018 for public entities and is available here.


Currently Topic 805[2] specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP.  The primary goal of ASU 2017-01 is to narrow the definition of a business.

Main Provisions

Under the ASU, the revised definition of a business consists of the following key concepts:

  • A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. (Par. 805-10-55-3A)

  • To be capable of being conducted and managed for the purposes described above, an integrated set of activities and assets requires two essential elements—inputs and processes applied to those inputs. A business need not include all the inputs or processes that the seller used in operating that business. However, to be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. (Par. 805-10-55-5)

Importantly, the ASU also introduces a “screen” to assist entities in determining when a set should not be considered a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. The ASU includes practical guidance on what to include in gross assets and what constitutes a single identifiable asset or a group of similar identifiable assets in the context of applying the screen.

Employees that form an organized workforce that has the necessary skills, knowledge, or experience to perform an acquired process.

BDO Observation: Many common transactions that have historically been considered business combinations will now be accounted for as asset acquisitions due to the introduction of the screen.  In particular, the real estate, pharmaceutical, biotechnology and financial industries may be significantly impacted, as illustrated in the multiple examples included in new paragraphs 805-10-55-51 through 55-96.

If the screen is not met, the ASU requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Further, the ASU removes the evaluation of whether a market participant could replace missing elements (as required under current GAAP).
The ASU provides a framework for determining whether the set includes both an input and a substantive process (and thus, should be considered a business). Under the framework, the criteria to consider depend on whether a set has outputs. The ASU narrows the definition of the term output such that it is consistent with how outputs are described in Topic 606.[3] That is, an output is the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.
Sets without outputs
Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the ASU introduces more stringent criteria for sets without outputs. A set that does not have outputs is considered to have both an input and a substantive process that together significantly contribute to the ability to create outputs only if it includes employees that form an organized workforce with the necessary skills, knowledge or experience to perform an acquired process, and an input that the workforce could develop or convert into output. In other words, the presence of an outsourced workforce arrangement is not sufficient to conclude that a substantive process has been acquired. The ASU provides factors to consider when determining whether the acquired workforce is performing a substantive process.
Sets with outputs
If a set has outputs, continuation of revenues does not, on its own, indicate that both an input and a substantive process have been acquired. When the set has outputs, the set will have both an input and a substantive process that together significantly contribute to the ability to create outputs when any of the following are present:

  1. An acquired contract that provides access to an organized workforce that has the necessary skills, knowledge, or experience to perform an acquired process. An entity should assess the substance of an acquired contract and whether it has effectively acquired an organized workforce that performs a substantive process.

  2. The acquired process(es) significantly contributes to the ability to continue producing outputs and cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs.

  3. The acquired process(es) significantly contributes to the ability to continue producing outputs and is considered unique or scarce.

BDO Observation: Although the ASU revises the definition of a business, the recognition and measurement guidance for business combinations and asset acquisitions remains the same. Consequently, the accounting treatment for transaction costs, contingent consideration, and several other items will continue to differ based on whether an acquired set constitutes a business or not. In this context, the FASB is planning to consider whether accounting differences for acquisitions (or disposals) of businesses and assets can be aligned in a future standard-setting project.

Effective Date and Transition

The amendments are effective prospectively for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments are effective prospectively for all other entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as follows:

  • For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.

  • For transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.


For questions related to matters discussed above, please contact your RTD or one of the following members of National Accounting:

Angela Newell
National Assurance Partner Brandon Landas
Assurance Partner Adam Brown
National Director of Accounting    

[1] Clarifying the Definition of a Business
[2] Business Combinations
[3] Revenue from Contracts with Customers

FASB Newsletter - January 2017

Mon, 01/16/2017 - 12:00am

2016 Accounting Year in Review During 2016 the Financial Accounting Standards Board (FASB) completed several major, long-term projects, and also issued guidance to resolve related practice issues. The FASB and the International Accounting Standards Board (IASB) focused on implementation issues related to the new revenue recognition standard, which resulted in several clarifying amendments during the year. Both boards also issued their respective lease standards, and the FASB finalized guidance on the classification, measurement and impairment of financial instruments. Moving forward, preparers and auditors will roll their sleeves up to implement these major new standards in the near term. Meanwhile, the FASB is planning its future agenda and continues to reduce complexity in U.S. GAAP where possible through its Simplification Initiative.

Our year in review letter summarizes the year’s most significant changes in guidance and what to expect in 2017. We’ve also included a comprehensive list of the effective dates for recently-issued accounting standards in the appendix.

  View the Newsletter

FASB Flash Report - January 2017

Mon, 01/16/2017 - 12:00am
FASB Issues Technical Corrections and Improvements to New Revenue Standard Download PDF Version
Summary The FASB recently issued ASU 2016-20[1] amending the new revenue recognition standard that it issued jointly with the IASB in 2014. The amendments do not change the core principles of the standard, but clarify certain narrow aspects of the standard including its scope, contract cost accounting, disclosures, illustrative examples, and other matters. The ASU becomes effective concurrently with ASU 2014-09[2] and is available here.
Background In May 2014, the FASB issued ASU 2014-09 establishing a comprehensive revenue recognition standard for virtually all industries, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. In May 2016, the FASB issued an exposure draft entitled “Technical Corrections and Improvements to Update 2014-09” which included nine proposed narrow amendments resulting from implementation issues discussed by the FASB Transition Resource Group, as well as technical inquiries and routine Codification feedback. In September 2016, the FASB issued a second exposure draft which included four additional proposed narrow amendments.  The amendments in ASU 2016-20 finalize all of the changes proposed in both exposure drafts with the exception of proposed changes to the guidance on accounting for pre-production costs related to long-term supply arrangements, which the Board decided not to amend based on feedback from constituents.  Based on comments from FASB staff and Board members, no additional changes to the new revenue standard are expected.
  Main Provisions The amendments in ASU 2016-20 clarify the following items: 
  Topic within ASC 606 Description Loan guarantee fees Topic 606 contains a scope exception for guarantees (other than product or service warranties) within the scope of Topic 460.[3] Stakeholders indicated that consequential amendments related to the standard are inconsistent on whether fees from financial guarantees are within its scope. The ASU clarifies that guarantee fees within the scope of Topic 460 (other than product or service warranties) are not within the scope of Topic 606. Entities should apply Topic 815[4] to guarantees accounted for as derivatives. Contract costs – impairment testing Subtopic 340-40[5] includes impairment guidance for certain capitalized costs. The ASU clarifies that when performing impairment tests of these costs an entity should (a) consider expected contract renewals and extensions and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount it expects to receive in the future. Contract costs – interaction of impairment testing with guidance in other topics Stakeholders questioned how the impairment testing in Subtopic 340-40 interacts with guidance in other Topics. The ASU clarifies that impairment testing should be performed in the following order:
  1. Assets not within the scope of Topic 340, Topic 350,[6] or Topic 360[7] (e.g., inventory subject to Topic 330[8]);
  2. Assets within the scope of Topic 340;
  3. Asset groups and reporting units within the scope of Topic 360 and Topic 350.
Provisions for losses on construction-type and production-type contracts The new revenue standard retains existing guidance on the provision for loss contracts in Subtopic 605-35,[9] but changed the assessment from the “segment” level in prior guidance to the “performance obligation” level under Topic 606. Stakeholders indicated that this change, in some circumstances, may require an entity to perform the loss assessment at a lower level than current practice. The ASU requires that the provision for losses be determined at least at the contract level, but also allows an accounting policy election to determine the provision for losses at the performance obligation level. Scope of Topic 606 Topic 606 contains a scope exception for insurance contracts within the scope of Topic 944.[10] The Board’s intention was to exclude from Topic 606 all contracts that are within the scope of Topic 944, not only insurance contracts (e.g., investment contracts that do not subject an insurance entity to insurance risk). The ASU removes the term insurance from the scope exception to clarify that all contracts within the scope of Topic 944 are excluded from the scope of Topic 606. Disclosure of remaining performance obligations Topic 606 requires an entity to disclose information about its remaining performance obligations, including the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Topic 606 also includes certain optional exemptions from that disclosure requirement. The ASU provides additional optional exemptions for variable consideration when the variable consideration is either a sales-based or usage-based royalty promised in exchange for a license of intellectual property or is allocated entirely to a wholly unsatisfied performance obligation or a distinct unsatisfied portion of a series accounted for as a single performance obligation. However, the ASU expands the information to be disclosed when an entity applies one of the optional exemptions. Disclosure of prior-period performance obligations Topic 606 requires an entity to disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods. Stakeholders indicated that the placement of the disclosure in the Codification results in confusion about whether this disclosure applies only to performance obligations with corresponding contract balances or to all performance obligations. The amendments in this ASU clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances. Contract modifications example The amendments in this ASU better align Example 7 with the principles in Topic 606 regarding contract modifications. Contract asset versus receivable Example 38, Case B in Topic 606 illustrates the application of the presentation guidance on contract assets and receivables. Some stakeholders expressed concern that the example indicates that an entity cannot record a receivable before its due date. The amendments in this ASU provide a better link between the analysis in Example 38, Case B and the receivables presentation guidance in Topic 606. Refund liability Example 40 in Topic 606 illustrates the recognition of a receivable and a refund liability. Some stakeholders expressed concern that the example indicates that a refund liability should be characterized as a contract liability. The ASU removes the reference to the term contract liability from the journal entry in Example 40. Advertising costs Guidance on when to recognize a liability for certain advertising costs had been included within Subtopic 340-20 and was inadvertently superseded by Topic 606. The amendments in this ASU reinstate the guidance on the accrual of advertising costs and also move it to Topic 720.[11] Fixed-odds wagering contracts in the casino industry Subtopic 924-605[12] currently includes explicit guidance that identifies fixed-odds wagering as gaming revenue. That industry-specific guidance was superseded by Topic 606. Therefore, some stakeholders questioned whether fixed-odds wagering contracts are within the scope of Topic 606 or whether they should be accounted for as derivatives within the scope of Topic 815. The ASU clarifies that fixed-odds wagering contracts issued by casino entities are exempt from derivative accounting and are within the scope of Topic 606. Cost capitalization for advisors to private funds and public funds The new revenue standard moved cost guidance from Subtopic 946-605[13] to Subtopic 946-720.[14] This amendment was intended to move the guidance only and was not intended to change practice. However, it could have resulted in inconsistent accounting for offering costs among advisors to public funds and private funds. The ASU aligns the cost-capitalization guidance for advisors to both public funds and private funds in Topic 946.  
  Effective Date and Transition The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements of Topic 606, specifically:
Public business entities will adopt the standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.[15]
All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted as of either:
  • An annual reporting period beginning after December 15, 2016, including interim periods within that year, or
  • An annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard.
For questions related to matters discussed above, please contact:
  Adam Brown
National Director of Accounting Angela Newell
National Assurance Partner Ken Gee
Assurance Partner Jennifer Kimmel
National Assurance Senior Manager   
  [1] Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers [2] Revenue from Contracts with Customers (Topic 606) is substantially converged with IFRS 15, the IASB’s companion standard. [3] Guarantees [4] Derivatives and Hedging [5] Other Assets and Deferred Costs—Contracts with Customers [6] Intangibles—Goodwill and Other [7] Property, Plant, and Equipment [8] Inventory [9] Revenue Recognition—Construction-Type and Production-Type Contracts [10] Financial Services—Insurance [11] Other Expenses [12] Entertainment—Casinos—Revenue Recognition [13] Financial Services—Investment Companies—Revenue Recognition [14] Financial Services—Investment Companies—Other Expenses [15] A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the SEC have the same effective date as public business entities.

BDO Comment Letter - Service Concession Arrangements (Topic 853)

Tue, 01/10/2017 - 12:00am
Service Concession Arrangements (Topic 853) — Determining the Customer of the Operation Services (File Reference No. EITF-16C)

BDO questions whether an amendment to the service concessions guidance is necessary.


2017 BDO IPO Outlook

Mon, 01/09/2017 - 12:00am

Positive Growth Forecast for U.S. IPOs in 2017 Larger Offerings Could Increase Proceeds by Close to 50 Percent Download PDF Version

By any measure, 2016 was a difficult year for initial public offerings (IPOs) on U.S. exchanges with virtually every statistical category – offerings (-38%), proceeds (-38%) and filings (-48%)  – down significantly from 2015.  Moreover, this was the second consecutive down year for the U.S. IPO market.  Compared to 2014, when both offerings and proceeds reached their highest levels since the dot-com boom of 2000, offering activity and proceeds are off 62 percent and 78 percent respectively.*
The year got off to a rough start due to stock market volatility – the Dow plunged more than 1000 points in one week – leading to a first quarter with just 8 IPOs.  While the stock market recovered nicely from that stumble, the IPO market’s recovery was more subdued.

According to the 2017 BDO IPO Outlook, BDO USA’s annual survey of capital markets executives at leading investment banks, there were multiple contributing factors for the decrease in 2016 offerings.  When asked to identify the primary reason for the drop in IPO activity last year, most bankers cite – access to private funding at attractive valuations (30%), uncertainty brought about by the U.S. Presidential election (27%), Brexit and other global economic uncertainties (20%) and the high volume of M&A activity leading potential offering businesses to opt for a sale instead of an IPO (18%).  A much smaller percentage (5%) blame the uncertainty of Federal interest rate hikes.
  2017 Forecast Looking forward, the capital markets community is projecting significant growth in the number of initial public offerings (IPOs) on U.S. exchanges in 2017.  Two-thirds (67%) predict an increase in the number of U.S. IPOs in the coming year, with almost one-fifth (19%) describing the increase as substantial.  Just under one-fifth (18%) forecast activity as flat compared with 2016.  Only 15 percent are projecting a decrease in offerings. 
Overall, bankers predict a 13 percent increase in the number of U.S. IPOs in 2017.  They anticipate these offerings will average $235 million, which projects to approximately $28 billion in total IPO proceeds on U.S. exchanges.  This would represent an increase of more than 49 percent from 2016 proceeds and a return to the approximate level of 2015.
  “Capital markets executives clearly feel that 2017 will put a stop to a two-year decline in the U.S. IPO market,” said Christopher Tower, a Partner in the Capital Markets Practice of BDO USA.  “Although bankers are projecting a significant increase in the number of IPOs, the key is the size of the deals. They are anticipating larger offerings in 2017.  These larger offerings should drive IPO proceeds back to 2015 levels.”   The Trump Effect When asked for the most likely factor to spur increased IPO activity in 2017, 39 percent of the bankers cite the promise of regulatory rollbacks under the incoming Trump administration.  Other factors identified by the executives are consistent positive returns from recent offerings (20%), less favorable private valuations forcing businesses to public markets (19%), the pricing of a major “name” offering (13%) and a pullback in M&A activity (8%) leading to an increase in IPOs as an exit strategy.

More than two-thirds (68%) of the capital markets community believe President-elect Trump and the Republican controlled Congress will have a positive impact on the U.S. IPO market, while just 15 percent predict a negative impact.  Sixteen percent of the bankers feel the new President and Congress will have no impact on offering activity.

  “With private funding starting to contract, private equity firms looking to exit mature businesses in their portfolio and the technology sector showing signs of increased offering activity, there were already numerous factors pointing to a turnaround in 2017,” said Ted Vaughan, a Partner in the Capital Markets Practice of BDO USA.  “The impact that Donald Trump’s election has had on the greater stock market and his promises to rollback regulations have only added to that momentum.”   Industries For the fourth consecutive year, the healthcare industry has been the bellwether of the U.S. IPO market – spawning double the number of offerings than any other industry. 
In 2017, a majority of bankers are forecasting an increase in IPOs from the technology (68%), healthcare (57%), biotech (55%) and financial (54%) industries.  In addition, close to half of the executives also project increases in offerings in the energy (49%) and industrial (48%) sectors. (see chart below).
Proportions of Capital Markets Executives expecting IPO activity to increase, remain stable or decrease in specific industries in 2017.
  Industry Increase Flat Decrease Technology 68% 23% 9% Healthcare 57% 26% 17% Biotech 55% 37% 8% Financial 54% 38% 8% Energy/Natural Resources 49% 30% 21% Industrial/Manufacturing 48% 34% 18% Real Estate 37% 31% 32% Media/Telecom 24% 45% 31% Consumer/Retail 16% 42% 42%    
Tech to Take-Off After three years of minimal activity, IPOs of technology businesses began to show signs of life in the second half of 2016 and a majority (59%) of capital markets executives anticipate a strong year for technology offerings in 2017. 
When asked which potential offering would have the most positive impact on the U.S. IPO market if it were to go public in 2017, Uber (59%) was the clear favorite.  Other popular offering candidates mentioned by significant percentages were Snap (20%) and Airbnb (14%). 

  Unicorn Sightings? In recent years, many businesses, especially technology companies, have delayed their IPOs due to the widespread availability of private financing at extremely attractive valuations.  Currently there are more than 100 private companies valued by VC firms at $1 billion or more.  If private valuations of these so-called “unicorns” continue to exceed those of public markets, 42 percent of the capital markets community contend some of these “unicorns” will fail.  Although that is a significant percentage, as another reflection of the improving sentiment toward IPOs, this represents a measurable improvement from last summer when a majority (55%) of the bankers were projecting unicorn failures.
  “Offerings from the technology industry, historically the leader of the IPO market, have been curtailed in recent years due to the wide availability of private financing at attractive valuations.  However, with private financing contracting, we began to see some tech businesses move forward with IPOs in the second half of 2016.  Successful offerings from Twilio and Nutanix demonstrate that investors have a healthy appetite for new entrants from the tech sector,” said Lee Duran, A partner in the Private Equity Practice of BDO USA.  “Snap, the maker of Snapchat, is widely expected to go public in late Q1 at a valuation between $20 billion and $25 billion.  The performance of the Snap IPO could well determine whether more unicorns leave their private stables for the promise of the public markets.”
Sources and Attributes of 2017 IPOs Private equity (36%) and venture capital (31%) portfolios are the most often mentioned sources of IPOs in the coming year.  Owner-managed, privately-held businesses (17%) and spinoffs/divestitures (16%) are the other sources identified by the bankers.  

When asked what offering attribute will be most valued by the investment community in 2017, half (50%) of the bankers cite long-term growth potential.  Stable cash flow (19%), innovative businesses offerings/products (18%), profitability (9%) and low debt (4%) are mentioned by smaller proportions of participants.

  IPO Threats When asked to comment upon the greatest threat to a healthy U.S. IPO market in 2017, more than a third (37%) of I-bankers cite global political and economic instability, while just under one-quarter (23%) identify inflated private valuations that will not be supported in public markets.  Smaller percentages focused on the uncertainty of the incoming Trump administration (18%), a weakening of the U.S. economy (13%) and Federal Reserve rate hikes (9%). 

  “As the world seemingly grows smaller by the day, global political and economic uncertainty is increasingly viewed as the greatest threat to the U.S. IPO market,” said Paula Hamric, a Partner in the National SEC Department of BDO USA.  “Surprising political outcomes, such as Brexit, and deadly terrorist attacks in various countries during the past year have demonstrated how international news can swiftly impact U.S. markets and introduce a level of volatility that is not conducive for businesses considering a public offering.”

For more information on BDO's Capital Markets services, please contact one of the regional leaders below:

Lee Duran
San Diego


Christopher Tower
Orange County

  Paula Hamric

Ted Vaughan 

About the Survey These findings are from The 2017 BDO IPO Outlook survey, a national telephone survey conducted by
Market Measurement, Inc. on behalf of the Capital Markets Practice of BDO USA. Executive interviewers
spoke directly to 100 capital markets executives at leading investment banks regarding the market for
initial public offerings in the United States in the coming year. The survey, which took place in December
of 2016, was conducted within a scientifically-developed, pure random sample of the nation’s leading
investment banks.

BDO USA is a valued business advisor to businesses making a public securities offering. The firm works with
a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations,
on myriad accounting, tax and other financial issues.
*Renaissance Capital is the source of all historical data related to number and size of U.S. IPOs

BDO Assurance Practice SEC Newsletter - January 2017

Thu, 01/05/2017 - 12:00am

Significant 2016 Developments

Much like last year, in 2016 the SEC’s agenda related to financial reporting focused on Congressionally-mandated rulemaking (e.g., rulemaking required by the Dodd-Frank Act of 2010 and the FAST Act of 2015) and activities related to its Disclosure Effectiveness Initiative. The Commission completed all rulemaking required by the FAST Act in 2016 and a final rule requiring resource extraction issuers to disclose payments made to the U.S. and foreign governments. Other than a proposal to amend the definition of a smaller reporting company, the majority of the other rulemaking and Commission activities related to the Disclosure Effectiveness Initiative. 


EBP Commentator - Fall 2016

Tue, 12/20/2016 - 12:00am

Download PDF Version

Is Your Health Plan Ready for a HIPAA Audit? Contributed by Joanne Szupka 
The U.S. Department of Health & Human Services (HHS) has begun the next phase of audits in conjunction with its review of policies and procedures implemented by covered entities (and those entities’ business associates) to meet the Health Insurance Portability and Accountability Act (HIPAA) Privacy, Security and Breach Notification rules.

In 2009, the Health Information Technology for Economic and Clinical Health Act (HITECH) mandated that HHS conduct periodic audits of both covered entities and business associates to ensure that covered entities and business associates are complying with the HIPAA Privacy, Security and Breach Notification Rules. A company’s health plan is classified as a covered entity. 
There are three distinct components to these rules:
  • The Privacy Rule addresses protected health information (PHI).
  • The Security Rule addresses electronic protected health information (ePHI).
  • The Breach Notification Rule addresses providing notification following a breach of unsecured PHI.
Pilot Program Results
The pilot program or Phase I of the audits occurred in 2011 and 2012 and included 115 covered entities. 47 out of the 115 covered entities were health plans, which represented approximately 41 percent of the total population. No business associates were selected for an audit under the pilot program.
The findings and observations in the pilot program were divided among the three rules as follows: 
  • Privacy Rule – 30 percent
  • Security Rule – 60 percent
  • Breach Notification Rule – 10 percent
Additionally, 57 percent of the health plans audited had no complete or accurate risk assessment program. While other causes were noted, the general conclusion of the Phase I audits was that non-compliance was due to the entity unaware of the HIPAA requirements.

Phase II
Phase II is currently on-going and will include covered entities and their business associates and will be a combination of desk audits and on-site audits. Desk audits have occurred in 2016 with on-site audits scheduled for 2017. In July 2016, 167 covered entities were notified via email that they were selected for a desk audit. Under the program, a covered entity selected for a desk audit may also be eligible for selection with an on-site audit. 

Each desk audit is limited to a review of seven controls and is split into two separate audits.  One audit examines the Security Rule controls while the other audit assesses compliance with the Privacy and Breach Notification Rules. If it is an on-site audit, the plan will also be evaluated against a comprehensive set of HIPAA compliance controls.

Regardless of audit location or type, a listing of documents will be requested from the entity. These documents may include privacy policies, procedure manuals, training materials, incident response plans and risk analysis.

Best Practices
Even if your company’s health plan is not selected for a HIPAA audit, Phase II is a good reminder of the importance of regulatory audit readiness and good fiduciary practices. Being knowledgeable, proactive and prepared are key elements, in our opinion, to avoiding panic should your plan be picked for a regulatory exam. Below are some  of the action steps that plan sponsors may want to consider for the company’s health plan(s):
  • Educate yourself on the HIPAA requirements.
  • Perform a review of the HIPAA documents to ensure that the documents are complete, up-to-date and readily available along with any HIPAA training and compliance with those trainings. The protocol that HIPAA auditors will use during an audit has been released (here) and indicates that, unless otherwise specified, the requested documents should be the versions in use as of the date of the audit notification/document request.   
  • Inspect your company’s HIPAA Security Risk Analysis. A security risk analysis is intended to be an accurate and thorough assessment of the potential risks and vulnerabilities to the confidentiality, integrity and availability of ePHI. While the security risk analysis focuses solely on ePHI, it is generally recommended that sponsors should take steps to address the security of PHI of both paper and oral form, if applicable to your company’s health plan. The Security Rule requires the security risk analysis to be documented and updated on an as-needed basis.  If it has been a few years since the plan sponsor has looked at the health plan’s security risk analysis, a prudent step is to consider implementing a review. 
Insights from Our Specialists   Changes to the Determination Letter Program Contributed by Kimberly Flett and Jenny Ludwig 
Effective January 1, 2017, plan amendment requirements as well as the determination letter program for individually designed plans will undergo some significant changes. The Internal Revenue Service (IRS) provided much-anticipated guidance on these changes with the release of Revenue Procedure (Rev. Proc.) 2016-37 in June 2016. 

Under the new system, the accustomed 5-year remedial amendment cycle for individually designed plans (Rev. Proc. 2007-44) will cease to exist once Cycle A concludes under the current model on January 31, 2017. Going forward under the new system, a Required Amendment List (RA List) will be published on an annual basis, which will contain all the necessary regulatory amendments a plan must adopt in order to maintain its qualified status. All amendments on the list must be adopted by the end of the second calendar year following the date the list is published (list is expected to be made available shortly after October 1st of each year). 
With Rev. Proc. 2016-37, individually designed plans may only apply for a determination letter for initial plan qualification and plan termination, as detailed further below: 
  • Initial Qualification - If a plan has never received a favorable determination letter then an application can be submitted in association with Form 5300.
  • Plan Termination - An application for a favorable determination letter may be submitted with Form 5310 when a plan is being terminated. The filing must be received no later than the later of one year of the effective date of the plan termination or one year from the date on which the action terminating the plan is taken.  The application to the IRS must not be filed any later than 12 months after the distribution of all plan assets.
The IRS is still considering whether applications will be accepted for other reasons than the two previously mentioned (in particular, future law changes or plans that may not be able to adopt pre-approved documents). While Rev. Proc. 2016-37 brings changes to the requirement that a plan operate under the appropriate compliance standards, any plan-specific operational plan amendments are still required by the end of the plan year the amendment is put into effect. An Operational Compliance List identifying compliance issues will be issued by the IRS to assist sponsors.

Additional guidance in Rev. Proc. 2016-51 modifies the Employee Plans Compliance Resolution System (EPCRS) correction program for these changes to the determination letter program. Opinion and advisory letter for pre-approved plans will still maintain the current six-year cycle.

Significant Proposed Form 5500 Changes Contributed by Kimberly Flett 
In July 2016, the government agencies that administer the Form 5500 Annual Return/Report of Employee Benefit Plan (Form 5500) announced proposed changes to the Form 5500 which are expected to significantly impact the degree of plan details reported as well as the amount of time and effort to properly complete the form. Changes are effective for the 2020 Form 5500 for plan years beginning on or after January 1, 2019, with certain changes potentially required sooner including new compliance questions. The Department of Labor (DOL) has indicated that the purpose of the changes is to modernize the financial statement and investment information filed about employee benefit plans, update service provider and fee information, require Form 5500 reporting by all group health plans, and provide greater DOL and IRS agency collaboration through new compliance questions. The proposed revisions were open for comment, with an extended deadline of December 5, 2016. 

Some of the notable proposed changes include:
  • Individual changes to schedules that includes the addition of a new Schedule J for group health plans with questions specific to the Public Health Service Act. Small group health plans that have been previously exempt from filing will now need to report coverage on Form 5500. This will increase the number of plan sponsors filing Form 5500 for health plan coverage.  Schedule E for ESOP plans will be reinstated (this Schedule was previously removed) and Schedule I for small plans will be eliminated and replaced by Schedule H with an audit report exemption.
  • Schedule H will be expanded to incorporate information on alternative investments, hard-to-value assets and investments through collective investment vehicles through the inclusion of new categories, such as the following: derivatives, foreign investments, limited partnerships, venture capital, private equity, hedge funds, self-directed brokerage accounts and tangible personal property. Plan sponsors will need to report the number and type of investment funds offered, including the default investment for the plan. Plan fees will be classified in greater detail including salaries, audit and recordkeeping fees.  Additional changes will include reporting information currently on the Schedule H, Line 4i – Schedule of Assets (Held at End of Year) and Schedule H, Line 4j - Schedule of Reportable Transactions attachments directly onto the body of the Schedule H in order to present this information within the filing in a data compliance format necessary for the electronic filing requirements. 
  • Schedule C will include more information regarding fee disclosure requirements for small plan filers and a separate Schedule C for each service provider.
  • New questions throughout that focus on plan participation and compliance including reporting of any enhanced contribution details, monitoring uncashed checks for plan distributions, confirming whether 401(k) plan participants were provided required fee disclosures, whether required minimum distributions were made to 5 percent owners and if any hardship distributions were made during the year.  Additionally, plan coding descriptions will be replaced with “yes” and “no” responses.
  • Audit requirements may be affected due to changing the audit count threshold on participants with actual account balances (rather than including in the count employees who are eligible to participate but do not have an account balance).
  • There are new required disclosures related to the plan auditor:
    • Disclosure of the audit engagement partner and audit matters
    • The auditor’s communications with those charged with plan governance
    • The audit firm’s peer review information
    • Inclusion of the plan’s limited audit scope certification (for plans for which a limited scope audit was performed)
Although the revisions are not effective immediately, plan sponsors, service providers and practitioners should begin to consider how to address the impact of changes once the Form 5500 is finalized, including:
  • Service provider/recordkeeping systems will need to be upgraded to provide more detailed information (such as for investments held) for plan sponsors to meet the new requirements.
  • Form 5500 preparers will need to gather more information in regards to completing the detailed compliance questions.
  • Small business sponsors of health plans that did not previously need to report may be subject to the new filing requirements. 
Current Trends in Employee Stock Ownership Plans  Contributed by Jay Powers 
Recruitment Tool
Our firm has seen recent interest by business owners in using an employee stock ownership plan (ESOP) as an employee recruitment tool. An ESOP can enable a sponsoring employer to provide company shares to all full-time employees based on compensation and/or company tenure at no cost to the employees at the time when an ESOP is established within the company.  Including a Management Incentive Plan (MIP), which is typically used by the majority of ESOP-owned companies, can also provide a separate pool of phantom equity that can be allocated to key participants on a more discretionary basis and, as a result, all employees may receive added benefits from the ESOP plan (the ESOP acts as a benefit plan similar to a 401(k) plan) and certain key employees can be awarded both ESOP shares and MIP grants.

Our ESOP Advisory Group recently assisted a company with implementation of an ESOP where the company’s location was in a part of the country that the founders felt was less desirable to the caliber of financial institutional professionals that the company’s founders (former Wall Street executives) were seeking to recruit. The company found that offering target talent the opportunity to become an owner through an ESOP was an effective recruitment tool that offset the negatives associated with the location.

Estate Planning Tool
Another practice that has gained popularity is the use of an ESOP as an estate planning tool. A significant potential tax planning benefit for owners is the Internal Revenue Code (IRC) Section 1042 Rollover, which permits the selling shareholders to defer paying capital gains taxes on the sale of stock to an ESOP, as long as the company is a C Corporation at the time of sale and the ESOP purchases at least 30 percent of the company’s stock. Additionally, if the ESOP transaction is financed in part by seller notes, this allows the owners to generate interest income.  A secondary benefit of the seller notes is detachable warrants, which is an equity incentive with the potential for significant future upside to the holder of the seller note.
Some of the most important estate planning benefits may not be monetary in nature. For example, a sale to an ESOP allows an owner to retain significant day-to-day operational interest in the business and a similar role on the company’s board of directors, if desired. This opportunity to preserve the legacy of the business and to control how much of the company is sold to the ESOP can be an attractive feature to business owners.   

Tax Planning and Business Transition Tool
A long-standing, but continuing trend is selling an S Corporation business to an ESOP to obtain the potential tax advantages to the business. Selling 100 percent of the stock in an S Corporation (a pass-through entity) to an ESOP creates a corporate entity that could eliminate paying income tax moving forward. This, in turn, may allow the company to repay the debt that funded the buyout of the owners more rapidly; the deleveraging of the debt on the balance sheet may potentially promote a quicker recovery of company value. The tax savings may be used for such purposes as boosting capital expenditures, advertising, or as capital in the acquisition of a target company.

Our contributing specialists are members of BDO’s Employee Benefit Plan (EBP) Center of Excellence. Flett and Ludwig are part of the Compensation and Benefits ERISA Practice, which serves qualified retirement and health and welfare plans. Services include plan design and administration, nondiscrimination testing, plan funding calculations, outsourced benefits consulting, plan compliance reviews, government compliance and reporting, DOL/IRS corrections and investigations, IRA consulting, actuarial services and Affordable Care Act compliance. A frequent contributor and lecturer on ERISA tax compliance matters, Flett leads the firm’s Compensation and Benefits ERISA Practice.   

Powers is a member of BDO’s ESOP Advisory Group that provides assistance to business owners interested in comparing alternatives for ownership transition as well as providing business owners with a full-service, turnkey process involving planning, structuring, and negotiating the sale of all or part of the business to the ESOP.  Powers is the managing director of the group and is actively involved with the ESOP Association and the National Center for Employee Ownership (NCEO).
New Reporting Guidance Contributed by Darlene Bayardo and Chelsea Smith Brantley 
Plan sponsors should be aware of the following guidance that impacts reporting and disclosures for EBPs: 
Accounting Standards Update (ASU) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent), removes the requirement to categorize investments for which fair values are measured using Net Asset Value (NAV) as a practical expedient in the fair value hierarchy. However, it is required to disclose the amount measured using NAV as a practical expedient so that financial statement users can reconcile the fair value of investments included in the fair value hierarchy to total investments measured at fair value on the statement of net assets available for benefits.  The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted and should be applied retrospectively for all periods presented.

ASU 2015-10, Technical Corrections and Improvements, includes a change in the definition of “Readily Determinable Fair Value” (RDFV) that has the potential to change previously reported fair value hierarchy levels for many investments that previously used the NAV as a practical expedient in both retirement accounts in plan sponsor financials as well as investments reported in EBP financial statements. Based on the revised definition of RDFV, investments such as pooled separate accounts (PSAs) and common/collective trusts (CCTs) may no longer qualify to use NAV as the practical expedient.

ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient, reduces the complexity in EBP plan accounting.  The guidance in each part of the ASU is effective for fiscal years beginning after December 15, 2015. Early adoption was permitted for all three parts individually or in aggregate. Parts I and II of the ASU should be applied retrospectively, while Part III should be applied prospectively. Refer to our Winter 2016 edition for more details on the plan financial reporting simplification and for practical considerations in the implementation.
On the Horizon Contributed by Joanne Szupka 
Sponsors of terminated or potentially terminating defined contribution and defined benefit plans will be interested to know that the Pension Benefit Guaranty Corporation (PBGC) is looking to expand its Missing Participant Program to cover terminated 401(k) and other defined contribution plans as well as certain defined benefit plans not currently covered by the PBGC program. PBGC anticipates having the expanded program available in 2018 for plans that terminate after 2017.

One option previously available to plan sponsors was the IRS Letter Forwarding Program that was terminated in August 2012. The lack of a central database of missing defined contribution participants for terminated plans makes it difficult for participants to locate their accounts.  Plan sponsors attempting to meet their fiduciary responsibilities to terminated plan participants currently have only had the guidance in the DOL’s Field Assistance Bulletin No. 2014-01 to follow.  Once implemented, PBGC's expanded program (which would be voluntary for defined contribution plans) is expected to simplify locating retirement benefits for participants of terminated plans and to assist plan fiduciaries in complying with their responsibilities relative to plan terminations. 
Increases in Certain ERISA Civil Penalties Contributed by Kimberly Flett 
The DOL published in the Federal Register on June 30, 2016 adjustments to civil monetary penalties that impacts items under Employee Retirement Income Security Act (ERISA) reporting requirements.  Effective August 1, 2016, the potential penalty for failure to timely file a Form 5500 to the DOL was increased from $1,100 per day to $2,063. Additional increases for ERISA violations include failure to furnish retirement plan benefit statements from $11 to $28 per employee; failure to furnish actuarial reports upon request from $1,000 per day to $1,632; failure to furnish a blackout notice or notice of the right to divest employer securities from $100 per day to $131.

There have been no changes to the IRS Form 5500 late filing charges, which currently is $25 per day to a maximum of $15,000 or the Delinquent Filer Voluntary Compliance Program (DFVCP) of the DOL. The cap on the DFVCP fees range from $1,500 for a small plans filing more than one year of returns to $4,000 for large plans.  
ACA Reporting Deadline Changes Contributed by Joanne Szupka 
The IRS issued Notice 2016-70 on November 18, 2016 providing employers an additional 30 days to deliver Affordable Care Act (ACA) reporting forms to employees.  The extended deadline is March 2, 2017, and applies only to the 2016 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage), and Form 1095-B (Health Coverage). 
Want a Sneak Peek at the 2016 Form 5500? Contributed by Joanne Szupka 
The DOL’s Employee Benefits Security Administration has released advance informational copies of the 2016 Form 5500 annual return/report. The “Changes to Note” section of the 2016 instructions highlight important modifications to the Form 5500 and Form 5500-SF and the applicable schedules and instructions including the IRS compliance questions, administrative penalties, Schedules H, I and SB. 

Filers Instructed to Not Answer Compliance Questions on 2016 Form 5500 Contributed by Kimberly Flett 
Once again, the IRS has instructed that filers should not answer the Compliance Questions included on the 2016 Form 5500. Similar to the 2015 Form 5500 (see our Summer 2016 edition), the IRS has stated that compliance questions on the 2016 Form 5500 should also not be completed for the upcoming filing season. Questions include:
  • Form 5500: Preparer Information (Page 1)
  • Schedule H: Lines 4o, 6a-d
  • Schedule I: Lines 4o, 6a-d
  • Schedule R: Part VII (Lines 20a-b, 21a-b and 22a-b)
  • Form 5500 SF: Preparer Information (Page 1), Lines 14a-d and Part IX (Lines 15a-b, 16a-b, 17a-b, 18 and 19)
  • Form 5500 EZ: Preparer Information (Page 2), Lines 4a-d, 13a-b, 14 and 15
Updates for Defined Benefit Plans Contributed by Joanne Szupka 
  • In October 2016, the Society of Actuaries (SOA) released the Mortality Improvement Scale MP-2016 (MP-2016 Scale). The MP-2016 Scale includes three additional years of historical U.S. population mortality data and incorporates data now through 2014. The MP-2016 Scale rates continue the trend of decreasing rates as they are generally lower than MP-2015 Scale rates (which were, in turn, also lower than the MP-2014 Scale rates).  The SOA anticipates that most 2016 pension obligations calculated using the MP-2016 Scale will be approximately 1.5 - 2.0 percent lower than the obligations calculated using the MP-2015 Scale.
  • The PGBC has released the 2017 Premium Rates.  Premium rates will increase for single-employers, including the flat rate and the variable rate premiums and the flat rate premium for multiemployers. For further details refer to http://www.pbgc.gov/prac/prem/premium-rates.html.
2016 Tax Return Due Date Changes and Impact on Retirement Plan Contribution Dates Contributed by Joanne Szupka 
Certain tax return and extension due dates will change for taxable years ending on or after December 31, 2016, based on provisions included in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 that was signed into law in July 2015. The changes represent years of lobbying by the American Institute of Certified Public Accountants (AICPA) for a more logical timing in the tax return due dates, especially to have pass-through entity returns and the resulting Form K-1s due before individual and corporate tax returns affected by such information.
The primary impact is to the due date for partnership tax returns, which will now be due a month earlier, while most C Corporation tax returns will be due a month later (with special circumstances for certain C Corporation returns with a June 30th year end). Even though these changes are expected to generally be helpful to companies, it is important to watch the dates as C Corporations have a number of due dates to keep track of depending on the year end of the corporation (this was done in order to balance the bill’s impact on tax revenue over a ten-year period).  For further details, refer to the recently issued BDO Compensation & Benefits Alert from November 2016.  
Our EBP Center of Excellence is dedicated to assisting plan sponsors in addressing their various EBP needs. For more information on BDO’s EBP services, please contact a member of our practice leadership:
  Beth Lee Garner
National Practice Leader      Luanne MacNicol, Grand Rapids
Central EBP Regional Leader   Darlene Bayardo
National Assurance   Wendy Schmitz, Charlotte
Atlantic EBP Regional Leader   Mary Espinosa, Orange County
West EBP Regional Leader   Joanne Szupka, Philadelphia
Northeast EBP Regional Leader   Jody Hillenbrand, San Antonio
Southwest EBP Regional Leade   Jam Yap, Atlanta
Southeast EBP Regional Leader  

Audit Committee Alert

Tue, 12/20/2016 - 12:00am
Emphasis and Focus on Controls, including Revenue, Leases, Management Review Controls, and Non-GAAP Measures  Download PDF Version

During the December 2016 AICPA Conference on Current SEC and PCAOB Developments, multiple regulators emphasized the continued need for company vigilance around internal controls over financial reporting (“ICFR”) on areas requiring significant judgment and/or subject to significant complexities.  Audit areas where deficiencies have been identified in previous PCAOB inspection cycles of public company audits: ICFR, responding to risks of material misstatement and accounting for estimates, including fair value measurements – particularly in valuation of assets and liabilities associated with business combinations – remain high on the PCAOB’s watch list. Additionally, management review controls, non-GAAP measures, revenue-related estimates and reserves – including new FASB standards encompassing revenue recognition, leases, financial instruments, and credit losses – will continue to require management, audit committee, and auditor attention and focus.

Earlier this year, the PCAOB issued staff inspection briefs previewing the 2015 inspection findings and highlighting their 2016 inspection areas of focus. PCAOB Chairman Doty, addressing the PCAOB’s Role in Enhancing Public Trust and Integrity in Audits, stated that inspections [of public company audit engagements] have resulted in improved audits and, where deficiencies were noted, have led to engagement teams “raising their game”.  Jay Hanson, a PCAOB Board member, in an address to the Association of Audit Committee Members, Inc. in October 2016, noted that PCAOB outreach to audit committees has found that many audit committees are regularly discussing PCAOB inspection findings and other activities around audit quality with their auditors. Hanson highlighted encouraging emerging practices whereby audit firms are implementing more robust engagement management and allocation of more experienced resources in addressing the most difficult areas of the audit. BDO advises our client audit committees to seek out and encourage more robust dialogues with engagement partners about the similarities and differences in approaches undertaken by management and the auditors in assessing internal controls, particularly management review controls, and to discuss the audit procedures and work being performed in these areas.

SEC Chief Accountant Wes Bricker expressed sentiments regarding the continued attention by regulators on ICFR assessments and the importance of ICFR in providing high-quality financial information on which investors can rely.  He indicated that over the next few years, updating and maintaining internal controls will be particularly important as companies work through the implementation of significant new accounting standards – revenue recognition, leases, financial instruments, and credit loss standards. Such implementation and execution “will require careful planning and execution, as well as sound judgment from management…”  In December the Center for Audit Quality released Preparing for the New Revenue Recognition Standard, a tool comprised of a series of questions and resources for audit committees to use as an aid in their assessment of their organizations’ readiness in implementing FASB ASC 606. BDO advises our clients to review existing tools and resources, carefully analyze and assess controls around the implementation of new accounting standards, and ensure such controls are robustly documented along with documentation supporting compliance with such controls.

On the non-GAAP front, the SEC has cast a brighter light on companies’ proper use and presentation of non-GAAP financial measures, expressing concerns about and providing guidance to prevent the misuse of such measures. Bricker further indicated that a premium should be placed on the audit committee’s understanding of the company’s non-GAAP policies, procedures, and controls. BDO advises our client audit committees to ensure they are well-versed in management’s use of non-GAAP measures and are comfortable that strong disclosure controls are in place to ensure that such measures are used only within acceptable parameters.

The release of additional guidance and tools in the form of the SEC’s May 2016 Compliance & Disclosure Interpretations guidance and the CAQ’s “Questions on Non-GAAP Measures: A Tool for Audit Committees” seems to be having a positive impact on the use of non-GAAP disclosures. Mark Kronforst, SEC Chief Accountant for the Division of Corporation Finance, indicated that he was encouraged by the seriousness with which companies have taken the SEC’s guidance in this area and the self-correction that appears to have occurred within subsequent quarterly filings in the areas of chief concern expressed by the SEC in regard to transparency, prominence and comparability. During a non-GAAP panel at the 2016 AICPA conference, emphasis was placed on the need for companies to employ sound practices, such as instituting policies that are approved by audit committees on the use of non GAAP measures, use of tools such as the CAQ’s questionnaire, and close reviews by appropriately qualified personnel of earnings releases and other communication vehicles outside the financial statements. Under current PCAOB standards, auditors are required to read other information (e.g., non-GAAP measures) included in documents that contain annual or interim financial statements for material inconsistency with the financial statements, but are not required to perform any other procedures over this information in situations where no inconsistencies are identified. However, audit committees are being encouraged to engage with both auditors and management and ask direct questions about the company’s compliance with regulations and the appropriateness of presentation of such measures.

Building upon the audit committee questionnaire related to non-GAAP measures, in December the CAQ published “Non-GAAP Financial Measures: Continuing the Conversation” to further explore the issue of non-GAAP information, providing context on its definition and use, pertinent regulatory developments, and the current level of auditor involvement. Additionally, the paper compiles sets of suggested questions for a broad range of key stakeholder groups – including management, investors, analysts, securities counselors, audit committee members, internal auditors, independent auditors, regulators, accounting standard setters, and academics -  to consider regarding their preparation or use of non-GAAP financial measures.

BDO encourages our client management teams and audit committees to review the resources highlighted in this alert, continue to dialogue in these areas, and consult with their internal auditors and external audit engagement teams. Planning for yearend audits should ensure that both the audit committee and the auditors have a firm understanding of the company’s internal control, including underlying information systems relevant to financial reporting; management’s assessment of internal controls; relevant business processes and current economic factors; and timely identification of significant risks.

For additional audit committee tools and resources, visit the BDO’s Center for Corporate Governance and Financial Reporting at: https://www.bdo.com/resource-centers/governance.

For questions related to matters discussed above, please contact Amy Rojik.

BDO Comment Letter - Accounting for Hedging Activities

Fri, 12/16/2016 - 12:00am
Targeted Improvements to Accounting for Hedging Activities (File Reference No. 2016-310)

BDO believes that the proposal alleviates many of the concerns regarding the current guidance being difficult to understand and burdensome to apply. However, while we appreciate the Board's decision to address only targeted topics, we believe that unless related practice matters are also addressed, some of the benefits of the proposal may be reduced.


SEC Flash Report - December 2016

Fri, 12/02/2016 - 12:00am
SEC Staff Updates the Financial Reporting Manual and Compliance and Disclosure Interpretations
The staff of the SEC’s Division of Corporation Finance recently published an update to the Division’s Financial Reporting Manual (FRM).1 The inside cover of the FRM lists a summary of the paragraphs that were updated. 
The update amended paragraph 10220.5, which addresses an emerging growth company’s reporting requirements associated with financial statements of entities other than the registrant and pro forma financial information.  An EGC is permitted to present only two years of financial statements for entities other than the registrant in its initial registration statement even if the application of the significance tests otherwise results in a requirement to present three years.  Paragraph 10220.5(a) explicitly extends this relief to an EGC’s acquired real estate operations under Rule 3-14. (The FRM had previously extended this relief to acquired businesses under Rule 3-05 and equity method investees under Rule 3-09.)  Additionally, paragraph 10220.5(c) was amended to explicitly permit an EGC to omit pro forma financial information from its initial registration statement if it reasonably expects that such periods will not be required at the time of the offering.  The guidance is consistent with securities law amendments included in the FAST Act which permit an EGC to omit historical periods from its financial statements if it reasonably expects that such periods will not be included in its effective registration statement.  
The update also provides guidance related to reporting implications of certain new accounting standards: 
  • The New Revenue Standard (FASB Topic 606) - Paragraph 11120.4 was added to address the presentation of pro forma financial information associated with a significant acquired business in the year of adoption.  If a registrant adopts Topic 606 on a full retrospective basis on January 1, 2018 and acquires a significant business in 2018, it is not required to apply the new revenue standard to pro forma financial information for periods prior to adoption (e.g., the pro forma income statement for the year ending December 31, 2017). 
  • The New Leasing Standard (FASB Topic 842) – Section 11200 was added to address reporting issues related to the adoption of the new leasing standard.  The guidance summarizes the available adoption dates and transition methods.  A calendar year-end registrant is required to adopt the standard on a modified retrospective basis on January 1, 2019, with an initial application date of January 1, 2017.  Paragraph 11210.1 specifies that companies are not required to also retrospectively revise their 2016 financial statements if they file a registration statement on Form S-3 in 2019.2 The guidance indicates that the reissuance of the financial statements in the Form S-3 only accelerates the requirement to recast the 2017 and 2018 financial statements, but it does not change the initial date of the standard’s application. 
  • The New Disclosures about Short-Duration Contracts for Insurance Entities Standard (FASB Topic 944) – Section 11300 was added to address reporting issues related to the adoption of ASU No. 2015-09, Disclosures about Short-Duration Contracts.  Similar to the sections on other new standards above, the guidance summarizes the adoption dates and transition methods.  Paragraph 11310.1 was added to address the disclosure requirements related to claims development tables. ASU 2015-09 requires disclosure of disaggregated claims development tables for each reportable segment which reflect re-estimates of claims by accident year for up to ten years.  Consequently, the guidance indicates that Property and Casualty insurers are no longer required to separately present the consolidated ten-year loss reserve development table required by Securities Act Industry Guide 6 and Exchange Act Industry Guide 4 in their filings. 
The staff also updated its C&DIs several times this fall.  Most of these updates are legal in nature and provide guidance on tender offers, Regulation A, Regulation AB, Regulation D, Pay Ratio Disclosure and various other Securities and Exchange Act rules and forms.  One notable interpretation relates to the financial statement requirements in a Regulation A offering.  As noted above, securities law amendments included in the FAST Act permit an emerging growth company to omit historical periods from its financial statements if it reasonably expects such periods will not be included in its effective registration statement.  One of the new C&DIs formally extends this reporting relief to Regulation A filers.  An issuer conducting a Regulation A offering is permitted to omit financial information for historical periods (including financial information of other entities that may be otherwise required) if it reasonably expects those periods will not be required at the time Form 1-A is qualified by the SEC. 

For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.   1 The FRM is an internal SEC staff reference document that provides general guidance covering several SEC reporting topics. While the FRM is not authoritative, it is often a helpful source of guidance for evaluating SEC reporting issues. The FRM, along with other helpful guidance, can be accessed from the Division of Corporation Finance home page, which is located at: http://www.sec.gov/divisions/corpfin.shtml. 2 Item 11(b)(ii) of Form S-3 requires companies to file restated financial statements if there has been a change in accounting principle and the change requires a material retroactive restatement of the financial statements.  

FASB Flash Report - December 2016

Fri, 12/02/2016 - 12:00am
FASB Clarifies Restricted Cash Presentation 
Download PDF Version
Summary The FASB recently issued ASU 2016-181 to clarify the presentation of restricted cash in the statement of cash flows. The new standard takes effect in 2018 for public entities and is available here. Early adoption is permitted.
Details Main Provisions
ASU 2016-18 updates Topic 2302 to address diversity in practice due to a lack of guidance on how to classify and present changes in restricted cash or restricted cash equivalents in the statement of cash flows. The ASU does not define restricted cash and there is no intent to change practice for what an entity reports as restricted cash.

The amendments require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. That is, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU includes examples of the revised presentation guidance.
The amendments require an entity to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Further, when cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows, either in narrative or tabular format. This information should be provided on the face of the cash flow statement or in the notes to the financial statements.

Effective Date, Transition Method and Disclosures
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments should be applied retrospectively to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Transition disclosure is required in the first interim and annual period including the nature of and reason for the change in accounting principle, the method of applying the change, and description of the prior-period information that has been retrospectively adjusted. 

For questions related to matters discussed above, please contact Adam Brown or Gautam Goswami.

1 Restricted Cash
2 Statement of Cash Flows

BDO Comment Letter - ​Receivables — Nonrefundable Fees and Other Costs

Tue, 11/29/2016 - 12:00am
Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (File Reference No. 2016-340) - BDO agrees investors should amortize callable debt securities to the earliest call date, but recommends clarifying certain matters in the final standard.