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BDO Comment Letter - Amendments to Smaller Reporting Company Definition

Mon, 08/29/2016 - 12:00am
File No. S7-12-16 Release No. 33-10107, Proposed Rule: Amendments to Smaller Reporting Company Definition

Overall, BDO supports expanding the number of registrants that qualify as smaller reporting companies and thereby benefit from scaled disclosure requirements. We believe that doing so is consistent with the Commission's goals of promoting capital formation and reducing compliance costs for smaller registrants while maintaining investor protections.
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FASB Flash Report - August 2016

Mon, 08/29/2016 - 12:00am
FASB Issues ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities Download PDF Version
Summary

The FASB recently issued ASU 2016-14[1] to improve the presentation of financial statements of not-for-profit entities such as charities, foundations, universities, and nonprofit health care providers, etc. This is the first major change to the nonprofit financial statement model in over 20 years, which is intended to provide more useful information to donors, grantors and other users. The ASU is available here, and becomes effective for fiscal years beginning after December 15, 2017.


Main Provisions

ASU 2016-14 impacts all not-for-profit entities in the scope of Topic 958, as well as health care entities subject to the nonprofit guidance in Topic 954.  The ASU addresses the following key qualitative and quantitative matters:

  • Net asset classes
  • Investment return
  • Expenses
  • Liquidity and availability of resources
  • Presentation of operating cash flows    
In addition, the ASU includes illustrative financial statements of not-for-profit entities, which reflect changes made by the new standard.
 
Net asset classes
On the balance sheet, the ASU replaces the current presentation of three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) with two classes of net assets – net assets with donor restrictions and net assets without donor restrictions. As such, entities will no longer distinguish between temporary and permanent restrictions on the face of the statements. In addition, the  net asset classification of underwater amounts of donor-restricted endowment funds will be classified as part of net assets with donor restrictions.  Additional disclosures related to these underwater endowment funds are required.
 
The new standard retains the current requirements to provide information about the nature and amounts of different types of donor-imposed restrictions and the need to highlight how these restrictions affect the use of the resources and their impact on liquidity.
 
The ASU eliminates the over-time approach for the expiration of restrictions on capital gifts and requires the use of the placed-in-service approach in the absence of donor explicit stipulations.
 
Investment return
On the statement of activities, an NFP will present the amount of the change in each of the two net asset classes above.  In addition, the ASU requires investment return to be presented net of all related external and direct internal expenses.  It eliminates the current requirement to disclose the amount of such netted expenses.
 
Expenses
Under current standards, not-for-profit entities must present expenses by function. The ASU introduces a requirement to present expenses by nature and function, as well as an analysis of these expenses in one location to help users assess how an NFP uses its resources.[2] This analysis can be presented on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. It should be supplemented with enhanced disclosures about the methods used to allocate costs among the functions.
 
Presentation of Operating Cash Flows
The ASU maintains the option for nonprofit organizations to present their statement of cash flows using either the direct or indirect method of reporting.  If an organization chooses to use the direct method, the reconciliation of changes in net assets to cash provided (used in) operating activities is no longer required. 
 
Liquidity and availability of resources
To improve the ability of financial statement users to assess a nonprofit entity’s available financial resources and the methods by which it manages liquidity and liquidity risk, the ASU requires specific disclosures including:
  • Qualitative information that communicates how a nonprofit entity manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
  • Quantitative information that communicates the availability of a nonprofit’s financial assets to meet cash needs for general expenditures within one year of the balance sheet date.  Items that should be taken into consideration in this analysis are whether the availability of a financial asset is affected by its nature, external limits imposed by grantors, donors, laws and contracts with others, and internal limits imposed by governing board decisions.

Effective Date and Transition The amendments in ASU 2016-14 are effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.  Application to interim financial statements is permitted but not required in the initial year of application.  The amendments in this ASU can be adopted early. Entities presenting comparative financial statements must apply the amendments retrospectively, although certain optional practical expedients are available for periods prior to adoption.
  On the Horizon This ASU completes the first phase of the Board’s project to improve the financial reporting of not-for-profit entities. In an earlier decision, the Board determined that a second phase would consider other potential changes that are likely to require more time to resolve, including potentially reconsidering intermediate operating measures and certain other enhancements.  Interested stakeholders should monitor the FASB website for further developments.
 
For questions related to matters discussed above, please contact: 
  Lee Klump
Assurance Director Tammy Ricciardella
Assurance Director  



[1] Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954) – Presentation of Financial Statements of Not-for-Profit Entities

[2] See paragraph BC58

BDO’s Approach to Audit Quality

Tue, 08/09/2016 - 12:00am

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Executive Summary
BDO USA is excited to release a new report designed to share insights into how our firm is focused on aligning our rapid growth and our expanding public company practice with our foundational values and core purpose and directing the way we maintain and uphold audit quality. 

As an accounting and financial services firm that has been serving the public for over 100 years, BDO USA is committed to our core purpose of helping people – our clients, our professionals, our communities – thrive every day. Our commitment to this central purpose is evident in our culture, our values, our relationships, and in how we conduct our audit engagements.

Capital market reliance placed on financial reporting demands a committed focus by audit firms to the performance of quality audits. BDO is accomplishing this through an internal framework that takes into account dynamic external factors including: the business, regulatory, and competitive environments in which we and our clients operate; accounting and financial reporting complexities; expectations of investors and other stakeholders, including those charged with governance; along with continual need for innovation and sustainability related to environmental, social and financial responsibilities that support capital markets. How our firm then readies itself internally to address these external factors is demonstrated through the execution of our firm’s “CLIMB” strategy centered on our Culture and unity; Leadership and accountability; Innovation; Market prominence; and Best in class:   



Our report outlines the specific investments and activities that BDO is undertaking to address each of the CLIMB areas:
  • Culture and unity focuses on the keys to recruiting, developing, and cultivating top talent and providing an environment of continuous learning and opportunities for professional development.
  • Leadership and accountability focuses on the drivers of audit quality inclusive of the structure and oversight of our national audit practice and emphasis on independence and ethics as cornerstones of accountability.
  • Innovation focuses on the design and enhancements being made to our global audit methodologies; tools; and policies and the establishment of national functional resources to support the growing technical demands of our audit practice and adapt quickly to needs of our clients and evolving requirements of regulators and other stakeholders. 
  • Market prominence focuses on the growth and depth of experience that our professionals bring to bear in serving our clients both domestically and internationally and ensuring that we are active participants in the profession as both contributors and advocates for audit quality.
  • Best in class focuses on the calibration of audit quality through a variety of activities including:
    • accepting and retraining highly ethical clients;
    • closely monitoring the supervision and review processes of our engagements;
    • encouraging consultation with specialists and the exercise of professional skepticism and judgment; 
    • investing in and taking seriously the lessons learned through robust internal and external inspection programs and quality assurance reviews;
    • actively promoting the auditing profession through participation in professional task forces to address risks and providing outreach to students considering a career in auditing;
    • engaging in frequent communications and providing education and resources to those charged with governance at our clients and contacts including board of directors and financial reporting and accounting staff and executives; and
    • rewarding our professionals’ behavior that supports audit quality and being recognized by the marketplace for creating a culture and environment which supports both our professionals and our clients.
We invite you to read our Approach to Audit Quality and get to know BDO, as we share insights that reflect our firm’s core values, people, and framework for continuous improvement and embedding quality in all that we do.
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BDO Comment Letter - Other Income

Tue, 08/09/2016 - 12:00am
Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (File Reference No. 2016-250).

BDO supports the proposed changes to accounting for the derecognition of nonfinancial assets, but recommends certain clarifications.

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Significant Accounting & Reporting Matters Q2 2016

Mon, 07/25/2016 - 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
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PCAOB Inspection Briefs Detailing Scope and Objectives of 2016 Auditor Inspections

Fri, 07/22/2016 - 12:00am


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In July, 2016, the PCAOB issued two staff inspection briefs detailing the scope, focus, and objectives of its 2016 inspections of auditors of public companies and other issuers, as well as auditors of brokers and dealers.
2016 Inspections of Auditors of Public Companies According to the staff inspection brief regarding the 2016 inspections of auditors of public companies (available here), the PCAOB continues to focus on areas where inspectors have found recurring deficiencies in past inspections, including:
  • Auditing internal control over financial reporting. Among other things, Inspections staff will consider the sufficiency of auditor’s procedures to identify, test and evaluate controls.
  • Assessing and responding to risks of material misstatement. Specifically, Inspections staff plan to focus on (1) the sufficiency of testing the design and operating effectiveness of controls to support the planned level of reliance, including testing controls over system-generated data; (2) whether the substantive procedures were specifically responsive to fraud risks and other identified significant risks; (3) the evaluation of the presentation of the financial statements, including the accuracy and completeness of disclosures; and (4) the evaluation of audit evidence that appeared to contradict certain assertions in the financial statements.
  • Auditing accounting estimates, including fair value measurements. Inspections staff will consider the auditor’s procedures regarding understanding how estimates were developed, as well as the auditor’s testing of data and evaluation of assumptions used by management.

Additional financial reporting focus areas for 2016 include:
  • The implementation of Auditing Standard 2410 (currently AS 18), Related Parties, which became effective for audits of financial statements for fiscal years beginning on or after December 15, 2014.
  • Areas that involve significant judgment from management and/or auditors, including the auditor’s evaluation of segment identification and disclosures, going concern, and income tax accounting and disclosures.
  • Audit procedures involving information technology, especially auditors’ use of software tools, and procedures to assess and address risks of material misstatement posed by cybersecurity.
  • The firm’s quality control system, including (1) its policies and procedures for identifying the “root” causes of audit deficiencies; (2) complying with required audit committee communications under AS 1301 (currently AS 16), Communications with Audit Committees; (3) monitoring and maintaining independence; (4) performing engagement quality reviews with due professional care; and (5) applying professional skepticism, especially in areas that involve significant management judgments or transactions outside the normal course of business.

The PCAOB also considers the current economic environment when determining the scope and focus of inspections. In 2016, one particular economic factor under consideration is the recent significant appreciation in the U.S. dollar index, and its effect on multinational companies. Other economic factors include:
  • Increased merger and acquisition activity
  • Continued search for higher yielding investment returns in a low interest rate environment
  • Continued fluctuations in oil and natural gas prices

The appendix of the staff inspection brief contains additional information on the inspection program, industry sector and market capitalization demographics, and inspection focus data for public company audits from inspection cycles in 2013 through 2015.
2016 Inspections of Auditors of Broker-Dealers According to the staff inspection brief regarding the 2016 inspections of auditors of broker-dealers (available here), inspections staff are focusing on the following broker-dealer audit areas and attestation procedures in 2016:
  • Auditor independence, including examining whether firms performed bookkeeping or other services that resulted in impaired independence, and focusing on whether firms confirmed annually, in writing, to the audit committee that the firm is independent of the broker or dealer.
  • Financial statement areas with recurring deficiencies, including revenue, the assessment and response to risks of material misstatement due to fraud, financial statement presentation and disclosures, and fair value measurements.
  • Audit procedures for related party transactions under AS 2410 (currently AS 18), Related Parties.
  • Audit procedures on the supporting schedules required by SEC Rule 17a-5 to accompany the financial statements, and whether the auditor’s report on such supporting schedules is in accordance with AS 2701 (currently AS 17), Auditing Supplemental Information Accompanying Audited Financial Statements.
  • Procedures required by Rule 17a-5 for the examination of compliance reports and the review of exemption reports.
  • The engagement quality review, including the reviewer’s evaluation of the engagement team’s significant judgments and conclusions; the reviewer’s identification of significant engagement deficiencies; and the reviewer’s qualifications.

We encourage you to explore the resources cited as you fulfill your duties on behalf of the boards and companies that you serve. For additional audit committee along with financial accounting and reporting tools and resources, visit BDO’s Board Governance page.

For questions related to matters dicussed above, please contact Jan Herringer or Amy Rojik.

BDO Comment Letter - Business and Financial Disclosure Required by Regulation S-K

Fri, 07/22/2016 - 12:00am
File No. S7-06-16 - Business and Financial Disclosure Required by Regulation S-K

BDO supports the Commission's efforts to analyze the disclosure regime of Regulation S-K.  We provide our comments based on our experience working with registrants on their filings and from our perspective as auditors. 

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BDO Comment Letter - Interests Held through Related Parties That Are Under Common Control

Thu, 07/21/2016 - 12:00am
Interests Held through Related Parties That Are Under Common Control (File Reference No. 2016-260)

BDO supports clarifying the guidance for indirect variable interests and believes additional items should be revisited by the FASB.
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SEC Flash Report - July 2016

Mon, 07/18/2016 - 12:00am
SEC Proposes to Eliminate Outdated and Redundant Disclosure Requirements
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On July 13th, the Securities and Exchange Commission proposed amendments to eliminate redundant and outdated disclosure requirements as part of its Disclosure Effectiveness Initiative, an ongoing broad-based staff review of the SEC’s disclosure rules to consider ways to improve the requirements for companies and investors. The proposal follows the SEC’s Request for Comment on the effectiveness of certain financial disclosure requirements of Regulation S-X published in September 20151 and the Concept Release on Regulation S-K published in April 2016.2  The amendments were also proposed in response to a FAST Act mandate which requires the SEC to eliminate provisions of Regulation S-K that are duplicative, outdated, or unnecessary disclosures for all filers. 
 
The proposal acknowledges that certain disclosure requirements in Regulations S-K and S-X have become outdated, redundant, overlapping or superseded in light of developments in U.S. GAAP, IFRS, other SEC disclosure requirements, and changes in the information environment.   The changes are intended to simplify the overall compliance process, but not change the mix of information provided to investors.  For example, some of these proposed changes include:
  • ​Eliminating the income tax rate reconciliation disclosure requirement in S-X 4-08(h)(2) as such disclosure is required by ASC 740-10-50-12.
  • Eliminating the requirement to provide a computation of earnings per share in S-K 601(b)(11) as such disclosure is required by ASC 260-10-50-1a.
  • Deleting S-K 101(b) which requires disclosure of segment financial information, restatement of prior periods when reportable segments change, and discussion of segment performance that may not be indicative of current or future operations.  Such disclosures are similar to those required by ASC 280 and S-K 303(b). 
  • Deleting S-K 201(d) which requires disclosure of the securities authorized for issuance under equity compensation plans.  Although the U.S. GAAP requirements are not identical to those contained in S-K 201(d), they provide disclosures about the nature and terms of equity compensation arrangements which results in reasonably similar disclosures. 
  • Eliminating the requirement in S-K 503(d) and related forms to provide a ratio of earnings to fixed charges when an offering of debt securities is registered.  The Commission believes this requirement is no longer relevant and useful.
The proposal also solicits comments on:
  • Certain disclosure requirements which may overlap with U.S. GAAP but provide incremental information.  The SEC plans to use the feedback received on these areas to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.    
  • Where disclosures appear in an SEC filing.  The proposal would result in the relocation of certain disclosures within a filing.  The SEC is seeking feedback on how the relocations may affect the prominence or context of certain disclosures. 
 
The proposal can be found here on the SEC’s website. Comments should be provided within 60 days following publication of the release in the Federal Register.

For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.    1 Further information regarding the Request for Comment can be found here in our Flash Report. Our comment letter can be found here. 2 Further information regarding the Concept Release can be found here in our Flash Report.  Our comment letter will be submitted in July.  

BDO Comment Letter - Simplifying the Accounting for Goodwill Impairment (File Reference No. 2016-230)

Tue, 07/12/2016 - 12:00am
July 2016 – Simplifying the Accounting for Goodwill Impairment (File Reference No. 2016-230)

BDO supports the proposed changes to simplify the accounting for goodwill.
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SEC Flash Report - July 2016

Tue, 07/12/2016 - 12:00am
SEC Proposes Amendments to Smaller Reporting Company Definition
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On June 27, 2016, the Commission proposed rules which would increase the financial thresholds in the smaller reporting company1 (SRC) definition. The proposal would expand the number of companies eligible for the scaled disclosures permitted by Regulation S-K and Regulation S-X. The financial thresholds in the definition of accelerated and large accelerated filer and the related filing requirements would remain unchanged.
 
Under the proposal, a company with less than $250 million of public float (or less than $100 million in annual revenues, if the company has no public float) would qualify as a SRC. The proposed financial threshold for re-entering SRC status is less than $200 million of public float (or less than $80 million in annual revenues, if the company has no public float). The following table summarizes the proposed amendments to the SRC definition, as compared to the current definition:
  Registrant Category Current Definition Proposed Definition Reporting Registrant Less than $75 million of public float at end of second fiscal quarter Less than $250 million of public float at end of second fiscal quarter Registrant Filing Initial Registration Statement Less than $75 million of public float within 30 days of filing Less than $250 million of public float within 30 days of filing Registrant with No Public Float Less than $50 million of revenues in most recent fiscal year Less than $100 million of revenues in most recent fiscal year Re-entering SRC Status Based on Public Float Less than $50 million of public float at end of second fiscal quarter Less than $200 million of public float at end of second fiscal quarter Re-entering SRC Status Based on Revenues
(No Public Float) Less than $40 million of revenues in most recent fiscal year Less than $80 million of revenues in most recent fiscal year
The current definitions of accelerated and large accelerated filer contain a provision that excludes registrants that qualify as SRCs. The proposal would eliminate that provision, while maintaining the financial thresholds in the definitions of accelerated filer (i.e. $75 million of public float) and large accelerated filer (i.e. $700 million of public float). Therefore, companies with public floats of $75 million or more, but less than $250 million,2 that qualify as SRCs under the amended definition, would still be subject to the accelerated filing requirements, including the accelerated timing of filing periodic reports and the requirement to provide the auditor’s attestation of management’s assessment of internal control over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. However, those companies would be allowed to take advantage of the scaled disclosure system available to SRCs.
 
Rule 3-05 of Regulation S-X requires financial statements of businesses acquired or to be acquired. Rule 3-05(b)(2)(iv) allows registrants to omit such financial statements for the earliest of three fiscal years required if the net revenues of the business to be acquired are less than $50 million. The Commission has not proposed to amend this threshold.
 
The proposal can be found here on the SEC’s website. Comments should be provided within 60 days after the release is published in the Federal Register.

For questions related to matters discussed above, please contact Jeff Lenz or Roscelle Gonzales.

1 The smaller reporting company definition excludes investment companies, asset-backed issuers and majority-owned subsidiaries of a parent that is not a smaller reporting company.

2 Or less than $200 million of public float, if re-entering the SRC status.
 

FASB Newsletter - July 2016

Tue, 07/12/2016 - 12:00am
Topic 842, Leases

In early February 2016, the Financial Accounting Standards Board (“FASB” or “the Board”) issued its highly-anticipated leasing standard in ASU 2016-021 (“Topic 842” or “the new standard”) for both lessees and lessors. Under its core principle, a lessee will recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. The pattern of expense recognition in the income statement will depend on a lease’s classification.

Lessor accounting remains largely consistent with previous U.S. GAAP, but has been updated for consistency with the new lessee accounting model and with the new revenue standard, ASU 2014-09.2
 
For calendar-year public business entities the new standard takes effect in 2019, and interim periods within that year; for all other calendar-year entities it takes effect in 2020, and interim periods in 2021. 

This publication summarizes the new leasing guidance, including practical examples to assist practitioners. It also includes our observations on key concepts, as well as insights into how certain aspects of the new standard compare with prior U.S. GAAP.

[1] Leases (Topic 842)
[2] Revenue from Contracts with Customers (Topic 606)


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SEC Flash Report - July 2016

Tue, 07/12/2016 - 12:00am
SEC Adopts Rule Requiring Resource Extraction Issuers to Disclose Payments to Governments
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On June 27th, the SEC adopted amendments to Exchange Act Rule 13q-1 and Form SD. The rule and form require 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. The requirements were originally adopted in 2012 pursuant to the Dodd-Frank Act but were vacated after they were challenged in a federal court. In response, the SEC rewrote the requirements. The SEC’s press release announcing this rulemaking can be accessed here, and the final rules can be accessed here.

The rule applies to “resource extraction issuers,” defined as domestic and foreign issuers that are engaged in the commercial development of oil, natural gas, or minerals and required to file an annual report under the Exchange Act. The activities that constitute “commercial development of oil, natural gas, or minerals” include exploration, extraction, processing, export, or the acquisition of a license for any such activity.
 
Issuers are required to disclose on Form SD any payment (or series of related payments) to the U.S. government or foreign governments, including majority-owned entities of a foreign government, that is not de minimis (which the rule defines as equaling or exceeding $100,000 during a fiscal year) and has been made to further the commercial development of oil, natural gas, or minerals.  The disclosures must be reported on a cash basis, do not need to be audited1 and are not subject to officer certifications. 
 
Issuers must comply with the final rule for fiscal years ending on or after September 30, 2018.  The disclosures will be filed annually in an XBRL-formatted exhibit to Form SD.  The report will be due 150 days after the end of an issuer’s fiscal year. Alternatively, issuers may use a report prepared for foreign regulatory purposes if the SEC deems the requirements of the foreign regime to be substantially similar to the Commission’s requirements.  An issuer may generally follow the due dates of the alternative regime. 
 
The final rule is substantially consistent with the rule the SEC proposed in December 2015.2 The most significant changes reflected in the final rule are:
 
  • The final rule provides a transition period for reporting payments by recently acquired entities that were not previously subject to reporting and a one year delay in reporting payments related to exploratory activities. 
  • In a separate order, the Commission recognized two EU Directives, Canada’s Extractive Sector Transparency Measures Act (ESTMA) and the U.S. Extractive Industries Transparency Initiative (USEITI) in their current forms as substantially similar disclosure regimes.
  • Community and social responsibility payments required by law or contract were added to the comprehensive list of payments covered by the disclosure requirements.

For questions related to matters discussed above, please contact Jeff Lenz or Brandon Landas.

1 Moreover, since Form SD does not include audited financial statements, auditors would not need to read the disclosures and consider whether they are materially inconsistent with the audited financial statements.
2 BDO’s SEC Flash Report that discussed the proposed rule can be accessed here
 

2016 BDO IPO Halftime Report

Tue, 07/12/2016 - 12:00am


Number of U.S. IPOs to Increase Slightly Over Remainder of Year Majority of Bankers Predict Serious Correction in Valuations of Tech Unicorns
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The number of initial public offerings (IPOs) on U.S. exchanges took a nosedive during the first six months of 2016, down by approximately 60 percent year-over-year. Proceeds are down even more (66%).* According to the 2016 BDO IPO Halftime Report, a survey of capital markets executives at leading investment banks, many of the issues causing businesses to hold off on their offerings are still present in the market and that will cause any increase in offerings during the second half of the year to be minimal.

When asked to identify the main factor in the dramatic drop in the number of IPOs on U.S. exchanges in 2016, the investment bankers identified four key drivers - stock market volatility during the initial weeks of the year (41%), the availability of private funding at attractive valuations (23%), the poor performance of 2015 IPOs (19%) and the rise in M&A activity causing more businesses to opt for the price certainty of a sale over the risk of an offering (16%).



“With strong percentages of bankers citing different reasons for the downward trend in IPOs, it is clearly a combination of several factors that have contributed to the stall in offerings,” said Ted Vaughan, partner on the Capital Markets Practice of BDO USA. “Beyond the main factors identified by the bankers, I would suggest that the Federal Reserve’s uncertainty on when to raise interest rates, the uncertainty surrounding the U.S. Presidential election, the collapse in crude oil prices and the ongoing instability throughout the global economy - most recently demonstrated by the exit of the UK from the European Union – have all been contributing factors.”

During the remainder of 2016, one-third (34%) of bankers predict the pace of U.S. IPO activity will increase from the first half of the year, while approximately one-fifth (18%) forecast a decrease in offering activity.  Close to half (47%) anticipate IPO activity will remain at the same level as the first half of the year.  Overall, capital market executives are predicting a slight increase (+ 5%) in the number of U.S. IPOs during the second half of the year.  They predict offerings will average $190 million in size, which projects to approximately $15 billion in total IPO proceeds on U.S. exchanges in 2016.  This would represent the lowest level of offerings since 2009, the height of the financial crisis, and lowest amount of proceeds since 2003.
Presidential Election Better than two-thirds (68%) of I-bankers contend that the U.S. Presidential election will have an impact on the U.S. IPO market.  When asked which of the U.S. presidential nominees would be better for the U.S. IPO market, a majority (58%) of the capital markets community identified Donald Trump, compared to just one-third (32%) that chose Hillary Clinton.  The remaining bankers (10%) expressed no preference between the two candidates in terms of impact upon the US IPO market.



“In many ways the election has already impacted the IPO market.  Any election brings with it a degree of uncertainty and this election has probably brought more uncertainty than any in recent memory.  Uncertainty, just like volatility, heightens our aversion to risk and that is not a conducive climate for moving forward with a public offering,” said Chris Smith, partner in the Capital Markets Practice of BDO USA.  
IPO Turnaround?  Capital markets executives are divided when asked what they consider to be the most important factor for generating more IPOs on U.S. exchanges during the second half of the year.  Close to one-third (30%) cite the need for a sustained stock market rally of more than a quarter and close to one-quarter (23%) point to the need for better pricings and improved returns from new offerings.  Pricing of a high-profile offering (21%), a correction in lofty private valuations (16%) and a pullback in M&A activity (9%) were other potential IPO drivers identified by the bankers.



“Although the U.S. IPO market began to show signs of life in May, almost doubling the number of offerings priced during the first four months of the year, it remains well behind the pace of 2015 and the average for the past decade, said Paula Hamric, partner in the Capital Markets Practice of BDO USA.  “In our survey, sizable proportions of the investment banking community cite different factors when asked for the key to getting the U.S. IPO engine running again.  However, the overarching theme is an aversion to the risk associated with making an offering in increasingly discerning public markets versus the certainty of private funding or a sale. Until these alternatives become less attractive and IPO pricing improves, growth in offering activity may be minimal.”
Source of IPOs When asked to identify the primary source of IPOs in the second half of the year, forty-one percent of capital market executives identified private equity firms. Lesser proportions cited venture capital portfolios (22%), spinoffs and divestitures (21%) and owner-managed, privately-held businesses (15%).


Industry Forecast For the fourth consecutive year, the healthcare sector – driven by biotech - is leading all industries in the number of IPOs priced on U.S. exchanges, accounting for more than half of all offerings.  Two-thirds (66%) of investment bankers believe this trend will continue in the second half of 2016.  Of the one-third (34%) who believe another industry will emerge with more offerings during the remainder of the year, 72 percent predict the technology industry will lead the way. 


Problem with Unicorns For many years, the technology industry served as the star of the U.S. IPO market.  However, in recent years, due to the wide availability of private financing, tech has played much more of a supporting role with far fewer offerings as they are able to stay private longer.  In fact, there are now more than 140 private technology businesses – dubbed “tech-unicorns” - that are valued at more than $1 billion.

A majority (52%) of capital markets executives at leading investment banks are predicting a serious correction in the valuations of these so-called “unicorns”.  Last year, in order to gain additional funding, some of these businesses went public at valuations considerably below their most recent round of private financing.  An overwhelming majority (85%) of bankers believe there will more of these type of offerings moving forward.

“In recent years, the widespread availability of private funding at attractive valuations has led to a dramatic drop in the number of IPOs coming from the technology sector, the historical leader in offering activity.  Instead, there are now more than 140 technology businesses privately valued at more than $1 billion, yet only one of these companies has pursued an IPO in 2016 as they fear their private valuations won’t stand-up to scrutiny in the more discerning public markets,” said Lee Duran, partner in the Capital Markets Practice of BDO USA.  “As new rounds of private financing reflect more realistic valuations, unicorns will increasingly be faced with a choice between being acquired or going public.  Either way, the actual profitability of these businesses will be given much greater weight versus projections of future performance.” 

One of the smaller unicorns, Twilio, a provider of communication software for other tech businesses, recently completed a very successful IPO.  It’s stock almost doubled on its initial day of trading, after pricing above its most recent private valuation.  Although this is welcome news to any tech business considering an offering, Twilio had a private valuation of just over $1 billion and is too small to be considered a bellwether for larger unicorns such as Uber, Snapchat and Airbnb.

Moreover, if private valuations continue to exceed those of public markets, a majority (55%) of the capital markets community anticipate some of these “unicorns” will fail.  When asked how many, the consensus was that approximately 17% will not survive.


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

Lee Duran
San Diego

 

Chris Smith 
Los Angeles

  Paula Hamric
Chicago  

Ted Vaughan
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FASB Flash Report - July 2016

Mon, 07/11/2016 - 12:00am
Topic 842, Leases Download PDF Version
Introduction In early February 2016, the Financial Accounting Standards Board (“FASB” or “the Board”) issued its highly-anticipated leasing standard in ASU 2016-021  (“Topic 842” or “the new standard”) for both  lessees and lessors. Under its core principle,  a lessee will recognize right-of-use  (“ROU”) assets and related lease liabilities  on the balance sheet for all arrangements with terms longer than 12 months. The pattern of expense recognition  in the income statement  will depend on a lease’s classification.
 
The following table summarizes lessee accounting  for finance and operating leases:
INSERT TABLE Lessor accounting  remains largely consistent  with previous U.S. GAAP, but has been updated for consistency with the new lessee accounting  model and with the new revenue standard, ASU 2014-09.2
 
For calendar-year  public business entities  the new standard takes effect in 2019, and interim periods within that year; for all other calendar-year entities it takes effect in 2020, and interim periods in 2021. The full standard is available here.
 
This publication  summarizes the new leasing guidance, including practical examples to assist practitioners.  It also includes our observations on key concepts, as well as insights into how certain aspects of the new standard compare with prior U.S. GAAP.
Background The FASB leases project began as one of several joint projects with the International Accounting Standards Board (IASB) aimed at converging U.S. GAAP and International  Financial Reporting Standards (IFRS). The objective of updating  the leases guidance is to increase transparency and comparability  among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information  about leasing arrangements. The new guidance is intended to address stakeholder concerns that previous leases guidance did not result in a faithful representation of leasing transactions, specifically that the rights and obligations associated with operating  leases were not recognized on the balance sheet.
 
After several years of deliberations and two exposure  drafts,  the FASB and IASB reached  different conclusions regarding the treatment  of leases, and each of the Boards issued separate guidance early in 2016. Refer to the IFRS section of document for a brief summary of the differences between Topic  842  and IFRS 16, Leases.
Scope

The scope of the new standard is generally consistent with prior guidance, and limits the definition of a lease to physical assets. The glossary defines a lease as “a contract, or part of a contract, that conveys the right to control  the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration”. In order to meet this definition, a contract must grant the customer the right to direct the use of the identified asset during the term of the contract, as well as obtain substantially all of the economic benefits from the asset’s use.

BDO Observation: Although the Board acknowledged in paragraph  110 in the Basis for Conclusions that the conceptual  basis for excluding leases of intangible assets, inventory  and assets under construction from the scope of the new standard is unclear at best, it nonetheless decided to continue to limit the scope of the new standard to physical assets only. As a result, those arrangements  will continue to be accounted for under Topic 350, Topic 330 and Topic 360, respectively. In addition, leases to explore for or use minerals, oil, natural gas and other  similar resources, including  leases of mineral rights, will continue to be accounted for under Topics 930 and 932, while leases of biological assets, including  timber,  will continue to be accounted for under Topic 905.

Specified Assets

In order to be considered an identified asset, a lease must either explicitly or implicitly  specify the asset subject to the lease. Similar to prior requirements,  an asset is not considered specified if the lessor has the right to substitute similar assets during the term of the lease and therefore maintain control. However, the new standard clarifies that in order to preclude an arrangement  from being deemed a lease, substitution rights must be substantive,  which is defined in ASC 842-10-15-10 as the lessor’s practical ability to substitute alternative assets throughout the term and the ability to derive an economic benefit from the substitution. The right to substitute only on or after a particular date or event, for repairs and maintenance or based on the availability of a technical upgrade are not considered substantive substitution  rights. In addition, the standard states that if the asset is located on the lessee’s premises, it is likely that the costs associated with substituting the asset would outweigh  the related benefits, and thus the substitution right would not be substantive. If the lessee cannot determine whether the substitution rights would be substantive to the lessor, the lessee must presume that they are not substantive.

BDO Observation: As noted above, the requirement that a right of substitution must provide economic benefits to the supplier in order to be considered substantive is new, and may require significant judgment. As a result of this guidance, more contracts may be considered leases than under prior guidance. This determination becomes more important  under the new guidance due to the balance sheet implications for the lessee.


Example 1: Customer enters into a contract with Manufacturer for the use of a copy machine for three years. Under the contract,  the copier is explicitly specified by serial number, but Manufacturer has the right to replace the copier at any time during the agreement, including in lieu of repairing it. While the contract specifies a location for the copier, Customer has the right to move the copier to any of its facilities upon three days written  notice to Manufacturer.
                                         
The contract contains a lease. There is an identified  asset, and Customer has the right to control  the use of the asset under lease throughout the three year period of the contract.  Customer has the right to obtain substantially all of the economic benefits from the use of the copier as the copier is located on Customer’s property,  and Customer has the right to direct the use of the copier, including the right to move it to another location.
 
Although Manufacturer has the right to replace the copy machine at any time, such substitution  would not generate an economic benefit for Manufacturer. As noted in 842-10-15-12, if the asset is located at the customer’s premises, then the costs associated with substitution are likely to exceed the benefits associated with substituting the asset.
 

 

Right to Control Use

In addition to relating to a specified asset, a contract  must convey the right to control  the use of the asset, which is defined as both the right to obtain the economic benefits from the use of the asset, as well as the right  to direct the use of the asset. When determining whether a contract conveys the right to obtain the economic benefits of the identified asset, the lessee should only consider the economic  benefits that result from the use of the asset within  the scope of the contract. In addition, terms that provide protective rights to the lessor, such as requiring the customer to follow industry-standard operating procedures, specifying the maximum amount of usage or requiring notification of changes in how or where the asset will be used, do not in isolation prevent the lessee from  having the right to direct the use of the asset. For example, if a customer leases a corporate jet for a two-year  period, restrictions within  the lease agreement limiting the number of hours the jet can be flown prior to obtaining preventative maintenance will not preclude the arrangement from meeting the definition of a lease as long as the customer has the right to control the use of aircraft during the two-year term, including deciding where and when it will travel and what passengers and cargo it will transport.
 
The lessee has the right to direct the use of the asset if it can change how and for what purpose the asset is used throughout the term of the agreement, or if those relevant decisions are predetermined  and the lessee either designed the asset in a way that predetermined its use or the lessor does not have the right to change the operating instructions during the term. Decision-making rights include the right to decide how to use the output produced by the asset, the right to change when or where the output  is produced, and the right to change how much output  is produced, if any. These rights are examples only, and are neither determinative  nor prescriptive. For example, a requirement to use an asset in a specified location does not necessarily imply that the lessee does not direct the use of the asset.
 


Example 2: Telco enters into an agreement with Logistics Company. Under the agreement, Telco requires Logistics Company to build or otherwise obtain a warehouse in a specified geographic location. While Logistics Company has latitude  in selecting the facility, it must be located in the specified area, and once selected cannot be relocated, even within  the specified area, absent extraordinary  circumstances (for example, destruction by fire). For the five year term of the agreement, Logistics Company will process all returned handsets directed by Telco to this warehouse pursuant to repair instructions provided by Telco. If Telco does not direct handsets to the warehouse, then the warehouse does not operate. Logistics Company is not allowed to service any customers other than Telco in the warehouse under the agreement. Logistics Company is required to operate and maintain  the warehouse on a daily basis in accordance with industry-approved operating procedures.
 
Even though in form this arrangement appears to be a service contract, the agreement contains a lease. Telco has the right to use the warehouse for five years. The arrangement includes an identified asset. Once selected, Logistics Company does not have the right to substitute the specified warehouse. Telco has the right to control  the use of the warehouse throughout  the five-year term of the contract because it has the right to obtain substantially all of the economic benefits from the use of the warehouse, and it has the right to direct the use of the warehouse. Telco makes the relevant decisions about how and for what purpose the warehouse is used because it has the right to determine whether, when and how much activity will occur at the warehouse. Because Logistics Company is precluded from using the warehouse for any other customer or purpose, Telco’s decision making about the timing  and quantity  of handsets processed in effect determines when and whether the warehouse will be utilized.
 

 

Short-Term Leases

The new standard  provides  lessees with a practical expedient related to short  term  leases. Lessees can elect an accounting policy under which the recognition provisions of the standard are not applied to leases with terms of 12 months or less and that do not include an option to purchase the underlying  asset that is reasonably certain to be exercised. Instead, lease payments related to these short term leases are recognized on a straight- line basis over the lease term, consistent  with current accounting standards. This election must be made by asset class.
 


Example 3: Builder is engaged to construct a 60 story building,  and leases a crane from Supplier Co. for the six months during which the frame will be erected. The lease agreement specifies a crane to be used, and although it does not allow the crane to be relocated without Supplier Co.’s approval, it otherwise allows Builder to direct the use of the crane. The lease does not include any renewal options, although in practice Builder could release the crane at then current market rates at the end of the lease term.
 
The agreement includes a lease. However, because the duration  of the contract is only six months, it qualifies for the practical expedient. Builder can elect to account for the lease on a straight-line basis through  income, without recognizing an ROU asset and a related lease liability.
 
Example 4: Assume the same facts as in Example 3, with the exception that the contract does not specify a fixed duration. Instead, the crane is subject to a daily rental rate, with weekly rent payments, and can be retained indefinitely.
 
The agreement still contains a lease. In order to determine  whether the lease qualifies for the practical expedient for short term leases, Builder must  analyze the lease term,  as further  discussed below in the “Lease Term” section. In this scenario, given that Builder determines the most likely duration  based on need to be six months, coupled with the physical difficulties of replacing the equipment during that period with another crane with this functionality  and the limited number of available cranes of this magnitude in the market, Builder determines that the term is six months. Therefore, Builder can elect to apply the practical expedient for short-term leases, consistent  with the FASB’s intent  (see paragraph 379 in the Basis for Conclusions).
 
BDO Observation: Topic 842 does not provide a scope exception for small value leases, similar to the exception provided in IFRS 16, the leasing standard  issued by the IASB. Nonetheless, the FASB does note  in paragraph  122 in the Basis for Conclusions that entities may adopt reasonable capitalization thresholds below which lease assets and lease liabilities  are not recognized, consistent with other applications of accounting policies, such as capitalization of property, plant and equipment. We believe that any application of a lease capitalization threshold should result in materially the same result when considering all leases, not solely the impact from applying the policy to a single lease.
Unit of Account Because the definition of a lease includes a specified asset, the unit of account is typically the individual asset. Therefore, if a contract includes the lease of multiple assets, it should be separated into multiple lease components  if the lessee can benefit  from  the right to use each asset on its own or in conjunction with other readily available resources, and the right of use is neither highly dependent on nor highly interrelated with the other rights to use assets in the contract. The standard also contains guidance requiring separate accounting for land and a building, unless the effect of separation would be insignificant. Conversely, two or more leasing contracts must be combined when they are entered into at or near the same time with the same counterparty or related parties, if (1) they were negotiated as a package with the same commercial purpose, (2) the amount
of consideration to be paid in one contract  depends on the price or performance of the other one, or (3) the rights to use the underlying  assets conveyed in the contracts  are a single lease component based on the separation guidance described above.
 
Example 5: Clean Air Co. provides air purification  systems, primarily to hospitals and other healthcare facilities, under leasing arrangements. Each system consists of multiple air filters installed throughout the lessee facility, in an amount and at locations determined based on the
size and design of the facility.
 
Because of airflow throughout the lessee facility, any individual air filter is ineffective on its own. Achieving air purification  requires the full complement of air filters provided in the arrangement. Therefore, the use of each air filter is highly dependent upon the use of the other air filters, and the arrangement is deemed to contain only one lease component.
 
BDO Observation: The guidance in ASC 842-10-15-28 on determining whether one or more lease components  should be accounted for separately is similar to the guidance in ASC 606-10-25-19 through 25-21 on determining whether a good or service promised in a revenue contract is distinct, and therefore represents a separate performance obligation. By the same token, the guidance in ASC 842-10-25-19 on when to combine contracts is almost identical to the guidance in ASC 606-10-25-9 on combining revenue contracts. This linkage is intentional, as the new lease standard incorporates concepts from the new revenue recognition  guidance, in particular the concept of control.

In addition, both lessees and lessors must separate lease components from non-lease components.  For purposes of this analysis, administrative tasks to initiate a lease and reimbursement of the lessor’s costs are not considered lease components,  and no lease consideration should be allocated to them. The new standard does allow lessees a practical expedient under which entities can elect not to separate non-lease components under the contract, but instead account for them as part of the lease component.  The practical expedient is not available for lessors.

BDO Observation: While previous GAAP also requires separation of lease and non-lease components, given the similarities  between current operating lease treatment and accounting for service contracts, this distinction often was not critical to the accounting. However, given the balance sheet implications of the new guidance for lessees, this distinction will become more important. For example, if a company  leases one floor of a multi-story  building as its office, and the lease payments  include the cost of common area maintenance, the portion of the lease payment related to the maintenance will need to be bifurcated and accounted for separately unless the company elects the practical expedient and accounts for it in conjunction with the lease. However, that results in a larger ROU asset and lease liability,  so companies will need to consider whether they will avail themselves of the practical expedient.

The consideration in a contract  must be allocated among the lease and non-lease components of the contract. Lessees must allocate the lease consideration to the separate lease and non-lease components on a relative standalone  selling price basis. If observable standalone prices are not readily available,  lessees must estimate standalone prices using observable information  to the extent possible. The residual approach may be acceptable if the standalone price for a component is highly variable or uncertain. Lessors must allocate the lease consideration  using the revenue guidance in ASC 606-10-32-28 through 32-41.
 
Example 6: Lessee leases a car for its salesperson from Dealership for three  years. Under  the lease, Lessee has the right  to drive the car for up to 15,000 miles per calendar year and to bring the car into the maintenance department of Dealership once per quarter for regularly scheduled maintenance as defined in the lease agreement. In addition  to fixed lease payments of $415 per month, Lessee is required to maintain full coverage insurance on the car and to pay for any maintenance  services required beyond regularly scheduled maintenance defined in the lease agreement. At the end of the lease term,  Lessee is also required to make additional  lease payments on a per mile basis for any mileage greater than 45,000 miles.
 
In this example, the lease contains two components, a car lease and a maintenance agreement. If Lessee has elected the practical expedient in 842-10-15-37, Lessee would not separate the two components, but would instead account for the combined contract as a single lease component. Lessee must elect the practical expedient  by class of underlying  asset, in this case, automobile  leases.
 
If Lessee has not elected the practical expedient, Lessee would allocate the total consideration in the contract between the car lease and the maintenance agreement on a relative  selling price basis. Although Lessee is required to maintain  insurance coverage, that requirement represents a protective right. In addition, because Lessee must contract directly with an insurance agency of its choice, those payments are not consideration in the contract with the dealership. By the same token, any additional maintenance services or charges for excess mileage would also be considered variable consideration and not included in the computation of total consideration under the contract. Thus the only amounts to be included in this calculation are the fixed monthly lease payments, which total $14,940 over the lease term.
 
In order to allocate the total consideration in the contract  between the car lease and the maintenance services, Lessee should  identify observable standalone prices for the maintenance  services and for the vehicle  lease. Lessee determines that it could enter into a maintenance agreement with an unrelated service center for $30 per month, and Dealership commonly leases the same car on a standalone  basis for
$400 per month. Therefore, the consideration in the contract is allocated to the lease and non-lease components  as follows:
    Standalone Price   Relative Standalone Price Car lease $14,400   $13,898 Maintenance 1,080   1,042   $15,480   $14,940   Portfolio Approach The new lease standard allows for a portfolio approach. Specifically, paragraph 120 in the Basis for Conclusions indicates that the standard permits both a lessee and a lessor to apply the leases guidance at a portfolio level for leases with similar characteristics as long as the use of the portfolio approach would not differ materially from the application of the new standard to the individual leases in the portfolio. Paragraphs 842-20-55-18 through 55-20 provide an example in which the portfolio approach is utilized in determining the discount rate for the lease.  Lease Classification The new lease standard carried forward consistent lease classifications, with one exception. For lessees, leases are classified as either an operating lease or a finance lease, while for lessors, leases are classified as sales-type, direct financing or operating. The one exception is that the new standard no longer allows leveraged lease treatment for leases that are entered into or modified after the effective date of the standard. As a result, new or modified leases that previously met the definition of a leveraged lease will be accounted for as one of the other three types of leases. Existing leveraged leases are grandfathered into the standard, and should continue to be accounted for by the lessor under prior guidance until they expire or are modified.

BDO Observation: Under Topic 840, a leverage lease is one that meets the criteria to be classified as a direct financing lease, but also includes a long-term creditor that provides financing in an amount sufficient to provide the lessor with significant leverage in the arrangement. In addition, the lessor’s net investment  in the lease must decline during the early years and rise during the later years of the lease, typically due to tax-related cash flows. Given the requirement in Topic 840 for leveraged leases to first meet the criteria for direct financing leases, we believe it is likely that many new or modified leases that would have historically been accounted for as leveraged leases will be accounted for as direct  financing  leases under the new standard.

Lease classification should be determined upon, and recognition begun on, lease commencement, which is defined as the date when the lessee obtains the right to use the asset. Any changes to the assumptions between lease commencement and the start of payments under the lease should be accounted for as a reassessment, as further described below.
 
Example 7: Burgers R Us enters into a ground and building lease to be used for a new restaurant. The lease provides for payments of $16,000 per month if Burgers  R Us begins operations in the location on or before November 1, 2012. Monthly lease payments increase by $500 for every month the grand opening is delayed beyond November 1, 2012. The lease term ends ten years after the first payment, which is due when the restaurant opens for business. The lease is entered into on May 1, 2012, at which time both lessee and lessor begin the work to obtain the relevant permits required to operate a Burgers R Us restaurant in that location. The relevant permits are obtained, and the lessor grants access to Burgers R Us to the site on August 1, 2012. At that time, Burgers  R Us begins leasehold improvement construction and other efforts required to conform the building to its brand requirements. The restaurant opens for business on December 1, 2012, at which time payments under the lease begin.
 
The lease commencement date is August 1, 2012. Although payments have not begun,  Burgers  R Us has the right to control access to and use of the building, as evidenced by starting construction on leasehold improvements. Lease classification should be determined, and lease recognition should begin, as of that date. Because Burgers  R Us does not know at lease commencement when lease payments will begin or the amount of lease payments, the total payments and term must be estimated. The lease liability  and ROU asset should be remeasured when the contingencies are resolved to reflect any difference between the estimate at lease commencement and the final amounts. See “Reassessment” section below for further information on performing the remeasurement.
 
Leases must be classified as finance leases by a lessee and sale-type leases by a lessor if any one of the following five criteria are met:
  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
  • The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
  • The lease term is for the major part of the remaining economic life of the underlying asset. However, this criterion is not used if the lease commences at or near the end of the asset’s economic life.
  • The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. 
If the lease agreement includes the right to use multiple assets with different useful lives, and they are not separated into separate lease components as discussed above, then the economic life of the predominant asset should be used when determining whether the lease term is for the major part of the remaining economic life of the underlying asset.

The first four criteria are consistent with the criteria in prior guidance, albeit without the bright line thresholds. If the lease transfers ownership of the underlying asset prior to the end of the lease term, or includes a purchase option that the lessee is reasonably certain to exercise, then the lease should be accounted for as a finance lease/sale-type lease. In determining whether the lessee is reasonably certain to exercise a purchase option, both lessee and lessor should consider the purchase price inherent in the option, as well as other market factors related to the asset and the company’s economic environment, as further discussed below under “Lease Term”. 

Under the new standard, the FASB removed the bright line thresholds from the third and fourth criteria, while retaining the intent and substance of the prior guidance. However, paragraph 842-10-55-2 indicates that one reasonable approach to determining whether either of these criterion have been met would be to conclude that 75% or more of the remaining economic life represents a major part, while 90% or more of the fair value of the underlying asset amounts to substantially all. In addition, a company might conclude that a commencement date that falls within the last 25% of the useful life of the underlying asset results in a commencement date at or near the end of the asset’s economic life. 

BDO Observation: Paragraph 73 in the Basis for Conclusions indicates that the guidance in 842-10-55-2 was provided in order to assist companies as they establish internal accounting policies and controls in order to ensure that the leasing guidance is operational in a scalable manner. Thus, we believe that a strict adherence to the bright lines of prior leasing guidance is no longer required. Lessees should  consider how best to articulate accounting policies in order to achieve consistent classification for similar leases, while adhering to the economic structure of the arrangement and the principle of the new standard. For example, a lessee might adopt a policy that establishes ranges that represent a major part of the remaining economic life and substantially all of the fair value of the underlying  asset, similar to the approach taken when determining whether a contingent liability is probable under Topic 450-20.

The new standard added a fifth criterion in determining whether a lease is a finance lease or sales-type lease, specifically whether the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Most lessors would be expected to structure such a lease to ensure that they are able to recover their investment in the underlying asset through required lease payments, thus resulting in finance/sales-type lease treatment because the present value of future lease payments represents substantially all of the fair value of the underlying asset. However, to the extent that is not the case, an inability of the lessor to repurpose the asset without undue cost at the end of the lease term will result in finance/sales-type lease treatment.
 
Example 8: Widget Co. enters into a lease agreement with Bob’s Custom Manufacturing.  Under this agreement Bob’s will construct a piece of equipment to be used in Widget’s production process. The requirements for the asset will be provided by Widget, and are subject to a U.S. patented  design. Because of the existence of the patent, Bob’s would be precluded from reusing the equipment at the end of the lease through redirecting it through a sale or subsequent lease. In addition,  it would likely be cost prohibitive to modify the equipment in such a way that it no longer complies with the patented design requirements. Therefore, the fifth lease criterion  applies, and Widget would account for the lease as a finance lease, while Bob’s would  account for the lease as a sales-type lease.
 
If none of the five criteria discussed above are met, a lessee will account for the lease as an operating lease. However, a lessor must still consider whether the present value of the future lease payments plus the value of any residual value guaranteed by the lessee or an unrelated third party equals or exceeds substantially all of the fair value of the underlying asset. If that is the case, and it is probable that the lessor will collect the lease payments plus any amount due under the residual value guarantee, then the lessor will account for the lease as a direct financing lease. Unless both criteria are met, the lessor will account for the lease as an operating lease.  Lease Term
The lease term must include the noncancellable period for which the lessee has the right to use the underlying asset plus any period covered by an option to extend the lease if the lessee is reasonably certain to exercise the option or if the exercise of the option is controlled by the lessor. In addition, if the lease contains an early termination provision, the period covered by the termination option should be included unless the lessee is reasonably certain to exercise the termination option.

The concept of “reasonably certain” is a relatively high threshold, and is intended to be interpreted consistently with the “reasonably assured” concept in previous guidance. In determining whether it is reasonably certain that an option will be exercised, a company should consider all economic factors relevant to that assessment, including contractual terms and conditions, significant leasehold improvements that are expected to have significant economic value after the initial lease term, costs related to exiting the lease including negotiating a new lease and relocation costs, costs associated with returning the leased asset to its contractually specified condition and/or location, and the importance of the underlying asset to the company’s operations. 

BDO Observation: In paragraphs 193 through 195 in the Basis for Conclusions, the Board explained that the concept “reasonably certain” is consistent with the term “reasonably assured” in prior guidance, and is intended to take into consideration all relevant economic factors, including contractual, asset, entity and market-based factors. The Board rejected an approach that would include renewal periods and purchase options based solely on management’s intent.  However, we believe that a company’s historical practice of exercising renewal or purchase options may indicate the existence of significant economic factors when assessing whether the exercise of renewal or purchase options is reasonably certain to occur under the new standard.

This definition of lease term applies equally to lessors and lessees. While it may be difficult for a lessor to determine whether a lessee is reasonably certain to exercise a renewal option or purchase option if the determination is based on lessee-specific factors, a lessor must nonetheless assess the likelihood, and must consider all known information. 
 
Example 9: Retailer leases a building  from Owner. The lease includes an initial  term of 15 years, plus five optional  renewal terms of five years each. Prior to opening the store to the public, Retailer must complete the construction of significant leasehold improvements in order to align the building with Retailer’s brand image. The leasehold improvements  are expected to cost $500,000. The building is expected to have a remaining economic life of 30 years at lease inception; however, Retailer concludes that the leasehold improvements have an economic life of only 20 years as it is Retailer’s experience that after 20 years the building will require a major remodel in order to refresh the brand and remain competitive in the market. At the end of the lease term (or renewal term if exercised), any leasehold improvements transfer to Owner. While the building is in a desirable location, Retailer concludes that it could obtain a similar building within the trade area at a similar cost at any time during the remaining economic life of the building.
 
The lease term should include the initial  term plus one renewal term. At the end of the initial term, Retailer will continue to own leasehold improvements with a remaining economic life of five years and an undepreciated carrying value of $125,000 which would transfer to Owner if a renewal option is not exercised. Thus, Retailer concludes that it is reasonably certain to exercise the first renewal option  because it will have leasehold improvements that are expected to have significant economic value when the renewal option becomes exercisable.
 
Conversely, Retailer concludes that it is not reasonably certain at lease inception that it will exercise the second, third, fourth  and fifth renewal terms. At the end of the first renewal period, Retailer will no longer have leasehold improvements with a significant economic value. Instead, Retailer believes that it would be required to incur significant costs to remodel the building in order to remain competitive in the market if it were to exercise the second renewal term. In addition,  at lease inception the lease payments for the renewal periods are considered at market, and a similar building could be found at a reasonable cost.
 
Example 10: Consider the same facts as Example 9, with the exception that the building is located in a highly desirable location in mid- town Manhattan close to Times Square. Retailer believes that a presence in this market is essential to its national growth strategy, and there are no similar structures in this area that would be acceptable at a reasonable cost. The building has a remaining useful life of 30 years.
 
In this scenario, the lease term includes the initial  term plus three renewal terms. Although  Retailer would no longer own leasehold improvements with significant economic value at the end of the first renewal term, because of the importance of the location to Retailer’s strategy, and the lack of alternative options, Retailer determines that it would not be able to identify  and obtain a lease on a similar building in this area without significant cost. Therefore, it is reasonably certain that Retailer will exercise the first three renewal terms, which will result in use of the building through the end of its remaining economic life. Because the building  is not expected to have a useful life beyond 30 years, it is not reasonably certain that Retailer would exercise any renewal options beyond that period.
  Lease Payments Lease payments include all fixed payments during the term of the lease, including in-substance fixed payments, less any lease incentives paid or payable by the lessor to the lessee. Lease payments also include any variable lease payments that depend on an index or rate, measured using the index or rate in place at lease commencement, as well as the exercise price of a purchase option that the lessee is reasonably certain to exercise, penalties related to a termination provision if it is reasonably certain that the lessee will exercise the termination option, any fees paid to the owners of a special-purpose entity for structuring the transaction, and for a lessee, amounts probable of being owed to the lessor under a residual value guarantee.

​BDO Observation: While fixed payments, purchase options and termination penalties are typically  specified in the lease agreement, it may require judgment to determine whether variable payments are in substance fixed, and at what amount. Likewise, estimating the amount expected to be owed under a residual value guarantee will also require judgment.

Variable lease payments include any payments that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. Examples of variable lease payments include payments measured as a percentage of sales, payments based on units produced, payments that increase based on changes in the value of an index such as the Consumer Price Index, and payments that are triggered upon occurrence of an event.

BDO Observation: Because variable payments  are generally  not included in lease payments, they would not be included in the lease receivable to be recognized by a lessor in a sales-type  lease. While this treatment  is consistent with Topic 840, it is considerably different than the treatment of variable payments in revenue arrangements accounted for in accordance with ASC 606, which includes the estimated amount of variable consideration that is not probable of reversal in the transaction price. Therefore, the timing of recognition could be different for sales of assets versus for sales-type  leases of similar assets when both transactions include variable consideration.

In addition, paragraph 842-10-55-37 clarifies that costs to dismantle and remove an underlying asset at the end of the lease term which are imposed by the lease agreement and which cannot be avoided generally would be considered lease payments. Conversely, obligations imposed by a lease resulting from a modification of the underlying asset (for example, a requirement to remove any leasehold improvements at the end of the lease term) would generally be considered an asset retirement obligation and accounted for in accordance with ASC 410-20.
 
Example 11: Susie’s Stitch-n-Sew enters into a five-year lease agreement with a mall operator that includes three five-year renewal options. Rent payments are $5,000 per month plus one percent of sales during the initial  term, with base rent increasing by 10% in each renewal period. Susie’s incurs costs of $100,000 installing leasehold improvements to customize the space to its brand requirements. These leasehold improvements have a useful life of eight years. The lease requires Susie to remove the leasehold improvements at the end of the lease term. Because the leasehold improvements have a useful life that is longer than the initial  lease term, Susie’s is reasonably certain to exercise the first renewal option.
 
The payments under the lease include both fixed and variable payments. The portion based on sales is variable and not based on an index or rate, and is therefore not included in lease payments. In addition, because the removal requirement is related to modifications made to the space by Susie’s, it would be considered an asset retirement obligation, and also not included in lease payments. Therefore, the total lease payments consist solely of the base rent for the initial  lease term of $60,000 per year plus $66,000 per year in the first renewal period, for a total of $630,000.
 
Example 12: Assume the same facts as in Example  11, with the exception that rent payments for all periods are seven percent of sales, with no base rent. In addition,  the lease specifies that annual sales for the initial  lease term must exceed $1,000,000, while annual sales for the first renewal period must exceed $1,100,000.
 
While the payments under the lease appear variable in nature, the existence of a minimum  sales threshold results in payments that are in substance fixed. Therefore, in this example lease payments equal $70,000  per year for the initial period and $77,000 per year for the first renewal period, for a total of $735,000.
 
Initial Direct Costs Initial direct costs are defined as incremental costs that would not have been incurred if the lease had not been obtained, such as commissions and payments made to an existing tenant to incentivize that tenant to terminate its lease. Costs to negotiate or arrange the lease that would have been incurred regardless of whether the lease was obtained are not considered initial direct costs. Examples of such costs are fixed employee salaries, general overheads, costs incurred by the lessor to solicit potential lessees including advertising, costs to service existing leases, and costs related to activities that occur before a lease is obtained such as costs to negotiate the lease, obtain legal or tax advice, or evaluate a potential lessee’s financial condition. 

BDO Observation: The definition  of initial direct costs in the new standard is substantially more narrow than the definition in prior leasing guidance, and aligns with the definition of incremental costs of obtaining a contract under the new revenue recognition guidance (see ASC 340-40-25-1 through 25-3). This will likely represent a significant change in practice, as many companies with active leasing programs currently capitalize external legal and other consulting fees and may capitalize internal legal fees and costs associated with an internal leasing department as initial  direct costs of their leases. Under the new standard, these costs will be expensed as incurred.
Lessee Accounting  Initial Measurement
At the commencement date, the lessee recognizes a right-of-use (ROU) asset and a lease liability. The lease liability is calculated as the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement. The lease payments used in this calculation are the same lease payments, over the same term, used in determining the lease classification. The discount rate should be the rate implicit in the lease, which is the rate that causes the aggregate present value of the lease payments and the residual value of the underlying asset to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor, minus any related investment tax credit expected to be retained and realized by the lessor, if that rate is readily determinable. If not, the lessee should use its incremental borrowing rate, which is defined as the rate that the lessee would have incurred to borrow the funds necessary to purchase the leased asset over a term similar to the lease term. 

BDO Observation: The concept of using the rate implicit  in the lease when it is readily determinable is similar to prior leasing guidance. As such, we believe that “readily determinable” implies information that is known without undue effort.

The standard includes an optional practical expedient whereby non-public entities may use a risk-free rate, determined using a period comparable to that of the lease term, as an accounting policy applied to all leases.
The value of the ROU asset to be recognized equals the amount of the lease liability, plus any lease payments made to the lessor at or before lease commencement and any initial direct costs of the lessee, less any lease incentives received from the lessor.  Subsequent Measurement After initial measurement, the lessee must recognize the costs associated with the lease each period. For finance leases, the lessee amortizes the ROU asset over the term of the lease on a straight-line basis or another basis if it more closely represents the benefits obtained under the lease. The lessee also recognizes interest on the lease liability calculated using the discount rate established at lease commencement. Any variable lease payments not included in the measurement of the ROU asset and lease liability are recognized in earnings in the period in which they become payable. 

For an operating lease, the lessee recognizes a single lease cost, calculated so that the remaining cost of the lease is recognized over the remaining lease term on a straight-line basis, unless another systematic and rational basis is more representative of the pattern of benefit under the lease. The lease liability is remeasured each period as the present value of the lease payments not yet paid, discounted using the discount rate established at lease commencement. The difference between the single lease cost and the change in the carrying value of the lease liability is applied to the ROU asset to determine the subsequent carrying value of the ROU asset. Variable lease payments related to operating leases are also recognized in earnings in the period in which they become payable. Insert Example 13

 

Lessor Accounting The accounting for the investment in the lease by the lessor varies depending on the lease classification, and remains substantially unchanged from prior guidance. For an operating lease, the underlying asset continues to be recognized and depreciated over its remaining useful life, while initial direct costs are deferred. After the commencement date, lease payments are recognized in income over the lease term on a straight-line 
basis unless another systematic and rational basis better reflects the pattern of benefit to be derived from use of the underlying asset, while variable lease payments are recognized in the period in which they occur. Initial direct costs are amortized into income on the same basis as lease payments are recognized.

BDO Observation: During the deliberations of the new standard, the FASB considered requiring a symmetrical approach for operating leases, which would  have resulted  in the lessor recognizing a lease receivable, consistent  with the lease liability  recognized by the lessee. However, the Board ultimately  concluded in paragraph 88 in the Basis for Conclusions that continuing to recognize the underlying asset and separately recognizing rental income provides more useful information  to financial statement users and better  reflects the business model of many lessors. An asymmetrical approach also reduces the complexity  that would be inherent in applying a derecognition model to leases of portions of larger assets, such as one floor  of a building.

For a sales-type lease, the lessor derecognizes the underlying asset and recognizes the net investment in the lease, as well as selling profit or loss. The net investment in the lease is calculated as the present value of lease payments not yet received and any residual value guarantee, discounted at the rate implicit in the lease, plus the present value of any unguaranteed residual asset. The selling profit or loss is calculated as the sum of the lease receivable and any prepaid lease payments (or the fair value of the underlying asset if less), minus the carrying amount of the underlying asset net of any unguaranteed residual asset. Any deferred initial direct costs should also be included in selling profit or loss unless the fair value of the asset equals its carrying amount, in which case initial direct costs are included in the net investment in the lease. 

Subsequent to lease commencement, the lessor increases the carrying amount of the net investment in the lease to reflect interest income using the effective interest method, and reduces the carrying amount as payments are received. In addition, any variable lease payments will be recognized in income in the period in which they are earned. At the end of the lease term, any remaining net investment in the lease (which would represent the residual value of the underlying asset) is reclassified to the appropriate category of asset, typically property, plant and equipment. 

Under the new standard, collectibility is not a criterion to be assessed when determining whether a lessor should classify a lease as a sale-type lease or not. If one of the five criteria in 842-10-25-2 is met, then the lease must be classified as a sales-type lease. If the lessor determines that it is not probable that the lease payments will be collected, then the arrangement is accounted for under the deposit method. The underlying asset is not derecognized, and any payments received are recorded as a deposit liability. This treatment continues until the lessor concludes that the remaining payments are probable of collection, at which time the lessor derecognizes the asset and recognizes the net investment in the lease, along with any selling profit.

BDO Observation: The treatment of sales-type  leases when collectibility  is not probable is consistent with the guidance in ASC 606 related to contracts with customers for which collectibility is not assured. However, it represents a change from prior guidance, which resulted in operating lease treatment when collectibility was not probable

Direct financing leases are accounted for in a similar manner to sales-type leases, with one important difference. While any selling loss is recognized at lease commencement, any selling profit and initial direct costs are deferred and included in the net investment in the lease. Subsequent accounting is also consistent with sales-type leases.

Unlike a sales-type lease, collectibility is a criterion that must be met in order to classify a lease as a direct financing lease. Therefore, if collectibility is not assured despite meeting the other criteria to be classified as a direct financing lease, the lessor must account for the lease as an operating lease.  Insert Example 14. Subleases

A lessee that enters into a sublease agreement should first consider whether it is relieved of the primary obligation under the original lease or not. If the lessee is relieved of the primary obligation under the original lease, then the sublease transaction is considered a termination of the original lease, and the ROU asset and lease liability are written off and gain or loss recognized for any difference. Any termination penalty paid that was not already included in the lease payments used to determine the ROU asset and lease liability would be expensed as incurred. If the lessee remains secondarily liable, any guarantee obligation should be accounted for in accordance with ASC 405-20-40-2.

If the lessee remains primarily liable under the original lease, then the lessee should account for the sublease in a manner similar to that of a lessor. If the sublease is classified as an operating lease, the lessee continues to account for the original lease as it did prior to the sublease. Any sublease income is recognized on a straight-line basis in earnings, unless another systematic and rational method is more representative of the benefits to be obtained by the sublessee. If the sublease is classified as a sales-type or direct financing lease, the lessee should derecognize the ROU asset associated with the original lease, recognize a net investment in the sublease, and continue to account for the original lease liability as it did prior 
to the sublease. 

The sublessor must use the rate implicit in the original lease in order to determine the sublease classification, unless it is not readily available, in which case the discount rate established for the original lease may be used. The sublessee should look to the original underlying asset in order to determine classification.

Insert Example 15 Reassessment A lessee should reassess the lease term or a lessee option to purchase the underlying asset only if one of the following events occurs:
  • There is a significant event or significant change in circumstances that is within the control of the lessee that directly affects whether the lessee is reasonably certain to exercise a renewal or termination option.
  • There is an event written into the contract that obliges the lessee to exercise or not exercise a renewal or termination option.
  • The lessee elects to exercise an option even though it had previously determined that it was not reasonably certain to do so.
  • The lessee elects not to exercise an option even though it had previously determined that it was reasonably certain to do so. 
Examples of significant events or changes in circumstances that are within the lessee’s control include but are not limited to constructing leasehold improvements that are expected to have significant value when the option becomes exercisable, making significant modifications or customizations to the underlying asset, making a business decision that is directly relevant to the ability to exercise an option such as extending the lease of a complementary asset, and subleasing the underlying asset for a period beyond the exercise date of the option. Changes in market factors, such as market rates to lease comparable assets, do not in isolation trigger reassessment. 

In addition, a lessee should remeasure the lease payments if there is deemed a change in the lease term as described above or one of the following other events occurs:
  • The lease is modified, and the modification is not accounted for as a separate contract.
  • A contingency upon which some or all of the variable payments during the remaining lease term is resolved, so that the payments become fixed.
  • There is a change in the assessment of whether the lessee is reasonably certain to exercise a purchase option.
  • There is a change in the amount expected to be paid under a residual value guarantee.
If the lessee remeasures its lease payments, any variable payments that depend on a rate or index should be remeasured using the rate or index at the remeasurement date. 
 
Example 16: Assume the same facts as in Example 9 related to determining the lease term. At lease inception, Retailer concludes that the lease term consists of the initial  15-year lease term and one five-year renewal period due to the existence of significant leasehold improvements with a 20-year life. After 13 years, Retailer adopts a new brand strategy which requires a complete reconstruction of the store front, plus various aspects of the internal structure and design. The reimaging costs $300,000,  and the new leasehold improvements are expected to have a useful life of 10 years.
 
Because the construction of the reimaged leasehold improvements  is within Retailer’s control, and they are expected to have significant value at the end of the first renewal  period,  Retailer  must  reassess the lease term.  Retailer  concludes  that it is now reasonably certain to exercise both the first and second renewal periods. Retailer must remeasure the lease liability  using the remaining lease payments from the last two years of the initial term plus lease payments for the first and second renewal periods, discounted at Retailer’s incremental borrowing rate at the time of reassessment. The difference between the remeasured lease liability and its current carrying amount is recorded as an adjustment to the related ROU asset to reflect the cost of the additional rights.
 
A lessor should only reassess the lease term, a lessee option to purchase the underlying asset or lease payments if the lease is modified and that modification is accounted for as a separate contract, as further discussed below. If a lessee exercises a previously unplanned renewal, termination or purchase option, the lessor should account for that exercise as a modification of the lease.
  Modifications Lessee Accounting
Modifications are accounted for as a separate contract if the modification grants the lessee an additional right of use not included in the original lease and the increase in the lease payments is commensurate with the standalone price of the additional right of use. 

If either of the criteria above is not met, then the lessee and lessor must reassess the classification of the lease as of the effective date of the modification, based on the modified terms and other circumstances as of that date. In addition, a lessee will reallocate the remaining consideration to the lease and any nonlease components; the lessee will also remeasure the lease liability using the discount rate determined at the effective date of the modification. If the modification results in an additional right of use, extends or reduces the term of the existing lease other than through the exercise of a contractual option, or changes the consideration in the contract, any difference resulting from remeasuring the lease liability is recognized as an adjustment to the corresponding ROU asset. If the modification fully or partially terminates the existing lease, then the lessee will decrease the carrying amount of the ROU asset on a basis proportionate to the full or partial termination. Any difference between the reduction in the lease liability and the proportionate reduction in the ROU asset is recognized as a gain or loss at the effective date of the modification. 

BDO Observation: Example 18 in the new standard, which is provided in 842-10-55-177 through 55-185, provides two different methodologies for determining the proportionate reduction in the ROU asset and thus the gain or loss when a modification  partially terminates  an existing lease. Either methodology is acceptable. However, we believe companies should select one methodology and apply it consistently to all lease modifications.
 
Example  17: Company T leases one floor  of an office building totaling  10,000 square feet, which it uses to house its headquarters. The lease commences  on January 1, 2013, has a term  of 10 years, and a price of $70/square foot. Company T determines that the lease should be classified as an operating  lease. During 2015, Company T experienced significant  growth,  and on January 1, 2016, modified  the lease to include 6,000 square feet on a second floor of the office building. The modification  allowed for the lease of the 6,000 square feet at $80/ square foot, the then current market price, and made the lease of the additional space coterminous with the lease for the original space.
 
In this example, the modification  results in a new lease because the terms of the existing lease are not changed, and the new space is leased at the then current market price. As such, the lease of additional space should be accounted for as a new lease, with an additional right-of- use asset and related liability  recognized.
 
Example 18: Consider the same facts as in Example  17, with the exception that the lease was modified  to reprice the entire space (existing floor plus new 6,000 square feet) at $75/square foot, and the term of the lease was extended for an additional five years.
 
In this fact pattern, the new lease agreement changes the terms of the original lease such that a modification  has occurred. First, Company T reassesses the lease classification, and concludes that operating lease classification  is still appropriate. Next, Company T must remeasure the existing lease liability  on January 1, 2016 based on the new terms,  as well as recognizing  a lease liability related to the second floor, which represents a second component.  Because the new terms grant Company T additional rights not included in the original  lease, the difference between the remeasured lease liability  related to the first floor and the carrying value of the existing lease liability  is recognized  as an adjustment to the right-of-use asset. Company T allocates the lease payments in the modified  lease agreement to the two components (i.e. the two floors)  on a relative  standalone  price basis. Because the current  market  rental  rate of $80 per square foot is the same for both floors, the consideration  can be allocated based on relative square footage. The first floor represent 62.5% of the total space leased, and thus 62.5% of the total remaining future lease payments of $14,400,000 will be allocated to that lease component,  while the remaining 37.5% will be allocated to the second floor component.
 
Lessor Accounting
If a lessor modifies an operating lease in such a way that the modification is not accounted for as a separate lease, the lessor should account for the modification as a termination of the existing lease and the creation of a new lease. If the modified lease is also classified as operating, then any prepaid or accrued lease payments related to the original lease are accounted for as part of the lease payments for the modified lease. If the modified lease is classified as a direct financing or sales-type lease, then any accrued rent asset or deferred rent liability should be included in the calculation of selling profit or loss.

If a lessor modifies a sales-type lease or a direct financing lease without resulting in a separate lease, the resultant accounting depends on the classification of the modified lease, as follows:
  • If the modified lease is also classified as a direct financing lease, the lessor simply adjusts the discount rate so that the initial net investment in the modified lease equals the carrying amount of the net investment in the original lease immediately before the effective date of the modification. 
  • If the modified lease is classified as a sales-type lease, the net investment in the original lease immediately before the effective date of the modification is assumed to be the carrying amount of the underlying asset. The carrying value is derecognized, and represents the cost of goods sold portion of selling profit or loss. 
  • If the modified lease is classified as an operating lease, the net investment in the original lease immediately before the effective date of the modification is also assumed to be the carrying amount of the underlying asset. The carrying amount is amortized into profit or loss over the remaining term of the modified lease. 
Impairment Lessee Accounting
ROU assets must be monitored for impairment, similar to other long-term nonfinancial assets. Impairments of both operating lease ROU assets and finance lease ROU assets are accounted for in accordance with ASC 360-10-35 on impairment or disposal of long-lived assets. The new standard indicates that a sublease arrangement in which the sublease revenue is less than the original lease cost is an indicator that the carrying amount of the ROU asset associated with the original lease may not be recoverable and thus must be assessed for impairment. 









 

Corporate Governance Flash Report - July 2016

Fri, 07/08/2016 - 12:00am
PCAOB Issues Staff Guidance for Audit Firms Filing the New Form AP Download PDF Version

In June 2016, the Public Company Accounting Oversight Board (PCAOB) issued staff guidance for audit firms filing the new Form AP Auditor Reporting of Certain Audit Participants and Related Voluntary Audit Report Disclosure Under AS 3101, Reports on Auditing Financial Statements. The guidance covers certain provisions and provides examples, such as assigning engagement partner identification numbers and estimating audit hours when disclosing the participation of other accounting firms, among other things. The PCAOB also launched a web resource page on Form AP for investors, auditors, and others. 

The staff guidance supports the final PCAOB rules, adopted by the PCAOB in December 2015 and approved by the SEC in May 2016, requiring disclosure of the engagement partner and other firms participating in an audit. 

As a reminder, audit firms are required to file Form AP for public company audit reports issued on or after: 
•    January 31, 2017 – for engagement partner names
•    June 30, 2017 – for other audit firms that participated in the audit 

Early next year, investors and others will be able to conduct searches of the Form AP database  from the PCAOB website. Users will be able to search by engagement partner name, audit firm, or public company name. Over time, the database can be used to evaluate data points about the engagement partner, including industry experience and number of years as engagement partner of a particular company.

We encourage you to explore the resources cited as you fulfill your duties on behalf of the boards and companies that you serve. For additional audit committee along with financial accounting and reporting tools and resources, visit BDO’s Board Governance page.
 
For questions related to matters discussed above, please contact Amy Rojik or Jan Herringer.

FASB Flash Report - July 2016

Thu, 07/07/2016 - 12:00am
FASB to Issue Exposure Draft on Income Tax Disclosures (ASC 740) (Updated) Download PDF Version
Summary Pursuant to its ongoing Disclosure Framework project, the Financial Accounting Standards Board (“FASB” or “Board”) will issue an Exposure Draft this summer (2016) of a proposed Accounting Standards Update (ASU) intended to improve income tax disclosure requirements under ASC 740, Income taxes. The objective of the FASB’s Disclosure Framework project is to improve the effectiveness of disclosures in the notes to financial statements by clearly communicating the information that is most important to users. Income Tax disclosures included in ASC 740-10-50 is one of four topics the FASB is currently evaluating for disclosure improvements.

At a meeting held June 8th, the FASB reviewed and finalized its prior tentative decisions on income tax disclosures reached during five previous meetings on the topic (four previous meetings held throughout 2015 and one meeting held on March 23rd, 2016). Following the June 8th meeting, the Board directed its staff to draft an Exposure Draft of an ASU containing all the final decisions, as summarized below, for a comment period of 60 days, or ending on September 30th, 2016, whichever is longer.

The FASB also decided to require a prospective transition for all proposed changes to income tax disclosures.
Details Proposed Decisions To Be Included In The Exposure Draft:

Definition Change - Public Business Entities

The current disclosure requirements under ASC Topic 740 are differentiated by public and nonpublic entities, terms which have various definitions for purposes of Topic 740. In December 2013, the FASB amended the Master Glossary to add the definition of a “public business entity,” which uses the same definition for all applicable Topics. This addition to the Master Glossary did not affect existing requirements, but rather was meant to be used by the Board in specifying the scope and effective date of future financial accounting and reporting guidance and disclosure requirements.1

During the June 8th meeting, the Board decided to replace the term “public entity” with the term “public business entity” throughout Topic 740 in accordance with ASU 2013-12. As a result, disclosures required under Topic 740 will be applicable based upon whether a company is a public business entity or an entity other than a public business entity (there is no separate definition for a non-public business entity), rather than whether an entity is a public entity or a non-public entity as currently defined in Topic 740.

BDO Observation: This change is not expected to have a significant impact on most entities currently classified as nonpublic entities. Additionally, some entities currently subject to the public requirements will now fall outside of the definition of public business entity. For more details see the definitions provided in Appendix I.

Changes in Tax Law (applicable to all entities)

The Board decided that income tax disclosures should include a qualitative disclosure when a tax law has been enacted in the current period that is probable2 to have an effect on the reporting entity in a future period. The purpose of this disclosure is to assist users in assessing changes in tax laws that would have an effect on future cash flows. During the staff outreach, feedback from stakeholders was mostly positive regarding this new disclosure requirement, however some expressed concern over the potentially large number of disclosures that would be mandated.

The FASB resolved this concern saying that only those changes in tax law which are probable to have a material effect on the entity are required to be disclosed. The disclosure is to apply to all entities.

BDO Observation: This proposal goes beyond the current requirement in ASC 740-10-50-9(g) to disclose, in the financial statements or notes thereto, the significant components of income tax expense related to continuing operations, which might include adjustments to deferred tax liabilities or assets for enacted changes in tax laws. However, this proposed disclosure requirement stops short of requiring quantitative disclosure of the nature and magnitude of the effect on future periods’ income taxes.

Changes in Assertion Related to Undistributed Foreign Earnings (applicable to all entities)

The Board decided that entities should be required to disclose the amount of, and an explanation for, any change in assertion about the temporary difference for the cumulative amount of investments associated with undistributed foreign earnings that are no longer asserted to be essentially permanent in duration. 

This includes corresponding disclosure requirements regarding changes in the other direction – i.e., that investments associated with undistributed foreign earnings for which a deferred tax liability is recognized are now asserted to be essentially permanent in duration which leads to the de-recognition of the outside basis deferred tax liability. That is, the disclosure covers changes in assertions in both directions.

The Board decided to require public business entities and all other entities (i.e., private) to make this disclosure.

BDO Observation: This decision is in response to feedback from users requesting more information on indefinitely reinvested foreign earnings. This proposed disclosure goes beyond existing disclosure requirements in paragraph 740-30-50-2(b) to disclose the cumulative amount of the temporary difference related to investments in foreign subsidiaries. That is, this proposed incremental disclosure focuses on the changes (increases and decrease) in the cumulative temporary difference.     
  
Cash, Cash Equivalents, Marketable Securities (Liquid Assets) Held by Foreign Subsidiaries (applicable to all entities)

The Board also decided to require disclosure of the aggregate of cash, cash equivalents, and marketable securities held by all foreign subsidiaries. It should be noted that loans (inter-company or otherwise) are not included in the list of liquid assets to be disclosed. The term ‘cash equivalents’ refers to short-term, highly liquid investments that have the following characteristics: (a) they are readily convertible to a known amount of cash, and (b) they are nearing maturity and present insignificant risk of changes in value because of changes in interest rates.3 Examples of cash equivalents are Treasury bills, commercial paper, and money market funds with original maturity of generally three months or less. 
  
The Board received feedback from users requesting additional information to better understand the sustainability of an entity’s tax rate and the quality of its earnings. ASC 740-30-50-2(c) requires disclosure of the amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration if determination of that liability is practicable or a statement that determination is not practicable. Most companies chose to issue a statement under ASC 740-30-50-2(c) that such disclosure is not practicable. In response, the FASB believes that this proposed disclosure would act as one data point which, taken together with other proposed disclosures, would give users of financial statements a better understanding of the timing and amount of future cash flows from accumulated foreign income.

This decision was reached after the Board considered, but ultimately rejected, two disclosure alternatives: (1)  disclosure of the disaggregated  temporary difference for the cumulative amount of investments associated with undistributed foreign earnings that are essentially permanent in duration for any country that represents at least 10 percent of the disclosed amount, and (2) disclosure of the amount of liquid assets (cash, cash equivalents, marketable securities, and loans) that represent accumulated foreign earnings that are indefinitely reinvested.

The main concern raised about a country-specific disclosure was that it would not be representational of where the earnings originated since the assertion could be made in a different foreign country than where the earnings originated, such as in a holding company structure. The proposal to disclose liquid assets in accumulated foreign earnings was deemed to be too costly and complex to disclose such level of details relative to the expected benefit.

BDO Observation: Users have asked for more information about indefinitely reinvested accumulated foreign earnings and the FASB felt it had to propose some improvements. This proposed disclosure will serve to further shine public spotlight on United States multinational corporations’ accumulated foreign income, which is estimated to exceed two trillion dollars. There is currently no footnote disclosure that would allow users to understand the amount of liquid assets as of the balance sheet date that could potentially be used for distribution of accumulated foreign income. This proposal provides users with an additional data point, albeit aggregated as opposed to broken by significant countries.       

Disaggregation of Pretax Income, Income Tax Expense, and Income Taxes Payments (applicable to all entities)
The Board decided to require all entities to disclose:
  • ​income before taxes disaggregated between domestic and foreign earnings,
  • income tax expense disaggregated between domestic and foreign, and
  • income tax paid by country where taxes paid are significant in relation to total cash taxes paid.4
 
These proposals attempt to address feedback from users indicating a desire for more information about foreign earnings and the tax effect of those earnings. The Board initially decided to require entities to further disaggregate foreign pretax income for any country that is significant to total pretax income. The Board believed country-specific disclosure would give users sufficient information to analyze tax exposures to foreign countries and better understanding of the sustainability of an entity’s tax rate and quality of the entity’s earnings.
 
However, the Board reversed its initial decision to require disaggregation of foreign pretax income by significant country due to preparers’ concerns about costs and complexity.
 
BDO Observation: The FASB decisions to require disclosure of pretax earnings and income tax expense disaggregated between domestic and foreign effectively codify existing SEC requirements. Therefore, this proposed disclosure would not be new to public entities which already furnish this disclosure in their public filings as required under SEC rules. Under this proposed disclosure, cash taxes paid in any one country that is significant relative to total cash taxes paid in any given period should be disclosed. While the term “significant” is not defined, one threshold that has been used and could be applied is 10 percent or greater of the total income tax paid. This disclosure proposal would be an expansion of income tax paid during the reporting period presented as a separate class of operating cash flow in the statement of cash flows (refer to ASC 230-10-45-25(f)) or disclosed under the “indirect method” (refer to ASC 230-10-50-2). This proposal, if it becomes a final accounting standard update, would be the only per-country required information in the income tax footnote. While it might be used as a proxy for gauging per-country earnings, cash tax paid during a particular fiscal year might be disproportionately higher or lower than the associated pretax income due to book-to-tax timing differences.   
 
Revisions to Carryforward Disclosure Requirement (applicable to all entities)

All entities will be required to disclose the amounts of federal, state, and foreign operating loss and tax credit carryforwards on the tax return.
Public business entities will be further required to disaggregate these values by time period of expiration for each of the first five years after the reporting date and aggregate amounts for the remaining years. Public business entities will also be required to disclose the deferred tax asset for carryforwards (tax affected), before valuation allowance, disaggregated by federal, state, and foreign and further disaggregated by time period of expiration for each of the first five years after the reporting date and aggregate amounts for the remaining years. Uncertain tax benefit (UTB) liabilities related to tax attributes carryforward would be aggregated from all jurisdictions and disclosed as a single number.  

We expect such disclosure for public business entities to look similar to the sample table below. We further expect that the table will include only material amounts and/or jurisdictions.
  Year of Expiration Federal Carryforward State Carryforward Foreign Carryforward Federal DTA State DTA Foreign DTA Less UTB Net DTA before VA 2016                 2017                 2018                 2019                 2020                 All other                  
BDO Observation:  Information about income tax carryforwards as reported on tax returns is already a required footnote disclosure (refer to ASC 740-10-50-3(a)), although not in this tabular format. This disclosure format will make it easier for users to understand the magnitude of income tax attributes by the major jurisdictions (i.e., federal, state and foreign) which are commonly used to present income tax information and the potential risk from expiration. It should be noted that on the face of the balance sheet, deferred tax assets for net operating losses and tax credits carryforwards must be reduced by uncertain tax benefit (UTB) liabilities if such tax carryforwards are available to reduce taxable income from future settlement of the uncertain tax liabilities and the entity intends to offset them on the tax return (i.e., balance sheet “net” presentation). Furthermore, an income tax carryforward DTA is presented in the component of deferred taxes disclosure (ASC 740-10-50-2) net of the UTB liability that is required to reduce the income tax carryforward DTA. This is necessary, as the sum of all deferred taxes presented in the component of deferred taxes disclosure should be the same as the total of all deferred taxes presented on the balance sheet. The proposed footnote disclosure would provide “gross” presentation of income tax attributes before any UTB liability (combined for all jurisdictions) and valuation allowance.    
 
Government Assistance Agreements that are within the Scope of Topic 740 (applicable to all entities)

The FASB decided to require all entities to disclose in the income tax footnote the existence and nature of a government agreement with the entity that has reduced, or may reduce, the entity’s income tax burden. This proposed disclosure focuses on government agreements that provide income tax benefits such as preferential tax rate, reduced tax rate, tax exemption, tax holiday or more.  Tax benefits that are available in determining taxable income or that are determined or limited on the basis of income tax liability are not in scope of this proposed disclosure (i.e., tax benefits which can be claimed by the entity without a government agreement, for example a research credit which is available to all entities meeting certain requirements in the tax law and/or regulations). The types of government assistance arrangements contemplated within the scope of this disclosure are entered into between a reporting entity and a governmental body.

BDO Observation: The FASB decided on June 8th to exclude income tax from the scope of its proposed ASU related to disclosure of Government Assistance under a brand new topic (i.e., Topic 832 in the Codification). Many comment letters responding to the FASB’s proposed Topic 832 indicated that all income tax disclosures, including income tax benefits obtained through government agreements, should be kept under Topic 740. Therefore, the FASB added this proposed disclosure under its income tax disclosure project. SEC rules currently require a public entity to disclose the existence of a tax holiday in a foreign jurisdiction including the aggregated benefit and other information such as termination date (SAB Topic 11C). The FASB’s proposed disclosure is broader and encompasses any form of income tax benefit provided to the entity through a government agreement.     

Uncertain Tax Benefits (public business entities)

The Board decided to propose the following changes to current disclosures:  
 
  • Amending the current requirement in ASC 740-10-50-15A(a)(3) regarding settlements with taxing authorities to require disaggregation of cash settlements and non-cash settlements (Note: a tabular reconciliation disclosure of beginning and ending gross UTBs is only required of public business entities).
  • Amending the current requirement in ASC 740-10-50-15A(a) regarding disclosure of a tabular reconciliation of the unrecognized tax benefits at the beginning and end of the period to require disclosure of the balance sheet accounts which are affected by UTBs.
  • Eliminating the current requirement in ASC 740-10-50-15(d) to disclose significant changes in UTBs that are anticipated to occur within 12 months of the reporting date (this requirement is applicable to all entities).
 
BDO ObservationThe proposal to eliminate the disclosure requirement in ASC 740-10-50-15(d) is significant. This “early warning” type disclosure can be useful information to foreshadow near-term changes in UTB liabilities. However, the FASB decided that this disclosure requires consideration of future events which are not within management’s control, and therefore should be removed.     
 
Rate Reconciliation (public business entities)
The Board decided to modify the current rate reconciliation required for public entities (now referred to as public business entities) and propose the required disclosure of:
 
  • An individual reconciling item that is more than 5 percent of the amount computed by multiplying the income before tax by the applicable statutory federal income tax rate, and
  • A qualitative description of those items that have caused a significant movement in the rate year over year.
 
BDO Observation: This decision effectively codifies the SEC guidance on rate reconciliation. SEC Rule 4-08(h)(2) in Regulation S-X requires a disaggregation of tax effects which increase or decrease the effective rate by at least 5% of the statutory rate. MD&A disclosure requirements generally include items that cause significant changes in the tax rate year over year. While the FASB initially proposed a rate reconciliation disclosure also for private entities, the FASB reversed course and on March 23 decided not to require private entities to disclose a rate reconciliation disclosure.

Valuation Allowance (public business entities)

ASC 740-10-50-2 currently requires disclosure of the total valuation allowance recognized for deferred tax assets as well as the net change during the year in the total valuation allowance. This current disclosure requirement applies to all entities.
 
The FASB decided to propose an expansion of this disclosure and require public business entities to disclose an explanation of the nature and amounts of the valuation allowance recorded and released during the reporting period. Private entities will not be required to provide this additional information.
  BDO Insights BDO supports the Board’s intent to improve the effectiveness of financial statements’ income tax footnote disclosures while minimizing costs and complexities. The FASB’s proposed ASU will provide incremental improvements to income tax footnote disclosure. BDO will submit a comment letter when the exposure draft of the proposed ASU is issued and is strongly encouraging all stakeholders to also participate in the FASB’s comment letter process. 
  Appendix I
ASC Master Glossary defintiions
Public Business Entity
 
A public business entity is a business entity meeting any one of the criteria below.

Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
d. It 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.
e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion. 

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
 
Public Entity (for purposes of Topic 740)
 
An entity that meets any of the following criteria:
 
a. Its debt or equity securities are traded in a public market, including those traded on a stock exchange or in the over-the-counter market (including securities quoted only locally or regionally).
b. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
c. Its financial statements are filed with a regulatory agency in preparation for the sale of any class of securities.
 
For questions related to matters discussed above, please contact one of the following practice leaders:
  Principal Authors:   Additional Resources:       Yosef Barbut
National Tax/Assurance Partner
ASC 740       Joe Russo
Partner, ASC 740 National Practice Leader
    Stephen Arber
Senior Director, International Tax 
    William Connelly
Tax Senior Director, National Tax ASC 740
      Alicia Massi
Associate, International Tax
              1 See ASU 2013-12. The term “public business entity” was added to the Master Glossary by ASU 2013-12 in order to minimize the complexity of having multiple definitions of “public entity” for varying Topics. Among other differences, the definition of “public business entity” excludes all not-for-profit entities and employee benefit plans, but includes entities required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis (e.g. banks required to file annual statements with the FDIC). See Appendix I for the Master Glossary definitions of “public entity” and “public business entity.” 2 The Accounting Standards Codification’s Master Glossary defines the term probable for GAAP purposes as “likely to occur.” That term is typically taken to mean a likelihood of approximately 75% to 80%.   3 ASC 230-10-20. 4 The term “cash taxes” means the amount of cash paid during the period to meet tax obligations.

SEC Flash Report - July 2016

Thu, 07/07/2016 - 12:00am
SEC Issues Interim Final Rule Covering Voluntary Summaries in Form 10-Ks Download PDF Version

On June 1, the SEC issued an interim final rule to implement a provision of the Fixing America’s Surface Transportation (FAST) Act.[1] The adopting release is available here on the SEC’s website. 
 
The rule adds Item 16 to Form 10-K and specifically permits issuers to voluntarily include a summary in Form 10-K.  If an issuer elects to provide a summary, each item within the summary must include a cross-reference via hyperlink to the related, more detailed disclosure in Form 10-K.  Registrants have historically been permitted to voluntarily provide information, such as a summary, but the FAST Act required SEC rulemaking to specifically permit the summary and require the use of cross-referencing. 
 
Item 16 provides registrants with flexibility in preparing the summary and does not specify the summary’s length (other than to say it should be brief), location, or disclosure items that should be covered.  The summary may only cross-reference information or exhibits that are included in Form 10-K at the time the form is filed.   
 
The rule becomes effective when it is published in the Federal Register.  The SEC is soliciting feedback on whether it should provide further guidance on the preparation and content of the summary, limit its length or dictate its location (among other topics).  The comment period will remain open for 30 days following the date the rule is published in the Federal Register.     
 
For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.
  [1] Further information on the FAST Act can be found here in a BDO Flash Report.  

BDO Comment Letter - Technical Corrections and Improvements to Update No. 2014-09

Tue, 07/05/2016 - 12:00am
Technical Corrections and Improvements to Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (File Reference No. 2016-240)   BDO supports the proposed clarifications to the new revenue standard, but believes certain enhancements are necessary in the final amendments.
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CAQ Questions on Non-GAAP Measures – A Tool for Audit Committees

Thu, 06/30/2016 - 12:00am
Download PDF Version

In June 2016, the Center for Audit Quality (CAQ) released “Questions on Non-GAAP Measures, A Tool for Audit Committees”. This tool is aimed at assisting audit committees in assessing the appropriateness and reliability of company management’s presentation, outside of the audited financial statements, of performance metrics that do not conform to Generally Accepted Accounting Principles (GAAP). This tool is, in part, responsive to the SEC’s May 2016 update to its compliance and disclosure interpretations, together with existing rules and regulations, and overall heightened scrutiny by the SEC and others in this area.   

The use of non-GAAP measures continues to increase as a means for companies to supplement GAAP financial information and provide analysts and investors with additional company and industry specific information to better understand the company and its performance. Regulators continue to express concerns and have cautioned companies against providing misleading presentations of non-GAAP measures and ensuring that such measures are properly reconciled to the appropriate GAAP measure.

The CAQ tool aims to complement the existing regulations and guidance to help the audit committee determine the meaningfulness of such information and whether:
  1. management is complying with the SEC rules and related interpretations to non-GAAP measures and
  2. non-GAAP measures are aiding analysts and investors in understanding the business and its performance.

The Questions on Non-GAAP Measures tool provides a brief background regarding the increased use of non-GAAP financial measures and information with associated guidance surrounding non-GAAP measures. It also summarizes the auditor’s responsibilities for other information included in documents which contain audited financial statements. Currently, the PCAOB requires the auditor to read the other information for material inconsistency with the financial statements, but he/she is not required to perform any other procedures over this information in situations where no inconsistencies are identified.

The remainder of the tool comprises sample questions audit committees may consider posing to management and the auditors separated into three main areas of focus:
  • Transparency: consideration of the purpose, prominence, and labeling of non-GAAP information, specifically in relation to traditional GAAP measurements (e.g., Has the non-GAAP measure been given more prominence than the most directly comparable GAAP measure?)
  • Consistency: determination of whether non-GAAP measures are consistent and balanced (e.g., Are the non-GAAP measures presented by the company balanced? Do the measures eliminate similar items that affect both revenue and expense, or do they only eliminate one or the other?)
  • Comparability: promotion of the comparability of non-GAAP measures presented (e.g., Do other companies present this measure or similar measures? If not, why is this measure important for this company but not its peers?)

Through use of this tool, the CAQ believes that the questions provided will “spark a dialogue among audit committees, management, and auditors on the non-GAAP measures presented by companies.” 

The important role of the audit committee in overseeing the integrity of an organization’s financial statement reporting process continues to evolve. We encourage you to explore the CAQ’s tool as you fulfill your duties on behalf of the boards and companies that you serve. For additional audit committee along with financial accounting and reporting tools and resources, visit BDO’s Board Governance page.

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

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