U.S. Assurance Publications

Subscribe to U.S. Assurance Publications feed
This is a feed of the latest BDO USA Assurance Publications.
Updated: 13 hours 24 min ago

An Offering from BDO’s Corporate Governance and Financial Reporting Center

Tue, 06/09/2015 - 12:00am


External Auditor Assessment Tools Click here to download the PDF version

In June 2015, the Audit Committee Collaboration1, facilitated by the Center for Audit Quality (CAQ), released both the “External Auditor Assessment Tool: A Reference for Audit Committees Worldwide” and an updated version of the U.S. “External Auditor Assessment Tool”. These tools are designed to assist audit committees in evaluating the external auditor to assess the quality of the audit, or to select or recommend the retention of the audit firm. The tools are scalable and permit the audit committee to gauge the quality of:
 
  • Services and sufficiency of resources provided by the auditor;
  • Communications and interactions with the auditor; and
  • The auditor’s independence, objectivity, and professional skepticism
Audit committees should conduct such evaluations regularly. Audit committees of public companies listed on the NYSE are specifically required to “at least annually, obtain and review a report by the independent auditor describing: the firm's internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the auditor's independence) all relationships between the independent auditor and the listed company.” NYSE commentary goes on to indicate that “after reviewing the foregoing report and the independent auditor's work throughout the year, the audit committee will be in a position to evaluate the auditor's qualifications, performance and independence. This evaluation should include the review and evaluation of the lead engagement partner. In making its evaluation, the audit committee should take into account the opinions of management and the listed company's internal auditors (or other personnel responsible for the internal audit function). In addition to assuring the regular rotation of the lead audit partner as required by law, the audit committee should further consider whether, in order to assure continuing auditor independence, there should be regular rotation of the audit firm itself. The audit committee should present its conclusions with respect to the independent auditor to the full board.”2

The evaluations are based on the audit committee’s experience with the auditor3, which is further informed by input from management and others within the company, including internal audit and other key managers. Another source of information for audit committee consideration, in addition to regulator inspection reports, peer review findings, and audit firm’s reports on quality control procedures outlined above, may include an audit firm’s public transparency report, if available. Audit committees may also request input from the audit firm itself on its performance through reporting as to how an audit firm’s management and operations support the performance of high quality audits.

As a good practice, it is suggested that audit committees finalize formal and informal assessments during group discussions (as opposed to collecting audit committee member comments separately). Additionally, audit committees are further encouraged to voluntarily share their processes for evaluating the auditors with stakeholders as part of improving their public disclosures with respect to the audit committee’s oversight of the external auditor.4

The U.S. External Auditor Assessment Tool provides background regarding the content of the formal and informal evaluations followed by sample question sets for audit committees to note their observations. Additionally, it includes a survey that the audit committee may provide to others within the organization who may have had substantial contact with the auditor in order to elicit valuable views on the quality of service provided and about the independence, objectivity and professional skepticism demonstrated by the auditors. The U.S. tool further contains an appendix highlighting relevant U.S. requirements and standards.

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 resources cited as you fulfill your duties on behalf of the boards and companies that you serve. For additional audit committee tools and resources, visit BDO’s Board Governance page.

For questions related to matters discussed above, please contact Amy Rojik.
 
1 The Center for Audit Quality (CAQ) has teamed up with the National Association of Corporate Directors, NYSE Governance Services, Tapestry Networks, the Independent Director’s Council, and the Association of Audit Committee Members, Inc. to form the Audit Committee Collaboration. For more information, refer to: www.auditcommitteecollaboration.org./
2 Refer to the NYSE Listed Company rules: 303A.07 (b)(iii)(A).
3 In addition to the audit firm, the assessment tool can be used to evaluate the lead audit engagement partner, audit team, and engagement quality reviewer.
4 Refer to BDO’s Audit Committee Disclosure Resources Practice Aid for more information.
 

FASB Flash Report - June 2015

Mon, 06/01/2015 - 12:00am
FASB Enhances Disclosures about Short-Duration Insurance Contracts Click here to download a PDF version
Summary The FASB issued an ASU to enhance disclosures for short-duration insurance contracts. The ASU is intended to increase transparency regarding significant estimates made in measuring liabilities for unpaid claims and claim adjustment expenses. It does not otherwise change the accounting for short-duration insurance contracts. The new standard takes effect in 2016 for calendar year-end public companies and is available here.
  Background Recently, the FASB issued ASU 2015-091 to enhance the disclosure requirements for short-duration insurance contracts (most property, liability and short-term health contracts) issued by insurers. That is, the new disclosures do not apply to entities other than insurance entities.
 
The purpose of the required disclosures is to provide financial statement users with more transparent information about an insurance entity’s liability for unpaid claims and claim adjustment expenses, subsequent adjustments to those estimates, methodologies and judgments in estimating claims, as well as the timing, frequency and severity of claims. Such disclosures should enable users to understand the insurance entity’s ability to underwrite and anticipate costs associated with claims.
  Main Provisions Annually, an insurance entity must disclose the following information about the liability for unpaid claims and claim adjustment expenses, an example of which is provided as implementation guidance:
 
  • Incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (not to exceed 10 years, including the most recent balance sheet presented). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary (unaudited) information.
  • A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the balance sheet.
  • For each accident year presented of incurred claims development information, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of reserving methodologies.
  • For each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information.
  • For each accident year presented of incurred claims development information, the average annual percentage payout of incurred claims by age (claims duration) for all claims (except health insurance claims).
Insurers should aggregate or disaggregate the disclosures above to provide meaningful information to users. In doing so, insurers should consider how their liabilities for unpaid claims and claim adjustment expenses have been presented for other purposes, such as earnings releases, annual or statutory reports, and information looked at by the chief operating decision maker.
 
Any significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses should be disclosed, along with the reasons for the change and effects of those changes on the financial statements.
 
Additionally, the roll forward of the liability for unpaid claims and claim adjustment expenses that is required annually under current guidance will now be required in both annual and interim reporting periods.2
 
There are additional disclosures required about liabilities for unpaid claims and claim adjustment expenses reported at present value. Those disclosures include:  the aggregate amount of discount deducted to derive at the liability for unpaid claims and claim adjustment expenses for each balance sheet presented, the amount of interest accretion recognized for each period of income statement presented, and the income statement line item that includes interest accretion.
  Effective Date and Transition The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2015 (i.e. year end 2016 for calendar year end entities) and interim reporting periods within annual periods beginning after December 15, 2016. The amendments are effective for all other entities for annual reporting periods beginning after December 15, 2016 and interim reporting periods within annual periods beginning after December 15, 2017. Early adoption is permitted.
 
Upon transition, the claims development table need not exceed five years if presenting previous years’ information is considered impracticable. An additional year is added to the disclosure each subsequent year up to ten years.

For questions related to matters discussed above, please contact Imran Makda, Barbara Woltjer or Adam Brown.
 
1 Financing Services-Insurance (Topic 944), Disclosures about Short-Duration Contracts
2 See amendments to ASC 946-40-50-3.
 

BDO Comment Letter - Revenue from Contracts with Customers / Deferral of the Effective Date

Thu, 05/28/2015 - 12:00am
Proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (File Reference No. 2015-240)
  Download

BDO Comment Letter - Income Taxes

Tue, 05/26/2015 - 12:00am
Proposed Accounting Standards Update, Income Taxes (Topic 740) (File Reference No. 2015- 200 – I and File Reference No. 2015-2010 – II) 
  Download

FASB Flash Report - May 2015

Mon, 05/18/2015 - 12:00am
FASB Issues Proposed Clarifications to the New Revenue Standard for Licenses and Identifying Performance Obligations Summary The FASB issued an exposure draft proposing amendments to the new revenue recognition standard that it issued jointly with the IASB in 2014. The proposed amendments would not change the core principles of the standard, but would clarify the accounting for licenses of intellectual property, as well as the identification of performance obligations in a contract.  The proposal is open for comment through June 30, and is available here.
  Background In May 2014, the FASB issued ASU 2014-091 (“the new revenue standard”), establishing a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries.    
 
The FASB has recently issued a proposed ASU2 which would clarify certain aspects of ASU 2014-09 but which would not alter the fundamental principles of the new revenue standard.  The proposed amendments are the result of implementation issues identified by the joint FASB/IASB Transition Resource Group (TRG). After considering the issues, the FASB decided certain changes are needed to make the new revenue standard more operational.  Comments are due by June 30, 2015. 
 
The IASB is performing additional research and is expected to issue a similar (but not identical) proposal in the near future.  The Boards do not expect significant divergence as a result of their respective amendments.
  Main Provisions The proposed amendments provide more detailed guidance, including additional implementation guidance and examples in the following key areas: 1) identifying performance obligations, and 2) licenses of intellectual property.
 
Identifying Performance Obligations
 
In order to identify performance obligations, an entity must assess whether goods or services promised in the contract are distinct.  The proposed amendments would more clearly articulate the guidance for assessing whether promises are separately identifiable, which is one of two criteria for determining whether the promises are distinct[3].  They would also modify the wording of the factors an entity should consider when assessing whether two or more promises are separately identifiable (paragraph 606-10-25-21), and provide additional examples within the implementation guidance for assessing these factors. 
 
In addition, an entity would not be required to identify goods or services promised that are immaterial in the context of the contract, which some stakeholders believed was required based on language in the basis for conclusions in ASU 2014-09.  Further, an entity would be permitted to account for shipping and handling activities occurring after the customer has obtained control of a good as a fulfillment activity rather than as an additional promised service.  This would be an accounting policy election and related disclosures would be required. As such, if elected, those shipping and handling activities would not be identified as separate performance obligations, and no revenue would be allocated to them.  Related costs would be presented as expenses.   
 
Licenses of Intellectual Property
 
Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to access the entity’s intellectual property (IP) (which is satisfied over time) or a right to use the entity’s intellectual property (which is satisfied at a point in time).  To this end, the proposed amendments are intended to clarify whether a license of IP represents a right of use or a right of access by categorizing the underlying IP as either functional or symbolic. 
 
Functional IP has significant standalone functionality because it can be used as is for performing a specific task, or be aired or played.  A license to functional IP represents a right to use the IP as it exists at a point in time, and does not include supporting or maintaining the IP during the license period.  A license to functional IP is generally satisfied at the point in time the customer is able to use and benefit from the license.  Examples of functional IP include software, biological compounds or drug formulas, and completed media content.
 
Symbolic IP does not have significant standalone functionality.  A license to symbolic IP represents a promise to both (a) grant the customer rights to use and benefit from the IP and make that underlying IP available for the customer’s use and benefit and (b) support or maintain the IP during the license period (or over the remaining economic life of the IP, if shorter).  This type of license is satisfied over time.  Examples of symbolic IP include brands, team or trade names, logos, and franchise rights.
 
The implementation guidance would also be clarified to indicate that a promise to grant a license that is not a separate performance obligation must be considered in the context above (i.e., functional or symbolic), in order to determine whether the overall performance obligation is satisfied at a point in time or over time, and how to best measure progress toward completion if recognized over time. 
 
Additionally, Topic 606 includes implementation guidance on when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of IP.  The proposed amendments would clarify two aspects of that guidance:
  1. An entity would not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.  In other words, a royalty is either subject to the guidance on sales-based and usage-based royalties, or it is not.
  2. The guidance on sales-based and usage-based royalties would apply to a sales-based or usage-based royalty whenever the predominant item to which the royalty relates is a license of IP.
The proposed amendments would further clarify that contractual restrictions on a customer’s rights in a licensing arrangement do not affect the entity’s identification of promised goods or services in the contract. 
  Effective Date and Transition The effective date and transition requirements for the proposed amendments would be the same as the effective date and transition requirements in ASU 2014-09.  The Board has also recently proposed a delay to the effective date of ASU 2014-09.  For more information, refer to BDO’s Flash Report on the proposed delay. 
  On the Horizon The TRG continues to discuss a number of additional revenue recognition implementation issues. As a result, additional changes are likely to make the new revenue standard more operational.  Therefore, stakeholders should monitor these developments during their implementation efforts.

For questions related to matters discussed above, please contact Adam Brown, Ken Gee or Chris Smith.
 
1 Revenue from Contracts with Customers (Topic 606) is substantially converged with IFRS 15, the IASB’s companion standard.
2 Proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
3 The second criterion is that the customer can benefit from the good or service, either on its own or with other readily available resources.
 

An Offering from the BDO Governance and Financial Reporting Center

Wed, 05/13/2015 - 12:00am


Audit Committee Disclosure Resources Click here to download a PDF version

Audit Committees have a significant responsibility in overseeing the financial reporting process. This responsibility continues to be defined by best practices and may vary in certain aspects with respect to risk management across organizations.  In the spirit of assisting audit committees with faithfully meeting this responsibility, the Center for Audit Quality (CAQ), along with various partners,1 has established the Audit Committee Collaboration. As part of their work, a variety of tools and resources are being produced that audit committees may find of interest in strengthening their performance and improving transparency to the marketplace. The following practice aid focuses on several resources which the CAQ and others have released that specifically examine trends and emerging practices with respect to disclosures being made by public company audit committees that go beyond the immediate satisfaction of compliance expectations and provide details that may allow investors and others to gain a better understanding of audit committee performance and thought processes. 

Enhancing the Audit Committee: A Call to Action: A publication issued by the Audit Committee Collaboration which serves as a call out to “public company audit committees of all sizes and industries to voluntarily and proactively improve their public disclosures to more effectively convey to investors and others the critical aspects of the important work that they currently perform.” In this regard, the Audit Committee Collaboration recognizes that the annual audit committee report included in a company’s proxy statement is one of the principal sources of public audit committee-related information. Audit committees are being encouraged to thoughtfully reassess their reporting and communication with stakeholders and if necessary, strengthen them going forward.
 
The Call to Action publication encourages audit committees to focus on the following areas:
 
  • Clarify the scope of the audit committee’s duties – in particular provide specificity regarding risk oversight
  • Clearly define the audit committee’s composition – provide clarity around consideration of members’ qualifications and independence
  • Provide relevant information about:
    • Factors considered when selecting or reappointing an audit firm – e.g., quality and qualifications of the firm such as staffing capacity, geographical reach, industry/sector experience, etc.
    • Selection of the lead audit engagement partner – information about the process and the audit committee’s involvement
    • Factors considered when determining auditor compensation – disclosure of key factors on which the audit committee based its compensation decisions and the consistency with the delivery of a quality audit
    • How the committee oversees the external auditor – disclosure of the audit process and/or specific activities (e.g., number of meetings held without management’s presence, types of issues discussed, and other activities)
    • The evaluation of the external auditor2 - disclosure regarding the annual process and key conclusions from that evaluation
 
As a good practice, audit committees are encouraged to coordinate such an assessment with the full board, corporate secretary and general counsel, as well as company management and internal audit.
 
Click here for a recently released brief educational video promoting the Call to Action.
 
Audit Committee Transparency Barometer: A publication issued in December 2014 as the product of a joint research project between the CAQ and Audit Analytics, an independent research service firm, that examined 2014 audit committee disclosures in proxy statements (both the audit committee report as well as the proxy statement in its entirety) to measure the robustness of such disclosures among 1,500 companies that represented a composite of Standard & Poor’s large-cap, mid-cap, and small-cap companies to establish a baseline reference for reporting by companies across this spectrum in future proxy seasons. In short, they concluded that across the spectrum of all size public companies, many companies are disclosing more than what is required, and many of the required disclosures are either consolidated in the audit committee report or found relatively easily within other sections of the proxy statement.

The Transparency Barometer looked at similar topics as addressed in the Call to Action outlined above and provides examples of certain disclosures of key factors whereby organizations have provided context between policies and decision-making and how such discussion may provide investors with higher confidence in the following processes and procedures that audit committees have established to carry out their role in the financial reporting process.
 
  • Audit firm selection: (1) Is there discussion of the audit committee’s considerations in appointing the auditor in terms of qualifications, geographic reach, or firm expertise? (2) Is there disclosure as to length of time the audit firm has been engaged?
  • Auditor compensation: (1) Is there a discussion of audit fees and the connection to audit quality? (2) Is there a discussion of how the audit committee determines auditor compensation? (3) Is there a discussion of how non-audit services may impact independence?
  • Auditor evaluation/supervision: (1) Is there a discussion of criteria considered when evaluating the audit firm? (2) Is there a disclosure of significant areas of the financial statements addressed with the auditor?
  • Selection of audit partner: (1) Is it stated that the engagement partner rotates every five years? (2) Is it explicitly stated that the audit committee is involved in selection of the audit engagement partner?
  • Scope of duties: Are key elements of the audit committee charter or other sections of the proxy included in the audit committee report (e.g., shared risk oversight)?

The questions above may be considered by all public company audit committees in their own assessments under the Call to Action in determining how robust their current disclosures are in serving the needs of the marketplace.

“Audit Committee Update: What you need to tell them, what they need to do”: In April 2015, Compliance Week offered a live webinar featuring presenters from the CAQ and Audit Analytics who discussed trends and emerging issues concerning  public company  audit committees. The panel discussion provided a brief history of events that are currently impacting audit committees along with certain tools and resources (a few discussed above) that are available to help audit committees execute their fiduciary duties and assist them in responding to the increasing responsibilities expected of them. This included a summarization of the findings by company type (large-, mid-, small-cap) from the Audit Committee Transparency Barometer analysis.

The presenters noted the trending areas for which audit committees are being expected to show some responsibility beyond the traditional boundaries of financial reporting oversight. These other areas include the Foreign Corrupt Practices Act, risk management, and cybersecurity. In recognition of this trend, the presenters encouraged organizations toward more robust defining/delineating of the specific roles of the audit committee in contrast with those of the full board with respect to who is assuming primary oversight (“championing”)
of these areas. Similar advice was provided for ensuring clear definition and communication (early on and continuing throughout the audit process) of what the audit committee’s expectations are with respect to the work being performed by both the internal and external auditors.

Another question raised during the presentation related to what data on assessing audit firms could be gathered and provided  to audit committees and boards? Presenters agreed that readily available data about audit fees, Securities and Exchange Commission  comment letters, Public Company Accounting Oversight Board (PCAOB) and peer review inspection reports remain the prevalent data currently available for peer group comparisons but may not always be the best indicators for an organization to readily determine who the best audit firm may be to serve them. As such, the CAQ is currently piloting3 a set of Audit Quality Indicators (AQIs) in hopes of identifying metrics which could better inform stakeholders about key matters contributing to audit quality.  It is anticipated the findings will be made available later in 2015.  For further information, refer to the CAQ Approach to Audit Quality Indicators.

The PCAOB currently has a similar but separate AQI project on its docket, whereby it is developing its own listing of AQIs to:
 
  • Inform PCAOB regulatory processes and policy making with additional insight into the status and trends of audit quality;
  • Possibly provide audit committees, investors, management, audit firms, other regulators, and the public with AQIs, providing insight into audit quality for their decisions and policy-making; and,
  • Provide firms with additional incentives to compete based on audit quality.
 
Refer here for more information. A PCAOB AQI concept release is anticipated during 2015.
  Next Steps Educating the public and instilling further confidence in the financial reporting process remains heavily dependent on the disclosures of the organizations about the roles, responsibilities, and activities conducted by audit committees. Beyond simply being a compliance exercise, audit committees are recognizing that the audit committee report function within the companies’ proxy statement is a vehicleto provide more clear and thoughtful disclosures to promote understanding and transparency.

We encourage you to explore for yourselves the resources cited in this practice aid as you assess your own processes and disclosures. For additional audit committee tools and resources, visit the CAQ’s Audit Committee Collaboration website as well as BDO’s Corporate Governance page.

For questions related to matters discussed above, please contact Amy Rojik.
 
 1 The Center for Audit Quality (CAQ) is an autonomous, nonpartisan, nonprofit group dedicated to enhancing investor confidence and public trust in global capital markets. The CAQ has teamed up with the National Association of Corporate Directors, Corporate Board Member/NYSE Euronext, Tapestry Networks, the Director’s Council, and the Association of Audit Committee Members, Inc. to form the Audit Committee Collaboration. Refer to www.auditcommitteecollaboration.org for more information.
  2 Refer to the CAQ’s Audit Committee Essentials: The Annual Auditor Assessment practice aid.
  3 BDO USA, LLP, along with several of its public company audit clients, is participating in the CAQ’s AQI pilot.

FASB Flash Report - May 2015

Tue, 05/12/2015 - 12:00am
FASB Issues Guidance to Exclude Investments in Certain Entities that Calculate Net Asset Value Per Share from the Fair Value Hierarchy Summary The FASB issued an ASU eliminating the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.  As such, certain fair value “levelling” disclosures are no longer required, although information must be disclosed so that users can reconcile amounts reported in the fair value hierarchy to the balance sheet.  The new standard takes effect in 2016 for public companies and is available here.
  Background ASC Topic 8201 provides a practical expedient permitting a reporting entity to measure the fair value of certain investments using the net asset value (NAV) per share (or its equivalent) of the investment (the “NAV practical expedient”). These often include investments in investment companies that do not have a readily determinable fair value (e.g. investment in a hedge fund or private equity fund). Prior to the ASU, investments that were measured at fair value using the NAV practical expedient were categorized within the fair value hierarchy based on liquidity, i.e., the ability and the length of time before which the reporting entity could redeem its investment at NAV.
 
If a reporting entity could not redeem its investment with the investee at NAV at the reporting entity’s balance sheet date but the investment was redeemable with the investee in the “near term”, then the reporting entity would take into account the length of time until the investment became redeemable in determining whether the fair value measurement of the investment was categorized within Level 2 or Level 3 of the fair value hierarchy. Some entities assessed the “near term” differently. As such, similar investments were categorized inconsistently in the fair value hierarchy (i.e., Level 2 vs. Level 3). The ASU eliminates this diversity.
  Main Provisions ASU 2015-072 simplifies Topic 820 by removing the requirement to categorize, within the fair value hierarchy, all investments measured using the NAV practical expedient.  Although classification within the fair value hierarchy is no longer required, an entity must disclose the amount of investments measured using the NAV practical expedient in order to permit reconciliation of the fair value of investments in the hierarchy to the corresponding line items in the balance sheet.  The implementation guidance presents an example of this reconciliation.
 
Investments measured using the NAV practical expedient continue to be: (i) exempt from the detailed disclosures related to the fair value hierarchy required by paragraph 820-10-50-2, and (ii) subject to the qualitative and quantitative disclosures described in paragraph 820-10-50-6A.
 
The ASU, however, reduces disclosures that were required for investments that are eligible for the use of, but for which the reporting entity opts not to use, the NAV practical expedient. These investments are no longer subject to the disclosures described in paragraph 820-10-50-6A. Since the fair value for these investments is determined using observable and/or unobservable inputs, the fair value measurements for these investments continue to be subject to the fair value disclosures required by paragraph 820-10-50-2, which includes “levelling” disclosures.
 
Other Matters: In connection with the changes above, the ASU made an additional change to preserve an exception for investment companies related to the statement of cash flows.  Prior to the amendments, an investment company was not required to present a cash flow statement if, among other conditions, substantially all of its investments were carried at fair value and classified within Level 1 or Level 2 in the fair value hierarchy.  Since investments that are measured at fair value using the NAV practical expedient will no longer be included in the fair value hierarchy, Topic 230 was amended to expand the exemption from providing a cash flow statement.  That is, the cash flow statement is not required for an investment company if, among other conditions, substantially all of its investments are carried at fair value and classified within Level 1 or Level 2 of the fair value hierarchy, or are measured using the NAV practical expedient and are redeemable in the near term at all times.
  Effective Date and Transition The amendments are effective retrospectively for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective retrospectively for all other entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted. 

For questions related to matters discussed above, please contact Adam Brown or Dale Thompson.
 
1 Fair Value Measurement
2 Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

FASB Flash Report - May 2015

Tue, 05/12/2015 - 12:00am
FASB Issues Earnings Per Unit Guidance for Master Limited Partnership Dropdown Transactions Summary The FASB has issued an ASU to clarify that that for purposes of calculating historical earnings per unit under the two-class method for a master limited partnership, the earnings of a transferred set of net assets before the date of a dropdown transaction should be allocated entirely to the general partner.  That is, none of the earnings are retroactively allocated to the limited partners. The new standard takes effect in 2016 and is available here.
  Main Provisions ASC Topic 2601 provides guidance on applying the two-class method of calculating earnings per unit for master limited partnerships (MLPs); the two-class method is required because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights of the partnership agreement.
 
A “dropdown” transaction occurs when a general partner transfers net assets to the MLP and is accounted for as a transaction between entities under common control. The statements of operations of the MLP are adjusted retrospectively to reflect the dropdown transaction as if it occurred on the earliest date during which the entities were under common control.
 
ASU 2015-062 clarifies that for purposes of calculating historical earnings per unit, the allocation of the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner interest.  As a result, the previously reported earnings per unit of the limited partners (typically the earnings per unit measure presented in the financial statements) should not change due to the dropdown transaction. The clarification is intended to reduce diversity in practice regarding treatment of such transactions, as alternatively, some entities had allocated earnings to the limited partners and incentive distribution rights holders on a hypothetical basis in periods prior to the dropdown, in a manner consistent with their post-dropdown contractual rights. 
 
Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required.
  Effective Date and Transition The amendments are effective retrospectively for all affected entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption is permitted. 

For questions related to matters discussed above, please contact Adam Brown or Gautam Goswami.
 
1 Earnings Per Share
2 Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions
 

FASB Flash Report - April 2015

Thu, 04/30/2015 - 12:00am
FASB Issues Proposal to Defer Revenue Standard by One Year Summary The FASB issued an exposure draft proposing a one-year delay of the effective date for the new revenue recognition standard that it issued jointly with the IASB in 2014.  Under the proposed amendments, the revenue recognition standard would take effect in 2018 for calendar year-end public entities.  It would take effect for private entities in 2019.  The proposal is open for comment through May 29, and is available here.
  Main Provisions The FASB has issued a proposed ASU1 which would defer the effective date of the new revenue standard.2 The deadline for comments on the proposal is May 29, 2015.
 
The FASB’s decision to propose a deferral results from a number of requests to defer the effective date. However, the Board also received feedback from some entities that do not think a deferral is necessary. As a result, the proposal includes an option for public and private entities to early adopt using the original effective dates, which is designed to provide flexibility for different companies in various stages of their implementation efforts. The IASB has also recently indicated it will propose a similar extension of the effective dates in IFRS 15, the companion to the new revenue standard in U.S. GAAP.
 
Specifically, the deferral would require public entities to apply the new revenue standard for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., beginning on January 1, 2018 for a calendar year entity). Public entities would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016.
 
Nonpublic entities would apply the new revenue standard for annual reporting periods beginning after December 15, 2018 (i.e., January 1, 2019 for a calendar year entity) and interim reporting periods within annual reporting periods beginning after December 15, 2019 (i.e., the quarter ended March 30, 2020 for a calendar year entity). Nonpublic entities may elect to early adopt for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein.
  BDO Comment While developing the proposed deferral, the FASB considered a two-year delay.  However, a majority of the Board members concluded one year is appropriate.  Those who respond to the exposure draft might consider addressing the length of the deferral in their comments.
  On the Horizon The joint FASB/IASB Transition Resource Group has held a number of meetings to discuss revenue recognition implementation issues. As a result, the Boards have decided certain changes are needed to make the new revenue standard more operational and are planning to propose amendments to that effect, which will also be exposed for public comment.  Additional changes in connection with future TRG deliberations are also possible.  Therefore, stakeholders should monitor these developments during their implementation efforts.

For questions related to matters discussed above, please contact Adam Brown, Ken Gee or Chris Smith.
 
1 Proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective date
2 ASU 2014-09 Revenue from Contracts with Customers
 

BDO Comment Letter - Disclosures about Hybrid Financial Instruments

Wed, 04/29/2015 - 12:00am
Re: Proposed Accounting Standards Update, Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives (File Reference No. 2015-220) (“the ED”).
  Download

FASB Flash Report - April 2015

Fri, 04/24/2015 - 12:00am
FASB Implements Practical Expedient for Measuring Defined Benefit Plan Obligations and Assets
  Summary
  The FASB recently issued an ASU providing an optional practical expedient for measuring an employer’s defined benefit obligation and plan assets when the company’s fiscal year-end does not coincide with a month-end. In this situation, an entity may elect to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. The new standard takes effect in 2016 for public companies and is available here.  
  Main Provisions ASU 2015-041 introduces a practical expedient within Topic 7152 for measuring defined benefit plan assets and benefit obligations.  Under the expedient, if an employer’s fiscal year-end does not coincide with a month-end, the employer may measure plan assets and benefit obligations using the month-end that is closest to the employer’s fiscal year-end.  This is intended to allow for the use of third party reports, such as those issued by a plan’s trustee.  An employer making the election will be required to apply it consistently from year to year, and to all of its benefit plans, if it has more than one. 
 
Additionally, an employer making the election will be required to adjust the fair value of the plan assets and obligations for any contribution or other significant event caused by the employer3 (e.g., amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) that occurs between the measurement date and the employer’s fiscal year-end. 
 
However, an employer does not need to adjust the fair value of individual classes of assets for a contribution occurring between the measurement date and the employer’s fiscal year-end; the employer should simply disclose the amount of the contribution to permit reconciliation of the total fair value of all the classes of plan assets in the fair value hierarchy to the ending balance of the fair value of plan assets.  The ASU includes the following example of such a reconciliation:4



Similarly, the amendments create a practical expedient for interim events.  If a significant event occurs during an interim period which calls for a remeasurement of defined benefit plan assets and obligations (e.g., partial settlement), the employer may remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event.  In this situation, the month-end remeasurement should be adjusted for any effects of the significant event that may or may not be captured in the month-end measurement.  For example, if the closest month-end is before the date of a partial settlement, then the measurement of plan assets must be adjusted to exclude assets that are no longer part of the plan.
 
An employer electing to apply the expedient must disclose this fact and the date used to measure defined benefit plan assets and obligations.  
Effective Date and Transition The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective for all other entities for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.  The amendments must be applied prospectively.  Early adoption is permitted.

For questions related to matters discussed above, please contact Liza Prossnitz or Jennifer Kimmel.
 
Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
Compensation—Retirement Benefits
3 No adjustment should be made for events the employer did not cause, such as changes in market prices or interest rates.
4 See the amendments to paragraph 715-20-50-1(d)(5)(ii).
 

FASB Flash Report - April 2015

Fri, 04/24/2015 - 12:00am
FASB Issues Guidance for Accounting for Fees Paid in a Cloud Computing Arrangement
  Summary The FASB has issued an ASU to clarify that if a cloud computing arrangement contains a software license, a customer should account for this element consistent with the acquisition of other software licenses that are capitalized.  Otherwise, a customer should account for the arrangement as a service contract, which would usually be expensed.  The new standard takes effect in 2016 for public companies and is available here.  
  Main Provisions ASC Subtopic 350-401 provides guidance on accounting for the cost of computer software developed or obtained for internal use.  ASU 2015-052 amends Subtopic 350-40 to clarify whether a hosting arrangement (e.g., cloud computing, software as a service, etc.) contains a software license, and thus, whether it is to be accounted for by the customer similarly to other internal-use software. 
 
Specifically, the amendments revise the scope of Subtopic 350-40 to include internal-use software accessed through a hosting arrangement only if both of the following criteria are met:
 
  1. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.  There is no significant penalty if the customer has the ability to take delivery of the software without incurring significant cost and the ability to use the software separately without significant loss of utility or value.
  2. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.

If both of the above criteria are present in a hosting arrangement, then the arrangement contains a software license and the customer should account for that element in accordance with Subtopic 350-40 (i.e., generally capitalize and subsequently amortize the cost of the license).  If both of the above criteria are not present, the customer should account for the arrangement as a service contract (i.e., expense fees as incurred). 
 
The Board noted in the Basis for Conclusions that because the amendments supersede paragraph 350-40-25-16, some entities’ accounting for acquired software licenses will change. At present, because of the guidance in paragraph 350-40-25-16, some entities analogize to operating lease guidance in accounting for some software licenses (that is, even when the entity obtains a software license, it accounts for the arrangement as executory in nature).  As a result of the amendments, all software licenses in the scope of Subtopic 350-40 will be accounted for in the same manner, consistent with the accounting for other licenses of intangible assets.  In general, we believe the majority of entities in the scope of the new standard will continue to expense cloud computing fees, consistent with current practice.
  Effective Date and Transition The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.   Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively.  Certain transition disclosures are required depending on the method of transition. 

For questions related to matters discussed above, please contact Adam Brown or Ken Gee.
 
1 Intangibles—Goodwill and Other—Internal-Use Software
2 Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
 

BDO Board Reflections - April 2015

Tue, 04/14/2015 - 12:00am
What topics should management and corporate boards be prepared to address with shareholders in 2015?
  With the stock market reaching all-time highs, dropping unemployment, increased hiring and a strong IPO market, 2015 has already been full of positive indicators for the U.S. economy. At the same time, the constant threat of cyber attacks, concerns with possible deflation and economic challenges in Europe and South America represent cause for potential concern. This unsettled climate should make for an interesting annual meeting season this Spring.
  Top of Mind Shareholder Topics The following compilation lists topics that corporate management and boards of directors should be prepared to address in connection with 2015 annual meetings. These reflect individual as well as inter-related areas of corporate financial and operational risk and strategy that require significant time and attention by companies of all sizes and across all industries. Where appropriate, topics have been aligned with additional pieces of thought leadership and/or learning opportunities for further consideration. 
  Cyber Security Highly publicized data breaches at Sony Pictures, Anthem Insurance and other major businesses continue to put cyber security at the top of the agenda for shareholders. Weaknesses in networks and data security can expose businesses to significant losses in brand and market value. Shareholders may want to know if the board is actively involved in cyber security planning, whether the company has a chief of cyber security in place and how the company is taking a proactive and preemptive approach to improve data security. Consider BDO’s Cyber Security Board Primer which distinguishes between activities boards should be conducting and steps management should be taking as well as provides cyber security resources and tools for further consideration. For CPE-worthy programming with respect to cyber security matters, refer to our Managing Risk in Cyberspace and Data Breach Essentials archived webinars. Stay tuned for additional BDO programming and thought leadership to be released this spring on steps companies can take in protecting their businesses and understanding trends through use of “big data” and data analytics tools and techniques.
Global Economic Concerns Investors have become well educated on how inter-related the world’s economies have become and are concerned how the financial crisis in Greece, unstable economic conditions in Venezuela and other markets will impact the global recovery. Sovereign debt holders or any companies with exposure (facilities or sales operations) in these countries should be prepared for worst case scenarios. Investors will ask about contingency plans the company has in place should there be a major collapse. Refer to our library of BDO’s industry publications for further insight on global and other issues impacting your industries.
  Risk Committees Only a small minority of companies have stand-alone risk committees. Most assign any risks to the audit committee, which has seen its responsibilities expand considerably beyond the oversight of the company’s financial reporting. Audit committees now grapple with issues ranging from cyber-security to foreign corrupt practices to whistleblower claims. Shareholders may inquire whether the current audit committee has the appropriate experience for all of these increased responsibilities. They may also inquire whether the company should have a separate risk committee composed of the proper expertise to provide oversight of these varied areas. Consider BDO’s Effective Audit Committees in the Ever Changing Marketplace along with related practice aids that will be refreshed in the summer of 2015.
  Accessing Public Equity Markets Over the past two years, initial public offerings (IPOs) in the U.S. have experienced a renaissance with both total offerings and proceeds raised reaching the highest levels since 2000. With IPO activity expected to remain strong in 2015, shareholders may want to know if the favorable IPO market will translate to new securities offerings from existing public companies and whether management is considering any such offerings in the foreseeable future. Consider BDO’s Capital Markets Practice recent BDO 2015 IPO Outlook for further information. If you are a private entity currently considering the road to going public, you find BDO’s Guide to Going Public of particular interest.
  M&A Opportunities/Takeover Defenses Large cash reserves could lead to many businesses pursuing growth through mergers and acquisitions. Shareholders will want to know if management is seeking out opportunities and that potential targets are properly vetted to avoid any buyer’s remorse. By the same token, Boards should have contingency takeover defenses in place to enable them to respond quickly to fend off attacks or maximize shareholder value should a transaction be accepted.
  Spinoffs There was a record 64 spinoffs in 2014 and activist shareholders will continue to campaign for more in 2015. Management should be prepared to respond to these well-funded investors who argue that businesses perform better when they aren’t part of a large conglomerate.
  Pay Disparity Although the SEC has continued to delay the implementation of new Dodd-Frank regulations requiring disclosure of the ratio of the CEO’s pay to the median pay of employees of the company, media reports of high ratios - such as Walmart’s CEO being paid better than 1,000 times more than the median Walmart worker - are sure to keep pay disparity a focus of shareholders at 2015 annual meetings. Companies should be aware of these concerns and communicate clearly to shareholders how their performance-focused executive compensation models benefit the company and shareholders. Consider BDO’s recent BDO 600 Compensation surveys: 2014 Board Compensation Practices and 2014 CEO and CFO Compensation Practices. For CPE-worthy programming, refer to our 2015 Executive Pay Outlook for Mid-Cap Companies archived webinar.
  Mid-Year Rate Hike? With Fed watchers predicting the long anticipated rate hikes to begin sometime this summer, investors may be interested whether management is planning to access the debt market to fund strategies prior to a rate hike in order to take advantage of favorable interest rates in the near term.
  Related Parties & Significant Unusual Transactions A new rule (PCAOB Auditing Standard 18), focused on related parties and unusual transactions, takes effect in 2015. The new standard, in part, requires auditors to more closely scrutinize executive pay and identify inherent risks, such as incentives that have the potential to reward management for decisions that could prove detrimental to shareholders interests. Investors will want to know that the board is on top of these relationships and transactions, and whether disclosures properly reflect the associated risks. BDO has covered aspects of AS 18 in a Flash Report as well as recent CPE-worthy programming for boards: 2015 What’s on the Minds of Boards? and 2015 Executive Pay Outlook for Mid-Cap Companies.
  Proxy Access Proxy access allows major shareholders to have more of a say in board composition and make their own suggested nominations for board directors instead of accepting only such candidates as proposed by the board. This is not a common practice in the U.S. and a proposed rule by the SEC to mandate proxy access was overturned in 2011 by a Washington, D.C. district court ruling. For shareholders to gain proxy access, the company’s has to have such a permissible practice written into its bylaws. In a general sense, supporters contend that shareholders should be able to nominate their own representatives in order to ensure accountability by the board. Opponents of proxy access often cite shareholder activism promotion of special interest measures if such they can install specific candidates. The debate continues as General Electric recently became one of the few companies to allow groups of shareholders to put forth nominees to the company’s board, provided the candidates’ backers have at least 3% of GE shares for at least three years. Hewlett Packard and Verizon Communications have adopted similar measures in recent years. Shareholders may ask whether the company will be adopting similar proxy access plans.
  Sustainability Once the province of leading “green” businesses, sustainability reporting is becoming increasingly more common among businesses in general. Companies gather information about processes to help avoid or mitigate any environmental or social risks that could materially impact the business. Beyond managing their social and environmental impacts, companies that practice sustainability report related benefits in improved operational efficiencies and an enhanced reputation with employees, shareholders and customers. Investors may be interested in knowing whether the company is planning on making sustainability disclosures.
  Succession Planning As the economy continues to improve, executive movement should start to increase - including CEO turnover. Succession planning is one of the board’s most important responsibilities. Shareholders will want to know that the board has a succession plan in place and candidates identified, if needed, for all C-level positions and board members as well. BDO has several resources of interest in this area: Perspectives on Executive Succession Planning, Succession Planning Discussion Guide, and Succession Planning Assessment Tools.
  Disaster Planning Severe storms have wreaked havoc with much of the U.S. this winter, as extreme weather and other natural disasters seem to be on the rise in recent years. These events are a powerful demonstration of supply chain risks in a global economy. Any single failure in a business’s supply chain can cause problems throughout the company. Boards should be prepared to articulate what they have done to prepare for low probability, but high impact events such as natural disasters.
Internal Controls The SEC and the PCAOB have been vocal about increased scrutiny related to internal controls over financial reporting (ICFR), even where there is no required audit of ICFR. Boards may be asked questions related to ICFR, whether the disclosure of any identified material weaknesses is sufficient and appropriate, and whether any significant deficiencies identified by management or the auditors have been properly addressed. Investors may also inquire if the company is in compliance with the new COSO framework for internal controls. Consider BDO’s series of Flash Reports on COSO frequently asked questions available on BDO’s Insights page and our CPE-worthy archived webinar COSO 2013: Preparing for Implementation.

This is just a sampling of some of the more prevalent, broadly applicable issues that are top of mind for shareholders as we continue on through 2015 and management and boards prepare for annual shareholder meetings.
  Resources BDO commits significant resources to keep our clients and contacts up to date on current and evolving technical, governance, industry, and reporting developments. Our thought leadership consists of quarterly email updates, publications, surveys, practice aids, and tools that span a broad spectrum of topics that impact financial reporting, as well as corporate governance. Our focus is not simply to announce changes in technical guidance, regulations or emerging business trends, but rather expound on how such changes may impact our clients’ businesses. Through our various webinar offerings, we reach a broad audience and provide brief, engaging, just-in-time training that we make available in a variety of ways to meet the needs of your busy schedule. To begin receiving email notifications regarding BDO publications and event invitations (live and web-based), visit the BDO registration page and create a user profile. If you already have an account on BDO’s website, visit the My Profile page to login and manage your account preferences.
 

FASB Flash Report - April 2015

Mon, 04/13/2015 - 12:00am
FASB Issues ASU to Simplify Presentation of Debt Issuance Costs

 

Summary

The FASB has issued an ASU intended to simplify U.S. GAAP by changing the presentation of debt issuance costs. Under the new standard, they will be presented as a reduction of the carrying amount of the related liability, rather than as an asset. The new treatment is consistent with debt discounts. It takes effect retroactively in 2016 and is available here.  
 

Main Provisions

ASU 2015-031 revises Subtopic 835-302 to require that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs.
 
Further, the amendments require the amortization of debt issuance costs to be reported as interest expense, which we believe is largely consistent with current practice. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. 
 
In the Basis for Conclusions, the FASB observed debt issuance costs that do not have an associated debt liability (for example, costs incurred before proceeds are received on a debt liability) generally are reported as deferred charges (i.e., assets) until the related debt liability is recorded and did not propose a change to this practice.   
 
The standard does not affect the recognition and measurement of debt issuance costs. As such, entities may need to track debt issuance costs separately in order to address other areas of U.S. GAAP such as third-party costs related to a debt restructuring accounted for under ASC 470-50 or the calculation of a beneficial conversion feature in accordance with ASC 470-20.

 
Effective Date and Transition

The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. Applicable disclosures for a change in an accounting principle are required in the year of adoption, including interim periods.

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


1 Simplifying the Presentation of Debt Issuance Costs
Interest—Imputation of Interest
 

Model Audit Committee Meeting Agendas

Wed, 04/08/2015 - 12:00am
The following Model Audit Committee Meeting Agendas suggest the timing, objectives, specific actions to be performed, and communications to be made to the board for certain audit committee meetings.
  Download

Strengthening Corporate Governance: Effective Mechanisms for Reporting, Investigating and Remediating Fraud

Wed, 04/08/2015 - 12:00am
There are numerous resources available that guide those charged with governance (referred to as audit committees) toward building programs to include anti-fraud controls and cultivation of anti-fraud environments. When put into place and followed, these programs go a long way in the prevention and deterrence of fraud. However, even when the strongest fraud prevention programs are in place and operating as designed, fraud may still occur. This practice aid is intended to briefly cover the key elements of an anti-fraud environment and responsibilities for such with emphasis on the structure, policies and procedures that audit committees need to ensure are in place before fraud occurs and the specific action steps to take if and when alleged fraud is suspected.
  Download

Initial Offerings Newsletter - Spring 2015

Tue, 04/07/2015 - 12:00am

  U.S. IPO Activity Hits Speed Bump in Q1 of 2015 IPO market has performed well, but repeating performance of 2014 will be difficult
After two consecutive years of robust growth, the U.S. market for initial public offerings (IPOs) has experienced a steep drop in activity during the initial months of 2015.  With just 34 IPOs, activity is down 47 percent from Q1 2014 and, similarly, total proceeds ($5.4 billion) are down 49 percent year-over-year.  This makes Q1 2015 the least active quarter in offering activity in two years (31 IPOs in Q1 2013) and the weakest in terms of proceeds raised since Q3 2011 ($3.5B).*

Thus far in 2015, the U.S. IPO market hasn’t had the benefit of large offerings that were fairly commonplace in 2014.  It has also been negatively impacted by a lack of deals coming from the technology and energy industries - two traditionally strong sources of offerings.

Moreover, the stock market, which was relatively flat in Q1, has certainly played a role in the drop in offerings.  Over the past two years of solid returns, businesses considering an IPO were motivated to pull the trigger on a deal in order to benefit from the rising market.  This year’s luke warm stock market has apparently removed the impulse to rush an offering out the door. 

By any year-over-year measurement, the 2015 IPO market is off to a much slower start than last year.  However, when you look back beyond 2014, from a historical perspective IPO activity in the first quarter was consistent with Q1 levels from 2011 through 2013.  Given the healthy 15 percent return for the average Q1 offering, the IPO market year to date has actually performed quite well.


* Heavily impacted by March 2008 $17.9 billion VISA IPO
Source: Renaissance Capital, Greenwich, CT (http://www.renaissancecapital.com)
  Industries The healthcare sector, which includes biotech businesses, had more IPOs than any other industry in both 2013 and 2014.  Healthcare maintained its leadership position in Q1 as it accounted for almost half (16) of all offerings during the first quarter of 2015.  The financial sector came in second for the quarter with nine deals, on pace with 2014 when the industry accounted for 36 offerings.

Much of the drop in overall IPO activity can be traced to steep reductions in offerings from the technology and energy industries in Q1.

Only four technology companies have gone public this year, as the private market is flush with venture capital allowing start-ups to wait longer before wading into the public markets.  Moreover, beyond traditional VC funding, hedge funds and mutual funds that previously shunned the risk associated with venture style investing are now joining in private-funding rounds.  These funds are seeking to boost returns and ensure that they can buy blocks of shares in IPOs as competition for tech offerings intensifies.  This new trend is greatly increasing the valuations of late-stage tech start-ups, which will eventually lead to larger deal sizes when they do pursue offerings.  In the near-term, it is slowing the number of IPOs coming from the tech sector.

The energy industry was a leading contributor to the 2014 IPO market, both in terms of number and size of deals.  In Q1, there were just two energy offerings as the sector has been heavily impacted by the collapse of oil prices.  With crude-oil futures dropping more than 50% from last summer, the IPO market for exploration and production companies has come to a virtual halt and isn’t likely to get moving in the near term.
  Forecast This year’s U.S. IPO market isn’t likely to match the heights of 2014, but it is still on track for a very healthy year.   Moving forward, the pipeline for deals in the remainder of 2015 remains promising.  Overall, U.S. economic conditions are healthy and there remains a backlog of PE and VC backed businesses that are looking to pursue an exit through an IPO. 


Source: Renaissance Capital, Greenwich, CT (http://www.renaissancecapital.com)

Although the stock market has been generally flat this year, given the positive performance of IPOs that priced in Q1, there is no reason for prospective offering businesses to delay their IPOs and there are potential sizable offerings on the horizon.

On March 31, Go-Daddy, the world’s largest website registrar, priced its initial public offering at $20 a share, raising $460 million.  By the end of trading on April 1, the stock closed at $26.15, up more than 30 percent.  If the offering continues to perform well, it could be a sign that investors have an appetite for better known brands in the tech sector and might entice other potential large tech IPOs to follow suit.  Uber, the mobile ridesharing application which was recently valued at $41 billion in its latest private funding round, and Airbnb, the international home rental site which was similarly valued at $20 billion, are just two examples of major consumer tech brands that could launch large IPOs in 2015. 

Perhaps the greatest threat to this year’s IPO market is also its current greatest strength - biotechnology firms.  Biotech businesses have played a major role in the healthcare industry being the leading source of IPOs over the past two years.  Biotech stocks have been on fire for more than a year and, given the highly prospective nature of these companies, there has been some concern about a potential “biotech bubble”.  During the last trading sessions of Q1, biotechs have lost some of their luster, raising bubble concerns.  This issue bears watching as we enter Q2, as it can have a major impact on the IPO market and the greater stock market moving forward.

* Renaissance Capital is the source for all historical data related to the number, size and returns of U.S. IPOs.
 

For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
Jay Duke, Dallas; Lee Duran, San Diego; Brian Eccleston, New York; Christopher Tower, Orange County

 

Auditor Required Communications with Audit Committees

Tue, 04/07/2015 - 12:00am
Effective communication between audit committees and external auditors is an integral part of the audit process. This guide provides required communications with audit committees, along with authoritative guidance references.
  Download

Sample Audit Committee Questions to Ask of Auditors & Management

Tue, 04/07/2015 - 12:00am
To assist the audit committee in performing its duties, the following is a list of questions they may ask the auditors and management in the context of periodic discussions (i.e., audit planning meeting; quarterly review meetings; and pre- and post-earnings release meetings). However, committees are cautioned against falling into a checklist mentality where the basic goal is completion of the checklist itself, rather than conducting their own company-specific investigation. Accordingly, these questions should be tailored to the circumstances of each company. You may find many of the following questions are appropriate to ask more broadly of both the auditors and management.
  Download

Effective Audit Committees in the Ever Changing Marketplace

Tue, 04/07/2015 - 12:00am
More than ever, there is a prevailing belief that effective audit committees are essential to the development and maintenance of efficient and effective capital markets. To that end, BDO continues the tradition of assisting those charged with governance (including audit committees, boards of directors and financial executives).

While geared primarily toward audit committees of public entities, much of the content included within is applicable to those charged with governance of private entities as well. Where appropriate, we have provided additional guidance/considerations specifically for private entities throughout this publication.
  Download

Pages