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FASB Flash Report - May 2017

Tue, 05/23/2017 - 12:00am
FASB Clarifies Accounting for Modifications of Share-Based Payments Download PDF Version
Summary The FASB recently issued ASU 2017-09[1] to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.[2] The ASU is available here, and becomes effective for all entities for fiscal years beginning after December 15, 2017.
  Background Topic 718 provides an accounting framework applicable to modifications of share-based payments, and currently defines a modification as “a change in any of the terms or conditions of a share-based payment award.” This definition is open to a broad range of interpretation and has resulted in diversity in practice as to whether certain changes in terms or conditions are treated as modifications.
  Main Provisions ASU 2017-09 clarifies that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:
  1. The fair value of the modified award is the same as the fair value of the original award immediately before the modification.[3] The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification.
  2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification.
  3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.
BDO Observation: The FASB decided not to specify whether the first test above is a binary assessment (that is, the value is either exactly the same immediately before and after the modification). Instead, entities will be able to apply judgment on this point, as they do in other areas of Topic 718.
The ASU also clarifies that the disclosure requirements in paragraphs 718-10-50-1 through 50-2A and 718-10-50-4 apply regardless of whether an entity is required to apply modification accounting. If applicable, this includes disclosing a lack of incremental compensation cost resulting from a modification.
BDO Observation: In 2016, the FASB issued ASU 2016-09[4] to simplify the accounting for certain aspects of stock compensation. One of the amendments increased the allowable statutory tax withholding threshold to qualify for equity classification from the minimum statutory withholding rate up to the maximum statutory rate in the applicable jurisdiction(s). Based on the clarification in ASU 2017-09, a change to an award to increase the withholding amount from the minimum to the maximum would not constitute a modification under Topic 718, provided that the classification of the award does not change and that no other terms or conditions are revised.

In addition, the ASU includes examples of common changes to the terms or conditions of an award and indicates whether those changes typically require an entity to apply modification accounting:
Examples of changes to an award that generally do not require modification accounting:
  • Changes that are administrative in nature, such as a change to the company name, company address, or plan name
  • Changes in an award’s net settlement provisions related to tax withholdings that do not affect the classification of the award.
Examples of changes to an award that generally require modification accounting include:
  • Repricing of share options that results in a change in value of those share options
  • Changes in a service condition
  • Changes in a performance condition or a market condition
  • Changes in an award that result in a reclassification of the award (equity to liability or vice versa) 
  • Adding an involuntary termination provision in anticipation of a sale of a business unit that accelerates vesting of the award.[5]
Effective Date and Transition The amendments in the ASU are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period.
An entity should apply the amendments prospectively to a modification that occurs on or after the adoption date.
For questions related to matters discussed above, please contact Yosef Barbut or Jennifer Kimmel.   [1] Scope of Modification Accounting [2] Stock Compensation [3] In this sentence, references to “fair value” also include the calculated value or intrinsic value of an award, if such an alternative measurement method is used. [4] Improvements to Employee Share-Based Payment Accounting [5] See paragraphs BC11 and BC12.

Audit Quality Perspectives from Our CEO

Mon, 05/22/2017 - 12:00am

Despite a dynamic business and political environment marked by post-election speculation as to the impact on the financial reporting regulatory environment and global markets, BDO USA, LLP (BDO)1 is keeping our focus. We continue to promote a strategy committed to the delivery of high quality audits that meet the public’s demand for compliance, transparency, and integrity of the financial statements on which we opine.

In 2016, we first shared Our Approach to Audit Quality through the lens of BDO’s strategic plan “CLIMB” – each letter representing a key pillar of an internal ramework through which our firm addresses dynamic external factors: Culture and Unity; Leadership and Accountability; Innovation; Market Prominence; and Best in Class. In our 2017 report, we emphasize the specific areas of interest where we, at our core, continue to make
concerted efforts. With the goal of helping our professionals and our clients thrive every day, we are aligning our practices and services accordingly.

By focusing first on our people, we foster a teaming environment to best serve our clients. We have intensified our drive towards creating a Culture of world-class talent procurement and retention. We have grown to a firm of approximately 6,500 professionals, increasing client service staff and seasoned partners, experienced in key technical areas and industries from public company practice matters to cybersecurity services. As our investment in top talent increases, so too does our investment in the infrastructure that supports our professionals in the form of messaging, training, systems, and tools. These activities permeate our over 60 offices and help unite us as one firm.

Governance is a key focus for our firm’s leaders. As such, Leadership and accountability at BDO has undergone a significant transformation, resulting in a management structure better aligned to support our business lines, regional practices and client industry concentration. Our firm has put into place tools, including a leadership platform, to help us focus the activities of our current leaders and develop our future leaders. Concurrently, our board has committed itself to a continuing education program to remain in step with corporate governance developments and oversight of risk.

Continued Innovation at BDO has taken the form of increased investment in evolving services, technologies, and analytical techniques to make audits more effective and efficient. In addition, we have placed even greater importance on ensuring our professionals have the requisite knowledge to address changing standards, regulatory complexities, and our expanding industry practices.

Our Market prominence has been complemented by the completion of seven major practice expansions in 2016 along with increased global capabilities and resources to assist clients with international operations. Additionally, through the creation of centers of excellence, we are committing to keep our clients informed on time-sensitive matters of importance to their businesses. As we continue to increase the experience level of and resources for our practice professionals, we are well positioned to serve our base of public company audit clients, which averaged over 380 in 2016 (inclusive of issuer employee benefit plan engagements).

Finally, our drive to be Best in class underscores the culmination of the aforementioned activities of our strategic plan in delivering high quality-centric audit service. We have placed a premium on the work of our national and local Audit Quality Team and Networks and are actively building these resources. We challenge our professionals to anticipate trends and provide them with opportunities to continue to contribute in meaningful ways to both the firm and to the audit profession through international and national office secondments, fellowships with regulators and standard setters, industry and standard-setting task forces, forums with board of directors and financial executives, and other means of service.

Building upon our 2016 BDO’s Approach to Audit Quality, the following report examines BDO’s specific areas of focus on audit quality for 2017 and beyond. We believe our commitment to our overall strategy, investments, and actions enables us to significantly increase our attention and focus on audit quality.

Wayne Berson
Chief Executive Officer of BDO USA, LLP and Chairman of the Global Board of Directors at BDO International Ltd. 

1 BDO is the U.S. member firm of BDO International Limited, a UK Company limited by guarantee, and forms part of the international BDO network of independent member firms.

Culture & Unity

Mon, 05/22/2017 - 12:00am
BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Culture & Unity is one of the five elements discussed in our 2017 Approach to Audit Quality report

As a firm, building upon our core values and fostering a culture of teamwork has taken on new meaning meaning as our Assurance practice has grown significantly. Our Assurance practice professional headcount of over 2,800 in 2016 has risen to historic numbers – up over 50% from 2014. Through college recruitment efforts from over 200 universities and private colleges and our highly popular Pathway to Success program, that introduces younger college accounting students to a career in public accounting, we have hired close to 1,400 professionals over the past three years, 69% of whom have chosen to join our Assurance practice.

BDO deploys an advanced Human Resources Information System to support each of our professionals in providing consistent high caliber service across all our business lines. With input from a cross-section of more than 200 BDO professionals, the firm’s core competencies were refreshed to align with behaviors that drive successful performance at every level in setting and clarifying client service expectations. These competencies are being used during professionals’ goal-setting conversations, regular performance assessments and career advising, and readying professionals for promotion and taking on additional responsibilities.

As the demand for talent increases, we continue to aggressively recruit experienced professionals. As part of an active succession planning process that fully assesses changing needs of the profession and our firm, we have placed key partners to serve as our National Managing Partner of Auditing, National Director of Independence, and National Director of SEC Practice to succeed partners transitioning to new roles or preparing for retirement from existing roles and to allow for an appropriate transition period to do so. These experienced professionals bring over 75 years of experience to BDO.

BDO continues to evolve the ways in which we communicate with our employees to respond to the mobility of our professionals and provide up to date information. Embracing changes in technology, the BDO News App was released to further connect our professionals in the office to those in the field. Additionally, a “TED Talks” style series of featured communications from our senior leaders, referred to as the “CLIMBxChange”, is provided to all professionals to ensure consistency in leadership tone and messaging.

Our approach to building an inclusive workplace provides appreciation of the different perspectives our employees bring to our firm while minimizing the impact of inherent unconscious bias through training programs and internal forums. As such, we actively train our professionals and promote and support internal forums such as our LGBT Pride Alliance, Women’s Inclusion, Multicultural Alliance, and Parents’ and Veterans’ Networks. These allow us to further efforts in promoting an environment that is gender, racially, ethnically, and generationally inclusive and responsive to the varying needs of our employee base.In order to retain high performing professionals, we formed early- and mid-career women’s councils staffed by employees who identify and raise issues to bolster mentoring opportunities for younger staff, which are receiving positive feedback.

Recognizing that employees perform better when they are energized and passionate about their work, BDO supports flexibility in the workplace and encourages employees to be intentional with their time in balancing busy careers and personal lives. The better we are at managing our time and our energy, the more successful our business will be. Additionally, our social programs – such as BDO Counts and BDO Green, embody our commitment to corporate responsibility and encourage our professionals to bring even more meaning to their professional lives. Our efforts in these and other endeavors have been recognized through a variety of honors.

BDO Comment Letter - Possible Changes to Industry Guide 3

Thu, 05/11/2017 - 12:00am
File No. S7-02-17: Request for Comment on Possible Changes to Industry Guide 3

BDO supports the Commission's efforts to modernize the nature, timing, scope and applicability of Guide 3.


BDO Comment Letter - Simplifying the Classification of Debt in a Classified Balance Sheet

Tue, 05/09/2017 - 12:00am
Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent) (File Reference No. 2017-200)

BDO supports the proposed guidance for classifying debt as current vs. long-term and recommends a number of enhancements to the final standard.


SEC Chief Accountant Speech: Advancing the Role and Effectiveness of Audit Committees

Mon, 05/08/2017 - 12:00am

Download PDF Version

The following highlights recent guidance and related tools and resources for consideration by audit committees in carrying out their oversight responsibilities.  

In a speech made in March 2017[1], SEC Chief Accountant Wes Bricker addressed the Audit Committee’s “critical role in contributing to financial statement credibility through its oversight and resulting impact on the integrity of a company’s culture and internal controls over financial reporting, the quality of financial reporting, and the quality of audits performed on behalf of investors.” His comments spoke to the ways in which the Audit Committee can promote high quality financial reporting and covered the following key areas:
  • Understanding the organization’s business operating environment - To establish a frame of reference in which the Audit Committee considers the scope of its oversight and focus, taking into account changes in the operating environment, rapid growth of operations that may strain controls, new business models, products or activities along with new accounting pronouncements, etc. that may bring new risks
  • Diversity in the Audit Committee’s composition – To diminish the extent of group thinking and broaden relevant skills and experience - e.g., industry or financial reporting – to enhance the ability to monitor financial reporting and hold management accountable. Refer to BDO’s June 2017 webinar Director Diversity – Striking the Right Balance in the Boardroom.
  • Audit Committee Workload – To balance the workload of core responsibilities with other emerging risk areas, such as cybersecurity, to ensure the Audit Committee has the appropriate capacity to execute effectively. The Board should be actively monitoring and managing the risk of Audit Committee overload. Audit committees should remain focused on core responsibilities and manage the scope of both these and additional responsibilities through charters, agenda-setting practices, continuing education, and leveraging advisors – legal, accounting, and other. Refer further to the BDO Audit Committee Requirements Practice Aid to manage and track board required activities.
  • Tone, culture, and the strength of the internal control environment – To ensure a strong foundation for effective internal control over financial reporting. These should be regularly assessed with both management and the external auditors to obtain a clear and common understanding of what tone means, why tone is important, and what mechanisms are in place to assess the adequacy of control environment, including across any relevant divisions and geographies.
  • Oversight of the external auditor - To promote its independence and align the auditor’s interests with those of investors. Refer to the updated External Auditor Assessment Tool designed by the CAQ in partnership with the Audit Committee Collaboration to assist Audit Committees in carrying out their responsibilities related to oversight of the external auditor.
  • Enhanced voluntary reporting – To enhance transparency in the activities of the Audit Committee via voluntary disclosure to enable investors to better understand and evaluate the Audit Committee’s performance. Refer to the CAQ 2016 Audit Committee Transparency Barometer.

For more information and educational opportunities on these and other topics related to audit committee oversight, please visit BDO’s Center for Corporate Governance and Financial Reporting.   [1] SEC Chief Accountant Wes Bricker’s remarks before the University of Tennessee’s C. Warren Neel Corporate Governance Center on March 24, 2017.

Significant Accounting & Reporting Matters Q1 2017

Thu, 04/27/2017 - 12:00am
Issued on a quarterly basis, the Significant Accounting and Reporting Matters Guide provides a brief digest of final and proposed financial accounting standards as well as regulatory developments. This guide is designed to help audit committees, boards and financial executives keep up to date on the latest corporate governance and financial reporting developments.

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

FASB Flash Report - April 2017

Tue, 04/25/2017 - 12:00am
A Focus on Income Tax Implications: United Kingdom Beginning the Formal Process of Exiting European Union Download PDF Version
Summary The UK’s first step in withdrawing from the European Union may trigger certain disclosure requirements for SEC registrants with international operations. This memorandum addresses income tax considerations under ASC 740 (US GAAP) and IAS 12 (IFRS).

In late March 2017, the United Kingdom (UK) prime minister delivered a formal document to the European Union (EU) initiating the UK’s withdrawal from the EU. The move follows from the outcome of the June 2016 referendum in which a plurality of UK citizens voted to leave the EU.  The letter submission initiated a formal process whereby the UK has two years (through March 2019) to negotiate its formal withdrawal with all member states (e.g., certain provisions in UK income tax treaties with member states). The UK will have until March 2019 to finalize its exit, unless all remaining 27 EU member states agree to extend the negotiation period. If negotiations are not finalized by March 2019, nor extended, EU treaties would cease to apply to the UK.  In addition to initiating its withdrawal, the UK government published details of what is called the “Great Repeal Bill” which is necessary to ensure future EU laws would no longer apply in the UK.[1]

In the meantime, EU law still stands in the UK until it ceases being a member (i.e., UK will continue to abide by EU laws and treaties). 
Brexit, a term coined with the UK’s decision to leave the EU, will impact UK trade, taxation of UK persons, business tax laws, and many more aspects of the broader UK economy. This alert focuses on the income tax accounting implications from the March 2017 letter submission under Topic 740 Income Taxes and the International Accounting Standard (IAS) 12, which is the IFRS equivalent standard.  

Income Tax Considerations
Under ASC 740 and IAS 12, deferred tax accounting is required when changes are formally enacted (US GAAP) or “substantively” enacted (IFRS).

With respect to Brexit, the main income tax accounting issue is whether the letter submission in March 2017 had an income tax accounting impact under Topic 740 or IAS 12. On this point, we understand the SEC staff has concluded that the letter submission did not trigger the need for an entity to adjust its deferred income taxes. Specifically, the letter submission is not considered a tax law enactment (under Topic 740) or “substantive” enactment (under IAS 12). The SEC staff expects that income tax accounting will occur when law changes are enacted or substantively enacted, or/and when the UK ceases to be a member of the EU.
However, the SEC staff has indicated that disclosures about the nature of the event and its potential implications might be necessary, depending on a registrant’s facts and circumstances. Accordingly, disclosure might be appropriate in MD&A, as well as the footnotes related to risks and uncertainties under Topic 275 and income taxes under Topic 740. Registrants may consider consulting with their advisors when determining  the nature and extent of such disclosures.
BDO Observation: We believe this conclusion is consistent with the legal status of the letter submission, which is an administrative step necessary to begin negotiating income tax treaties between the UK and other member states. The UK has extensive bilateral tax agreements and the outcome of any negotiation is uncertain (e.g., a particular country might agree to retain specific benefits that are currently only afforded EU member states).
Other uncertainties exist, including whether the withdrawal process will trigger the recognition of deferred intercompany profits on a retroactive or prospective basis. Registrants potentially impacted by Brexit should monitor UK-EU negotiations leading to enactments (or substantive enactments) of tax law changes to reflect their financial statement impact in the appropriate period.
Sample Disclosure
Included below is a sample disclosure; it should be modified for a company’s specific facts & circumstances related to UK operations. The information in [ ] pertains to the relevant IFRS standard for companies reporting under IFRS.    
“We [Company XYZ] have operations in the UK and several European countries where we historically had material current and deferred income tax balances related to those activities.  As such, the UK’s 2016 decision to withdraw from the European Union or EU could have a material effect on our current and deferred income taxes. In March 2017, the UK initiated, through letter submission to EU, a formal two-year process to officially withdraw its membership. During this two-year period, the UK and EU member states are expected to negotiate many provisions in the UK bilateral agreements and tax treaties with EU member states as well as EU rules governing the income tax treatment of deferred intercompany profits. The final outcome of these negotiations will not be known until both the EU and the UK approve them and the UK enacts the related changes in its tax laws. EU law will cease to apply in the UK at the end of the two-year process in March 2019, unless the negotiations are extended. The letter submission in March 2017 is an administrative step required to begin the formal withdrawal process and is not considered a tax law enactment under ASC 740 [or substantive enactment under IAS 12]. Consequently, we plan to adjust our current and deferred taxes when tax law changes related to UK’s withdrawal from EU are actually enacted [or substantively enacted] and/or when EU law ceases to apply in the UK.”              
For questions related to matters discussed above, please contact Yosef Barbut (212-885-8292), Joe Russo (214-665-0646 external) or Neil Brackstone, BDO UK Partner (+44 (0)118 925 4442).   [1] The Bill will repeal the 1972 European Communities Act, which took Britain into the EU and meant that European law took precedence over laws passed in the British parliament. It will also end the jurisdiction of the European Court of Justice. All existing EU legislation will be copied across into domestic UK law to ensure a smooth transition on the day after Brexit.

Cyber Responsibility Officially Reaches the Board

Thu, 04/20/2017 - 12:00am
Twelve Questions Every Board Should Ask The new cybersecurity regulation proposed by the New York Department of Financial Services is expected to go into effect on March 1, 2017. Are you ready? In an article for Directors & Boards, BDO's Judy Selby and Amy Rojik share their insights on the implications for the board.
  View the Article

SEC Flash Report - April 2017

Thu, 04/20/2017 - 12:00am
Portion of Conflict Minerals Rule No Longer to be Enforced  On April 3rd, a U.S. District Court entered a final judgment in the ongoing lawsuit related to the SEC’s conflict minerals rule.  The final judgment upholds a U.S. Court of Appeals decision that a portion of the conflict minerals rule infringes upon a company’s constitutional right of free speech. More specifically, the courts determined that the requirement for a company to describe its products as “having not been found to be ‘DRC conflict free’” violates the company’s constitutional rights. The Commission now needs to determine how to address the Court’s decision. 

In light of the final judgment, Acting Chairman Piwowar issued a statement directing the SEC staff to begin work on a recommendation for the Commission.[1]  The SEC staff also issued updated[2] guidance on how a company should comply with aspects of the conflict minerals rule not affected by the Court’s decision.  The guidance clarifies that the SEC staff will not enforce compliance with Item 1.01(c) of Form SD, the specialized disclosure form used for conflict minerals reporting.  Item 1.01(c) requires companies to conduct due diligence on the source and chain of custody of conflict minerals.  Acting Chairman Piwowar expressed support for this guidance in his statement, explaining that the primary purpose of the work required by Item 1.01(c) is to make a disclosure which has since been found to be unconstitutional. 
For questions related to matters discussed above, please contact:
  Jeffrey Lenz
National Director, SEC Practice Paula Hamric
National Assurance Partner   [1] Piwowar’s statement also directs the staff to consider feedback received from his invitation to comment on the conflict minerals rule in January (refer to our SEC Flash Report here for further details).  [2] The updated guidance follows the SEC staff’s initial guidance issued in 2014 in light of the U.S. Court of Appeals ruling.  That guidance is described on page 5 of our 2014 SEC Year in Review letter, which is available here.  

FASB Flash Report - April 2017

Thu, 04/13/2017 - 12:00am
FASB Shortens Premium Amortization Period for Purchased Callable Debt Securities Download PDF Version
Summary The FASB recently issued ASU 2017-08[1] (the “ASU” or “Update”) to amend the amortization period to the earliest call date for purchased callable debt securities held at a premium. The ASU is available here, and becomes effective for public entities for fiscal years beginning after December 15, 2018, and for private entities one year later.
Background Previous GAAP generally required an investor to amortize the premium on a callable debt security as a component of interest income over the contractual life of the instrument (i.e., yield-to-maturity amortization) even when the issuer was certain to exercise the call option at an earlier date. This resulted in the investor recording a loss equal to the unamortized premium when the call option was exercised by the issuer. 
  Main Provisions The Update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e., yield-to-earliest call amortization). This amortization method is expected to better align with expectations incorporated in market pricing on the underlying securities.
The amendments:
  • Apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based upon prepayments of the underlying loans, not because the issuer exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendments.
  • Apply to all premiums on callable debt securities, regardless of how they were generated. For example, this includes initial purchase premium, deferred acquisition costs and cumulative fair value hedge adjustments that increase the amortized cost basis of a callable security over par value.
  • Require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date.
  • Do not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity.
  • Do not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other GAAP. 
  Effective Date and Transition The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.
For questions related to matters discussed above, please contact:
  Angela Newell
National Assurance Partner    Gautam Goswami
National Assurance Partner   Adam Brown
National Director of Accounting       [1] Premium Amortization on Purchased Callable Debt Securities 

Global Equity Rewards Matrix – Tool to Identify Potential International Tax Consequences for Equity Compensation

Thu, 04/06/2017 - 12:00am
BDO’s Compensation and Benefits practice has launched a global equity rewards matrix, available both online and as a mobile app, to provide information about the issuance of equity compensation – such as restricted stock and stock options - to individuals around the world. The matrix can be used for scenarios such as evaluating key points that companies need to think about when considering the issuance of equity compensation in a new country.  Boards, particularly compensation committees, may wish to encourage their management teams to review this tool to aid in risk management of global compensation practices. Often decisions about executive compensation are made without regard to foreign implications simply because of unfamiliarity with such implications, resulting in potentially negative consequences and missed opportunities for optimization.
The rewards matrix tool contains country-specific outlines that describe the key income tax, social tax, withholding and reporting requirements by type of award for both the company and employee, including:
  • Restricted stock
  • Restricted stock units
  • Stock options
“In an increasingly globalized world, the potential tax consequences for an organization in such scenarios can vary greatly, depending on the design of their equity, administration and many other factors. Users can filter by country and tax area for a high-level overview of considerations.” - BDO Global Equity Team Co-Chair Jessica Pancamo

The rewards matrix is a high-level tool which helps companies define potential risks and consider opportunities when designing compensation globally. The tool can also be used when consulting with advisors to:
  1. Implement a specific country plan to reduce employee and/or employer taxes, social taxes and an employer’s global cost of issuing such awards.
  2. Prepare local country filing requirements.
  3. Find solutions to more complicated matters that result from issuing awards such as mobile employee considerations, payroll issues and local country corporate tax deductions. 
Learn more about the Global Equity Rewards Matrix at an upcoming webinar on April 10, 2017 at 12PM ET, titled: Compensation Committee - How Is Your Organization Managing Your Global Equity Compensation Risk? To register for this program or view the subsequent archived recording, refer here.
For more information please contact Jessica Pancamo, BDO Global Equity Team Co-Chair

SEC Flash Report - April 2017

Thu, 04/06/2017 - 12:00am
Rule and Form Amendments Applicable to Emerging Growth Companies  Last week, the SEC adopted technical amendments to several rules and forms to reflect securities law amendments included in the JOBS Act of 2012.  Title I of the JOBS Act created the “emerging growth company” filer status, which permits reduced disclosures in an IPO registration statement and provides a temporary exemption from certain financial reporting and governance requirements thereafter.[1]  As Title I of the JOBS Act was self-executing, SEC rulemaking was not required for emerging growth companies to take advantage of the relief provided by Title I.  However, the SEC’s rules and forms did not reflect the Title I provisions until the technical amendments made last week.  These amendments also modify the cover page of various periodic and transactional reports to include two check boxes – the first to indicate whether the issuer is an emerging growth company and the second to indicate whether the issuer has elected not to use the extended transition period for complying with any new or revised accounting standards. 

In addition to the form and rule amendments, the SEC also adopted new rules to include an inflation-adjusted threshold in the definition of an emerging growth company.  The JOBS Act requires the Commission to index to inflation the annual gross revenue amount to determine emerging growth company status every five years.  Accordingly, the emerging growth company revenue threshold was increased from $1,000,000,000 to $1,070,000,000.  Similar inflation adjustments were made to the offering and investment limits in the crowdfunding rules as well (e.g., the maximum amount an issuer can sell under Regulation Crowdfunding in a year increased from $1,000,000 to $1,070,000). 
For questions related to matters discussed above, please contact:
  Jeffrey Lenz
National Director, SEC Practice Paula Hamric
National Assurance Partner   [1] Additional information about the JOBS Act, EGC status and reporting relief is available here.  

Initial Offerings Newsletter - Spring 2017

Thu, 04/06/2017 - 12:00am

U.S. IPO Market Delivers Impressive Year-Over-Year Growth in Q1 of 2017 Download PDF Version
New Uncertainties Challenge Promising Forecast for Remainder of Year After a very difficult year in 2016, the U.S. market for initial public offerings (IPOs) bounced back significantly in the first quarter of 2017 – with offerings (+ 212%), proceeds (+ 1,380%) and filings (+ 58%) up dramatically over Q1 2016, when stock market uncertainty brought offering activity to a virtual halt.  The $9.9 billion in proceeds raised was the most in a first quarter since 2014 ($10.6 billion), when both proceeds and offerings reached their highest levels since the dot-com boom of 2000.

On a quarter-to-quarter basis, proceeds (+ 52%) and filings (+ 36%) were up considerably from Q4 2016, although the number of offerings were down (- 17%).

Much of the positive performance in Q1 can be attributed to a more welcoming economic climate, as both the Dow Jones and NASDAQ stock indexes reached record highs during the quarter and the Trump administration’s pro-business agenda – promising tax cuts, deregulation and infrastructure spending – proved encouraging for companies looking to sell shares to the public for the first time.
“The U.S. IPO market is off to a good start in 2017, but just ‘how good’ is open to interpretation,” said Ted Vaughan, Partner in the Capital Markets Practice of BDO USA.  “Certainly, the dramatic year-over-year jump in offerings, proceeds and filings is more attributable to the depths the market reached in the initial months of 2016, than it is to the current pace of offering activity.  At the same time, the market has kept the momentum of the recovery in offerings that began last year and the increase in offering size – which was predicted in the 2017 BDO IPO Outlook – has proceeds on pace to approach $40 billion, which would be the highest level since 2014.”
    2017 Q1 U.S. IPO Trend Tracker      2016  2017   +/- 10 yr. high 10 yr. low             IPOs  8  25  + 212% 64 (2014) 1 (2009)             Proceeds  $0.7B $9.9B + 1,380%  $19.1B* (2008)  $0.7B (2009, 2016)             Avg. Deal $88M  $396M   + 350%  $1.59B* (2008)  $88M (2016)             Filings 24  38 + 58%  106 (2014) 4 (2009)
*Heavily impacted by March 2008 $17.9 billion VISA IPO
Source: Renaissance Capital, Greenwich, CT (www.renaissancecapital.com)

Snap A major contributor to the jump in proceeds in Q1 was the March 1 offering of Snap, Inc., the parent company of social media darling, Snapchat.  The Snap IPO raised $3.4 billion, accounting for more than one-third of total proceeds raised in the quarter.

But the significance of the Snap IPO goes beyond its impact on Q1 proceeds. Snap was the largest technology offering since Alibaba went public in 2014 and it was also one of the more visible “unicorn” companies – privately-held businesses valued at more than $1 billion.  Snap’s IPO performance was widely expected to determine whether more unicorns would be leaving their private stables for the promise of the public markets in 2017.

On its first day of trading, Snap rose 44% over its $17 offering price and climbed as high as $29.44 (+ 73%) on day two, but shares have dropped significantly since and were trading below the company’s first day closing price of $24.48 at the close of the quarter.
“It is much too early to tell if Snap will become a public company success like Facebook or if it goes the way of Groupon, but the company’s uneven stock performance in its initial weeks of trading surely isn’t the ‘all systems go’ indicator that Airbnb, Uber, Spotify and other prospective big name tech IPOs were looking for,” said Lee Duran, Partner in the Private Equity Practice at BDO USA.  “These businesses will have to continue to evaluate the potential benefits and risks of going public, as Snap has done, against the certainty of a sale, as AppDynamics chose in accepting Cisco’s offer earlier this year.” 
Industries In addition to the tremendous increase in proceeds during Q1 of 2017, perhaps the most significant development of the quarter was the wide breadth of industries represented among the offerings.  The U.S. IPO market saw multiple offerings from the energy (5), healthcare (4), technology (4), consumer (4), industrial (3), real estate (2) and financial (2) sectors.
“The diversity of industries represented among Q1 IPOs was a clear departure from the recent trend of healthcare businesses leading all sectors.  A year ago, healthcare accounted for all 8 first quarter offerings,” said Paula Hamric, Partner in the National SEC Department of BDO USA.  “A pick-up in U.S. drilling activity may account for the increase in IPOs among energy companies, but future energy offerings will most likely be closely tied to the price of oil.  Although the Snap IPO generated a great deal of attention, it is the strong performance of all four Q1 tech offerings (+ 21% average return) that could signal more deals from the technology sector during the remainder of the year.”
Forecast The election of Donald Trump clearly had a positive impact on the U.S. stock market during Q1 and the President’s promises – and those of the Republican-controlled Congress - to cut taxes and rollback regulations were positive signs for businesses that may have previously avoided going public due to regulatory fears. 

Yet, some economists believe the “Trump Bump” may be over.

They question whether stocks are currently over-valued and market indexes did drift downward for most of March, although they remain above pre-election levels.  Moreover, the recent collapse of the Republican healthcare bill in the House has begun to raise doubts about the ability of the President and the GOP to deliver on their aggressive pro-business agenda.

These concerns introduce a certain level of uncertainty for the U.S. IPO market moving forward, but the forecast for the remainder of the year remains promising. 

After a difficult 2016 – that led to numerous deal postponements -  there is significant pent-up desire among investors in private equity and venture capital to cash out of their holdings, many of which they have owned for more than the typical 10 years.  Private equity backed businesses accounted for almost half of all IPOs in the first quarter and there are more to come.
“With stock indexes near all-time highs, low volatility and the average Q1 IPO delivering better than 10 percent in returns, the Q2 forecast looks promising,” said Christopher Tower, Partner in the Capital Markets Practice of BDO USA.   “Avoiding unexpected surprises will be a key for the recovering market as economic confidence can change swiftly in the very connected world we live in.  Surprising political outcomes, such as Brexit, and deadly terrorist attacks in various countries during the past year have demonstrated how international news can swiftly impact U.S. markets and introduce a level of volatility that is not conducive for businesses considering a public offering.”
IPOs on the Horizon The following are potential U.S. IPOs of note for Q2.
  Offering Company Size Industry Potential Offering Gardner Denver Holdings Industrial Equipment $800 million Azul Brazilian Airline $475 million WideOpenWest Telecom/Cable $750 million Antero Midstream Energy $500 million Cadence Bancorporation Financial $300 million Netshoes Brazilian E-Commerce $100 million Schneider National Trucking/Logistics $550 million  
For more information on BDO’s Capital Markets services, please contact one of the regional leaders:
Lee Duran, San Diego; Paula Hamric, Chicago; Chris Smith, Los Angeles; Ted Vaughan, Dallas

AICPA Issues SAS 132 on Going Concern

Thu, 04/06/2017 - 12:00am
AICPA ASB Issues SAS 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern Download PDF Version
The Auditing Standards Board (ASB) of the AICPA recently issued Statement on Auditing Standards (SAS) No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (SAS 132). SAS 132 supersedes SAS No. 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (SAS 126), and will be effective for audits of financial statements of nonissuers for periods ending on or after December 15, 2017, and reviews of interim financial information for interim periods beginning after fiscal years ending on or after December 15, 2017.
SAS 132 was issued to address the provisions of FASB Accounting Standards Update (ASU) No. 2014­15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern and GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. SAS 132 retains several concepts of SAS 126, including a requirement for the auditor to make a separate conclusion regarding the existence of substantial doubt about an entity’s ability to continue as a going concern, among other matters. The most significant changes to the existing auditing standards as a result of the issuance of SAS 132 include the following:
Auditor’s Objectives and Related Conclusions

SAS 132 clarifies that the auditor’s objectives include separate determinations and conclusions regarding (1) the appropriateness of management’s use of the going concern basis of accounting, when relevant, in the preparation of the financial statements, and (2) whether substantial doubt about an entity’s ability to continue as a going concern exists, based on the evidence obtained, for a reasonable period of time (as defined in the applicable financial reporting framework).
Financial Support by Third Parties or the Entity’s Owner-Manager
When management’s plans include financial support by third parties or the entity’s owner-manager and such evidence is necessary to support management’s assertions about the entity’s ability to continue as a going concern for a reasonable period of time, SAS 132 requires the auditor to obtain sufficient appropriate audit evidence about the intent of such supporting parties to provide the necessary financial support, including written evidence of such intent, and the ability of such supporting parties to provide the necessary financial support. The application guidance in SAS 132 explains that evidence regarding such intent may be either in the form of written evidence from management about the third party commitment (sometimes referred to as a “support letter”), or direct confirmation with the supporting party. The application guidance also explains that when the financial support is provided by an owner-manager, the evidence regarding intent may be in the form of a support letter or a written representation. An illustration of a third party support letter is included in the application guidance.
Period Beyond Management’s Assessment
SAS 132 requires the auditor to inquire of management regarding its knowledge of conditions or events beyond the period of management’s evaluation that may affect the entity’s ability to continue as a going concern. The inquiries are not intended to require management to extend its evaluation period, but may affect other disclosure requirements or the consideration of whether the financial statements are fairly presented.
Use of Emphasis Paragraphs When Substantial Doubt is Alleviated
The application material in SAS 132 provides guidance regarding when an auditor decides to include an emphasis paragraph in the auditor’s report to highlight the liquidity issues related to management disclosures when the auditor concludes that substantial doubt has been alleviated by management’s plans. The application guidance also provides an example of the emphasis paragraph in these circumstances.
Interim Financial Information
SAS 132 also amends AU-C section 930, Interim Financial Information, to require auditors to perform interim review procedures to address the situations when the applicable financial reporting framework includes requirements for management to evaluate the entity’s ability to continue as a going concern for a reasonable period of time in preparing interim financial information. The amendments to AU-C sec. 930 also require the auditor to include an emphasis-of-matter paragraph in the review report when certain conditions or events exist related to substantial doubt about an entity’s ability to continue as a going concern regardless of whether the entity is required under the applicable financial reporting framework to include a statement in the notes to the interim financial information that substantial doubt exists.
Financial Statements Prepared in Accordance With a Special Purpose Framework
SAS 132 clarifies that the issues of the going concern basis of accounting and whether substantial doubt exists are separate issues. When the going concern basis of accounting is not relevant in the preparation of special purpose financial statements, the requirement of SAS 132 to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting do not apply. However, regardless of whether the going concern basis of accounting is relevant, the auditor is required under SAS 132 to conclude, based on the audit evidence obtained, whether substantial doubt exists and to evaluate the possible effects on the financial statements.
BDO encourages both management and audit committees to review SAS 132, which can be accessed here. For additional information and learning events relevant to boards, audit committees, and financial reporting executives, please refer to BDO’s Center for Corporate Governance and Financial Reporting.
For more information please contact:
  Jan Herringer
National Assurance Partner

SEC Flash Report - March 2017

Thu, 03/30/2017 - 12:00am
During March, the Securities and Exchange Commission completed rulemaking and published a request for comment.  These activities were primarily related to the SEC’s broader disclosure effectiveness initiative and include:   
  • A request for comment on possible changes to Industry Guide 3 – Statistical Disclosure by Bank Holding Companies. Industry Guide 3 was first published over 40 years ago.  The request seeks input on the overall scope and applicability of Guide 3 disclosures and solicits feedback on whether the disclosures continue to provide the information investors need to make informed investing and voting decisions.  It also questions whether there are additional disclosures that would be relevant to investors and whether to eliminate overlapping or duplicative disclosures. The request for comment can be found here on the SEC’s website.  Comments are due May 8, 2017.
  • A proposal to require Inline XBRL.  Issuers have historically been required to provide XBRL data in an exhibit to their filings.  Consequently, issuers copy their financial statement information into a separate document and tag it in XBRL.  The SEC’s proposal would require issuers to embed XBRL tags directly in their financial statements using a format known as Inline XBRL in lieu of providing tagged data in a separate exhibit.  The proposal follows an SEC order issued in June last year which permitted, but did not require, issuers to use Inline XBRL.  The intent of the proposal is to reduce the preparation costs and increase the quality and usefulness of the data, thereby increasing its use by investors and other market participants.  The Inline XBRL requirements would become effective for large accelerated filers in the second year following the effective date of the rule, followed by accelerated filers in the third year, and all other filers in the fourth year. 
The proposing release is available here on the SEC’s website.  Comments are due May 16, 2017.
  • An IFRS taxonomy.  The IFRS taxonomy will allow foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB to submit their financial statements in XBRL.  Issuers will be required to submit their financial statements in XBRL for fiscal periods ending on or after December 15, 2017, though they can voluntarily begin using the taxonomy immediately. 
The press release announcing the availability of the taxonomy is available here on the SEC’s website.
  • Final rules requiring hyperlinks to exhibits. The rules, which are applicable to all forms for which exhibits are required under Item 601 of Regulation S-K,[1] will require registrants to include a hyperlink to each exhibit (excluding XBRL exhibits) listed in the exhibit index of their periodic and transactional filings. To facilitate the use of hyperlinks, exhibits must be filed in HTML format.  The intent is to facilitate easier access to these exhibits for investors and other stakeholders.  The rules become effective for filings submitted on or after September 1, 2017.  Smaller reporting companies and filers other than large accelerated or accelerated filers who use ASCII format (instead of HTML format) need not comply until September 1, 2018. 

The adopting release is available here on the SEC’s website.   
For questions related to matters discussed above, please contact:
  Jeffrey Lenz
National Director, SEC Practice   Paula Hamric
National Assurance Partner     [1] The rules are also applicable to registrants that file Forms F-10 or 20-F.

FASB Flash Report - March 2017

Mon, 03/27/2017 - 12:00am
FASB Updates Presentation of Pension and Other Postretirement Benefit Plan Costs

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Summary The FASB recently issued ASU 2017-07[1] to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and to narrow the amounts eligible for capitalization in assets. The ASU is available here, and becomes effective for public entities for fiscal years beginning after December 15, 2017, and for private entities one year later.
Background Defined benefit pension cost and postretirement benefit cost (net benefit cost) are components of an employer’s financial arrangements and the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. Topic 715[2] does not currently prescribe where the amount of net benefit cost should be presented in an employer’s income statement, nor does it require entities to disclose by line item the amount of net benefit cost that is included in the income statement or capitalized in assets. This lack of guidance has resulted in diversity in practice in the presentation of such costs.
Main Provisions ASU 2017-07 applies to any employer that sponsors a defined benefit pension plan, other postretirement benefit plan, or other types of benefits accounted for under Topic 715. The amendments require that an employer disaggregate the service cost component from the other  components of net benefit cost, as follows:
  • Service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations, but in some cases may be eligible for capitalization, as discussed below.
  • All other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These other components are listed in Topic 715 and generally include interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other compresenhive income, and gains or losses from changes in the value of the projected benefit obligation or plan assets.[3] If a separate line item is used to present the other components of net benefit cost, it must be appropriately described. If a separate line item is not used, an entity must disclose the line item(s) in the income statement that includes the other components of net benefit cost.
In addition, the amendments permit capitalizing only the service cost component of net benefit cost, assuming such costs meet the criteria required for capitalization by other U.S. GAAP , rather than total net benefit cost which has been permitted under prior GAAP. For example, an entity might capitalize service cost as part of internally manufactured inventory or fixed assets.  
BDO Comment: The amendments will generally increase the reported amount of income from operations by shifting non-service cost components of net benefit costs outside of income from operations.  However, the amendments may decrease the reported amount of net income as non-service cost components will no longer be eligible for capitalization.
Effective Date and Transition The amendments in ASU 2017-07 are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those years. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period.
The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. The standard will apply prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods to apply the retrospective presentation requirements. An entity must disclose its use of the practical expedient.
For questions related to matters discussed above, please contact one of the following practice leaders:
  Angela Newell
National Assurance Partner    Liza Prossnitz
National Assurance Partner   Jennifer Kimmel
National Assurance Senior Manager       [1] Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost [2] Compensation—Retirement Benefits [3] The components of net benefit cost are defined in paragraphs 715-30-35-4 and 715-60-35-9.

BDO 2017 Shareholder Meeting Alert

Mon, 03/20/2017 - 12:00am

Deregulation, Tax Reform, Cybersecurity and New Accounting Among Top Issues at 2017 Shareholder Meetings Almost daily reports of increasingly sophisticated cyber breaches, global economic concerns, historic changes to accounting standards, and growing anticipation for promised deregulation and tax reform are just a few of the topics being discussed in U.S. corporate board rooms.  These issues and many more will make for an interesting annual Spring meeting season. 

BDO’s Center for Corporate Governance and Financial Reporting once again reports on a variety of topics that corporate management and boards of directors should be prepared to address in connection with 2017 annual meetings. Where appropriate, topics have been aligned with additional pieces of thought leadership and/or learning opportunities for further consideration.
  Download the Alert

FASB Flash Report - March 2017

Wed, 03/15/2017 - 12:00am
FASB Updates Presentation of Employee Benefit Plan Interest in a Master Trust  

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Summary The FASB recently issued ASU 2017-06[1] to clarify the presentation and disclosure requirements for an employee benefit plan’s interest in a master trust. The ASU is available here, and becomes effective for plan years beginning after December 15, 2018.
Background A master trust is a trust for which a regulated financial institution[2] serves as a trustee or custodian and in which assets of more than one employee benefit plan (EBP) sponsored by a single employer or by a group of employers under common control are held. Historically, stakeholders found EBP disclosures about master trust investments to be of limited value.
  Main Provisions ASU 2017-06 applies to EBPs within the scope of Topics 960,[3] 962,[4] or 965.[5] The amendments require a plan to present its interest in the master trust and the change in its interest in that master trust as single line items in the statement of net assets available for benefits and the statement of changes in net assets available for benefits, respectively. 
In addition, the amendments update and align the disclosure requirements for an interest in a master trust across Topics 960, 962, and 965. Under the ASU:
  • An EBP with an undivided (proportionate) interest in a master trust will continue to disclose its percentage interest in the master trust.
  • An EBP with a divided interest in a master trust will disclose the dollar amount of its interest in specific investments held by the master trust, rather than its percentage interest in the master trust itself.
  • An EBP will also disclose a master trust’s other asset and liability balances and the dollar amount of the plan’s interest in each of those balances.
  • Health and welfare plans’ investment disclosures for 401(h) account assets have been eliminated. Instead, the plan financials will disclose the name of the defined benefit pension plan which includes such investment disclosures. 
The ASU includes an example of a plan with a divided interest in a master trust. Several other disclosure requirements have also been streamlined in the final amendments.
  Effective Date and Transition The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted.
For questions related to matters discussed above, please contact Darlene Bayardo or Beth Garner.
  [1] Employee Benefit Plan Master Trust Reporting [2] A regulated financial institution is a bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency [3] Plan Accounting—Defined Benefit Pension Plans [4] Plan Accounting—Defined Contribution Pension Plans [5] Plan Accounting—Health and Welfare Benefit Plans