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FASB Flash Report - January 2016

Mon, 01/11/2016 - 12:00am
FASB Issues Targeted Amendments to the Recognition and Measurement Guidance for Financial Instruments  Download PDF Version
  Summary The FASB recently issued ASU 2016-01 which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The Update provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The Update also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The new standard takes effect in 2018 for public companies and is available here. Early adoption is only permitted for the provision related to instrument-specific credit risk and the fair value disclosure exemption provided to nonpublic entities.
Details ASU 2016-011 (the “Update”) includes amendments on recognition, measurement, presentation and disclosure of financial instruments, which are discussed below.

Investments in Equity Securities
The Update requires an entity to measure investments in equity securities, except for those that result in consolidation or are accounted for under the equity method of accounting, at fair value with changes in fair value recognized through net income. The Update also provides a “practicability election” to measure equity investments without a readily determinable fair value that do not qualify for the NAV practical expedient under Topic 8202, “Fair Value Measurement”, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This election shall be made for each investment separately and once selected shall continue to be applied until the equity security no longer qualifies for this exception. The Update provides implementation guidance on identifying observable price changes and whether a security issued by the same issuer is similar to the equity security held. The Update also requires that the observable price of a similar security be adjusted for the different rights and obligations to determine the amount that should be recorded as an upward or downward adjustment in the carrying value of the security measured to reflect the current fair value of that security.
 
Impairment of Equity Securities without Readily Determinable Fair Values
A nonmarketable equity security measured under the practicability election shall be written down from book value to its fair value if a qualitative assessment indicates that the investment is impaired. The Update requires an entity to perform a qualitative assessment each reporting period considering, but not limited to, certain specified impairment indicators. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite lived intangible assets. The Update also requires disclosure of the carrying amount of those equity securities and adjustments made because of observable price changes (including information it considered in developing them), as well as impairment charges during the reporting period.
 
Liabilities Measured Using the Fair Value Option
The Update requires an entity to present separately in OCI the portion of the total change in the fair value of financial liabilities resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option. The entity may consider the portion of the total change in fair value that excludes the amount resulting from a change in a base market risk, such as a risk-free rate or a benchmark interest rate, to be the result of a change in instrument-specific credit risk. Alternatively, an entity may use another method that faithfully represents the portion of the total change in fair value resulting from a change in instrument-specific credit risk. The entity shall apply the method consistently to each financial liability. Upon derecognition, the cumulative amount of the gain or loss on the financial liability that resulted from changes in instrument-specific credit risk would be included in net income.
 
Presentation of Financial Assets and Financial Liabilities
The Update requires separate presentation of financial assets and financial liabilities by measurement category (e.g. fair value through net income, fair value through OCI, amortized cost) and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the notes to the financial statements.
 
Deferred Tax Assets
The Update clarifies that an entity should assess the need for a valuation allowance on a deferred tax asset related to unrealized losses of investments in debt instruments recognized in OCI in combination with the entity’s other deferred tax assets. Prior to this Update, the alternative approach used in practice evaluated the need for a valuation allowance for a deferred tax asset related to unrealized losses on debt instruments recognized in other comprehensive income separately from other deferred tax assets. This alternative approach will no longer be acceptable.
 
Disclosures for Financial Instruments Measured at Amortized Cost
For entities other than public business entities, the Update eliminates the requirement under Topic 825, “Financial Instruments”, to disclose the fair values of financial assets and financial liabilities measured in the financial statements at amortized cost. While public business entities will still be required to provide those fair value disclosures either on the face of the balance sheet or in the notes, along with the level within which the fair value measurement is categorized (Level 1, 2 or 3), they will no longer have to disclose the method(s) and significant assumptions used in estimating those fair values. Further, this Update excludes receivables and payables due in one year or less, deposit liabilities with no defined or contractual maturities and nonmarketable equity securities accounted for under the practicability election from this disclosure requirement. The Update also requires public business entities to measure the fair value using the exit price notion consistent with Topic 820 when disclosing fair value of financial instruments measured at amortized cost. This change to existing GAAP eliminates the entry price method previously used by some entities for disclosure purposes for some financial instruments.
  Effective Date and Transition The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019 with early adoption permitted for fiscal years beginning after December 15, 2017 including interim periods within those years.

Early application to financial statements of fiscal years or interim periods that have not yet been issued (or not been made available for issuance) of either or both of the following amendments is permitted as of the beginning of the fiscal year of adoption:
  1. Separate presentation in OCI of the portion of the total change in the fair value resulting from a change in the instrument-specific credit risk of a liability measured using the fair value option.
  2. Elimination of the requirement by entities other than public business entities to disclose the fair values of financial instruments carried at amortized cost.

As such, entities may wish to consider early adopting these provisions for 2015 year-end financial statements.

Except for the early application guidance discussed above, early adoption of the amendments in this Update is not allowed. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the Update.

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

1 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities
 
2 Paragraph 820-10-35-59

FASB Newsletter - January 2016

Thu, 01/07/2016 - 12:00am
2015 Accounting Year in Review During 2015 the Financial Accounting Standards Board (FASB) made progress on several major, long-term projects, while also issuing guidance to resolve known practice issues. The following Accounting Year in Review letter from BDO summarizes the year’s most significant changes in guidance and what to expect in 2016. Also included is a comprehensive list of the effective dates for recently-issued accounting standards in the appendix.
  Download

BDO Assurance Practice SEC Newsletter - January 2016

Mon, 01/04/2016 - 12:00am


Significant 2015 Developments
Consistent with Chair White’s focus over the past few years, the Commission’s 2015 agenda continued to be dominated by rulemaking required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Jumpstart Our Business Startups (JOBS) Act of 2012. The Commission made progress on the backlog of Dodd-Frank rulemaking related to executive compensation matters, including a final rule on pay ratio disclosures and proposals on pay vs. performance disclosures and compensation clawback policies. In December, the Commission re-proposed a rule to require resource extraction issuers to disclose payments made to the U.S. and foreign governments. The re-proposal followed a Court decision in July 2013 to vacate the rule requiring disclosure of the same information that the SEC adopted in 2012. The Commission also completed all of the major rulemaking required by the JOBS Act, including final rules related to crowdfunding and amendments to Regulation A. The Commission and its staff now need to focus on implementing the provisions of the Fixing America’s Surface Transportation (FAST) Act, which was passed in December and included provisions that amend securities laws, some of which became effective immediately.
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BDO Assurance Practice SEC Newsletter - January 2016

Mon, 01/04/2016 - 12:00am


2015 AICPA SEC AND PCAOB Conference The annual AICPA National Conference on Current SEC and PCAOB Developments was held on December 9-11, 2015 in Washington, DC, where representatives of the Securities and Exchange Commission and the Public Company Accounting Oversight Board shared their views on various accounting, reporting, and auditing issues. This newsletter provides an overview of the issues discussed.
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The BDO 600

Tue, 12/22/2015 - 12:00am


The BDO 600 survey details CEO and CFO compensation practices of publicly traded companies in the following industries:
 
  • Energy
  • Financial services–banking
  • Financial services–nonbanking
  • Healthcare
  • Manufacturing
  • Real estate
  • Retail
  • Technology

Companies in the six non-financial service industries have annual revenues between $25 million and $1 billion. Companies in the two financial services industries have assets between $50 million and $2 billion. All data in our survey were extracted from proxy statements that were filed between May 15, 2014 and May 15, 2015. Consolidated proxy information was provided by Kenexa.com.
 
Our survey is unique because it focuses on mid-market companies; most compensation surveys focus on much larger companies.
  Download Study   Download Infographic

PCAOB Adopts Rules Requiring Disclosure of the Engagement Partner and Other Accounting Firms Participating in an Audit

Mon, 12/21/2015 - 12:00am
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At the PCAOB’s open meeting, held on December 15, 2015, the PCAOB adopted rules requiring disclosure of the engagement partner and other accounting firms participating in an audit1. The new rules and amendments, if approved by the SEC, are effective as follows:
  Disclosure of engagement partner name Reports issued on or after January 31, 2017 Disclosure of other audit firms participating in the audit Reports issued on or after June 30, 2017
The new rules and amendments are accessible here and a summary in the form of a PCAOB Fact Sheet here.
 
The new rules will require audit firms to disclose the names of each audit engagement partner as well as the names of other audit firms that participate in the audit in a new Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit. Disclosure will include:
  • The name of the engagement partner;
  • The names, locations and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours; and
  • The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of total audit hours.
 
To assist firms in complying with the requirements of Form AP, the PCAOB intends to publish an implementation guide that will address questions that may arise in completing Form AP, including the use of estimates in determining the extent of participation of other accounting firms. The guide is expected to be issued shortly after the SEC approves the rules.
 
The standard filing deadline for Form AP will be 35 days after the date the auditor’s report is first included in a document filed with the SEC. However, for an initial public offering that date is 10 days after such a filing. The data reported on Form AP will be accessible through a searchable database on the PCAOB’s website.
 
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 This Alert updates BDO’s previous July 2015 Alert, which described the PCAOB’s supplemental request for comment on Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form.
 

FASB Flash Report - December 2015

Mon, 12/21/2015 - 12:00am
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  Summary On November 23, 2015, the Financial Accounting Standards Board (“FASB” or “Board”) voted to affirm several changes intended to simplify and improve the accounting for share-based payments and directed its staff to begin drafting a final Accounting Standards Updates (“ASU”) for vote by written ballot.

The final ASU is expected to be released in 2016 with the changes effective in 2017 for calendar year public entities and 2018 for calendar year nonpublic entities, with early adoption permitted.
The decisions affirmed by the Board represent significant steps toward simplifying and improving certain pretax and tax accounting requirements of the current model. They will have a broad-reaching effect across all industries and will reduce the cost of complying with the standard while maintaining or improving the usefulness of information provided to users of financial statements.
  Details

The FASB issued an Exposure Draft (“ED”) on June 8, 2015, containing a proposed ASU to amend ASC Topic 718, Compensation – Stock Compensation (refer to this BDO Flash Report from June 2015 for a summary of the ED’s proposals). The Board received 69 comment letters from various stakeholders who in large part supported the Board’s initiative to simplify the standard and agreed that the proposals would simplify the standard in a meaningful way. However, many respondents disagreed with the proposal to recognize all income tax effects in income tax expense.

The ED has nine proposals and the Board affirmed all but one related to the classification of an award with repurchase features (i.e., puts and calls).

The following decisions apply to all entities:

1.  Accounting for Income Taxes upon Vesting or Settlement of Share-Based Awards

The FASB affirmed two significant tax accounting amendments:

(a) To require recognizing in income tax expense the tax benefit on the tax return that exceeds the tax benefit recognized in the financial statements and tax deficiencies, i.e., the excess of tax benefit recognized in earnings over the tax benefit actually realized on the tax return, and

(b) To require recognizing, through income tax expense, net operating losses (“NOLs”) stemming from excess tax benefits even when they do not reduce income tax payable in the current period.
The changes to account for the excess tax benefits (including NOLs) and tax deficiencies through income tax expense will be on a prospective basis.

NOLs existing on the effective date which are currently tracked off balance sheet would be recorded on the balance sheet, through a cumulative adjustment to equity as of the beginning of the year in which the guidance is adopted (modified retrospective), and assessed for realization to determine whether a valuation allowance is required.

The Board also agreed to amend ASC subtopic 740-270 which contains the interim period tax accounting guidance and specify that excess tax benefits and tax deficiencies would be accounted for in the interim period in which they arise. Discrete recognition of tax effects from windfalls and shortfalls would avoid the need to forecast and recognize such effects through an estimate of the annual effective tax rate from continuing operations.    

The FASB’s tax accounting decisions will eliminate the need to maintain and track an APIC pool. 

2.  Cash Flow Presentation of Excess Tax Benefits

The FASB affirmed an amendment to require excess tax benefits to be shown within operating activities. This resolution is consistent with the decision to eliminate equity accounting for all tax effects related to share-based awards and instead require recognition of the tax effects in income tax expense.
The change in the statement of cash flows classification would be applied either prospectively or retrospectively for all prior periods presented in the financial statements, at the option of the entity.

3.  Accounting for Share Award Forfeitures

The FASB affirmed an amendment to allow an entity-wide accounting policy election to either estimate forfeitures (current GAAP) or account for forfeitures as they occur.

This change would be recognized through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).
The accounting policy election would only apply to awards with service conditions; awards with performance conditions would still be assessed at each reporting date to determine whether it is probable that the performance condition will be achieved.

An accounting policy election to account for forfeitures when they occur would result in reversing compensation costs previously recognized when an award is forfeited before the completion of the requisite service period (the reversal is recognized in the period the award is forfeited). Dividends paid while an option is outstanding which do not have to be paid back upon forfeiture would be reclassified to compensation cost in the period in which the forfeiture occurs.

4.  Minimum Statutory Tax Withholding Requirements

The classification of a share-based payment is significant because it determines whether the award’s grant-date fair value is fixed (equity classification) or is subject to periodic fair value adjustments recognized through earnings (liability classification).

The FASB affirmed an amendment to allow a partial cash-settlement for withholding tax up to the maximum individual statutory withholding tax rate (in the applicable jurisdictions) without requiring liability classification. This change in accounting would be applied through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).

A statutory obligation to withhold tax on an employee’s behalf would not cause liability classification if the amount withheld does not exceed the employee’s maximum individual statutory rate in a given jurisdiction. A single “maximum” statutory rate for a given jurisdiction would need to be determined and not a “maximum” rate per individual in a given jurisdiction. The maximum individual statutory tax rates would be based on rates required by the relevant tax authority (or authorities, for example, federal, state, and local) and provided in tax law, regulations, or the authority’s administrative practice.

5.  Cash Flow Presentation of Employee Payroll Taxes Paid When Shares are Withheld to Pay Minimum Statutory Withholding Tax

The FASB affirmed an amendment to require that tax paid with shares withheld by the entity to cover the cash equivalent of the employee’s tax be classified as a financing activity rather than an operating activity. That is, the withholding represents an in-substance treasury stock transaction.

Under current accounting, a liability for employee payroll taxes on employee stock compensation is generally considered an operating expense included in cash flows from operations. The change in the statement of cash flows classification would be applied retrospectively for all prior periods presented in the financial statements, at the election of the entity.

The Board’s decision to require presentation of an employee’s tax paid by the entity with shares withheld from the employee only covers the portion of taxes effectively paid for with shares. This presentation does not extend to any other portion of payroll taxes which the entity must withhold and remit to the relevant taxing authority.
 

The following two decisions apply to nonpublic entities only:

6.  Expected Term of Awards – Practical Expedient

The FASB affirmed an amendment, with modification, to provide nonpublic companies with a practical expedient to estimate the expected term for all awards with performance or service conditions. The practical expedient would not apply to awards with a market condition.
 
The amendment would permit nonpublic companies to elect a practical expedient to estimate the expected term for all awards having service or performance conditions. The expected term would be the midpoint between the vesting date and the contractual term for qualifying awards with a service condition.
If vesting is conditioned upon satisfying a performance condition, an assessment would be made at grant date to determine whether it is probable that the performance condition would be achieved. If it is probable, the expected term would be the midpoint between the requisite service period and the contractual term.

If achieving the performance condition is not considered probable, the expected term would be the contractual term if the service period is implied. When the service period is explicitly stated, the midpoint between the requisite service period and the contractual term would be the expected term. The FASB decided to modify this proposal based on feedback received from respondents and to permit consideration of the service period.   

This practical expedient policy would be applied on a prospective basis.

7.  Intrinsic Value Election for Liability Classified Awards

The FASB affirmed an amendment to provide a one-time election for nonpublic companies to switch from a fair value measurement of liability classified awards to an intrinsic value measurement. The election would be made as of the effective date of the final Update without the need for the entity to evaluate whether the change in accounting policy is preferable.

This change would be applied through a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is effective (modified retrospective).

Other decisions reached:

8.  Eliminating the Indefinite Deferral in Topic 718

The FASB affirmed an amendment to remove from Topic 718 the indefinite deferral of the requirement that an award becomes subject to other GAAP when the rights conveyed are no longer dependent on the holder being an employee. It should be noted that this decision is not expected to change current practice.  

The following proposal has been removed from this simplification project:

9. Classification of Awards with Repurchase Features

The FASB decided it may reconsider this proposal as part of another project on distinguishing liabilities from equity. 


Effective Date and Disclosures:

The amendments contained in the final ASU will be effective for fiscal years beginning after December 15, 2016 for public companies and after December 15, 2017 for nonpublic companies. Early adoption to any period will be permitted.

Certain disclosures will be required at transition, including the nature and reason for the change in accounting principle and quantitative information of the cumulative effect on retained earnings or additional paid in capital.
 


For more information, please contact one of the following regional practice leaders:

National Assurance Group
  Adam Brown
National Director of Accounting
    Patricia Bottomly
National Assurance Partner
 

National Tax Services -  Topic 740 Group

Yosef Barbut
Tax Partner

SEC Flash Report - December 2015

Thu, 12/17/2015 - 12:00am
SEC Re-Proposes Rule Requiring Resource Extraction Issuers to Disclose Payments to Governments
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On December 11th, the SEC re-proposed Exchange Act Rule 13q-1, which was mandated by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act).  Congress enacted Section 1504 to combat global corruption by promoting international transparency of payments made to governments for the commercial development of oil, natural gas, and minerals.  Rule 13q-1 would require resource extraction issuers to disclose information about certain payments made to the United States and foreign governments.  The SEC’s press release announcing this rulemaking can be accessed here, and the proposing release can be accessed here.  Comments on the proposed rule are due by January 25, 2016. 

The Commission initially adopted Rule 13q-1 to satisfy the Act’s statutory mandate in August 2012.  However, following a lawsuit to overturn the rule filed by the American Petroleum Institute, the U.S. Chamber of Commerce and two other business groups, a federal court vacated the rule in July 2013.  The court ruled that the SEC misread Section 1504 of the Act to require public disclosure of such information. The court also noted that the SEC’s decision to deny any exemptions from the rule was “arbitrary and capricious.”  In response, the SEC has rewritten and re-proposed the rule.  The Commission has also filed with a court a rulemaking schedule indicating that it will vote on a final rule in June 2016.

The proposal is substantially consistent with the rule adopted in 2012.  The most significant changes are:
  • The term “project” was defined.
  • The Commission will consider using its authority to grant requests for exemptive relief.
  • As an alternative to the required report, issuers would be able to use a report prepared for foreign regulatory purposes if the SEC deems the requirements of the foreign regime to be substantially similar to the Commission’s requirements.

The proposed rule would apply to “resource extraction issuers,” defined as domestic and foreign issuers engaged in the commercial development of oil, natural gas, or minerals and are required to file an annual report under the Exchange Act.  The activities that constitute “commercial development of oil, natural gas, or minerals” would include exploration, extraction, processing, export, or the acquisition of a license for any such activity. 
 
Issuers would be required to disclose any payment (or series of related payments) to the U.S. government or foreign governments that is not de minimis (which the rule defines as equaling or exceeding $100,000 during a fiscal year) and has been made to further the commercial development of oil, natural gas, or minerals. 
 
The disclosures would include, among other things, the type and total amount of payments made for each project and to each government.1 As proposed, a project is contract-based and would be defined as the “operational activities that are governed by a single contract, license, lease, concession, or similar legal agreement, which form the basis for payment liabilities with a government.”  The proposal contains a non-exclusive list of factors to consider when considering whether two or more agreements may be treated as a single project for purposes of the disclosure.      
 
Since Rule 13q-1 was first adopted in 2012, several international bodies and countries have adopted similar disclosure requirements.  The European Union has adopted and Canada has proposed rules requiring similar disclosures.  In light of these developments, the Commission proposed allowing issuers to use a report prepared for foreign regulatory purposes as discussed above.
 
The proposed location and timing of the disclosures are similar to the initial rule adopted in 2012.  The disclosures would be filed annually in an XBRL-formatted exhibit to Form SD, which was created for the purpose of reporting the information required by this rule and the rule requiring disclosure of the use of conflict minerals.  The report would be due 150 days after the end of an issuer’s fiscal year.  The proposed disclosures may be reported on a cash basis and would not need to be audited.2 or be subject to officer certifications.

For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.
 

1 The disclosure must include payments made by the issuer’s subsidiaries or other entities it controls, by reference to the financial consolidation principles applied in the issuer’s audited financial statements (e.g., a consolidated variable interest entity).  Consequently, payments made by an issuer’s equity method investee would generally not need to be reported.  2 Moreover, since Form SD does not include audited financial statements, auditors would not need to read the disclosures and consider whether they are materially inconsistent with the audited financial statements.  

SEC Flash Report - December 2015

Wed, 12/16/2015 - 12:00am
FAST Act Amends SEC Reporting Requirements  

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On December 4th, the President signed the Fixing America’s Surface Transportation (FAST) Act into law.1 While the Act is focused on providing transportation funding, certain provisions of the Act amend the securities laws.  Some of the amendments are self-executing, while others require SEC rulemaking.
 
The amendments included in Title LXXI of the Act are intended to improve access to capital for emerging growth companies.  Unless otherwise noted below, the provisions related to Title LXXI are effective immediately.  These amendments:
  • Reduce the number of days an EGC’s confidential submissions must be made public before its IPO roadshow to 15 days.  EGCs are permitted to submit an IPO registration statement confidentially for review by the SEC staff.  A confidentially submitted initial registration statement and subsequent amendments were previously required to be made public 21 days prior to the IPO roadshow.
  • Permit an issuer that qualifies as an EGC at the time its initial registration statement is filed or submitted to maintain its EGC status even if it is otherwise lost until the earlier of:
    • The issuer’s completed initial public offering, or
    • One year after the date on which the issuer lost its EGC status.  
For example, if an issuer submitted its initial registration statement as an EGC but crossed the $1 billion revenue threshold before going effective, it would be permitted to maintain its EGC status until the earlier of the dates mentioned above.
 
  • Permit an EGC to omit historical periods from its financial statements if it reasonably expects that such periods will not be included in its effective registration statement.  For example, if a calendar year end EGC submits its initial registration statement in December 2015 for confidential review by the SEC staff, the SEC’s rules required it to present its financial statements for the years 2013 and 2014 and the nine months ended September 30, 2014 and 2015.  The FAST Act allows an EGC to omit the 2013 financial statements if it reasonably expects that the 2013 period will not be included in the effective registration statement (i.e., if the registrant in this example expects to present full year 2014 and 2015 financial statements in the registration statement when it becomes effective in 2016).  While this provision officially becomes effective on December 28th, the SEC staff has indicated that it will not object if EGCs apply this provision immediately.
The SEC subsequently issued two Compliance and Disclosure Interpretations related the provision above (available here on the SEC’s website).  The guidance indicates an EGC:
  • May omit financial statements of other entities from its filings or submissions (e.g., Rule 3-05 target financial statements) if it reasonably expects such financial statements will not be required at the time of the offering.
  • May not omit interim financial statements from its filings or submissions if the interim period or longer period (interim or annual) has been or will be included in the required financial statements at the time of the offering.  For example, a calendar year end EGC that expects to commence its offering in April 2016 may not omit its 2014 and 2015 nine-month interims from its filings or submissions as they relate to the annual periods that will be required at the time of the offering.
Other self-executing changes add a new exemption for secondary sales of securities that are purchased by accredited investors and revise Section 12(g) of the Exchange Act so that savings and loan holding companies are treated the same as banks and bank holding companies for purposes of registration, termination of registration or suspension of their Exchange Act reporting obligations.2
 
Other significant changes to securities laws included in the FAST Act which require SEC rulemaking or additional analysis will:
  • Permit smaller reporting companies to forward incorporate information by reference into Form S-1.  Consequently, these companies will be able to update an effective registration statement without filing an amendment.  This will facilitate offerings such as secondary offerings by selling shareholders.  However, it will not permit delayed shelf offerings by such issuers, because Securities Act Rule 415(a)(1)(x) requires such offerings to be registered on Form S-3 or F-3.  The amendments to Form S-1 are required by January 18, 2016.
  • Require the SEC to conduct a study on the disclosure requirements of Regulation S-K with a goal to modernize and simplify its requirements.  The study and the Commission’s corresponding recommendations are due to Congress by November 28, 2016.
  • Require the SEC to revise Regulation S-K to determine how to scale or eliminate the requirements for filers other than large accelerated filers and eliminate duplicative, outdated, or unnecessary disclosures for all filers.  These changes are required by June 1, 2016 unless further consideration is needed under the study mentioned above.
  • Permit issuers to include a summary page on Form 10-K that cross-references to other sections in Form 10-K.  Currently, a registrant is not prohibited from including a summary, but the FAST Act adds a provision which specifically allows it and requires cross-referencing.  Rulemaking is required by June 1, 2016.

Further information on the FAST Act can be found here on the SEC’s website.

For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.   1 The text of the Act is available here

2 The JOBS Act raised the number of shareholders of record a company may have before SEC registration is required from 500 to 2,000 as long as there are less than 500 shareholders who are not accredited investors.  Nonpublic banks and bank holding companies are not subject to the 500 unaccredited investor threshold.  The JOBS Act also raised the number of shareholders of record a bank or bank holding company must be below in order to terminate its SEC registration from 300 to 1,200.
 

2016 BDO IPO Outlook

Mon, 12/14/2015 - 12:00am


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After three consecutive years of healthy increases in the number of initial public offerings (IPOs) and proceeds raised on U.S. exchanges, the U.S. IPO market came back to earth in 2015, as virtually every statistical category – offerings, proceeds, filings and returns – were down significantly year-over-year.

According to the 2016 BDO IPO Outlook, BDO USA’s annual survey of capital markets executives at leading investment banks, there is no clear consensus on the reason for the decrease in offerings. When asked to identify the primary reason behind the drop in IPOs, bankers cite – poor IPO performance discouraging other potential offerings (29%), uncertainty surrounding the potential interest rate hike by the Federal Reserve (21%) and the surge in M&A activity causing many IPO candidates to opt for a sale over the risk of an offering (21%). Smaller proportions mention a slowing US economy (16%) and the lack of offerings from traditionally strong technology and energy sectors (11%).



“Given the robust growth of the U.S. IPO market during 2013 and 2014, the drop in activity in 2015 was to be expected to some extent. While the number of offerings in 2015 is off considerably from the two previous years, it is actually slightly above the average for the previous decade,” said Ted Vaughan, Partner in the Capital Markets Practice at BDO USA. “Moving forward, the flat forecast for 2016, a first in the seven years we’ve conducted this survey, is certainly concerning. When one considers that the chief factors the bankers identify for this year’s downturn in offerings are still very much with us as we approach the new year, it is understandable why they are less than optimistic about the outlook for growth in IPO activity in 2016.”
 
Looking forward, I-bankers are forecasting similar results in 2016. Thirty-seven percent of the capital markets community predict an increase in U.S. IPOs in the coming year, although only 4 percent believe it will be a substantial jump, while an almost identical proportion (36%) forecast activity as flat compared with 2015. Just over a quarter (27%) expect a decrease in offerings on domestic exchanges. Overall, bankers predict the number of U.S. IPOs in 2016 will be about the same as 2015 (+ .15%). However, they anticipate these offerings will average $219 million in size, which projects to $37 billion in total IPO proceeds on U.S. exchanges, an increase of 23 percent from 2015.
  Sources & Attributes of 2016 IPOs Private equity (47%) is the most often mentioned source of IPOs for the coming year. Spinoffs and divestitures (26%), venture capital portfolios (18%) and owner managed privately-held businesses (9%) are the other sources identified by bankers.

When asked what offering attribute will be most valued by the investment community in 2016, more than one-third (35%) of bankers cite long-term growth potential and over one-quarter (28%) identify businesses with innovative products or offerings. Stable cash flow (16%), profitability (16%) and low debt (5%) are cited by smaller proportions of participants.



In 2016, the investment banking community is predicting an average offering size of $219 million for U.S. IPOs. They are also forecasting one-day returns of 12 percent and overall returns of 2 percent for the average IPO. Each of these figures is in line with this year’s disappointing performance, reinforcing the capital markets community’s subdued expectations as we enter 2016.


“U.S. IPO proceeds are down by more than 60 percent from 2014, the largest drop of any of the statistical categories. Absent mega-offerings, such as an Alibaba or Facebook, it will be difficult for IPO proceeds to reach the heights achieved in 2014, as the overwhelming majority of U.S. offerings in 2015 have been by companies with less than $1 billion in annual revenue,” said Chris Smith, Partner in the Capital Markets Practice at BDO USA. “This trend is an outgrowth of the Jumpstart Our Business Startups (JOBs) Act, enacted in 2012 to make it easier for firms with less than $1 billion in annual revenue to tap the public markets by reducing costs and regulatory burdens. Moving forward the health of the U.S. IPO market will be more tightly linked to the number of offerings versus total proceeds raised.”  
Industries For three consecutive years, the healthcare industry has been the bellwether of the U.S. IPO market. In 2015, the healthcare sector spawned three times the number of offerings from any other industry. In 2016, close to two-thirds (62%) of those in the investment banking community are predicting a further increase in offerings from the healthcare industry and lesser majorities are forecasting an increase in IPOs in technology (59%) and biotech (57%). No other industry is predicted to achieve an increase in IPOs by a majority of the survey participants. (see full chart below).

Proportions of Capital Markets Executives expecting IPO activity to increase, remain stable or decrease in specific industries.
  Industry Increase Flat Decrease Healthcare 62% 26% 12% Technology 59% 33% 8% Biotech 57% 29% 14% Financial 31% 42% 27% Real Estate 31% 33% 36% Energy / Natural Resources 30% 22% 48% Media / Telecom 29% 42% 29% Consumer / Retail 18% 40% 42% Industrial / Manufacturing 17% 52% 31%  
Tech Takes an IPO Holiday In recent years, many businesses, especially technology companies, have put off their IPOs due to the widespread availability of private financing at extremely attractive valuations. Currently there are more than 100 private companies valued by VC firms at $1 billion or more. When asked about the valuations of these “tech unicorns”, close to two-thirds (62%) of investment bankers do not believe these valuations will be supported in the public markets.

Due to these inflated valuations and the pricing pressures brought about by this year’s poor IPO performance, a majority (60%) of capital markets executives anticipate the tech sector will remain a marginal player in the 2016 IPO market. Moreover, close to half (47%) of bankers believe a correction in the valuations of highly visible, pre-IPO tech companies may cause investors to lose confidence and lead them to avoid the risk of new offerings to the public markets.



Close to three-quarters (73%) of the capital markets community believe private company marketplaces, such as Nasdaq Private Market and Second Market, can serve as an effective tool to correct inflated valuations prior to an IPO coming to market.

“Given the reduced demand for highly anticipated public offerings by Square and other technology companies, private investors, who have previously valued tech startups at $1 billion or more, are likely to avoid new deals unless these businesses are willing to raise money at lower values.  The combination of potentially lower valuations and lower capital availability for late-stage private rounds should encourage some companies to move toward the IPO process, but many others will still turn to a private sale,” said Lee Duran, Partner in the Capital Markets Practice of BDO USA.  “U.S. companies are now dropping initial public offerings and selling themselves at the highest rate in years as M&A activity has surged.  The technology sector has been one of the chief drivers of U.S. M&A activity in 2015. Given the uncertainty of the current IPO market, company owners are increasingly likely to find an attractive offer from a potential acquirer more appealing than the inherent risk of an IPO.”
  IPO Threats When asked to comment upon the greatest threat to a healthy U.S. IPO market in 2016, close to half (44%) of I-bankers cite global political and economic instability. More than a quarter (27%) specifically identify a weakening US economy. Smaller minorities focused on reduced investor appetite for risk (15%), a Federal Reserve rate hike (8%) and a major decline in biotech offerings (2%).


Global IPOs The U.S. led all countries in IPO proceeds in 2015, generating 17 percent of total global proceeds. When asked to identify the chief factor driving this trend, the capital markets community is divided among three main areas - continued low interest rates increasing demand for higher yielding assets (27%), a lack of confidence in foreign economies (27%) and increased investor confidence in the U.S. economic recovery (24%). Slow growth in China (9%) and a steady stream of biotech and healthcare IPOs in the US (9%) are other factors mentioned by smaller proportions of the bankers.



Moving forward, 42 percent of I-bankers believe U.S. exchanges will increase their share of global IPO proceeds during the coming year, although only 5 percent describe the increase as substantial. An identical percentage (42%) predict the U.S. cut of the global pie will remain about the same as 2015. Just sixteen percent anticipate the U.S. share will decline in 2016.
 
More than one-third (38%) of capital markets executives believe the number of foreign-based IPOs on U.S. exchanges will increase in the coming year, though only 4 percent describe the increase as substantial. A similar percentage (35%) expect the number of foreign-based offerings to remain about the same as 2015 and more than one-quarter (27%) predict a decrease in foreign-based offerings. A majority of the bankers (59%) identify Asia as the geographic location most likely to spawn foreign-based IPOs on U.S. exchanges in 2016. Europe (19%) and Latin America (11%) are other regions cited by sizable proportions
of bankers.

In terms of which foreign exchanges will be most popular for IPOs in 2016, Hong Kong (21%), London (19%) and Shanghai (18%) were the exchanges most frequently mentioned by bankers.
 
For more information on BDO's Capital Markets services, please contact one of the regional leaders below:
 

Lee Duran
San Diego

 

Christopher Tower
Orange County

  Brian Eccleston
New York  

Ted Vaughan
Dallas

 

Chris Smith
Los Angeles

 

 

 
About the Survey These findings are from The 2016 BDO IPO Outlook survey, a national telephone survey conducted by Market Measurement, Inc. on behalf of the Capital Markets Practice of BDO USA.  Executive interviewers spoke directly to 100 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States in the coming year. The survey, which took place in late November and early December of 2015, was conducted within a scientifically-developed, pure random sample of the nation’s leading investment banks.

BDO USA is a valued business advisor to businesses making a public securities offering.  The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad accounting, tax and other financial issues.

 

BDO Comment Letter - Effectiveness of Financial Disclosures

Mon, 12/07/2015 - 12:00am
File No. S7-20-15 - Request for Comment on the Effectiveness of Financial Disclosures about Entities
Other than the Registrant

We support the Commission’s initiative to review and consider ways to improve the
effectiveness of the financial disclosure regime under Regulations S-X and S-K.
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Proxy Voting Policies Focus on Overboarding

Sat, 11/28/2015 - 12:00am


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Two of the leading governance services providers, Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co., are focusing on the continually increasing time required of board members of public companies and have reconsidered their policies related the number of concurrent directorships that boards members can effectively hold at a given time to counter “overboarding.”

In November 2015, ISS released its 2016 updates to its benchmark proxy voting policies. The policies will generally be applied for shareholder meetings on or after February 1, 2016. Key U.S. benchmark policy changes include a change to ISS’s director overboarding policy. For most directors except for standing CEOs, the maximum number of public company boards that a director can sit on before being considered “overboarded” is being reduced from six to five.  There will be a one-year grace period until 2017, giving directors and companies sufficient time to make any changes in advance of the 2017 proxy season, should they wish to do so. During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships.

Prior to the 2016 update, ISS had set limits of six directorships for most board members and three total board memberships - service on the home company board and two outside directorships - for sitting CEOs in response to rising investor concerns about over-boarding and academic research questioning the performance of “busy” directors. In support of the current change, ISS cites the National Association of Corporate Directors’ (NACD) 2014-2015 Public Company Governance Survey which indicates that respondent directors of public companies now spend an average of 242 hours a year (or more than 30 eight-hour work days annually) on board service. This typical time commitment jumps up to 278 hours (or nearly five more eight-hour work days) when you add in the survey respondents’ estimates of additional time spent in informal meetings/conversations with management. In contrast, the average annual director time commitment reported by NACD’s survey respondents in 2005 was 190 hours (or fewer than 24 eight-hour work days).1 For more information and additional ISS proxy voting policy changes impacting the Americas, EMEA, and Asia-Pacific regions, refer here.

Glass Lewis has also recognized that the time directors are devoting to their board obligations has increased in recent years. That, coupled with increased investor scrutiny of directors’ commitments, has resulted in directors serving on fewer boards. Therefore, Glass Lewis has indicated that in 2016 it will closely review director board commitments and may note as a concern instances of directors serving on more than five total boards, for directors who are not also executives, and more than two total boards for a director who serves as an executive of a public company. Their voting recommendations in 2016, however, will be continue to be based on their existing thresholds six total boards for directors who are not public company executives and three total boards for a director who serves as an executive of a public company. Beginning in 2017, Glass Lewis will generally recommend voting against a director that exceeds the new directorship thresholds of five (nonexecutive officer directors) and two (executive officer directors), respectively. For more information on this and other Glass Lewis proxy voting policies, refer here.

Many companies already place their own determined limits on directorships of their board members based upon their understanding of the demands on board members’ time and the concerns expressed by their investors. BDO encourages boards to continually self-assess and consider the broader obligations, experience levels, and capabilities of all of their board members and the various roles and responsibilities they are expected to provide the companies they serve. 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 or Tom Ziemba.

1 NOTE: The 2015-2016 NACD Public Company Governance Survey indicates that on average, directors spent a total of 248.2 ours on board-related matters in the past year and board chairs spend an average of 292.1 hours on board duties. This is inclusive of director estimates related to informal meetings or conversations with management.  Among other findings, the survey also indicates that director turnover has steadily increased over the past four years from 41% to 72% of respondents who reported to have replaced 1 or more directors.

FASB Flash Report - November 2015

Sat, 11/28/2015 - 12:00am
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Summary The FASB recently issued ASU 2015-17 as part of its Simplification Initiative. The amendments eliminate the guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax liabilities and assets between current and noncurrent amounts in a classified balance sheet. Rather, deferred taxes will be presented as noncurrent under the new standard. It takes effect in 2017 for public companies and is available here. Early adoption is permitted, including for December 31, 2015 year-end financial statements.
  Details Background
Prior U.S. GAAP required that in a classified balance sheet, deferred tax liabilities and assets be separated into a current and a noncurrent amount on the basis of the classification of the related asset or liability.  If deferred tax liabilities and assets did not relate to a specific asset or liability, such as a carryforward, they were classified according to the expected reversal date of the temporary difference. 

Main Provisions
To simplify the presentation of deferred income taxes, the FASB issued ASU 2015-171 to require that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The Board concluded a single noncurrent classification reduces complexity for preparers without decreasing the usefulness of information reported to investors.  However, an entity should not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions, consistent with the guidance under existing U.S. GAAP. Therefore, for many reporting entities, deferred income taxes will be presented in noncurrent assets and noncurrent liabilities.  

Effective Date and Transition
The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.  Early adoption is permitted as of the beginning of any interim or annual reporting period.

An entity shall disclose the nature of and reason for the change in accounting principle in the first interim and first annual period of adoption and may apply the amendments in this Update either:
 
  • Prospectively to all deferred tax liabilities and assets, including a statement that prior periods were not retrospectively adjusted; or
  • Retrospectively to all periods presented, disclosing quantitative information about the effects of the accounting change on prior periods.

For questions related to matters discussed above, please contact Yosef Barbut, Gautam Goswami or Adam Brown.
 
1 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.

 

BDO Knows: Variable Interest Entities - After Adoption of ASU 2015-02

Wed, 11/18/2015 - 12:00am
The following VIE practice aid is designed to assist entities that have adopted ASU 2015-02 with the consolidation analysis required by ASC 810.  Entities that have not adopted ASU 2015-02 may refer to BDO’s prior VIE practice aid, which was last updated in August 2015.

Users of this practice aid are encouraged to follow the steps outlined in the flowchart to apply the VIE consolidation criteria required by US GAAP during their initial assessment of an entity or during any subsequent reconsideration. Note that the discussion in Section II, which follows the flowchart, clarifies only some aspects of the steps presented in the flowchart. In that regard, the flowchart is not a substitute for US GAAP and users should ensure any conclusions reached are consistent with the FASB’s Accounting Standards Codification.
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BDO Comment Letter - Narrow-Scope Improvements

Mon, 11/16/2015 - 12:00am
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (File Reference No. 2015-320) (“the ED”)

BDO supports most of the proposed revenue changes, but believes additional questions remain.
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BDO Comment Letter - Effective Dates and Transition Guidance

Wed, 11/11/2015 - 12:00am
File Reference No. PCC-15-01 – Effective Date and Transition Guidance
Intangibles—Goodwill and Other (Topic 350)
Business Combinations (Topic 805)
Consolidation (Topic 810)
Derivatives and Hedging (Topic 815)

BDO supports providing transition relief for the existing PCC accounting alternatives.
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CAQ Issues 2015 Audit Committee Transparency Barometer

Fri, 11/06/2015 - 12:00am
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Summary The Center for Audit Quality (the CAQ) has issued its second edition of the Audit Committee Transparency Barometer, an annual report issued jointly with Audit Analytics. The 2015 Barometer identifies encouraging trends in 2015 with respect to voluntary, enhanced disclosure around external auditor oversight, an important facet of the audit committee’s broader financial reporting oversight role. The Barometer reflects findings from the review of the robustness of proxy statement disclosures among companies in the S&P Composite 1500 -  comprised of S&P 500 (large-caps), the S&P MidCap 400, and the S&P SmallCap 600. It also highlights certain disclosure examples as references.
 
The 2015 Barometer builds on the initial 2014 edition and provides a year-over-year comparison in certain key audit committee disclosure areas. Among other findings, the 2015 Barometer indicates:
 
  • 25% of the S&P 500 companies include a discussion of the audit committee’s consideration in recommending the appointment of the audit firm, up from 13% in 2014.
  • 16% of S&P 500 companies explicitly stated the role audit committees play in determining the audit firm’s compensation, doubling from 8% in 2014.
  • Disclosure of the criteria considered when evaluating the audit firm more than tripled among S&P MidCap 400 companies, rising from 7% to 25%. Disclosure of this criteria among S&P SmallCap 600 companies increased from 15% to 22%.

According to the Barometer, these efforts by audit committees to enhance their disclosures are encouraging, given the importance of meaningful, tailored information for investors and other stakeholders. Through tracking of such data and provision of examples, this tool can provide a fresh perspective to audit committees as they assess their approach to disclosures in the coming proxy seasons.
 
The importance of transparency is further underscored by the 2015 issuance, and extension of the comment period until November 30, 2015, of the SEC’s Concept Release on Possible Revisions to Audit Committee Disclosures. A significant amount of commentary provided to date on this Concept Release has come from audit committee members who, while expressing they are in favor of expanded disclosure, would prefer to do so on a voluntary basis that allows for a flexible, scalable, and meaningful principles-based approach to be most reflective of the needs of a company’s stakeholder base and not result in a boiler-plate exercise after a few iterations.
 
The Barometer further cites direct requests to and compliance by large-cap companies from several investment groups and pension funds for additional information relating to the audit committee’s oversight of the external auditor as a contributing factor to enhanced reporting in proxy disclosures.
  Next Steps We encourage our client and contact audit committee members to review the Barometer and consider the transparency and value provided to the public by your current disclosures. We further encourage, if you have not done so already, review of the SEC’s Concept Release and consider providing your thoughts and perspectives to the SEC, as this will undoubtedly continue to be a significant topic of interest to regulators, audit committees, management, auditors, shareholders and other stakeholders.
 
For additional audit committee tools and resources, including BDO’s Alert on the SEC’s Concept Release, visit BDO’s Board Governance page.

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

FASB Flash Report - November 2015

Mon, 11/02/2015 - 12:00am
FASB Makes Tentative Decisions about Income Tax Disclosures
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The Financial Accounting Standards Board (“FASB” or “Board”) made tentative decisions at its October 21, 2015 meeting on the income tax disclosure requirements in ASC 740 Income Taxes. The October 21 meeting follows two prior Board meetings on income tax disclosures. These decisions are made pursuant to the FASB’s on-going Disclosure Framework project. The objective is to improve the effectiveness of financials statement footnote by clearly communicating important and relevant information.    

The Board’s tentative decisions on income tax disclosure include:
  1. Disclosing the fact that a tax law is enacted in the current period and that it is probable the enacted law would affect the reporting entity in future periods. 
  2. Disaggregating income taxes paid between domestic taxes paid and foreign taxes paid. 
  3. Disclosing the change in the valuation allowance and explaining the nature and amounts recorded and released during the reporting period.1
  4. Requiring non-public entities (in addition to public entities) to disclose a tax rate reconciliation using percentage or dollar amounts of the reported income tax expense from continuing operations to the amount of income tax expense that would result from applying domestic statutory rates to pretax income from continuing operations. The revisions would require that (1) a reconciling item which totals at least 5% of the tax computed at the statutory rate would be separately disclosed in the rate reconciliation and (2) a qualitative description of items that cause significant movement in the tax rate year over year.2
  5. Disclosing the balance sheet line item in which deferred income taxes are presented if they are not presented as a separate line item on the face of the balance sheet. 
  6. Disclosing gross operating loss and tax credits carryforwards and their expiration dates as shown on the income tax returns, the amounts and expiration dates of the carryforwards giving rise to deferred tax asset(s) (the tax-affected amount of operating losses), and the total amount of unrecognized tax benefit (UTB) liabilities that offset the tax-effected carryforwards.3

An exposure draft is not expected until the FASB obtains and considers additional input from stakeholders on all tentative decisions related to income tax disclosures. The FASB will conduct additional outreach with stakeholders to discuss the tentative decisions and determine whether changes are necessary before the Board votes to expose these proposals for comment. As such, an exposure draft could be released in mid-to-late 2016.
Details Disclosure Framework Project
This FASB project seeks to improve the effectiveness of disclosures in the notes to financial statements by requiring disclosure of information that is the most important or relevant to an entity’s financial statement users. Such disclosure would presumably inform a user’s understanding of the amount and timing of expected cash flows related to a particular line item in the financial statements (e.g., income taxes). The FASB’s disclosure framework is also intended to promote consistent decisions by the FASB about disclosure requirements and to serve as a “guide” to disclosure decisions undertaken by reporting entities. The FASB intends to facilitate the use of judgment by preparers in providing disclosures. To achieve these objectives, the Board is evaluating disclosure requirements of significant topics against its proposed Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements.
  BDO Insights BDO supports the FASB’s efforts to improve the effectiveness of financial statement footnotes by developing a framework to promote judgments that result in relevant disclosure.
 
In this context, public entities generally disclose the enactments of significant tax law(s) or changes in tax laws in the Management Discussion & Analysis (“MD&A”) section of a registrant’s financial statements. Requiring all entities to include a footnote disclosure of enacted tax law changes and to state when it is probable that such tax law changes would affect future periods would reflect important tax information in the financial statements.4
 
Similarly, the valuation allowance for deferred tax assets is a critical accounting estimate for many entities and the tentative decision to require disclosing the details  of the change during the period (i.e., the nature and amounts) would provide additional transparency of the accounting for the valuation allowance (i.e., management’s judgment) in the footnotes.
 
The tentative decision to require non-public entities to provide the reconciliation of the income tax expense to the income tax at the statutory tax rate would provide useful information to their financial statement users. The decisions would effectively codify SEC-specific disclosure requirements within US GAAP. Requiring a disaggregation of tax effects which increase or decrease the effective rate by at least 5% of the statutory rate would codify Rule 4-08(h)(2) in Regulation S-X. Disclosing items that cause significant changes in the tax rate year over year similarly codify MD&A disclosure requirements.       
 
The disclosure of income tax carryforwards (as shown on the tax returns), the related deferred tax assets and the UTB liabilities that might offset the carryforwards would provide additional transparency over important income tax information. ASU 2013-11 revised the balance sheet presentation of UTB liabilities and income tax carryforwards to require, with limited exception, a net presentation on the face of the balance sheet.5 When a net presentation is required, the footnote disclosure of the components of deferred income taxes (ASC 740-10-50-2) would not show income tax carryforwards that are presented net of UTB liabilities.6
                 
The Board also decided to provide additional transparency about the amount of income taxes paid, disaggregated between foreign and domestic jurisdictions. Some financial statement users have requested additional information about cash tax payments and how they reconcile with income tax expense. Cash payments to governments for taxes are required to be presented as cash outflows from operating activities in the statement of cash flows.7 If the indirect method is used, the amount of income taxes paid is required to be disclosed as supplemental cash flow information.8 The Board’s decision to also include this information in the tax footnote and to further disaggregate income tax paid between foreign and domestic cash tax payments would provide additional relevant information as to the magnitude of income tax payments to foreign governments relative to payments to the U.S. federal, state, and local jurisdictions.    

BDO will continue to monitor this project and provide input to the FASB.


For more information, please contact one of the following regional practice leaders:

National Assurance Group

Adam Brown
National Director of Accounting
    Patricia Bottomly
National Assurance Partner
 


National Tax Services -  Topic 740 Group

Yosef Barbut
Tax Partner

1 Amending ASC 740-10-50-2
2 Amending ASC 740-10-50-12 through 50-14
3 Amending ASC 740-10-50-3(a)
4 The SEC requires disclosure of the effects of “tax holidays” granted to a reporting entity. Staff Accounting Bulletin (SAB) Topic 11C Miscellaneous Disclosures requires disclosure of the aggregate tax benefit and earnings per share effects of “tax holiday(s)” and any factual circumstances such as the expiration date(s).   
5 For additional information on ASU 2013-11, refer to BDO Knows ASC 740 Income Tax Accounting Question & Answer Series #2 – Balance Sheet Presentation of Uncertain Tax Benefits Pursuant to Accounting Standard Update 2013-11 (October 2014)
6 A tax attribute DTA would be presented in the component of deferred taxes table net of the UTBs that are required to reduce the DTA. The sum of all deferred taxes presented in the component of deferred taxes table should be the same as the total of all deferred taxes presented on the balance sheet.
7 ASC 230-10-45-17(c)
8 ASC 230-10-50-2 
 

PCAOB Re-Opens Comment Period on Audit Quality Indicators Concept Release

Mon, 11/02/2015 - 12:00am
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In July 2015, the PCAOB issued a Concept Release on Audit Quality Indicators (AQIs) identifying 28 potential quantitative audit quality indicators (AQIs) at both the firm and engagement level that are intended to provide additional information about whether audit work being performed is being conducted by the appropriate individuals with the requisite experience, skills, resources, and tools. Refer to BDO’s previous Alert for further details. The original comment period ended September 28, 2015. The PCAOB recently announced its agenda for the November 12-13, 2015 meeting of its Standing Advisory Group (SAG), which will focus discussion on AQIs, among other emerging areas. Consistent with its standard practice, the Board has decided to reopen until November 30, 2015, the comment period on the AQI Concept Release to provide an opportunity for members of the public to offer their views, including on any new information that becomes available as a result of the SAG meeting.
  Next Steps We encourage audit committees, financial executives, and auditors to explore the resources cited in this Alert and determine how such proposed guidance may benefit your organization or whether there are further considerations to be incorporated to achieve stated goals. For additional audit committee tools and resources, visit BDO’s Board Governance page.

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

BDO Comment Letter - Principal versus Agent Considerations

Wed, 10/21/2015 - 12:00am
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(File Reference No. 2015-290) (“the ED”)

BDO supports the proposed changes to the principal vs. agent guidance, but recommends refining them in key areas.
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