Quarterly accounting roundup: An update on important developments The Dbriefs Financial Reporting series Robert Uhl, Partner, Deloitte & Touche LLP

Quarterly accounting roundup: An update on important developments The Dbriefs Financial Reporting series Robert Uhl, Partner, Deloitte & Touche LLP Chris Chiriatti, Managing Director, Deloitte & Touche LLP Stephen McKinney, Managing Director, Deloitte & Touche LLP Amy Steele, Partner, Deloitte & Touche LLP Jennifer Kehrer, Senior Manager, Deloitte & Touche LLP June 27, 2017

Agenda Revenue Leases FASB Standard Setting Financial Instruments Question and Answer Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 1

Items to note Keep in mind: This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance. Check with a qualified advisor before taking any action. Learning Objective: To enhance participants understanding of important accounting issues and developments pertaining to recent actions of standard setters, regulators, and others. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 2

Polling question #1 Are you a financial statement preparer, user, auditor, or other interested party? Preparer User Auditor Other Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 3

Revenue recognition Implementation considerations Transition method The following chart illustrates the percentage of SEC registrants that have disclosed their anticipated transition method in their most recent SEC filings: 9% 51% 40% Full Retrospective Modified Retrospective Undecided/Other Note: Based on public filings made by nearly 1,000 SEC registrants as of May 31, 2017, of which 15 have early adopted (8 companies applied the full retrospective transition method and 7 companies applied the modified retrospective transition method). Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 5

Revenue recognition Implementation considerations Transition method (cont.) Of those SEC registrants that stated their anticipated transition method (i.e., excluding undecided or undisclosed registrants), the following summarizes the anticipated transition method by industry sector: Automotive Chemical & Specialty Materials Consumer Products Financial Services Health Care Providers & Plans Industrial Products & Services Life Sciences Media & Entertainment Oil & Gas Power & Utilities Real Estate Retail and Distribution Technology Telecom Travel and Hospitality 0 10 20 30 40 50 Full Retrospective Modified Retrospective Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 6

Polling question #2 What transition method is your company planning to use to adopt the new revenue standard? Full retrospective Modified retrospective Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 7

Revenue recognition Hot topics Topic Applicable guidance Key issues Identification of performance obligations Material rights A good or service that is promised to a customer is distinct if it is both: capable of being distinct and distinct within the context of the contract. If an entity grants a customer the option to acquire additional goods or services at a discount that is incremental to discounts typically given, then the option may represent a material right. If an option represents a material right, then it should be accounted for as a separate performance obligation, which will result in a deferral of revenue. Is the identified promised good or service truly distinct? Is there a transformative relationship between the goods or services. Assessing whether a discount provides a customer with a material right. Determining the SSP of the material right. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 8

Revenue recognition Hot topics (cont.) Topic Applicable guidance Key issues Contract modifications Changes in transaction price If additional distinct goods or services are added and the price increase reflects the stand-alone selling price ( SSP ), then account for the modification as a separate contract. If not, the accounting depends on whether the remaining goods or services are distinct from those already transferred: If yes, prospective treatment ( new contract ). If no, cumulative catch-up adjustment. An entity should allocate changes in the transaction price on the same basis as at contract inception. Application of this guidance may result in a cumulative catch-up adjustment to revenue for amounts allocated to satisfied performance obligations. When does the modification guidance apply. Determining when goods are added at SSP. Modifications in transction Differentiating a change in transaction price from a modification. Accounting for both a change in transaction price and a modification. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 9

Revenue recognition Hot topics (cont.) Topic Applicable guidance Key issues Over time recognition Contract costs Recognize revenue over time if one of the following criteria are met: The customer simultaneously receives and consumes the benefits of the entity s performance as the entity performs. The entity s performance creates or enhances a customer-controlled asset. The entity creates an asset that has no alternative use and the entity has a right to payment for performance completed to date. Capitalize the incremental costs to obtain a contract with a customer if the costs are expected to be recovered. Additional fulfillment cost guidance. Capitalized contract costs should be amortized on a systematic basis consistent with the pattern of transfer of related goods or services. Determining whether an enforceable right to payment exists in contract manufacturing arrangements. Evaluating whether work-in-process is controlled by the customer. Accounting for preproduction costs in longterm supply arrangements. Amortization period of capitalized contract costs (e.g., contract term versus customer life). Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 10

Revenue Recognition Implementation Pitfalls Six months and three days until the standard is effective for calendar year end public companies. Potential pitfalls may be: Overreliance on peer company disclosures or those of early adopters Assuming the standard will not have a material impact and not considering the impact to disclosures Not involving the entire organization, including senior management and the audit committee, in the implementation process Assuming all contracts with customers are created equally Not considering changes necessary to internal controls over financial reporting in order to obtain and synthesize new data necessary to comply with accounting and disclosure requirements. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 11

New revenue standard 2013 COSO framework Risk assessment Principle 6 Principle 7 Principle 8 Principle 9 Identify objectives associated with the adoption of the new standard to enable identification of risks relating to the objectives. Identify and document risks associated with the adoption of the new standard and reconsider the risks throughout the adoption process. Consider fraud risks related to the adoption of the new standard (e.g., considering the potential for new fraud schemes, particularly given changes in accounting, controls, and IT). Complete the assessment of the new standard and its impact on the company, including on internal control, data and system requirements, disclosures, and reporting. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 13

New Revenue Standard 2013 COSO Framework Control Activities Principle 10 Evaluate the internal controls affected by the adoption of the new standard and identify new internal controls to address new risks associated with the standard. Principle 11 Consider impacts on general controls over technology and modify as appropriate. Principle 12 Revise policies and procedures to address risks and internal controls related to the new standard and establish responsibility and accountability for executing the policies and procedures. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 14

New revenue standard Internal controls Planning and assessment Controls over identification of material revenue streams and different contract types within those revenue streams. Entity-level controls such as the control environment and general tone at the top. Entity-level controls over training provided to personnel to educate on the requirements of ASC 606. Controls over accounting conclusions reached including the impact to other account balances such as costs of sales or services, contract assets and liabilities, and income tax accounts. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 15

Polling question #3 What issue do you expect will result in the most significant change for your company? Contract modifications Material rights Over time recognition Contract costs Disclosures Other/Not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 16

New revenue standard Internal controls Implementation Direct control activities over the recognition of revenue under the five-step model of ASC 606. Controls over the review of the SAB 74 disclosures, and ongoing disclosures. Identification and implementation of changes to information technology systems, including the logic of reports. Review of information used to support accounting conclusions, new estimates, adjustments to the financial statements, and disclosure requirements. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 17

Polling question #4 Do you think the principles based nature of ASC 606 will provide: A fresh start to achieving consistent reporting across industries An opportunity for significant diversity in practice to emerge within industries Don t know/not certain Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 18

Leases Recent developments FASB did not create TRG for leases Board meetings used to address implementation issues raised by stakeholders Primarily relate to lessee accounting, scope, and transition Recent meetings in May and June Pipeline laterals Easements Whether to apply ASC 840 or ASC 842 during transition 16 proposed technical corrections FASB expects to issue a proposed ASU on the technical corrections with a 45 day comment period Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 20

Share-based compensation Recent developments ASU 2016-09 issued in March 2016 Change related to the exception to liability classification of an award with a net-settlement feature Resulted in discussion on applicability of the modification accounting under 718 ASU 2017-09 issued in May 2017 Amended scope of modification accounting to limit when it is required to apply Transition & Effective Date Effective for annual reporting periods, including interim periods, beginning after December 15, 2017 Early adoption is permitted, including during interim periods Applied prospectively Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 22

Scope of Modification Accounting under ASC 718 ASU 2017-09 Not required to apply modification accounting if all of the following are met: Fair value of the award is the same before and after the modification Vesting conditions are the same Classification of the award has not changed Fair value calculation may not be required Unit of account should be consistent under guidance in ASC 718 Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 23

Polling question #5 How prepared is your organization to comply with the new lease accounting standard? Extremely prepared Very prepared Somewhat prepared Not too prepared Not at all prepared Don t know/na Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 24

EITF update Cloud computing costs Cloud computing implementation costs ASU 2015-05 was issued to address scoping of cloud computing costs The project identified whether or not the costs were in the scope of ASC 350-40 (internally developed software) Stakeholders have stated that GAAP is unclear about implementation costs for a cloud computing arrangement for which there is not a software license The lack of clarity led to the FASB adding to the EITF s agenda a narrow-scope project on the accounting for implementation costs in a cloud computing arrangement The EITF is expected to discuss cloud computing at its July 20, 2017 meeting. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 26

EITF update (cont.) Cloud computing Potential alternative #1 Cloud computing implementation costs would be expensed when incurred Potential alternative #2 Cloud computing implementation costs would be recognized as an asset (including prepaid assets) or an expense based on existing guidance Potential alternative #3 Cloud computing implementation costs would be accounted for the same as implementation costs associated with a software license Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 27

Consolidation guidance ASC 810 Recent developments Two Projects: Reorganization of ASC 810 Targeted improvements Private company scope exception to VIE Model for entities for under common control Determining if a fee paid to a decision maker is a variable interest Indirect interest held by related parties under common control Changes to related party considerations in the primary beneficiary assessment: Most closely associated test a.k.a the related party tiebreaker test Substantially all guidance Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 28

Polling question #6 Company A and Company B hold 95% and 5% equity interest of a Subsidiary C, respectively. Company A and Company B are under common control of Parent D. 92% of the products produced by Subsidiary C are purchased by Company A to be used in the production of Company A s inventory. Under the proposed amendments, which party would consolidate Subsidiary C? Company A Company B Neither Company A or Company B Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 29

Financial instruments Credit losses June 12th credit losses TRG meeting Discussed 5 issues Generally agreed on 3 Will revisit TDRs and credit card receivables Next meeting is not scheduled Beneficial interests Whether to adjust the EIR Credit losses TRG PCD transition TDRs Estimated life of credit cards Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 31

Financial instruments (cont.) Hedging New ASU on hedging expected to be issued in August 2017 What will change Concept of separately recognizing periodic hedge ineffectiveness Ability to hedge contractually-specified components of the price of forecasted purchases and sales of nonfinancial assets What won t change Highly Effective effectiveness threshold retained Voluntary de-designation of a hedging relationship New guidance will be effective for public business entities in 2019 and for all other entities in 2020 Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 32

Financial instruments (cont.) Other recent developments Project Accounting for Interest Income Associated with the Purchase of Callable Debt Securities Liabilities and Equity Targeted Improvements (down round features) Status ASU 2017-08 issued on March 30, 2017. New guidance is effective for public business entities in 2019 and for all other entities in 2020. A final ASU is currently being drafted, which is expected to be issued in the third quarter of 2017. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 33

Polling question #7 Do you plan to early adopt the proposed Hedging standard? Yes No Don t know/na Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 34

Join us July 13 at 12 p.m. ET as our Financial Reporting series presents: Implementation of the New FASB Revenue Standard: Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 36

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Contact information Bob Uhl Partner Deloitte & Touche LLP ruhl@deloitte.com @Twitterhandle Stephen McKinney Managing Director Deloitte & Touche LLP smckinney@deloitte.com @Twitterhandle Chris Chiriatti Managing Director Deloitte & Touche LLP cchiriatti@deloitte.com @Twitterhandle Connect with me on LinkedIn Connect with me on LinkedIn Connect with me on LinkedIn Amy Steele Partner Deloitte & Touche LLP asteele@deloitte.com @Twitterhandle @Twitterhandle Connect with me on LinkedIn Connect with me on LinkedIn Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: An update on important developments 38

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This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2017 Deloitte Development LLC. All rights reserved. Quarterly accounting roundup: CFO An Meets update M&: on Value important Creation developments in the Digital Age 40

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