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July 2016 

Greetings,

We are pleased to release MaloneBailey's July 2016 newsletter highlighting recent SEC and FASB updates. Please note that the updates provided in this newsletter are not a comprehensive list. We have selected the updates that we believe may be of relevance to you. Our goal is to provide you with resources to keep you informed of the ever-changing rules and regulations pertaining to regulatory and accounting matters. 

We encourage you to visit the SEC and FASB websites for more information as well as a complete list of updated rules and regulations.  We invite you to contact us should you have any questions about the information provided in this issue. You can find a list of MaloneBailey partners and their contact information at the end of this newsletter. 

For easy navigation, please refer to the 'In This Issue' section, which contains a hyperlinked table of contents of rule and regulation updates that may affect you. We invite you to visit our website to review archived versions of this newsletter containing past SEC and FASB updates.

The MaloneBailey Team
 
In This Issue

SEC Updates
FASB Updates

Recent SEC Updates
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Form 10-K Summary

Summary - The SEC has approved an Interim Final Rule that allows Form 10-K filers to provide a summary of business and financial information contained in its Annual Report. The rule implements a provision of the Fixing America's Surface Transportation (FAST) Act. The FAST Act was adopted in December 2015 and includes several amendments to the federal securities laws, including provisions related to improving access to capital for emerging growth companies, disclosure modernization and simplification, and small company simple registration requirements.

The Interim Final Rule provides filers with flexibility in preparing the summary and those opting to provide it must include hyperlinks to the related, more detailed disclosure in the Form 10-K. It also requests comment on whether the rule should include specific requirements or guidance for the form and content of the summary and whether the rules should be expanded to include other annual reporting forms.  The SEC recently adopted rules to revise Forms S-1 and F-1 to permit emerging growth companies to omit certain historical financial information from registration statements provided that all required financial information is included at the time of the offering. 

The SEC also adopted rules to reflect statutory changes to the 12(g) thresholds for registration, termination of registration and suspension of reporting for savings and loan holding companies.
The rule will become effective when published in the Federal Register and the public comment period will remain open for 30 days from such date.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, Remarks Before the SEC Historical Society - "The Continuous Process of Optimizing the Equity Markets" by Mary Jo White, SEC Chair

Summary - SEC Chair Mary Jo White recently spoke at the SEC Historical Society in Washington, D.C. Ms. White discussed the SEC's historical equity market structure agenda and current efforts in this area. Chair White provided that the SEC "is now in the midst of another significant phase of market structure review, as technology advancements continue to accelerate the pace of change in how orders are generated and executed. While these advancements have generally served retail and institutional investor interests well, as I have remarked before, it is critical that we, as regulators, keep pace with these changes with a keen focus on the fundamentals driving them." Topics briefly discussed by Chair White included:
  • The SEC's proposed national market system plan to create a consolidated audit trail;
  • Regulation ATS, which is a proposal designed to shed light on dark pools and bring greater transparency about how alternative trading systems operate;
  • Regulation Security Compliance and Integrity, which strengthened the technology infrastructure of the market and expanded SEC oversight of that technology; and
  • The SEC's work with securities exchanges to address issues like order types and operations, data feed disclosures, and "single points of failure" within infrastructure systems that have the ability to significantly disrupt trading.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, New Directions in Corporate Compliance: Keynote Luncheon Speech by Andrew J. Donohue, Chief of Staff

Summary - Andrew J. Donohue, Chief of Staff of the SEC, recently gave a speech at the "Rutgers Law School Center for Corporate Law and Governance Conference" held in Camden, New Jersey. Mr. Donohue shared his thoughts and observations regarding corporate compliance based on his experience being responsible for legal and for corporate compliance at my diverse firms, including domestic and international operations, broker-dealers, investment advisers, and commodity trading advisors. Topics discussed by Mr. Donohue included:
  • Integrity and personal responsibility;
  • The critical role culture plays in corporate compliance;
  • Keep it simple and intuitive;
  • The role of technology; and
  • Complexity of firms, their operations, and their products or services.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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SEC Staff Views, Regulation Crowdfunding - A Small Entity Compliance Guide for Issuers 

Summary The staff in the SEC's Division of Corporation Finance (Corp Fin) has issued the following documents related to Regulation Crowdfunding:
  • Compliance and Disclosure Interpretation (C&DI), Regulation Crowdfunding; and
  • Small Entity Compliance Guide on Regulation Crowdfunding.
The C&DI provides guidance on aspects of Regulation Crowdfunding, which is an SEC final rule that permits companies to offer and sell securities through crowdfunding. Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects. Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.

Regulation Crowdfunding  permits individuals to invest in securities-based crowdfunding transactions subject to certain investment limits. The rules also limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.

The Small Entity Compliance Guide on crowdfunding summarizes and explains provisions of Regulation Crowdfunding. Topics covered include:
  • Requirements of Regulation Crowdfunding;
  • Issuer disclosure;
  • Limits on advertising and promoters; and
  • Restrictions on resales.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, New Ways for the Financing of Small and Medium Enterprises and the Challenges of Crowdfunding by Mary Jo White, SEC Chair

Summary - SEC Chair Mary Jo White recently gave a speech entitled, New Ways for the Financing of Small and Medium Enterprises and the Challenges of Crowdfunding. Ms. White acknowledged the fact that small businesses play a crucial role in the U.S. economy and capital markets. Ms. White indicated that the SEC "has been quite focused in recent years advancing a range of initiatives aimed at facilitating capital formation for small and emerging companies, including by updating and amending our existing rules for smaller offerings and by developing new rules for crowdfunding." Highlights of Ms. White's remarks include:
  • There is significant interest and excitement in the U.S. about the use of securities-based crowdfunding, which will hopefully give small businesses another tool for raising capital and building vibrant markets. Companies have many options for raising money to fund their businesses, and those seeking capital will ultimately be in the best position to decide whether crowdfunding or another capital-raising option will work best for them.
  • Importantly, in implementing the SEC's statutory crowdfunding mandate, the rules issued seek to maintain strong investor protections, while also streamlining capital formation for smaller issuers. There are also specific initial and ongoing disclosure requirements regarding the business and the securities offering and requirements for financial statements.
  • The SEC has completed all of its other statutory requirements from the JOBS Act to promote capital-raising. In 2013, the SEC created a new exemption that allows companies to engage in general solicitation of the public for certain unregistered securities offerings, provided that all purchasers are "accredited investors" and that issuers take reasonable steps to verify that status. Historically, general solicitation had not been permitted in these types of private offerings. The SEC has implemented statutory enhancements to the registration and reporting process for initial public offerings of common equity securities. These enhancements are known as the "IPO on-ramp."
  • About 85% of the companies doing IPOs since the JOBS Act was enacted have chosen to start as an emerging growth company. Nearly 1,000 emerging growth companies have taken advantage of the ability to confidentially submit draft registration statements for their IPOs.
  • The SEC has also been working to improve capital formation for smaller companies through the SEC staff's Disclosure Effectiveness Initiative. As part of this initiative, the SEC staff is reviewing the SEC's key disclosure requirements, and is considering ways to improve the disclosure regime for the benefit of both companies and investors.
  • As part of the Disclosure Effectiveness Initiative, the SEC staff is considering how our rules can be improved for smaller companies. Just last month, the SEC issued a "concept release" in which it considered and sought comment on aspects of our scaled disclosure system for smaller reporting companies. The scaled disclosure system provides accommodations to smaller reporting companies with regard to certain disclosure requirements, as compared to the requirements applicable to their larger counterparts. The SEC looks forward to comments on this concept release to help inform any potential further consideration of changes to the scaled disclosure system.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, Disclosure in the Digital Age: Time for a New Revolution by Commissioner, Kara M. Stein

Summary -  SEC Commissioner Kara M Stein recently gave a speech entitled, "Disclosure in the Digital Age: Time for a New Revolution." Ms. Stein spoke at the "48th Annual Rocky Mountain Securities Conference" held in Denver, Colorado. Commissioner Stein discussed how to breathe new life into the critical matchmaking process between companies and investors, including her thoughts on developing a new way of communicating via disclosure in the Digital Age. Highlights of Ms. Stein's remarks included:
  • Disclosure is how companies present themselves to investors, and how investors, who need to grow their capital, find just the right match for them. It is how workers saving for retirement find the right mutual fund or investment adviser, how institutional investors identify long term investments, and how analysts begin their research.
  • While technology has been evolving, the SEC's EDGAR system has not changed much. EDGAR now serves as the SEC's central data repository. It receives over 700,000 disclosure documents every year from companies, investment companies, and individuals. EDGAR needs a redesign to catch up to the new digital world. However, even the redesign needs to be part of a larger, more holistic effort.
  • Another ongoing initiative to improve communications between companies and investors is the "Disclosure Effectiveness" project. The SEC is seeking input on dozens of issues, asking hundreds of questions, relating to both the form and substance of various disclosures. And yet, it falls short since there are important questions that were not asked. Questions relating to corporate governance disclosures were left out. Also missing were questions about how to best measure corporate performance.
  • Companies must be prepared to offer investors the fair, neutral, and decision-useful information they want in order to part with their hard-earned capital. Materiality evolves. It changes as society changes, and it also changes with the availability of new and better data. To achieve effective disclosure, we must understand what is important to today's investors.
  • Today, investors make their decisions based on an array of information, which goes beyond mere profit and loss. Many believe that the era of sustainability or impact investing has arrived. Sustainability disclosure differentiates companies and may foster investor confidence, trust, and employee loyalty. Studies indicate that today's investors are considering strategies that take into account environmental, social and corporate governance criteria.
  • Structured or machine-readable data allows data to be pulled out of filings and presented according to the needs of the consumer. Structured data can provide big advantages for companies. Companies could provide this information once, and then not have to repeat it over and over again across numerous filings. The beauty of this approach is that it completely separates how the company submits the data from how investors access the data. Investors should be able to effortlessly and electronically get exactly what they need, when they need it, nothing more and nothing less.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, Remarks Before the 2016 Baruch College Financial Reporting Conference by Wesley R. Bricker, Deputy Chief Accountant

Summary  - Wesley R. Bricker, Deputy Chief Accountant at the SEC, recently spoke at the "2016 Baruch College Financial Reporting Conference," held in New York. Mr. Bricker provided observations on the ongoing transition period activities for the new standards on revenue recognition and leases as well as the FASB's financial instruments' credit impairment proposal. Mr. Bricker also addressed certain non-GAAP reporting practices and discussed the role of the PCAOB in promoting auditor attention on current and emerging financial reporting risks through its standard-setting, inspection, and other important programs.
Highlights of Mr. Bricker's remarks include:
  • Given the pervasiveness of the changes within the new revenue recognition and lease accounting standards, now is a good time for companies to focus on investor outreach and education so that investors can sufficiently understand the effect of the new standards on companies' financial reporting. Disclosure from management regarding what is changing, why it is changing, and how should be useful to investors.
  • While all industries and business models will likely be impacted to some degree by the new guidance, investors should pay particular attention to those companies with complex business models. Under the new five-step model, revenue is recognized when control of the good or service transfers from the seller to a customer. This model represents a shift from the current revenue recognition guidance which emphasizes the transfer of "risks and rewards," rather than control, as a criterion for recognition. For some companies, such as those with construction and production-type contracts, this control based model may impact the timing of revenue recognition as compared to current GAAP.
  • The SEC staff has long advised that a registrant should provide disclosures to investors of the impact that a recently issued accounting standard will have on its financial statements when that standard is adopted in a future period (so-called "transition disclosures"). Without adequate transition disclosures, investors may not be prepared to fully understand changes in the company's financial performance from one period to the next and the impact of adopting a new accounting standard. These transition disclosures are essential for new accounting standards, including the new revenue recognition and leasing standards.
  • Application of the new revenue recognition standard requires preparers to make judgments in financial reporting that will later be evaluated by auditors, regulators, and investors. The SEC staff will continue to respect well-reasoned, practical judgments when those judgments are grounded in the principles of the standard and considered the utility of the resulting information to investors. Conversely, aggressive interpretations that appear to be taken to achieve a specific outcome, such as preserving existing reporting, will not be well received, particularly when that outcome is inconsistent with the principles of the new standard.
  • Recent examples of company practices related to non-GAAP measures have caused concern, including the use of individually-tailored accounting principles to calculate non-GAAP earnings; providing per share data for non-GAAP performance measures that look like liquidity measures; and non-GAAP tax expense. Recent examples of company practices related to operating metrics have also caused concern for the SEC staff.
  • Revenue adjustments in non-GAAP measures do more than just adjust from GAAP: they change the very starting point from which other performance analyses flow. As the SEC staff monitors current practices and implementation of the new revenue standard, it will be looking to see if the reporting concepts within those standards are supplanted by any number of company-specific non-GAAP alternatives. For all of these reasons, if you present adjusted revenue, you will likely get a comment from the SEC staff. Registrants can expect the SEC staff to look closely, and skeptically, at the explanation as to why revenue adjustments are appropriate.
  • The PCAOB has been focused over the last year on improving its standard setting process to be more effective and efficient. The PCAOB has acknowledged that it is already working on integrating some new tools from this review into its active standard-setting agenda. And indeed, the SEC staff has already seen encouraging results from some of the initial changes.
  • Another area of importance for the PCAOB's focus is understanding and addressing, on a timely basis, the implications to audit quality of new and emerging risks. Such risks are inherent in the dynamic environment in which today's public companies operate and include the impact of changes in technology and the growing use of big data on the manner in which audits are conducted.
  • In order to preserve and, where necessary, strengthen the quality of independent audits in the years to come, it is essential to ensure that auditing standards are appropriately responsive to these developments. Similarly, it will be important to keep the PCAOB's inspection program focused on those new and emerging risks.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Staff Speech, Keynote Address at the SEC-Rock Center on Corporate Governance Silicon Valley Initiative by Mary Jo White, SEC White by Mary Jo White, SEC Chair

Summary - SEC Chair Mary Jo White recently delivered the keynote address at the "SEC-Rock Center on Corporate Governance Silicon Valley Initiative" conference. Ms. White discussed some of the opportunities, challenges, and risks in these rapidly changing markets.

Chair White noted in her remarks that as "technology has evolved, so too have the financial markets that support it. New models for how these companies are funded and how investors unlock their value are changing the landscape of private start-up financing and the IPO market. SEC rulemakings have also opened new ways to raise start-up capital with general solicitation allowed in private offerings, securities-based crowdfunding campaigns coming soon, and an updated and expanded Reg A (known as Regulation A+)." However, Ms. White also cautioned that all "of these factors are contributing to the decision made by more and more companies to stay private longer."

Topics discussed by Ms. White included:
  • The challenges of pre-IPO financing and information;
  • The challenges of new models of capital formation and markets;
  • Financial controls and corporate governance roles and challenges; and
  • Digital finance developments.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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SEC Proposes Amendments to Smaller Reporting Company Definition

Summary - The SEC proposed amendments that would increase the financial thresholds in the "smaller reporting company" definition. The proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, thus qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X. Smaller reporting companies may provide scaled disclosures under the Commission's rules and regulations. The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition. In addition, if a company does not have a public float, it would be permitted to provide scaled disclosures if its annual revenues are less than $100 million, as compared to the current threshold of less than $50 million in annual revenues.

In addition, as in the current rules, once a company exceeds either of the thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold. Under the proposal, a company would qualify only if its public float is less than $200 million or, if it has no public float, its annual revenues are less than $80 million.

The SEC is not proposing to increase the $75 million threshold in the "accelerated filer" definition. As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would be subject to the requirements that apply currently to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor's attestation of management's assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

Comments on the proposal are due 60 days after publication in the Federal Register.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Resource Extraction Issuers -- SEC Adopts Rules for Resource Extraction Issuers Under Dodd-Frank Act

Summary - The SEC announced it adopted rules to require resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals. The rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to further the statutory objective to advance U.S. foreign policy interests by promoting greater transparency about payments related to resource extraction. These rules were adopted to replace previous rules that were initially adopted by the SEC on August 22, 2012, but were subsequently vacated by the U.S. District Court for the District of Columbia.

The final rules require an issuer to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the SEC under the Securities Exchange Act. The issuer must also disclose payments made by a subsidiary or entity controlled by the issuer. Specifically, under the final rules, resource extraction issuers must disclose payments that are: 
  • Made to further the commercial development of oil, natural gas, or minerals (as defined in the rules);
  • Not de minimis, which is defined in the rules as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year; and
  • Within the types of payments specified in the rules. 
The required disclosure will be filed publicly with the SEC annually on Form SD no later than 150 days after the end of its fiscal year. The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language format. Resource extraction issuers are required to comply with the rules starting with their fiscal year ending no earlier than September 30, 2018.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Securities Act Rules -- SEC Staff Updates Securities Act Rules Interpretation 

Summary - The SEC staff has updated its Compliance and Disclosure Interpretation (C&DI), Securities Act Rules. The SEC staff has added Questions 271.17 thru 271.23, which provide guidance on exemptions for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Board Diversity -- SEC Chair White Indicates SEC Staff Continues Work on Possible Rules Requiring Firms to Reveal Board Diversity

Summary - SEC Chair Mary Jo White recently spoke at an International Corporate Governance Network conference. In her remarks, Ms. White indicated that the SEC staff is preparing a recommendation to the SEC to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors. Chair White indicated that some "may oppose even minimally more prescriptive diversity disclosure requirements. My view is that the SEC has a responsibility to ensure that our disclosure rules are serving their intended purpose of meaningfully informing investors. This rule does not and it should be changed. Our lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors."

Chair White also discussed the role of the SEC in corporate governance, the use of non-GAAP financial measures, and sustainability disclosures. Highlights of Ms. White's remarks on these issues included:

  • The SEC has an impact on corporate governance through its disclosure powers, requiring public companies to provide investors with the information they need to make informed investment and voting decisions. The SEC thus does not decide who may sit on a corporate board, but its rules do require disclosure about those who serve or are nominated to serve as directors and, importantly, why they were selected to serve.
  • In connection with the SEC staff's ongoing disclosure effectiveness review, the SEC recently issued a broad-based concept release seeking input from investors, issuers and other affected market participants on its business and financial disclosure requirements. The SEC's overall challenge is to re-focus the lens of disclosure to better serve today's investors. The challenge for investors is even greater- to use your voices not only to inform us about the disclosures you need to make informed decisions, but also to influence corporate behavior to better protect and generate sustainable corporate value.
  • Ms. White generally thinks it is a good idea to provide companies with flexibility to use non-GAAP measures that are not misleading and the SEC does hear that investors want such information. But recently Chair White has had significant concerns about companies taking this flexibility too far and beyond what is intended and allowed by its rules. In too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation. Ms. White strongly urged companies to carefully consider recent guidance on non-GAAP measures issued by the SEC staff and to revisit their approach to non-GAAP disclosures.
  • On the use of non-GAAP measures, Chair White indicated that the SEC is watching this space very closely and are poised to act through the filing review process, enforcement and further rulemaking if necessary to achieve the optimal disclosures for investors and the markets.
  • SEC rules and guidance are clear that, to the extent issues about sustainability are material to a company's financial condition or results of operations, they must be disclosed. But deciding whether such disclosures are triggered in a particular context is often easier said than done when trying to calibrate materiality to phenomena that have a longer term horizon than most other financial metrics do.
  • At this juncture, the path forward on enhancing sustainability reporting is clearly still developing. Unlike financial disclosures, established and agreed upon sustainability metrics for reporting do not yet exist. In many countries outside of Europe and South Africa, sustainability reporting is still largely voluntary. There is much debate about climate change and how to address it.
  • Although the SEC is seeing increased disclosure and engagement on sustainability matters, it is taking a more focused look at such disclosures, particularly related to climate change, in annual filing reviews. There is, in short, more work and thinking to be done on sustainability reporting at the SEC, and by companies and investors, including on whether, when, where, and how to provide disclosure and what precisely should be provided. The issue has the SEC's attention, but disclosure alone will not achieve the ultimate results many investors and other constituents are seeking.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Recent FASB Updates
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FASB Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting

SummaryThe FASB has issued Accounting Standards Update (ASU) 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting.  This ASU rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting.

SEC Staff Announcement, "Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606, Revenue from Contracts with Customers," was announced at the March 3, 2016, EITF meeting. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The SEC Staff is rescinding the following SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities-Oil and Gas, effective upon adoption of Topic 606, Revenue from Contracts with Customers. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606:
  • Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2;
  • Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1;
  • Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; and
  • Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5.
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

Summary The FASB has issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.  The amendments clarify the following two aspects of Topic 606: (a)  identifying performance obligations; and (b)  the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606.

The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The effective date for nonpublic entities is deferred by one year.

Identifying Performance Obligations
Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments add the following guidance:
  1. An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
  2. An entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.
To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. The amendments improve the guidance on assessing the promises are separately identifiable criterion by:
  1. Better articulating the principle for determining whether promises to transfer goods or services to a customer are separately identifiable by emphasizing that an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.
  2. Revising the related factors and examples to align with the improved articulation of the separately identifiable principle.
Licensing Implementation Guidance
Topic 606 includes implementation guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The amendments are intended to improve the operability and understandability of the licensing implementation guidance by clarifying the following:
  1. An entity's promise to grant a customer a license to intellectual property that has significant standalone functionality (e.g., the ability to process a transaction, perform a function or task, or be played or aired) does not include supporting or maintaining that intellectual property during the license period.
  2. An entity's promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality) includes supporting or maintaining that intellectual property during the license period.
  3. An entity considers the nature of its promise in granting a license, regardless of whether the license is distinct, in order to apply the other guidance in Topic 606 to a single performance obligation that includes a license and other goods or services (in particular, the guidance on determining whether a performance obligation is satisfied over time or at a point in time and the guidance on how best to measure progress toward the complete satisfaction of a performance obligation satisfied over time).
For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

Summary -  The FASB has issued Accounting Standards Update (ASU) No. 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.

Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.

The amendments also simplify two areas specific to private companies:
  1. Practical Expedient for Expected Term: In lieu of estimating the period of time that a share-based award will be outstanding, private companies can now apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics.
  2. Intrinsic Value: Private companies can now make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. Previously, private companies were provided an option to measure all liability-classified awards at intrinsic value, but some private companies were unaware of that option.
Accounting for employee share-based awards was identified by the Private Company Council (PCC) as an area of concern among private company stakeholders. The PCC worked with the FASB to discuss and analyze the issues that private companies have encountered in this area when applying the standard. The PCC also asked the FASB staff to conduct outreach with users as a part of the FASB's pre-agenda research on the topic.

The FASB also considered the conclusions in the Financial Accounting Foundation's Post-Implementation Review Report on Statement 123(R), Share-Based Payment. Though the report concluded that the prior standard achieved its purpose, it noted that certain areas within Statement 123(R) may be costly and difficult to apply.

For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323)

SummaryThe FASB has issued Accounting Standards Update (ASU) No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.  The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.

The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

Summary -  The FASB has issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options.  Topic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract (the "clearly and closely related" criterion).

U.S. GAAP provides specific guidance for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly and closely related criterion. The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk.

The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.

Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018.

All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period.

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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

Summary -  The FASB has issued Accounting Standards Update (ASU) No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument.

The term novation, as it relates to derivative instruments, refers to replacing one of the parties to a derivative instrument with a new party. In practice, derivative instrument novations may occur for a variety of reasons, including financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or in response to laws or regulatory requirements. The derivative instrument that is the subject of a novation may be the hedging instrument in a hedging relationship that has been designated under Topic 815, Derivatives and Hedging.

The issue is whether a change in the counterparty to a derivative instrument that has been designated as a hedging instrument, in and of itself, results in a requirement to dedesignate that hedging relationship and therefore discontinue the application of hedge accounting. The guidance in Topic 815 is not explicitly clear about the effect on an existing hedging relationship, if any, of a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. Furthermore, the existing guidance, which is limited, is interpreted and applied inconsistently in practice.

The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria.

The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.

The amendments may be applied on either a prospective basis or a modified retrospective basis.

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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accountaing Standards Update No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products

Summary - The FASB has issued ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments apply to entities that offer certain prepaid stored value products (e.g., prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks).

Liabilities related to the sale of prepaid stored-value products are financial liabilities. The amendments provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606 Revenue from Contracts with Customers. Neither current U.S. GAAP nor the pending guidance in Topic 606 contains specific guidance for the derecognition of prepaid stored-value product liabilities.

The amendments are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period.

The amendments should be applied either: (a) using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective; or (b) retrospectively to each period presented.

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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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FASB Accounting Standards Update No. 2016-03, Intangibles -Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance

Summary -  The FASB has issued ASU No. 2016-03, Intangibles - Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council). The amendments in this ASU are effective immediately.

The amendments could affect all private companies within the scope of ASU 2014-02, Intangibles - Goodwill and Other (Topic 350): Accounting for Goodwill; ASU 2014-03 Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps - Simplified Hedge Accounting Approach; ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements; or ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination.

The amendments make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections.

The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs.

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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.