Changes to Goodwill Impairment Testing

 Effective for fiscal years beginning after December 15, 2011 (early adoption is permitted)  Accounting Standards Update 2011-08: Technical Corrections To  Various Topics changes the first step of goodwill impairment testing. Previously, the fair value of the reporting unit was compared to the carrying value of the reporting unit. If the fair value is less than the carrying value (of the reporting unit), then the fair value of the goodwill is compared to the carrying value of the goodwill. If the fair value is less than the carrying value (of the reporting unit), there the goodwill impairment is recognized.

After ASU 2011-08, the first step of the goodwill impairment test is a qualitative test to assess if goodwill is more likely than not to be impaired. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. An entity now has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the entity determines that it is more likely than not that goodwill is impaired, then the Goodwill impairment test proceeds under the former two step process discussed above.

Form 5500 Resources

In preparation of the upcoming Form 5500 (extended) filing deadline here are some links that may be useful:

United States Department of Labor (DOL): current and past Form 5500 and Schedules (1995 through current)

United States Department of Labor (DOL): 2010 Form 5500 Instructions

Internal Revenue Service (IRS): Form 5500 Corner

Internal Revenue Service (IRS): Form 5500 Filing Tips

Internal Revenue Service (IRS): Form 5500EZ


United States Department of Labor (DOL): EFAST 2 Form 5500 and Form 5500-SF Filing Tips

United States Department of Labor (DOL): Form 5500 Data Sets -- Data from Form 5500 Filings

ASC 820 (Formerly SFAS 157) Amended January 2010:

ASC 820 (formerly SFAS 157) has been significantly amended since its inception. ASU 2010-06 Improving Disclosures About Fair Value Measurements is a significant amendment effective for financial statements beginning after December 15, 2009 (except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010). 

The essence of ASC 820 remains unchanged but there are some significant changes to disclosure requirements. Per ASU 2010-06.

ASC 820 Before ASU 2010-06		ASC 820 After ASU 2010-06
Transfers into and out of Level 3 (changes in valuation technique); discussion of changes in valuation techniques		Transfers into and out of Levels 1, 2, and 3 (changes in valuation technique); also requires disclosure of the reasons for the change
For Level 3 inputs, roll forward disclosure of purchases, sales, and settlements (net)		For Level 3 inputs, roll forward disclosure presenting separately information about purchases, sales, and settlements (on a gross basis rather than net)
Level Input disclosure to be presented for each major category of assets and liabilities		Level input disclosure for each class of assets and liabilities
The inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.		For fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3), a description of the valuation technique (or multiple valuation techniques) used, such as the market approach, income approach, or the cost approach, and the inputs used determining the fair values of each class of assets or liabilities. If there has been a change in the valuation technique (for example, changing from a market approach to an income approach or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason for making it.

The above is just a summary of some of the significant differences between ASC 820 disclosure requirements before and after ASU 2010-06. I recommend a good reading of ASU 2010-06 and the current ASC 820   if your financial statements or client's financial statements will be subject to the above fair value disclosures.

ASU 2010-25 -- Reclassifies Participant Loans

Prior to 12/15/10, participant loans were classified as investments in an Employee Benefit Plan. Effective for periods ending after December 15, 2010, ASU 2010-25 Plan Accounting – Defined Contribution Pension Plans (Topic 962) amends the ASC to reclassify participant loans from investments to notes receivable from participants. Participant loans are no longer subject to ASC 820 disclosure requirements. The provisions of ASU 2010-25 are to be applied retrospectively to all prior periods presented.

Under ASU 2010-25, current year and prior year participant loans should be classified as Notes Receivable from Participants under the Receivables section of the balance sheet. Appropriate disclosure of the Notes Receivable from Participants will need to be made in the Significant Accounting Policies note disclosure. The Participant loans will no longer be included in the ASC 820 disclosures.

The change in accounting principle will require disclosure in the year the Plan adopts ASU 2010-25. See ASC 250-10-50-1 through 250-10-50-3 for the required disclosures.

Participant loans should still be reported on Form 5500 Schedule H, Line 4i - Schedule of Assets (Held At End of Year).

Timely Use of Forfeitures in an Employee Benefit Plan

Recently the Internal Revenue Service (IRS) and Department of Labor (DOL) have been focusing some much needed attention on the timely use of forfeitures in employee benefit plans. Forfeitures are typically generated when participants who have non-vested employer contributions distribute their balances; the result is an amount of employer contributions left in the plan which are no longer allocated to a specific individual. 

The use of forfeitures should be authorized in the Plan Document. Typically, forfeitures are used to pay plan expenses, reduce employer contributions, or are allocated to remaining participants accounts.

The IRS has taken the position that forfeitures must be used or allocated to participants in the year incurred. Per the Spring 2010 IRS publication Retirement News for Employers: Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participant’s accounts in accordance with a definite formula  defined in the plan.

This means that a Plan cannot carry forfeiture balances over from one year to the next. So what happens if forfeitures are maintained in the plan at year-end? For example, some plans make an employer contribution annually which is not determined until after year-end; would the plan be required to allocate forfeitures to participant accounts in lieu of reducing the post year-end employer contribution? Not necessarily.

The IRS makes it clear in the 2010 IRS publication Retirement News for Employers that the Plan will remain qualified if there are forfeitures maintained in the plan at year-end so long as:

1.    The plan document authorizes forfeitures to be used to pay plan expenses or to reduce employer contributions.

2.    There is an administrative plan/procedures in place to ensure that forfeitures will be used up promptly in the year in which they occurred or in some instances no later than the immediately succeeding plan year.

IT appears that IRS is more concerned with the plan using forfeitures within a reasonable time frame after the forfeitures occur in consideration of the overall design and operation of the plan. For example, forfeitures in a plan that makes weekly employer contributions should be $0 (or close to $0) as of year-end unless there were some forfeited accounts generated near year-end; in this case the forfeitures would need to be used promptly after year-end. However, for a plan with annual employer contributions which are determined subsequent to year-end, it would be appropriate to use the forfeitures as of year-end to reduce the subsequent employer contribution.

So, make sure that your plan is designed properly and that there are administrative procedures in place to ensure that forfeitures are used timely depending on the design and overall operation of the plan.

Quick Tip - Common Financial Formulas

Some common and some not so common formulas used in the finance:

Determining the Yield of a Discounted Security -- Discounted securities, such as United States Treasury Bills (T-bills), commercial paper, repurchase agreements, etc., do not have a stated return as other bond instruments do (i.e. a return of X%). Discounted securities are purchased at a price less than the amount the investor will receive upon maturity and thus have a rate of return built into their pricing. For example, you purchase a $1,000, 13 week T-bill for $990 and in 13 weeks you will receive $1,000. The rate of return is calculated as:

1. Formula: ([Selling Price - Purchase Price] / Purchase Price) x (365 days in a year / [days investment held]
2. Example: 
• ([$1,000  - $990] / $990) x (365 / [13 weeks * 7 days in a week])
• ($10 / $990) x (365 / 91)
• 0.01 x 4.01
• 0.0401 or 4.01% return
3. Note: Some calulcations use a 360 day year rather than a 365 day year. Typically, you should use the following:
• 365 Day Year - T-bills
• 360 Day Year - Commercial Paper and Repurchase Agreements
  

Present Value of a Bond -- This is the current value of a bond (or what you should pay for it today based on its expected return). Remember that with a bond you pay now for what you expect to receive in coupon payments over the years and a final payment of principal at the end of the bond. Also, all of the coupon payments and the final principal payment needs to be adjusted to account for inflation.

1. Formula - (assuming constant coupon payments):  
• Present Value of Bond = Present Value of Coupon Payments + Present Value of Principal Payment
• PV of Bond (Present Value of An Annuity x Coupon Payment) + (Present Value of Single Sum x Principal Payment)
  
2. Example 1 - 10% coupon bond with annual coupon payments. $1,000 par value and 3 years to maturity:
• First, determine your discount rate. 
• What is your required return? 
• Consider interest rates and returns of similar investments. 
• Let's assume average inflation of 3% per annum and that a current Certificate of Deposit with a maturity of 3 years would return 4.5%. Assuming that the bond is a high quality bond with good liquidity and no expectation of default, a return of 5% - 7% may be appropriate. Or whatever you determine the appropriate required return to be. 
• For our purposes, let's go with 7%.
  
• Now, determine the future value of your coupon payments
• First, determine present value interest factor (PVIFA). Using the discount rate determined above and the maturity of 3 years, use the standard Present Value of an Annuity Tables (can be found via Google search or in an accounting or finance textbook) to determine your PVIFA. For example find the 3 years on the left column and follow that over to 7% required return. The number is: 2.6243.
• Next, Determine your Coupon Payment
  
• Coupon Payment = quoted bond yield x par value of bond
• 10% x $1,000 = $100 per year
• Then, multiply your coupon payment by the PVIFA: 
• $100 x 2.6243 = $262.43, 
• This is the current value of the coupon payments over the three years (assuming that you require 7% return). 
• Another way to think of it is that this is the most you should pay for the future value of the coupon payments in order to return 7% on them.
• Now determine the future value of your final principal payment (par value)
  
• First determine your Present Value Interest Factor (PVIF). Using the Present Value Interest Factor tables (again, a Google search or textbook may be helpful in finding these common tables). Find the 3 on the left and follow it over to the 7%, the number is 0.8163.
• The multiply the par value (amount you will receive at maturity) by the PVIF
  
• $1,000 x 0.8163 = $816.30
• This is the amount that the final payment is worth today (assuming a 7% required return)
• Another way to think of it is that this is the most you should pay for the future value of the final bond payment in order to receive a return 7% on that amount (remember that the cash flows from the bond interest payments are calculated above).
• Now Add the Present Value of the Coupon Payments and the Present Value of the Final Payment (Par Value)
• $262.43 + $816.30 = $1,078.73
• This is the maximum amount that you should pay for this bond in order to receive a return of 7%
3. Example 2 - 10% coupon bond with semi-annual coupon payments. $1,000 par value and 3 years to maturity:
•  Interest payments may be made more frequently than annually (as in the previous example). You can use the following to adjust the above calculation accordingly. Note that I will use semi-annual payments for this example but if it is quarterly just adjust everything by 4 instead of 2.
• Adjust the above by:
1. When calculating the coupon payment divide the annual payment by the number of payments per year
• Annual coupon payments of $100 per above / 2 semi-annual payments in a year = $50 per payment
• $100 / 2 = $50
2. Multiply the required rate of return by the number of periods in the year
   
• 7% required return x 2 semi-annual payments in a year = 14%
• 7% x 2 = 14%
3. Multiply the number of periods to maturity (i.e. years) by the number of periods in the year
• For our purposes there are 2 semi-annual periods in a year, so
• 3 years x 2 = 6 periods
4. Determine the new PVIFA  using the annualized data
• For our purposes this is 6 periods at 6% per period (as determined above)
• Using the PVIFA tables noted above this yields a PVIFA of 4.917
  
5. Calculate the PVIF using the new annualized required return and number of periods
• For our purposes this is 6 periods at 6% per period (as determined above)
• Using the PVIF tables noted above this yields a PVIF of 0.7050
  

Convergence of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)

Had to cram some last minute continuing professional education (CPE), but I did get an interesting update on the status of the convergence of GAAP and IFRS.

The 2009 American Institute of Certified Public Accountants (AICPA) Conference on Securities Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) Current Developments yielded no new guidance on the time frame for the convergence of Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are aiming for a June 30, 2011 timeline with effective dates not expected prior to January 1, 2013.
Some good sites I found with information on GAAP and IFRS. Some sites have good PDF downloads as well:

• A good site by Russell Novak & Company, LLP
• A good downloadable PDF from PriceWaterhouseCoopers (PWC) 
• GAAP-IRS 
• Good PDF by Ernst & Young 
• And of Course, the American Institute of Certified Public Accountants (AICPA) has some good guidance on the International Financial Reporting Standards project(IFRS)