PWC - FS Presentation Guide - US GAAP

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Financial statement
presentation
© 2017 PwC. All rights reserved. "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited
liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity.
This content is for general information purposes only, and should not be used as a substitute for
consultation with professional advisors. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty (express or
implied) is given as to the accuracy or completeness of the information contained in this publication.
The information contained in this publication was not intended or written to be used, and cannot be
used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory
body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible
for any loss sustained by any person or entity that relies on the information contained in this
publication. Certain aspects of this publication may be superseded as new guidance or interpretations
emerge. Financial statement preparers and other users of this publication are therefore cautioned to
stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.
Portions of various FASB documents included in this work are copyrighted by the Financial
Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and are reproduced with permission.
PwC guide library
Other titles in the PwC accounting and financial reporting guide series:
□ Bankruptcies and liquidations
□ Business combinations and noncontrolling interests, global edition
□ Consolidations and equity method of accounting
□ Derivative instruments and hedging activities
□ Fair value measurements, global edition
□ Financing transactions
□ Foreign currency
□ IFRS and US GAAP: similarities and differences
□ Income taxes
□ Leases
□ Loans and investments
□ Revenue from contracts with customers, global edition
□ Stock-based compensation
□ Transfers and servicing of financial assets
□ Utilities and power companies
PwC i
Acknowledgments
The Financial statement presentation guide represents the efforts and ideas of many
individuals within PwC. The following PwC people contributed to the content or
served as technical reviewers of this publication:
Core team
Elizabeth Paul Maria Constantinou
Kassie Bauman Valerie Wieman
Catherine Benjamin
Other contributors
Jeffrey Allen Katherine Hurley
John Althoff Marc Jerusalem
Nicole Berman Lucy Lillycrop
John Bishop Chenelle Manley
Jay Brodish Charles Melko
Roberta Chmielnik Christopher May
Christopher Chung John McKeever
David Cook Kenneth Miller
Chip Currie Lauren Murphy
Lawrence Dodyk Brian Ness
Donald Doran Daghan Or
David Evans Mark Pollock
Sarah Fitch Brian Robertson
John Formica Steven Schaefer
Paul Francis Jay Seliber
Jon Franklin Cody Smith
Jim French Suzanne Stephani
Christopher Gerdau Steven Wasco
Steve Halterman Chen Wu
John F. Horan III
ii PwC
Preface
PwC is pleased to offer our Financial statement presentation guide. This guide was
last updated in October 2016. Since then, certain sections have been updated to reflect
new guidance or interpretations. See Appendix D, Summary of significant changes,
for more information.
This guide serves as a compendium of the many presentation and disclosure

requirements included in today’s accounting and SEC literature. Appropriate financial
statement presentation and disclosure is key to achieving the objectives of financial
reporting, including providing decision-useful information to investors, lenders,
creditors, and other stakeholders. This guide has been prepared to support
practitioners in the preparation of their financial statements.
How to use this guide
We highlight below certain conventions used throughout the guide and other
information regarding the guide’s contents and organization.
□ Throughout the guide, we have used shortened versions of certain terminology,

such as “net income” when referring to net income or loss, or “retained earnings”
when referring to retained earnings or deficit.
□ Most chapters in this guide focus solely on the presentation and disclosure
requirements applicable to the respective accounting topics. PwC’s recognition
and measurement guidance is contained in other PwC publications. Certain
topics, however, relate only to presentation and disclosure. As such, the chapters
are comprehensive. These chapters are Statement of cash flows, Earnings per
share, Segments, Discontinued operations, and Accounting changes.
□ Statement of cash flows requirements related to all topics are detailed in chapter
6, Statement of cash flows.
□ In general, the content refers to consolidated financial statements, with the

exception of chapter 31, Parent company financial statements.
□ Presentation and disclosure requirements unique to interim reporting are

discussed in chapter 29, Interim financial reporting. When interim and annual
presentation and disclosure requirements are the same, the content is included in
the chapter on the given topical area (for example, derivatives and hedging).
□ Questions and examples are used throughout the guide for illustrative purposes.
Practitioners should still evaluate the relevant facts and circumstances in their
situations.
PwC iii
Preface
This guide addresses financial statement presentation and disclosure related to the
core financial statements. As a result, the following areas are not addressed in this
guide:
□ Management Discussion and Analysis (MD&A)
□ Regulation S-K reporting
The presentation and disclosure guidance in this guide is applicable to reporting

entities that are going concerns. PwC’s Bankruptcies and liquidations guide addresses
the presentation and disclosure requirements applicable to entities reporting on a
liquidation basis.
This guide discusses the requirements in SEC Regulation S-X, Article 5, for
commercial and industrial companies. In most cases, the content does not include the
requirements of other Articles of Regulation S-X or other industry-specific guidance.
However, some chapters address topics relevant to reporting entities in other
industries, such as investments and derivatives.
References to US GAAP and SEC guidance
Definitions, full paragraphs, and excerpts from the FASB’s Accounting Standards
Codification or SEC guidance are clearly designated, either within quotes in the
regular text or enclosed within a shaded box. In some instances, guidance was cited
with minor editorial modification to flow in the context of the PwC Guide. The
remaining text is PwC’s original content.
SEC guidance comes in a variety of forms. Regulation S-X prescribes the form and
content of and requirements for financial statements filed with the SEC. The SEC’s
codification of Financial Reporting Policies contains extracts of Accounting Series
Releases (ASRs) and Financial Reporting Releases (FRRs) expressing the interpretive
views on accounting and disclosure matters. Certain SEC views on accounting and
auditing are also expressed in the enforcement-related ASRs and the Accounting and
Auditing Enforcement Releases (AAERs). Also, Staff Accounting Bulletins (SAB
topics) express the SEC staff’s views on certain accounting and disclosure matters.
Finally, the SEC has adopted numerous accounting and reporting positions, which are
outlined in the Financial Reporting Manual prepared by the Division of Corporation
Finance. In this guide, we may refer to SEC guidance generically, or specifically
identify the guidance underlying the requirement.
References to other chapters and sections in this guide
When relevant, the discussion includes general and specific references to other
chapters of the guide that provide additional information. References to another
chapter or particular section within a chapter are indicated by the abbreviation “FSP”
followed by the specific section number (e.g., FSP 2.3.2 refers to section 2.3.2 in
chapter 2 of this guide).
iv PwC
Preface
References to other PwC guidance
This guide provides references to other PwC guides to assist users in finding other
relevant information. References to other guides are indicated by the applicable guide
abbreviation followed by the specific chapter number. The other PwC guides referred
to in this guide, including their abbreviations, are:
□ Bankruptcies and liquidations (BLG)
□ Business combinations and noncontrolling interests, global edition (BCG)
□ Consolidation and equity method of accounting guide (CG)
□ Derivative instruments and hedging activities (DH)
□ Fair value measurements, global edition (FV)
□ Financing transactions: debt, equity and the instruments in between (FG)
□ Income taxes (TX)
□ Leases (LG)
□ Loans and investments (LI)
□ Revenue from contracts with customers, global edition (RR)
□ Stock-based compensation (SC)
□ Transfers and servicing of financial assets (TS)
□ Utilities and power companies (UP)
In addition, PwC’s Accounting and reporting manual (the ARM) provides

information about various accounting matters in US GAAP, and PwC’s SEC Volume
provides guidance on SEC registration and reporting requirements.
Copies of the other PwC guides may be obtained through CFOdirect, PwC’s
comprehensive online resource for financial executives (www.cfodirect.com), a
subscription to Inform, PwC’s online accounting and financial reporting reference tool
(www.pwcinform.com), or by contacting a PwC representative.
Accounting Trends & Techniques, published annually by the AICPA (and available on
Inform), is another source of information regarding financial reporting practices.
SEC filings may be accessed on the SEC’s website at

www.sec.gov/edgar/searchedgar/webusers.htm. To search across SEC filings, use the
full text search feature on the SEC’s website at
http://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_MainAccess.jsp. The
“Advanced Search” feature can be used to perform searches within specific companies,
form types, or industry SIC codes.
PwC v
Preface
As you craft your disclosures, you may find it helpful to locate examples of a particular
accounting treatment or footnote disclosure used by other entities in practice.
However, you should recognize that other entities may have applied materiality
judgments that influenced the necessity or extent of footnote disclosure that may not
be apparent from reading the financial statements. Searching financial statement
databases for examples should not replace detailed technical research and appropriate
professional advice on accounting matters.
Guidance date
This guide was last updated in October 2016 and considered guidance as of October
15, 2016. Since then, certain sections have been updated to reflect new guidance or
interpretations. See Appendix D, Summary of significant changes, for more
information. Additional updates may be made to keep pace with significant
developments. Users should ensure they are using the most recent edition available on
CFOdirect (www.cfodirect.com) or Inform (www.pwcinform.com).
The FASB has several active projects that may affect current presentation and
disclosure requirements. Financial statement preparers and other users of this
publication are therefore encouraged to monitor the status of these projects, and if
finalized, evaluate the effective date of the new guidance and the implications on
presentation and disclosure. In addition, those using this publication are cautioned to
stay abreast of and carefully evaluate subsequent authoritative and interpretative
guidance that is issued after this guide.
Other information
The appendices to this guide include guidance on professional literature, a listing of

technical references and abbreviations, and definitions of key terms.
*****
Presentation and disclosure is paramount to effective financial reporting. This guide

has been prepared to support you in applying the loans and investments accounting
guidance. It should be used in combination with a thorough analysis of the relevant
facts and circumstances, review of the authoritative accounting literature, and
appropriate professional and technical advice.
We hope you find the information and insights in this guide useful.
Paul Kepple
US Chief Accountant
vi PwC
Table of contents
1 General presentation and disclosure requirements
1.1 Chapter overview .................................................................................................. 1-2

1.2 General presentation and disclosure requirements for all reporting entities ... 1-2
1.2.1 Basis of presentation ............................................................................... 1-3
1.2.2 Reporting periods .................................................................................... 1-3
1.2.3 Chronological ordering of data ............................................................... 1-4
1.2.4 Disclosure of accounting policies ........................................................... 1-4
1.2.5 Use of estimates ....................................................................................... 1-5
1.3 Enhancing disclosure effectiveness ..................................................................... 1-5
2 Balance sheet
2.1 Chapter overview .................................................................................................. 2-2

2.2 Scope ..................................................................................................................... 2-2
2.2.1 Sample balance sheets – updated May 2017…………………………………… 2-2
2.3 General presentation requirements .................................................................... 2-6
2.3.1 Reporting periods .................................................................................... 2-7
2.3.2 Chronology ................................................................................................ 2-7
2.3.3 Individually significant account balances ................................................ 2-7
2.3.4 Classified balance sheet ............................................................................ 2-8
2.3.4.1 Operating cycle ............................................................................ 2-8
2.4 Balance sheet offsetting ........................................................................................ 2-11
2.5 Noncontrolling interests ....................................................................................... 2-12
2.6 Considerations for private companies .................................................................. 2-12
3 Income statement
3.1 Chapter overview................................................................................................. 3-2

3.2 Scope .................................................................................................................... 3-2
3.3 Format of the income statement ........................................................................ 3-3
3.3.1 Sample income statement ................................................................... 3-3
3.4 General presentation and disclosure requirements .......................................... 3-6
3.4.1 Reporting periods ................................................................................ 3-6
3.4.2 Thresholds for presenting separate revenue categories and related
costs ...................................................................................................... 3-7
3.5 Sales and revenues .............................................................................................. 3-8
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3.5.1 Revenues versus gains ......................................................................... 3-9

3.5.2 Income from litigation settlements..................................................... 3-11
3.5.3 Gross versus net revenue presentation ............................................... 3-11
3.5.4 Shipping and handling fees and costs................................................. 3-12
3.5.5 Out-of-pocket reimbursements ........................................................... 3-13
3.5.6 Taxes collected from customers and remitted to governmental
authorities ............................................................................................ 3-13
3.5.7 Sales incentives .................................................................................... 3-13
3.5.8 Negative revenue and upfront payments to customers ..................... 3-14
3.5.9 Multiple-deliverable arrangements .................................................... 3-15
3.5.10 Sales returns and exchanges ............................................................... 3-17
3.5.11 Milestone method of revenue recognition .......................................... 3-17
3.5.12 Advertising barter transactions........................................................... 3-18
3.5.13 Other nonmonetary transactions ........................................................ 3-18
3.5.14 Construction and production-type contracts ..................................... 3-19
3.5.15 Research and development arrangements ......................................... 3-20
3.6 Cost of sales ......................................................................................................... 3-20
3.7 Operating expenses ............................................................................................. 3-21
3.7.1 Advertising expense ............................................................................. 3-21
3.7.2 Provision for doubtful accounts and notes ......................................... 3-22
3.7.2.1 Presentation …………………………………………………….......... 3-22
3.7.2.2 Disclosure ……………………………………………………………….. 3-23
3.7.3 Depreciation and amortization of long-lived assets .......................... 3-23
3.7.4 Impairment of long-lived assets.......................................................... 3-25
3.7.5 Research and development expense ................................................... 3-25
3.7.5.1 Collaborative arrangements ............................................... 3-25
3.7.6 Restructuring expense ......................................................................... 3-26
3.7.7 Amortization of intangibles and impairment of goodwill ................. 3-26
3.7.8 Gains or losses on involuntary conversions ....................................... 3-27
3.7.9 Foreign currency transaction gains/losses ......................................... 3-27
3.7.10 Other general expenses ........................................................................ 3-27
3.7.10.1 Gains or losses from sale of long-lived assets ................... 3-27
3.7.11 Unusual or infrequently occurring items ........................................... 3-27
3.8 Non-operating income and expenses ................................................................. 3-28
3.8.1 Non-operating income ......................................................................... 3-28
3.8.2 Non-operating expenses ...................................................................... 3-28
3.8.3 Interest expense and amortization of debt discount ......................... 3-29
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3.8.4 Gains or losses on sales of businesses ................................................ 3-29

3.8.5 Government grants .............................................................................. 3-29
3.9 Other presentation requirements....................................................................... 3-29
3.9.1 Income or loss before income tax expense ......................................... 3-30
3.9.2 Income tax expense.............................................................................. 3-30
3.9.3 Equity in earnings of unconsolidated entities .................................... 3-30
3.9.4 Income or loss from continuing operations ....................................... 3-30
3.9.5 Discontinued operations ..................................................................... 3-30
3.9.6 Income or loss before cumulative effects of changes
in accounting principles ...................................................................... 3-30
3.9.7 Cumulative effects of changes in accounting principles .................... 3-30
3.9.8 Net income or net loss ......................................................................... 3-30
3.9.9 Net income attributable to noncontrolling interests ......................... 3-31
3.9.10 Earnings per share data ....................................................................... 3-31
3.10 Allocation of expenses to subsidiaries or carve-out entities ............................. 3-31
3.10.1 Presentation considerations ................................................................ 3-32
3.10.2 Disclosure considerations ................................................................... 3-34
3.11 Considerations for private companies ............................................................... 3-35
4 Reporting comprehensive income
4.1 Chapter overview ................................................................................................ 4-2

4.2 Scope .................................................................................................................... 4-2
4.3 Components of comprehensive income ............................................................. 4-2
4.3.1 Displaying the tax effects of OCI components ..................................... 4-3
4.3.2 New guidance ......................................................................................... 4-3
4.4 Presenting comprehensive income .................................................................... 4-4
4.4.1 Presenting comprehensive income attributable to
noncontrolling interest .......................................................................... 4-5
4.4.2 Sample single statement of comprehensive income ............................ 4-5
4.4.3 Sample statement of comprehensive income (that follows
the income statement) ........................................................................... 4-7
4.5 Accumulated other comprehensive income and reclassification
adjustments ......................................................................................................... 4-9
4.5.1 Types of reclassification adjustments ................................................. 4-9
4.5.2 Presenting reclassification adjustments ............................................. 4-10
4.5.2.1 Example — insurance industry ............................................ 4-12
4.5.3 Presenting reclassifications parenthetically on the face of the
financial statements ............................................................................. 4-12
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4.5.3.1 Sample disclosure — reclassification adjustments in

AOCI included in statement of income ............................... 4-13
4.5.4 Presenting reclassifications in a footnote .......................................... 4-14
4.5.4.1 Sample disclosure – Footnote displaying changes in
AOCI ..................................................................................... 4-15
4.5.5 Presenting reclassifications attributable to noncontrolling
interest ................................................................................................. 4-17
4.5.6 Income tax considerations for reporting reclassifications out of
AOCI .................................................................................................... 4-17
4.6 OCI in spin-off transactions ............................................................................... 4-18
4.7 Considerations for private companies .............................................................. 4-19
5 Stockholders’ equity
5.1 Chapter overview ................................................................................................. 5-2

5.2 Scope .................................................................................................................... 5-2
5.3 Presentation of changes in stockholders’ equity ............................................... 5-3
5.3.1 Noncontrolling interest........................................................................... 5-4
5.4 Disclosures for all classes of securities ............................................................... 5-5
5.5 Common stock ..................................................................................................... 5-5
5.5.1 Balance sheet presentation ..................................................................... 5-5
5.5.2 Disclosure ................................................................................................ 5-6
5.6 Preferred stock .................................................................................................... 5-6
5.6.1 Disclosure ................................................................................................ 5-6
5.6.2 Perpetual preferred stock (no redemption) ........................................... 5-7
5.6.2.1 Balance sheet presentation ...................................................... 5-7
5.6.3 Redeemable preferred stock ................................................................... 5-7
5.6.3.2 Disclosure .................................................................................. 5-9
5.6.4 Convertible preferred stock .................................................................... 5-11
5.6.4.2 Disclosure .................................................................................. 5-11
5.6.4.3 Contingently convertible preferred stock — with related
derivatives ................................................................................. 5-12
5.6.4.4 Discount on contingently convertible preferred stock ........... 5-12
5.7 Retained earnings ............................................................................................... 5-12
5.7.1 Restrictions on retained earnings .......................................................... 5-13
5.7.1.1 Restrictions on retained earnings in loan agreements ........... 5-13
5.7.1.2 Subsidiary restrictions on retained earnings .......................... 5-14
5.7.2 Appropriations on retained earnings ..................................................... 5-14
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5.8 Treasury stock ..................................................................................................... 5-15

5.8.1 Balance sheet presentation ..................................................................... 5-15
5.8.2 Disclosure ................................................................................................ 5-15
5.8.3 Presentation of a subsidiary investment in a parent ............................. 5-15
5.9 Additional paid-in capital ................................................................................... 5-16
5.9.1 Notes received for common stock — updated May 2017 ...................... 5-16
5.10 Dividends ............................................................................................................. 5-17
5.10.1 Stock dividends ..................................................................................... 5-17
5.10.1.1 Stock dividend declared but not paid ................................. 5-18
5.10.2 Unpaid dividends ................................................................................. 5-19
5.10.3 Liquidating dividends .......................................................................... 5-19
5.10.4 Stockholders' rights plans ("poison pill" takeover defenses)…………. 5-19
5.10.4.1 Earnings capitalized in prior years ..................................... 5-19
5.10.4.2 Fractional shares .................................................................. 5-20
5.11 Stock splits ........................................................................................................... 5-20
5.11.1 Differentiation between stock dividends and stock splits .................. 5-20
5.12 Balance sheet restatement – stock dividend and stock split ............................ 5-20
5.13 Change in capitalization at or prior to closing of an IPO .................................. 5-21
6 Statement of cash flows

6.2 Scope .................................................................................................................... 6-2
6.3 Cash basis method of reporting .......................................................................... 6-6
6.4 Format of the statement of cash flows ............................................................... 6-7
6.4.1 Sample statement of cash flows – updated May 2017 ....................... 6-7
6.4.2 Direct versus indirect method ............................................................ 6-10
6.5 Cash, cash equivalents, and restricted cash – updated May 2017 ................... 6-12
6.5.1 Definition of cash equivalents.............................................................. 6-13
6.5.2 Accounting policy defining cash equivalents ...................................... 6-14
6.5.3 Bank overdrafts..................................................................................... 6-14
6.5.4 Book overdrafts ..................................................................................... 6-15
6.5.5 Checks written but not released........................................................... 6-16
6.5.6 Compensating balances ........................................................................ 6-16
6.5.7 Restricted cash ...................................................................................... 6-17
6.5.7.1 Definition………………………………………………………………..... 6-17
6.5.7.2 Presentation – balance sheet……………………………………….. 6-18
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6.5.7.3 Presentation – statement of cash flows…………………………. 6-18

6.5.7.4 Disclosure………………………………………………………………….. 6-20
6.5.8 Auction rate securities and variable rate demand notes .................... 6-21
6.5.9 Money market funds ............................................................................ 6-21
6.5.10 Balances created at subsidiaries by centralized treasury functions .. 6-22
6.6 Gross and net cash flows ..................................................................................... 6-23
6.7 Classification of cash flows ................................................................................. 6-24
6.7.1 Investing activities ............................................................................... 6-24
6.7.1.1 Property, plant, and equipment and leasehold
improvements ..................................................................... 6-25
6.7.1.2 Business combinations ....................................................... 6-26
6.7.1.3 Investment securities and securities measured under the
fair value option – updated May 2017 ............................... 6-29
6.7.1.4 Contributions and advances to joint ventures .................. 6-30
6.7.1.5 Derivatives – updated May 2017 ....................................... 6-30
6.7.1.6 Proceeds received from the settlement of insurance
claims................................................................................... 6-34
6.7.1.7 Corporate-owned and bank-owned life insurance ............ 6-34
6.7.2 Financing activities ............................................................................... 6-34
6.7.2.1 Discounts and premiums on
debt securities – updated May 2017 .................................. 6-35
6.7.2.2 Debt extinguishment costs ................................................. 6-38
6.7.2.3 Debt restructurings accounted for under ASC 470-50 ..... 6-38
6.7.2.4 Floor plan financing programs .......................................... 6-39
6.7.2.5 Structured payables ............................................................ 6-40
6.7.2.6 Liabilities settled through paying agents .......................... 6-40
6.7.2.7 Stock compensation ............................................................ 6-40
6.7.2.8 Cash flows related to noncontrolling interests……………… 6-42
6.7.2.9 Derivative transactions that contain a financing
element……………………………………………………………………. 6-42
6.7.3 Operating activities .............................................................................. 6-44
6.7.3.1 Planned major maintenance .............................................. 6-45
6.7.3.2 Distributions received from equity method investees ...... 6-45
6.7.3.3 Transfers of trade receivables with holdbacks or
deferred purchase price structures .................................... 6-48
6.7.4 Cash flows with aspects of more than one class ................................. 6-49
6.8 Discontinued operations ..................................................................................... 6-52
6.9 Foreign currency cash flows ............................................................................... 6-54
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Preparing the statement of cash flows for a reporting entity with

6.9.1 foreign operations ................................................................................ 6-54
6.10 Noncash investing and financing activities ....................................................... 6-59
6.10.1 Constructive receipts and disbursements ........................................... 6-60
6.10.2 Examples of noncash investing and financing activities ................... 6-60
6.11 Considerations for private companies – updated May 2017 ............................ 6-61
7 Earnings per share (EPS)

7.2 Scope .................................................................................................................... 7-2
7.3 Types of EPS computations ................................................................................ 7-2
7.3.1 Basic EPS .............................................................................................. 7-3
7.3.2 Diluted EPS .......................................................................................... 7-4
7.3.3 Presentation of basic and diluted EPS ................................................ 7-4
7.3.3.1 Other per-share performance measures ............................ 7-5
7.3.4 Disclosure related to EPS .................................................................... 7-5
7.4 Basic EPS ............................................................................................................. 7-6
7.4.1 Numerator ............................................................................................ 7-6
7.4.1.1 Adjustments for cumulative undeclared dividends .......... 7-7
7.4.1.2 Adjustments for accretion/decretion of equity ................. 7-8
7.4.1.3 Adjustments for redemption or induced conversion of
preferred stock .................................................................... 7-10
7.4.1.4 Adjustments related to beneficial conversion features ..... 7-13
7.4.2 Participating securities and the two-class method ............................ 7-13
7.4.2.1 Overview of the two-class method ..................................... 7-14
7.4.2.2 Allocating undistributed earnings to participating
securities .............................................................................. 7-15
7.4.2.3 Allocating losses to participating securities ...................... 7-17
7.4.2.4 Allocating earnings to participating securities when
there is income from continuing operations and an
overall net loss, or loss from continuing operations and
overall net income ............................................................... 7-20
7.4.2.5 Other securities which may be considered participating.. 7-21
7.4.2.6 Targeted stock ..................................................................... 7-24
7.4.3 Denominator ........................................................................................ 7-25
7.4.3.1 Contingent shares ............................................................... 7-26
7.4.3.2 Mandatorily convertible instruments ................................ 7-27
7.4.3.3 Prepaid variable share forwards ........................................ 7-27
7.4.3.4 Restricted stock-based compensation awards .................. 7-28
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7.4.3.5 Employee stock options ...................................................... 7-28

7.4.3.6 Mandatorily redeemable common stock and common
stock subject to forward purchase contracts requiring
physical settlement ............................................................. 7-28
7.4.3.7 Share lending agreements .................................................. 7-29
7.4.3.8 Employee stock purchase plans (ESPPs) ........................... 7-29
7.4.3.9 Penny warrants ................................................................... 7-30
7.5 Diluted EPS .......................................................................................................... 7-30
7.5.1 Anti-dilution and sequencing – the control number concept ........... 7-31
7.5.2 Participating securities ........................................................................ 7-32
7.5.3 Contingently issuable shares ............................................................... 7-32
7.5.4 Methods of incorporating potentially dilutive securities
in diluted EPS ....................................................................................... 7-35
7.5.5 Treasury stock method ....................................................................... 7-35
7.5.5.1 Written options and warrants ............................................ 7-36
7.5.5.2 Purchased options ............................................................... 7-37
7.5.5.3 Options or warrants to purchase convertible securities ... 7-38
7.5.5.4 Unit structures .................................................................... 7-38
7.5.5.5 Stock-based compensation under the treasury stock
method – before adoption of ASU 2016-09 ...................... 7-39
7.5.5.6 New guidance – stock-based compensation under the
treasury stock method ........................................................ 7-54
7.5.5.7 Market prices used in the treasury stock method ............. 7-55
7.5.5.8 Year-to-date computations in the treasury stock
method ................................................................................. 7-56
7.5.5.9 Modifications to use of the treasury stock method ........... 7-56
7.5.6 If-converted method for convertible securities .................................. 7-58
7.5.6.1 Treatment of capitalized interest on convertible debt ...... 7-63
7.5.6.2 Impact of partial redemption or conversion on diluted
EPS ....................................................................................... 7-64
7.5.6.3 Convertible debt with a cash conversion feature .............. 7-65
7.5.6.4 Contingently convertible instruments ............................... 7-66
7.5.7 Other arrangements potentially impacting diluted EPS ................... 7-68
7.5.7.1 Instruments settleable in cash or shares or classified as
liabilities but potentially settleable in shares .................... 7-68
7.5.7.2 Securities of subsidiaries and of other investees ............... 7-72
7.5.7.3 Escrow share arrangements ............................................... 7-72
7.5.8 Illustrative computation of diluted EPS ............................................. 7-73
7.5.9 Diluted EPS under the two-class method (as proposed in an
exposure draft of FAS 128) .................................................................. 7-76
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7.6 Change in capital structure ................................................................................. 7-79

7.6.1 Stock splits/reverse stock splits/stock dividends .............................. 7-79
7.6.2 Securities issued for nominal consideration ...................................... 7-80
7.6.3 Stock rights plans ................................................................................. 7-81
7.6.4 Distributions to stockholders with components of
stock and cash ...................................................................................... 7-81
7.6.5 IPO or spin-off of a subsidiary and recapitalizations ........................ 7-81
7.6.6 Computing EPS when dividends are paid from the
proceeds of an IPO ............................................................................... 7-83
7.6.7 Partially paid shares and partially paid stock subscriptions ............. 7-84
7.6.8 Bankruptcy ........................................................................................... 7-84
7.6.9 Computing EPS when changing from S-corp to C-corp,
partnership to C-corp, or LLC to C-corp ............................................ 7-84
7.7 EPS in prior period adjustments ........................................................................ 7-84
8 Other assets
8.1 Chapter overview................................................................................................. 8-2

8.2 Scope .................................................................................................................... 8-2
8.3 Receivables .......................................................................................................... 8-3
8.3.1 Accounts and notes receivable and financing receivables ................. 8-3
8.3.1.1 Presentation requirements .................................................. 8-4
8.3.1.2 Disclosure requirements ...................................................... 8-4
8.3.2 Shareholder and other receivables ..................................................... 8-12
8.3.3 Discounts or premiums on note receivables ...................................... 8-12
8.3.4 Loan origination and other fees .......................................................... 8-13
8.3.4.1 Net fees and costs ................................................................. 8-13
8.3.5 Hypothecation or other pledging of receivables ................................ 8-14
8.4 Inventory ............................................................................................................. 8-14
8.4.1 General presentation requirements .................................................... 8-14
8.4.2 General disclosure requirements ........................................................ 8-14
8.4.3 Last-in, first-out (LIFO) inventories ................................................... 8-16
8.4.3.1 LIFO used for a portion of inventories ................................ 8-16
8.4.4 Change in inventory costing method .................................................. 8-16
8.5 Prepaid assets and other current and noncurrent assets .................................. 8-17
8.5.1 Prepaid and other current assets ........................................................ 8-17
8.5.2 Foreclosed or repossessed assets ........................................................ 8-17
8.5.3 Other assets – noncurrent ................................................................... 8-17
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8.5.4 Deferred costs – capitalized advertising costs ................................... 8-17

8.6 Property, plant, and equipment ......................................................................... 8-18
8.6.1 Long-lived assets classified as held and used ..................................... 8-18
8.6.1.1 Impairment ........................................................................... 8-18
8.6.1.2 Disposal gain or losses ......................................................... 8-19
8.6.2 Long-lived assets to be disposed of other than by sale ...................... 8-19
8.6.3 Leases ................................................................................................... 8-19
8.7 Held for sale......................................................................................................... 8-19
8.7.1 Assets (disposal group) sold or classified as held for sale ................. 8-20
8.7.2 Change to a plan of sale ....................................................................... 8-21
8.7.3 Newly acquired asset classified as held for sale ................................. 8-22
8.8 Intangible assets subject to amortization .......................................................... 8-22
8.8.1 Post-acquisition disclosures.................................................................. 8-22
8.8.1.1 Research and development assets ....................................... 8-23
8.8.1.2 Estimate of useful life ........................................................... 8-23
8.8.2 Impairment losses ................................................................................. 8-23
8.9 Intangible assets not subject to amortization and goodwill ............................. 8-23
8.9.1 Intangible assets not subject to amortization ...................................... 8-24
8.9.1.1 Impairment of intangible assets not subject to
amortization .......................................................................... 8-24
8.9.1.2 Renewal or extension of an intangible asset’s legal or
contractual life ..................................................................... 8-24
8.9.2 Goodwill ................................................................................................. 8-24
8.9.2.1 Goodwill reconciliation ........................................................ 8-25
8.9.2.2 Goodwill impairment ........................................................... 8-26
8.9.2.3 New guidance ........................................................................ 8-26
8.10 Long-term contracts............................................................................................ 8-27
8.10.1 Contract receivables ............................................................................ 8-27
8.10.2 Contract costs ...................................................................................... 8-29
8.10.3 Other disclosures related to long-term contracts .............................. 8-30
8.11.1 Indefinite-lived intangible assets ....................................................... 8-31
8.11.2 Goodwill ............................................................................................... 8-31
8.11.2.1 Impairment loss .................................................................. 8-32
8.11.2.2 Intangible assets subsumed into goodwill ........................ 8-32
8.11.3 SEC requirements not applicable to private companies ................... 8-33
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9 Investments — debt and equity securities

9.2 Scope .................................................................................................................... 9-2
9.3 Overview of classification guidance ................................................................... 9-3
9.4 Balance sheet presentation ................................................................................. 9-5
9.4.1 Current and noncurrent classification .............................................. 9-6
9.4.2 Deferred tax balances ......................................................................... 9-6
9.5 Income statement presentation ......................................................................... 9-7
9.5.1 Other-than-temporary impairments — income statement .............. 9-7
9.5.2 Other-than-temporary impairments — within OCI ........................ 9-7
9.6 Disclosure – investments at fair value .............................................................. 9-11
9.6.1 Major security types .......................................................................... 9-11
9.6.2 Disclosures for securities classified as AFS ..................................... 9-12
9.6.3 Disclosures for securities classified as HTM ................................... 9-13
9.6.4 Disclosures for AFS and HTM securities classified by
maturity date ...................................................................................... 9-14
9.6.5 Disclosure of impairments of securities ........................................... 9-15
9.6.5.1 Investments in an unrealized loss position –
quantitative disclosures ..................................................... 9-15
9.6.5.2 Investments in an unrealized loss position – qualitative
disclosures .......................................................................... 9-16
9.6.5.3 Credit losses recognized in net income ............................. 9-17
9.6.6 Reclassifications out of AOCI for AFS securities ............................. 9-19
9.6.7 Sales, transfers, and related matters ................................................ 9-20
9.6.8 Options that do not qualify for derivative accounting .................... 9-22
9.6.9 Beneficial interests in securitized financial assets .......................... 9-22
9.7 Disclosure – cost method investments ............................................................. 9-22
10 Equity method investments

10.2 Scope ................................................................................................................... 10-2
10.3 Balance sheet presentation ................................................................................ 10-3
10.4 Income statement presentation ......................................................................... 10-4
10.4.1 Presentation alternatives .................................................................. 10-4
10.4.1.1 Royalties, technical fees, interest, and dividends on
advances and senior securities ...................................... 10-7
10.4.1.2 Full or partial sale of equity method investment.......... 10-7
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10.4.1.3 Other-than-temporary impairment .............................. 10-7

10.4.1.4 Difference between investor cost and underlying
equity in net assets of investee ...................................... 10-8
10.4.1.5 Intercompany profits on transactions between
investor and investee...................................................... 10-8
10.4.1.6 Private company accounting alternatives adopted by
investee ........................................................................... 10-8
10.4.1.7 Discontinued operations reported by an investee ........ 10-8
10.4.1.8 Low income housing tax credit partnerships ............... 10-8
10.4.1.9 Proportionate consolidation .......................................... 10-9
10.4.2 Investee accounting changes ............................................................. 10-9
10.4.3 Investment becomes qualified for the equity method – current
guidance ............................................................................................. 10-10
10.4.3.1 Investment becomes qualified for the equity method
– new guidance ............................................................... 10-10
10.4.4 Investment no longer qualifies for the equity method ..................... 10-11
10.4.5 Change from a controlling interest to a noncontrolling investment
accounted for under the equity method ............................................ 10-11
10.5 Statement of other comprehensive income ...................................................... 10-11
10.5.1 Equity method – foreign operations ................................................ 10-13
10.6 Disclosures .......................................................................................................... 10-13
10.6.1 Summarized financial information of equity method investees –
annual SEC disclosure requirements ................................................ 10-16
10.6.2 Summarized financial information of equity method investees –
interim SEC disclosure requirements ............................................... 10-17
10.7.1 Private company accounting alternatives ........................................ 10-18
11 Other liabilities

11.2 Scope .................................................................................................................... 11-2
11.3 Accounts and notes payable ................................................................................ 11-3
11.3.1 Trade creditors ................................................................................... 11-3
11.3.1.1 Overdrafts (bank & book) .............................................. 11-3
11.3.1.2 Classification of outstanding checks ............................. 11-4
11.3.1.3 Checks written but not released .................................... 11-4
11.3.1.4 Drafts payable ................................................................ 11-4
11.3.1.5 Structured payables ....................................................... 11-5
11.3.1.6 Liabilities settled through paying agents ..................... 11-8
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11.3.2 Borrowings from financial institutions or holders of commercial

paper ................................................................................................... 11-9
11.3.3 Related parties .................................................................................... 11-10
11.3.4 Underwriters, promoters, and employees ........................................ 11-10
11.3.5 Accounts or notes payable to other parties ....................................... 11-11
11.4 Accruals and other liabilities .............................................................................. 11-11
11.4.1 Dividends payable .............................................................................. 11-11
11.4.2 Income taxes ....................................................................................... 11-11
11.4.3 Employee benefits .............................................................................. 11-11
11.4.3.1 Compensated absences .................................................. 11-11
11.4.3.2 Rabbi trusts .................................................................... 11-12
11.4.4 Restructuring ...................................................................................... 11-13
11.4.4.1 Presentation and disclosure related to exit or disposal
cost obligations .............................................................. 11-13
11.4.4.2 Income statement presentation considerations
related to exit or disposal cost obligations ................... 11-15
11.4.5 Warranty ............................................................................................. 11-16
11.4.6 Unconditional promises to give ......................................................... 11-18
11.5 Environmental accruals ...................................................................................... 11-18
11.5.1 Presentation considerations .............................................................. 11-18
11.5.2 Required disclosures .......................................................................... 11-19
11.5.3 Additional disclosure considerations — encouraged but not
required............................................................................................... 11-19
11.5.4 SEC reporting considerations ............................................................ 11-20
11.5.5 Environmental policy note ................................................................ 11-22
11.6 Asset retirement obligations ............................................................................... 11-23
11.6.1 Disclosure requirements .................................................................... 11-23
11.7 Deferred revenue ................................................................................................. 11-23
11.7.1 New guidance — Breakage for certain prepaid stored-value
products .............................................................................................. 11-24
11.8 Liabilities held for sale ........................................................................................ 11-24
12 Debt
12.1 Chapter overview ............................................................................................... 12-2

12.2 Scope .................................................................................................................. 12-2
12.3 Balance sheet classification — term debt ......................................................... 12-2
12.3.1 Callable debt .................................................................................. 12-3
12.3.2 Puttable debt ................................................................................. 12-4
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12.3.2.1 Due-on-demand loan agreements .............................. 12-4

12.3.2.2 Subjective acceleration clauses ................................... 12-4
12.3.2.3 Contingently puttable debt .......................................... 12-6
12.3.3 Classification of debt with a covenant violation .......................... 12-6
12.3.3.1 Covenant violation at the balance sheet date with no
waiver obtained ........................................................... 12-7
12.3.3.2 Covenant violation at the balance sheet date with no
waiver obtained and a grace period ........................... 12-7
12.3.3.3 Covenant violation and waiver or modification at
the balance sheet date ................................................. 12-7
12.3.3.4 Covenant violation avoided at the balance sheet date
through a loan modification ....................................... 12-9
12.3.3.5 Covenant violation occurring or anticipated after the
balance sheet date ....................................................... 12-10
12.3.4 Refinancing short-term debt ....................................................... 12-11
12.3.4.1 Using financing agreements that contain subjective
acceleration clauses to evidence an ability to
refinance short-term debt on a long term basis ........ 12-11
12.3.4.2 Use of working capital refinance debt ........................ 12-14
12.3.4.3 Inability to refinance short-term debt with a
commitment from a parent company ........................ 12-14
12.3.4.4 Refinancing with successive short-term
borrowings ................................................................... 12-14
12.4 Balance sheet classification – revolving debt agreements ............................. 12-15
12.4.1 Revolving debt requiring execution of a note for each
borrowing ...................................................................................... 12-15
12.4.2 Revolving debt that specifies a borrowing base .......................... 12-16
12.4.3 Revolving debt subject to lockbox arrangements and
subjective acceleration clauses ..................................................... 12-17
12.4.4 Revolving debt related to long-term projects .............................. 12-18
12.4.5 Increasing rate debt ...................................................................... 12-18
12.5 Balance sheet classification — paid-in-kind notes........................................... 12-19
12.6 Balance sheet classification — liquidity facility arrangements for variable
rate demand loans ............................................................................................. 12-20
12.7 Balance sheet classification — debt with a cash conversion feature ............... 12-22
12.8 Balance sheet classification — debt discounts and premiums ........................ 12-24
12.8.1 Impact of covenant violations at the balance sheet date on
classification of debt discount or premium ................................. 12-25
12.9 Balance sheet classification — debt issuance costs .......................................... 12-25
12.9.1 Commitment fees associated with revolving lines of credit ....... 12-25
12.10 Balance sheet classification — other ................................................................. 12-26
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12.10.1 Subsidiary’s debt when fiscal year differs from parent ............... 12-26
12.10.2 Debt restructuring ......................................................................... 12-26
12.10.3 Structured payables ...................................................................... 12-26
12.11 Income statement classification ....................................................................... 12-27
12.11.1 Debt extinguishment gains and losses ......................................... 12-27
12.11.2 Income statement classification related to modifications or
exchanges on a revolving debt agreement ................................... 12-27
12.11.3 Participating mortgage loans ....................................................... 12-27
12.11.4 Classification of expenses related to debt with conversion
feature ............................................................................................ 12-28
12.11.5 Restructuring debt with related parties ....................................... 12-28
12.12 Disclosure ........................................................................................................... 12-28
12.12.1 Long-term debt ............................................................................. 12-28
12.12.2 Short-term debt ............................................................................. 12-30
12.12.3 Collateral ....................................................................................... 12-30
12.12.4 Participating mortgage loans ....................................................... 12-31
12.12.5 Own-share lending arrangements (in contemplation of
convertible debt issuance) ............................................................ 12-31
12.12.6 Debt with cash conversion features ............................................. 12-32
12.12.7 Troubled debt restructurings ....................................................... 12-33
12.12.8 Revolving debt related to long-term projects .............................. 12-34
12.13 Guarantees of a reporting entity’s debt by others ............................................ 12-34
12.13.1 Issuers of guaranteed securities ................................................... 12-34
12.13.2 Preparing condensed consolidating financial information ........ 12-34
12.13.2.1 Form and content of condensed consolidating
financial information ................................................... 12-34
12.14 Registration rights arrangements ..................................................................... 12-36
13 Pensions and other postemployment benefits

13.2 Scope .................................................................................................................. 13-2
13.3 Defined benefit plans ........................................................................................ 13-3
13.3.1 Balance sheet presentation ................................................................ 13-3
13.3.1.1 Funded status presentation .............................................. 13-3
13.3.1.2 Balance sheet classification .............................................. 13-4
13.3.2 Income statement presentation – before adoption of ASU
2017-07 – updated May 2017 ............................................................ 13-4
13.3.2.1 Capitalizing costs – before adoption of ASU 2017-07 ..... 13-5
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13.3.3 Income statement presentation – after adoption of

ASU 2017-07 – added May 2017………………………………………………. 13-5
13.3.3.1 Capitalizing costs – after adoption of ASU 2017-07 ....... 13-7
13.3.4 Statement of stockholders' equity presentation ............................... 13-7
13.3.4.1 Gains and losses ................................................................ 13-8
13.3.4.2 Prior service cost ............................................................... 13-8
13.3.4.3 Foreign pension and OPEB plans..................................... 13-8
13.3.5 Disclosure ........................................................................................... 13-9
13.3.5.1 Description of the plans ..................................................... 13-9
13.3.5.2 Amounts recognized on the balance sheet and funded
status ................................................................................... 13-10
13.3.5.3 Reconciliation of the benefit obligation and the fair
value of plan assets ………………………………………………….. 13-10
13.3.5.4 Plan assets ……………………………………………………………… 13-11
13.3.5.5 Net periodic benefit cost and other comprehensive
income …………………………………………………………………… 13-19
13.3.5.6 Expected cash flows of the reporting entity and the
plan ……………………………………………………………………….. 13-20
13.3.5.7 Assumptions …………………………………………………………… 13-20
13.3.5.8 Certain disclosures for postretirement healthcare
plans ……………………………………………………………………… 13-21
13.3.5.9 Significant events ……………………………………………………. 13-22
13.3.5.10 Other disclosures …………………………………………………….. 13-23
13.3.6 Reporting entities with two or more plans ………………………………… 13-24
13.3.6.1 Aggregate benefit obligation in excess of
plan assets………………………………………………………………. 13-24
13.3.6.2 US and international plans ………………………………………. 13-24
13.3.7 Subsidiaries participating in parent company plans ………………….. 13-24
13.4 Defined contribution plans ............................................................................... 13-25
13.4.1 General disclosure .............................................................................. 13-25
13.4.2 Hybrid plans ....................................................................................... 13-25
13.5 Multiemployer plans ......................................................................................... 13-25
13.5.1 Multiemployer pension plans ............................................................ 13-25
13.5.2 Multiemployer other postretirement plans ...................................... 13-27
13.5.3 Withdrawal or increase in contribution level is probable or
reasonably possible ............................................................................ 13-27
13.6 Nonretirement postemployment benefits ........................................................ 13-27
13.6.1 Termination benefits .......................................................................... 13-28
13.6.2 Other postemployment benefits ........................................................ 13-28
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14 Leases

14.2 Scope .................................................................................................................. 14-2
14.3 Lessees................................................................................................................ 14-2
14.3.1 General disclosure requirements ..................................................... 14-2
14.3.2 Operating leases ............................................................................... 14-3
14.3.2.1 Presentation ................................................................... 14-3
14.3.2.2 Disclosure ....................................................................... 14-3
14.3.3 Capital leases .................................................................................... 14-5
14.3.3.1 Presentation ................................................................... 14-5
14.3.3.2 Disclosure ....................................................................... 14-5
14.3.4 Sale-leaseback transactions ............................................................. 14-6
14.3.4.1 Presentation ................................................................... 14-6
14.3.4.2 Presentation of “failed” sale-leasebacks ....................... 14-7
14.3.4.3 Disclosure of “failed” sale-leasebacks ........................... 14-7
14.3.5 Subleases ........................................................................................... 14-7
14.4 Lessors ................................................................................................................ 14-8
14.4.1 General disclosure requirements ..................................................... 14-8
14.4.2 Operating leases ............................................................................... 14-8
14.4.2.1 Presentation ................................................................... 14-8
14.4.2.2 Disclosure ....................................................................... 14-8
14.4.3 Sales-type leases and direct financing leases .................................. 14-9
14.4.3.1 Presentation ................................................................... 14-9
14.4.3.2 Disclosure ....................................................................... 14-10
14.4.4 Leveraged leases ............................................................................... 14-10
14.4.4.1 Presentation ................................................................... 14-10
14.4.4.2 Disclosure ....................................................................... 14-12
15 Stock-based compensation

15.2 Scope .................................................................................................................. 15-2
15.3 Presentation ....................................................................................................... 15-2
15.3.1 Balance sheet .................................................................................... 15-2
15.3.1.1 Short-term versus long-term classification ……........... 15-3
15.3.2 Income statement ............................................................................. 15-3
15.3.2.1 Capitalized compensation cost ...................................... 15-4
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15.3.3 Temporary (mezzanine) equity ........................................................ 15-5

15.4 Disclosure........................................................................................................... 15-5
15.4.1 Description of awards and methods ................................................ 15-6
15.4.2 Option and similar awards ............................................................... 15-6
15.4.3 Other awards..................................................................................... 15-8
15.4.4 Fair value disclosure ......................................................................... 15-8
15.4.4.1 Expected term assumption ............................................ 15-9
15.4.4.2 Expected volatility assumption ..................................... 15-9
15.4.4.3 Change in valuation technique...................................... 15-9
15.4.5 Multiple awards ................................................................................ 15-10
15.4.6 Impact on financial statements ....................................................... 15-10
15.5 Separate financial statements of a subsidiary .................................................. 15-11
15.6 Non-employee awards ....................................................................................... 15-11
15.7 Employee stock ownership plans (ESOPs) ...................................................... 15-12
15.7.1 Presentation ...................................................................................... 15-12
15.7.2 Disclosure ......................................................................................... 15-13
15.8.1 Disclosures in periods prior to an initial public offering .............. 15-16
16 Income taxes
16.1 Chapter overview .............................................................................................. 16-2
16.2 Scope ................................................................................................................. 16-2
16.3 Balance sheet presentation of deferred tax accounts ..................................... 16-3
16.3.1 Principles of balance sheet classification — before adoption of
ASU 2015-17 ..................................................................................... 16-4
16.3.2 Principles of balance sheet classification — after adoption of
ASU 2015-17 ..................................................................................... 16-5
16.3.3 Balance sheet classification of valuation allowances — before
adoption of ASU 2015-17 ................................................................. 16-5
16.3.4 Balance sheet classification of valuation allowances — after
adoption of ASU 2015-17 ................................................................. 16-7
16.3.5 Offsetting and multiple jurisdictions — before adoption of ASU
2015-17 ............................................................................................. 16-7
16.3.6 Offsetting and multiple jurisdictions — after adoption of ASU
2015-17 ............................................................................................. 16-10
16.4 Disclosures related to balance sheet tax accounts .......................................... 16-10
16.4.1 Gross deferred tax assets and gross deferred tax liabilities .......... 16-10
16.4.2 Valuation allowance and the net change in the valuation
allowance.......................................................................................... 16-10
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16.4.3 The amounts and expiration dates of loss and tax credit
carryforwards ................................................................................... 16-12
16.4.4 Temporary differences for which a deferred tax liability has not
been recognized ............................................................................... 16-13
16.4.5 Other required disclosures .............................................................. 16-14
16.5 Income statement presentation ....................................................................... 16-15
16.5.1 Deferred tax expense or benefit ...................................................... 16-15
16.5.2 Interest and penalties ...................................................................... 16-15
16.5.3 Professional fees .............................................................................. 16-16
16.5.4 Change in tax laws, rates, or status ................................................ 16-16
16.5.5 Income taxes and net income attributable to noncontrolling
interests ............................................................................................ 16-18
16.6 Disclosures related to income statement amounts ......................................... 16-19
16.6.1 Amount of income tax expense or benefit ...................................... 16-20
16.6.2 Effective tax rate reconciliation ...................................................... 16-20
16.6.3 Significant components of income tax expense ............................. 16-21
16.6.3.1 Investment tax credits .................................................... 16-22
16.6.3.2 Adjustments of a deferred tax liability or asset for
enacted changes in tax laws or rates, or a change in
the tax status of the entity .............................................. 16-22
16.6.4 Additional disclosures for SEC registrants .................................... 16-23
16.7 Presentation and disclosure for uncertain tax positions ................................ 16-24
16.7.1 Presentation of unrecognized tax benefits ..................................... 16-24
16.7.1.1 Presentation of unrecognized tax benefits when a
carryforward exists ......................................................... 16-25
16.7.2 Disclosure requirements for uncertain tax positions .................... 16-27
16.7.3 Disclosure of positions where a change is reasonably possible in
the next 12 months .......................................................................... 16-27
16.7.4 Tabular reconciliation of unrecognized tax benefits ..................... 16-28
16.7.4.1 The gross amounts of increases and decreases in
unrecognized tax benefits as a result of tax positions
taken during a prior period ............................................ 16-29
16.7.4.2 Increases and decreases in unrecognized tax benefits
recorded for positions taken during the year ................ 16-30
16.7.4.3 The amounts of decreases in the unrecognized tax
benefits relating to settlements with taxing
authorities ....................................................................... 16-31
16.7.4.4 Reductions to unrecognized tax benefits resulting
from a lapse of the applicable statute of limitations ..... 16-32
16.7.4.5 Examples of the tabular reconciliation of
unrecognized tax benefits ............................................... 16-32
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16.7.4.6 Items that should not be included in the tabular

reconciliation of uncertain tax benefits ......................... 16-35
16.7.5 Unrecognized tax benefits that, if recognized, would affect the
effective tax rate ............................................................................... 16-36
16.7.6 Tax years still subject to examination by a major tax
jurisdiction ....................................................................................... 16-37
16.8 Required disclosures for other transactions with income tax effects ............ 16-37
16.8.1 Income tax-related disclosures for stock-based compensation .... 16-37
16.8.2 Pass-through entities....................................................................... 16-37
16.8.3 Specific disclosure required in the separate statements of a
member of a consolidated tax group .............................................. 16-38
16.8.4 Significant risks and uncertainties disclosures .............................. 16-39
16.9 Considerations for private companies ............................................................. 16-39
17 Business combinations

17.2 Scope .................................................................................................................. 17-2
17.3 Income statement presentation ........................................................................ 17-3
17.4 Disclosures for business combinations ............................................................ 17-3
17.4.1 General acquisition disclosure ......................................................... 17-4
17.4.2 Disclosures of consideration transferred ........................................ 17-4
17.4.3 Disclosure of contingent consideration and
indemnification assets ...................................................................... 17-5
17.4.4 Disclosure of major classes of assets acquired and liabilities
assumed ............................................................................................ 17-5
17.4.5 Disclosures of acquired receivables ................................................. 17-6
17.4.5.1 Disclosure requirements for finance receivables and
allowance for credit losses .............................................. 17-6
17.4.6 Disclosures about assets and liabilities arising
from contingencies ........................................................................... 17-6
17.4.7 Goodwill disclosures......................................................................... 17-7
17.4.8 In-process research and development (IPR&D) disclosures ......... 17-8
17.4.9 Disclosures of separate transactions and pre-existing
relationships ..................................................................................... 17-8
17.4.10 Disclosures of bargain purchases .................................................... 17-8
17.4.11 Partial acquisitions ........................................................................... 17-9
17.4.12 Acquiree’s financial information and pro forma financial
information ....................................................................................... 17-10
17.4.12.1 Preparation of ASC 805 pro forma information ............ 17-11
17.4.12.2 Regulation S-X, Article 11 pro forma disclosures .......... 17-12
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17.4.13 Financial statement effect of adjustments related to prior

acquisitions ....................................................................................... 17-15
17.4.13.1 Measurement period adjustments — before adoption
of ASU 2015-16 ................................................................ 17-16
17.4.13.2 Measurement period adjustments — after adoption of
ASU 2015-16 .................................................................... 17-17
17.4.13.3 Contingent consideration adjustments .......................... 17-19
17.4.13.4 Fair value disclosures under ASC 820 ........................... 17-19
17.5 Sample disclosures ............................................................................................ 17-20
17.6 Other considerations for business combinations — pushdown
accounting .......................................................................................................... 17-26
17.6.1 Change-in-control events ................................................................. 17-26
17.6.2 Making the election to apply pushdown accounting ...................... 17-26
17.6.3 Pushdown accounting presentation considerations ....................... 17-27
17.6.4 Pushdown accounting disclosure considerations ........................... 17-28
18 Consolidation

18.2 Scope .................................................................................................................. 18-2
18.3 General consolidation presentation and disclosure principles ....................... 18-3
18.3.1 Presentation and disclosure considerations: partially-owned
consolidated subsidiaries ................................................................. 18-4
18.3.2 General consolidation disclosure considerations ........................... 18-5
18.4 Variable interest entities (VIEs) ....................................................................... 18-5
18.4.1 Balance sheet presentation of consolidated VIEs ........................... 18-5
18.4.2 VIE disclosures ................................................................................. 18-8
18.4.3 Aggregation considerations ............................................................. 18-12
18.4.4 Maximum loss ................................................................................... 18-12
18.4.5 VIE information “scope out” ............................................................ 18-13
18.4.6 Disclosure considerations for VIEs in certain jurisdictions ........... 18-13
18.4.7 Disclosure requirements for reporting entities that hold interests

in registered and similar unregistered money market funds ......... 18-14
18.5 Voting interest entities (VOEs) ......................................................................... 18-15

18.5.1 Corporations ..................................................................................... 18-15
18.5.2 Partnerships ...................................................................................... 18-16
18.6 Proportionate consolidation ............................................................................. 18-18
18.7 Combined financial statements — updated May 2017 .................................... 18-18
18.8 Consolidation procedures ................................................................................. 18-20
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18.8.1 Eliminating intra-entity transactions in consolidation .................. 18-20

18.8.1.1 Capital transactions between a reporting entity and its
subsidiaries ...................................................................... 18-21
18.8.2 Fiscal periods of a reporting entity and its subsidiary ................... 18-21
18.8.3 Specialized industry accounting principles in consolidation ......... 18-23
18.8.4 Presentation of nonhomogeneous subsidiaries .............................. 18-23
18.9 Change in entities in the consolidated group ................................................... 18-24
18.9.1 Change from equity method or cost method to consolidation ....... 18-25
18.9.2 Deconsolidation ................................................................................ 18-25
18.10.1 Private company alternative — common control leasing
arrangements .................................................................................... 18-26
19 Derivatives and hedging
19.1 Chapter overview .............................................................................................. 19-2

19.2 Scope.................................................................................................................. 19-2
19.3 Balance sheet presentation............................................................................... 19-2
19.3.1 Balance sheet classification – current versus noncurrent ............... 19-2
19.3.2 Balance sheet offsetting of derivatives .............................................. 19-6
19.3.2.1 Balance sheet offsetting of derivatives in qualifying
accounting hedges .............................................................. 19-7
19.3.2.2 Offsetting collateral ............................................................ 19-8
19.3.3 Presentation of hybrid financial instruments measured at fair
value .................................................................................................... 19-8
19.4 Income statement presentation ....................................................................... 19-9
19.4.1 Presentation of derivative gains and losses — gross versus net ....... 19-9
19.4.2 Presentation of gains and losses on hedging derivatives ................. 19-10
19.4.3 Presentation of derivatives not in qualifying accounting hedges .... 19-10
19.5 Disclosure .......................................................................................................... 19-12
19.5.1 Disclosure objectives .......................................................................... 19-13
19.5.2 Qualitative disclosure requirements.................................................. 19-13
19.5.2.1 Accounting policy disclosures ............................................ 19-13
19.5.2.2 Balance sheet classification ................................................ 19-14
19.5.3 Quantitative disclosure requirements ............................................... 19-14
19.5.3.1 Disclosures required in a tabular format .......................... 19-15
19.5.3.2 Volume of derivative activity ............................................. 19-17
19.5.3.3 Fair value hedges of foreign currency ............................... 19-17
19.5.3.4 Cash flow hedges ................................................................ 19-18
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19.5.3.5 Net investment hedges ....................................................... 19-22

19.5.3.6 Non-qualifying or non-designated derivatives ................. 19-22
19.5.4 Disclosure of credit-risk-related contingent features....................... 19-23
19.5.5 Disclosure of credit derivatives ......................................................... 19-23
19.5.6 Disclosure of offsetting (netting) of derivatives ............................... 19-25
19.5.6.1 Disclosure of collateral ....................................................... 19-28
19.5.6.2 Level of disaggregation ....................................................... 19-28
19.5.7 Hybrid financial instruments measured at fair value ...................... 19-31
19.5.8 Embedded conversion options .......................................................... 19-31
19.6 Use of clearing houses ...................................................................................... 19-31
19.6.1 Margin ................................................................................................. 19-33
19.6.1.1 Initial margin ...................................................................... 19-33
19.6.1.2 Variation margin — updated May 2017 ............................. 19-34
19.7.1 Private company alternative — hedge accounting ............................ 19-34
20 Fair value

20.2 Scope ................................................................................................................... 20-2
20.2.1 Determining whether account balances are included in scope ........ 20-3
20.2.1.1 Cash equivalents ................................................................. 20-3
20.2.1.2 Investments ........................................................................ 20-3
20.2.1.3 Servicing assets and liabilities ........................................... 20-3
20.2.1.4 Hedged items ...................................................................... 20-3
20.2.1.5 Pension plan assets ............................................................ 20-4
20.2.1.6 Excess 401(k) plans ............................................................ 20-4
20.2.1.7 Goodwill and indefinite-lived intangibles ........................ 20-4
20.2.1.8 Long-lived assets to be disposed of by sale ....................... 20-4
20.3 Fair value hierarchy ............................................................................................ 20-5
20.3.1 Overview .............................................................................................. 20-5
20.3.2 Steps 1 through 3 in the fair value hierarchy framework .................. 20-6
20.3.3 Step 4: Determine level in the hierarchy of the significant input
(or all significant inputs) ................................................................... 20-7
20.3.4 Step 5: Assess disclosure required by the fair value standard .......... 20-10
20.3.4.1 Disclose the fair value of the entire asset/liability by
level ..................................................................................... 20-10
20.3.4.2 Disclose all significant Level 3 inputs in a table ............... 20-10
20.3.5 Step 6: Reassess .................................................................................. 20-10
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20.4 Disclosure............................................................................................................ 20-11

20.4.1 Main requirements .............................................................................. 20-11
20.4.1.1 Disclosure of asset impairments ....................................... 20-14
20.4.1.2 Transfers between levels in the hierarchy ........................ 20-15
20.4.1.3 Level 3 rollforward disclosure ........................................... 20-15
20.4.1.4 New guidance – Use of net asset value as a practical
expedient ............................................................................ 20-19
20.4.1.5 Practical expedient not elected .......................................... 20-20
20.4.1.6 Disclosures for financial instruments not measured at
fair value ............................................................................. 20-20
20.4.2 Disclosure of valuation techniques and unobservable inputs .......... 20-23
20.4.2.1 Change in valuation approach or valuation technique –
updated May 2017 .............................................................. 20-25
20.4.2.2 Table of significant unobservable inputs .......................... 20-26
20.4.2.3 Third-party pricing ............................................................ 20-28
20.4.2.4 Qualitative disclosures for Level 3 fair value
measurements ................................................................... 20-29
20.4.3 Concentrations of credit risk of all financial instruments ................ 20-30
20.4.4 Market risk of all financial instruments............................................. 20-31
20.5 Fair value option ................................................................................................. 20-31
20.5.1 Presentation of FVO ............................................................................ 20-32
20.5.1.1 Presentation of instruments with FVO versus without
FVO ..................................................................................... 20-32
20.5.1.2 Presentation of changes in fair value under the FVO ….. 20-32
20.5.2 New guidance – Presentation of financial liabilities for which the
fair value option is elected .................................................................. 20-33
20.5.3 Disclosure of FVO ............................................................................... 20-33
20.5.3.1 Disclosures pertaining to instrument-specific credit risk
for financial liabilities for which the fair value option is
elected ................................................................................. 20-35
20.5.3.2 Disclosures for instruments that would otherwise have
been accounted for under the equity method .................. 20-35
20.5.3.3 Sample disclosure – FVO .................................................. 20-36
20.5.4 Disclosures for collateralized financing entities ................................ 20-36
20.6.1 Private company alternative – hedge accounting ............................. 20-38
21 Foreign currency

21.2 Scope .................................................................................................................. 21-2
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21.3 Transaction gains and losses ............................................................................ 21-2

21.3.1 Presentation – updated May 2017 ................................................... 21-2
21.3.1.1 Presentation option for dealer transactions .................... 21-4
21.3.1.2 Presentation of transaction gains and losses on
deferred tax assets and liabilities ..................................... 21-4
21.3.2 Disclosure – updated May 2017 ...................................................... 21-4
21.3.2.1 Disclosure of transaction gains and losses on deferred
tax assets and liabilities .................................................... 21-4
21.4 Cumulative translation adjustments ................................................................ 21-4
21.4.1 Presentation ...................................................................................... 21-4
21.4.1.1 Release of CTA ................................................................... 21-5
21.4.2 Disclosure ......................................................................................... 21-5
21.5 Other disclosures ............................................................................................... 21-6
21.5.1 Foreign currency commitments and contingencies ....................... 21-7
21.5.2 Effects of exchange rate changes subsequent to year-end ............. 21-8
21.5.3 Effects of foreign currency exchange rate changes during the
period on the results of operations ................................................. 21-8
21.5.4 Foreign currency hedging policy ..................................................... 21-8
21.5.5 Determination of functional currency ............................................. 21-8
21.5.6 Multiple foreign currency exchange rates ....................................... 21-9
21.5.7 Operations in highly inflationary economies .................................. 21-9
22 Transferred financial assets, servicing assets, and servicing liabilities

22.2 Scope .................................................................................................................. 22-2
22.3 Disclosure objectives and aggregation of disclosures ...................................... 22-3
22.3.1 Disclosure objectives ........................................................................ 22-3
22.3.2 Aggregation of disclosures ............................................................... 22-4
22.3.3 Location of disclosures ..................................................................... 22-5
22.3.4 Considerations for consolidated financial statements ................... 22-6
22.3.5 Accounting policy disclosures footnote ........................................... 22-6
22.4 Transfers reported as sales with transferors having continuing
involvement ....................................................................................................... 22-7
22.4.1 Disclosures for each income statement presented ......................... 22-7
22.4.2 Disclosures for each balance sheet presented ................................. 22-8
22.4.3 Disclosures for other transfers of financial assets reported as
sales .................................................................................................. 22-13
22.5 Sales of loans and trade receivables ................................................................. 22-14
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22.6 Collateral and transfers reported as secured borrowings ............................... 22-16

22.6.1 Balance sheet presentation — general considerations ................... 22-16
22.6.2 Balance sheet presentation — offsetting considerations ................ 22-17
22.6.3 Disclosure considerations relating to offsetting and master
netting arrangements ....................................................................... 22-18
22.6.4 Collateralized financing transactions: disclosures by obligors
(transferees of noncash collateral) .................................................. 22-18
22.6.5 Regulation S-X disclosures specific to repurchase and reverse
repurchase agreements .................................................................... 22-19
22.6.6 Collateral-related disclosures .......................................................... 22-20
22.7 Servicing assets and servicing liabilities .......................................................... 22-22
22.7.1 Balance sheet presentation .............................................................. 22-22
22.7.2 Disclosures applicable to all servicing assets and liabilities .......... 22-22
22.7.3 Disclosures of servicing assets and liabilities subsequently
measured at fair value ...................................................................... 22-23
22.7.4 Disclosures of servicing assets and liabilities subsequently
measured under the amortization method ..................................... 22-24
22.7.5 Disclosures related to electing fair value measurement of
servicing assets and liabilities in a subsequent year ....................... 22-29
23 Commitments, contingencies, and guarantees

23.2 Scope .................................................................................................................. 23-2
23.3 Commitments .................................................................................................... 23-2
23.3.1 General commitments ...................................................................... 23-2
23.3.2 Unconditional purchase obligations ................................................ 23-3
23.3.2.1 Unrecognized commitments ........................................... 23-4
23.3.2.2 Recognized commitments ............................................... 23-5
23.4 Contingencies – updated May 2017 ................................................................. 23-5
23.4.1 Loss contingencies ............................................................................ 23-5
23.4.1.1 Accrual and disclosure required ..................................... 23-5
23.4.1.2 No accrual, but disclosure required................................ 23-7
23.4.1.3 Neither accrual nor disclosure required ......................... 23-9
23.4.2 Accruing legal costs .......................................................................... 23-9
23.4.3 Recovery of a loss.............................................................................. 23-9
23.4.3.1 Insurance recoverables ................................................... 23-10
23.4.3.2 Financial statement classification of recovery ............... 23-11
23.4.4 Lawsuits covered by insurance ........................................................ 23-13
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23.5 Gain contingencies ............................................................................................ 23-13

23.5.1 Recoveries representing gain contingencies ................................... 23-13
23.6 Guarantees ......................................................................................................... 23-14
23.6.1 ASC 460 disclosure requirements ................................................... 23-15
23.6.2 Fair value disclosures ....................................................................... 23-17
23.6.3 Joint and several liability ................................................................. 23-18
23.6.3.1 Disclosure requirements ................................................. 23-18
23.7 Off-balance sheet considerations...................................................................... 23-19
23.7.1 Off-balance-sheet credit risk ............................................................ 23-19
23.8 Interaction with other guidance ....................................................................... 23-19
23.9 Considerations for private companies – updated May 2017........................... 23-20
24 Risks and uncertainties

24.2 Scope .................................................................................................................. 24-2
24.3 Disclosure ........................................................................................................... 24-3
24.3.1 Nature of the reporting entity’s operations ..................................... 24-3
24.3.2 Use of estimates in preparing the financial statements ................. 24-3
24.3.3 Certain significant estimates............................................................ 24-4
24.3.4 Current vulnerability related to certain concentrations ................. 24-7
24.3.5 Assessment of disclosure criteria .................................................... 24-9
24.4 Interaction with other guidance ....................................................................... 24-9
24.4.1 ASC 450, Contingencies ................................................................... 24-9
24.4.2 ASC 360, Property, Plant and Equipment ..................................... 24-9
24.4.3 ASC 280, Segment Reporting .......................................................... 24-10
24.4.4 ASC 825, Financial Instruments ..................................................... 24-10
24.5 Going concern .................................................................................................... 24-10
24.5.1 Assessing going concern ................................................................... 24-10
24.5.2 Disclosure threshold: Substantial doubt ......................................... 24-13
24.5.3 Consideration of management’s plans ............................................ 24-15
24.5.4 Required disclosures ........................................................................ 24-16
24.5.5 Example application ......................................................................... 24-17
25 Segment reporting

25.2 Scope .................................................................................................................. 25-2
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25.3 Application overview ......................................................................................... 25-3

25.4 Identifying operating segments ........................................................................ 25-5
25.4.1 Business activities ............................................................................. 25-5
25.4.2 Determination of the CODM ............................................................ 25-7
25.4.3 Information regularly reviewed by the CODM ............................... 25-8
25.4.3.1 Multiple sets of information received by the CODM ..... 25-9
25.4.3.2 Investments in unconsolidated entities ......................... 25-12
25.5 Aggregation ........................................................................................................ 25-13
25.5.1 Quantitative aggregation criteria ..................................................... 25-14
25.5.2 Qualitative aggregation criteria ....................................................... 25-17
25.6 Quantitative thresholds ..................................................................................... 25-19
25.6.1 The 10 percent tests .......................................................................... 25-19
25.6.1.1 Immaterial operating segments ...................................... 25-23
25.6.2 The 75 percent revenue test ............................................................. 25-23
25.6.3 “All other” category .......................................................................... 25-24
25.7 Disclosures ......................................................................................................... 25-25
25.7.1 General information ......................................................................... 25-25
25.7.2 Information about profit or loss and assets .................................... 25-26
25.7.3 Information about investments and expenditures ........................ 25-29
25.7.4 Information about the measurement of segment profit or loss
and assets .......................................................................................... 25-30
25.7.5 Reconciliations ................................................................................. 25-32
25.7.6 Entity-wide disclosures .................................................................... 25-34
25.7.6.1 Information about products and services ...................... 25-34
25.7.6.2 Information about geographic areas .............................. 25-35
25.7.6.3 Information about major customers .............................. 25-37
25.7.7 Interim period information.............................................................. 25-38
25.7.8 Revision of information for changes in segments .......................... 25-39
25.7.8.1 When to reflect changes in segment reporting .............. 25-42
25.7.9 Revision of prior period segment information is impracticable .... 25-44
25.7.10 Changes of reportable segments during an interim period............ 25-45
25.7.11 Changes in segment performance measures ................................... 25-45
25.7.12 Case study — applying ASC 280 ...................................................... 25-46
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26 Related parties

26.2 Scope .................................................................................................................. 26-2
26.3 Related party presentation matters .................................................................. 26-5
26.3.1 Common control transactions ......................................................... 26-6
26.4 Related party required disclosures ................................................................... 26-6
26.4.1 Disclosures about common control relationships .......................... 26-8
26.4.2 Disclosures about arm’s-length basis of transactions .................... 26-8
26.5 Common related party transactions ................................................................. 26-8
26.5.1 Investments, including equity method investments and
investments in joint ventures........................................................... 26-9
26.5.2 Leasing arrangements ...................................................................... 26-9
26.5.3 Debt ................................................................................................... 26-10
26.5.4 Guarantees ........................................................................................ 26-10
26.5.5 Equity ................................................................................................ 26-11
26.5.6 Advances to and receivables from related parties .......................... 26-11
26.5.7 Business combinations ..................................................................... 26-11
26.5.8 Deconsolidation of a subsidiary ....................................................... 26-11
26.5.9 Compensation arrangements ........................................................... 26-11
26.5.10 Franchisors ....................................................................................... 26-12
26.6.1 Private company alternative — common control leasing ............... 26-13
27 Discontinued operations

27.2 Scope .................................................................................................................. 27-2
27.3 Criteria for reporting discontinued operations ................................................ 27-2
27.3.1 Conditions required for reporting discontinued operations .......... 27-4
27.3.1.1 Acquired business that qualifies as held for sale upon
acquisition ...................................................................... 27-6
27.4 Presentation ....................................................................................................... 27-7
27.4.1 Balance sheet .................................................................................... 27-7
27.4.2 Income statement ............................................................................. 27-8
27.4.2.1 Gain or loss on disposal ................................................. 27-12
27.4.2.2 Earnings per share ......................................................... 27-12
27.4.2.3 Transition service agreements ...................................... 27-12
27.4.2.4 Debt-related items ......................................................... 27-13
27.4.2.5 Pension settlements and curtailments ......................... 27-16
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27.4.2.6 Income tax allocation and adjustments ........................ 27-17

27.4.2.7 Derivatives...................................................................... 27-17
27.4.2.8 Noncontrolling interest ................................................. 27-17
27.4.2.9 Cumulative effect of changes in accounting principles 27-17
27.4.2.10 Predecessor financial statements .................................. 27-18
27.4.3 Other presentation matters .............................................................. 27-18
27.4.3.1 Presentation of spin-off transactions ........................... 27-18
27.4.3.2 Reissuance of financial statements ............................... 27-21
27.5 Disclosure ........................................................................................................... 27-22
27.5.1 Financial statement disclosures ...................................................... 27-22
27.5.1.1 Equity method investment discontinued operations
disposals ......................................................................... 27-23
27.5.1.2 Changes to a plan of disposal ........................................ 27-23
27.5.1.3 Continuing cash flows and continuation of
activities.......................................................................... 27-24
27.5.1.4 Discontinued operations subsequently retained ......... 27-25
27.5.1.5 Allocation of interest to discontinued operations ........ 27-25
27.5.1.6 Segment disclosures ...................................................... 27-25
27.5.1.7 Adjustments to amounts reported in discontinued
operations ....................................................................... 27-26
27.5.1.8 Individually significant disposal not eligible for
discontinued operations ............................................... 27-26
28 Subsequent events

28.2 Scope .................................................................................................................. 28-2
28.3 Evaluation of subsequent events ..................................................................... 28-3
28.3.1 SEC filer ............................................................................................ 28-3
28.3.2 Conduit bond obligor ....................................................................... 28-4
28.4 Types of subsequent events ............................................................................... 28-4
28.5 Recognized subsequent events ……………………………………………………………… 28-5
28.5.1 Examples of recognized subsequent events .................................... 28-5
28.5.1.1 Litigation settlements …………………………………………. 28-6
28.5.1.2 Change in capital structure ........................................... 28-6
28.5.1.3 Changes in lower of cost or net realizable value
related to inventory valuation ....................................... 28-7
28.5.1.4 Other postemployment benefit costs ........................... 28-7
28.6 Nonrecognized subsequent events ................................................................... 28-8
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28.6.1 Disclosure requirements for nonrecognized subsequent

events ................................................................................................ 28-9
28.6.2 Pro forma financial data ................................................................... 28-9
28.6.3 Examples of nonrecognized subsequent events ............................. 28-9
28.6.3.1 Business combinations .................................................. 28-10
28.6.3.2 Exercise of a call option on debt ................................... 28-11
28.6.3.3 Debt extinguishments .................................................... 28-11
28.6.3.4 Changes in the classification of long-lived assets ........ 28-11
28.6.3.5 Changes in the conditions of contingently
redeemable instruments ................................................ 28-12
28.6.3.6 Acceptance by an employee of special termination
benefits after the balance sheet date............................. 28-12
28.6.3.7 Subsequent events impacting construction-type or
production-type revenue contracts ............................... 28-12
28.6.3.8 Bankruptcy filing .......................................................... 28-13
28.6.3.9 Changes in ownership interest ...................................... 28-13
28.6.3.10 Sales of securities at a loss............................................. 28-13
28.7 Parent/subsidiary financial statements ........................................................... 28-14
28.8 Reissuance of financial statements ................................................................... 28-15
28.9.1 Disclosures not required for private companies ............................. 28-15
28.9.2 Additional disclosure requirements for private companies ........... 28-16
29 Interim financial reporting

29.2 Scope .................................................................................................................. 29-2
29.3 Presentation of interim financial information ................................................. 29-3
29.3.1 Presentation requirements — balance sheet ................................. 29-4
29.3.2 Presentation requirements — income statement .......................... 29-4
29.3.3 Presentation requirements — comprehensive income ................. 29-5
29.3.4 Presentation requirements — cash flow statement ...................... 29-7
29.3.5 Presentation requirements — statement of changes in
stockholders’ equity ........................................................................ 29-8
29.4 Interim footnote disclosures ............................................................................. 29-8
29.4.1 General recurring interim reporting requirements that are
identical to annual reporting requirements .................................. 29-9
29.4.2 Defined benefit pension plans and other postemployment
benefits ............................................................................................ 29-10
29.4.3 Equity method investees ................................................................ 29-11
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29.4.4 Financing receivables and allowances for credit losses ................ 29-11
29.4.5 Reportable operating segments ..................................................... 29-12
29.4.6 Seasonal revenue, costs, or expenses ............................................. 29-12
29.4.7 Other interim reporting requirements for certain
transactions ..................................................................................... 29-12
29.4.7.1 Other interim reporting requirements for certain
non-recurring transactions that are identical to
annual reporting requirements ..................................... 29-12
29.4.7.2 Business combinations .................................................. 29-13
29.4.7.3 Changes in accounting principles or estimates ............ 29-14
29.4.7.4 Discontinued operations ............................................... 29-14
29.4.7.5 Disposal of a component of a reporting entity and
unusual or infrequently occurring items ...................... 29-14
29.4.7.6 Significant changes in estimates or provisions for
income taxes ................................................................... 29-14
29.5 Fourth quarter considerations .......................................................................... 29-15
29.6.1 Accumulated other comprehensive income .................................. 29-16
29.6.2 Defined benefit pension plans and other postemployment
benefits ............................................................................................ 29-17
29.6.3 Financial instruments not measured at fair value ........................ 29-17
30 Accounting changes

30.2 Scope .................................................................................................................. 30-2
30.3 Differentiating between a change in accounting principle, a change in
estimate, or a correction of an error ................................................................. 30-2
30.4 Change in accounting principle ........................................................................ 30-3
30.4.1 Justification for a change in accounting principle.......................... 30-4
30.4.2 Preferability letters ........................................................................... 30-4
30.4.3 Presentation and disclosure considerations ................................... 30-5
30.4.3.1 The impracticability exception ....................................... 30-7
30.4.3.2 Indirect effects of a change in accounting principle ...... 30-7
30.4.3.3 Disclosure of the impact that recently issued
accounting standards will have on the financial
statements ........................................................................ 30-8
30.5 Change in accounting estimate ......................................................................... 30-9
30.6 Change in the reporting entity and common control transaction .................. 30-10
30.7 Correction of an error ........................................................................................ 30-11
30.7.1 Restatements .................................................................................... 30-13
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30.7.2 Revisions and out-of-period adjustments ....................................... 30-15

30.7.3 Reclassifications ............................................................................... 30-17
30.8 Interim reporting considerations ..................................................................... 30-17
30.8.1 Changes in accounting principle...................................................... 30-17
30.8.2 Recently adopted standards ............................................................. 30-18
30.8.3 Change in estimates.......................................................................... 30-18
30.8.4 Adjustments related to prior interim periods ................................. 30-19
30.9 Other matters ..................................................................................................... 30-19
30.9.1 Spin-off or sale of a subsidiary of an SEC-registered
reporting entity ................................................................................. 30-19
30.9.2 Conforming accounting policies of acquired entities ..................... 30-20
31 Parent company financial statements

31.2 Scope .................................................................................................................. 31-2
31.3 Presentation requirements for parent company financial statements ........... 31-3
31.3.1 Format of parent company financial statements ............................ 31-3
31.3.2 Footnote disclosures......................................................................... 31-3
31.4 Presenting subsidiaries and investees in parent company financial
statements .......................................................................................................... 31-4
31.4.1 Investments in noncontrolled entities ............................................ 31-4
31.4.2 Investments in consolidated subsidiaries ....................................... 31-4
31.4.3 Special situations requiring cost method accounting ..................... 31-6
31.5 Other considerations ......................................................................................... 31-6
31.5.1 Accounts and adjustments recorded at the
parent company level ....................................................................... 31-6
31.5.2 Accounting changes .......................................................................... 31-7
31.5.3 Discontinued operations .................................................................. 31-7
31.5.4 Cash dividends received from subsidiaries ..................................... 31-7
32 Limited liability companies, general partnerships, and limited partnerships

32.2 Scope .................................................................................................................. 32-2
32.3 Presentation ...................................................................................................... 32-3
32.3.1 Basis of accounting – LPs and LLCs that are partnerships............ 32-3
32.3.2 Basis of accounting – LLCs that are not partnerships ................... 32-3
PwC xxxix
Table of contents
32.3.3 Comparative financial statements ................................................... 32-4

32.3.4 Owners’/Members’ equity ................................................................ 32-4
32.3.4.1 Capital contributions ....................................................... 32-5
32.3.5 Other presentation considerations .................................................. 32-6
32.4 Disclosure ........................................................................................................... 32-6
32.4.1 Reconciliation between statements prepared on
different bases ................................................................................... 32-6
32.4.2 Income tax matters ........................................................................... 32-6
32.4.2.1 Change in tax status ........................................................ 32-7
32.4.3 Related parties .................................................................................. 32-8
32.4.4 Finite life of the entity ...................................................................... 32-8
32.4.5 Variable interest entities .................................................................. 32-8
32.5 General partnership financial statement disclosures ...................................... 32-9
32.6 Calculating earnings per unit (EPU) for MLPs ................................................ 32-9
32.6.1 IDRs that are participating securities ............................................. 32-10
32.6.2 IDRs that are not participating securities ....................................... 32-10
32.6.3 New guidance — EPU: common control transaction ..................... 32-11
32.7 Conversion of a corporation into a partnership ............................................... 32-12
32.7.1 Tax considerations of the new entity ............................................... 32-13
32.8 Smaller reporting companies that are LPs ....................................................... 32-13
32.9.1 Comparative financial statements ................................................... 32-14
32.9.2 Basis of accounting ........................................................................... 32-14
32.9.3 SEC filers that may not comply with SEC requirements ................ 32-14
Appendices
A Professional literature .............................................................. A-1

B Technical references and abbreviations ………………………………. B-1
C Key terms …………………………………………………………………………. C-1
D Summary of significant changes................................................ D-1
xl PwC
Chapter 1:
General presentation
and disclosure
requirements
PwC 1-1
General presentation and disclosure requirements
1.1 Chapter overview

This chapter provides an introduction to the general concepts of presentation and
disclosure that underlie the detailed guidance that is covered in the remaining
chapters of this guide.
1.2 General presentation and disclosure

requirements for all reporting entities
ASC 205, Presentation of Financial Statements, provides the baseline
authoritative guidance for presentation of financial statements for all US GAAP
reporting entities. ASC 205-10-45-1A lists the required financial statements
under US GAAP.
ASC 205-10-45-1A
A full set of financial statements for a period shall show all of the following:
a. Financial position at the end of the period
b. Earnings (net income) for the period, (which may be presented as a separate
statement or within a continuous statement of comprehensive income [see
paragraph 220-10-45-1A])
c. Comprehensive income (total nonowner changes in equity) for the period in

one statement or two separate but consecutive statements (if the reporting
entity is required to report comprehensive income, see paragraph 220-10-15-
3)
d. Cash flows during the period
e. Investments by and distributions to owners during the period.
The presentation rules in ASC 205 closely align with SEC regulations, except for
certain circumstances when the SEC may prescribe incremental requirements.
The presentation and disclosure requirements discussed in this guide presume

that the related accounting topics are considered to be material and applicable to
the reporting entity. That assumption applies throughout the guide and will not
be restated in every instance. Accounting topics or transactions that are not
material or not applicable to a reporting entity generally do not require separate
presentation or disclosure, unless otherwise indicated.
Note about ongoing standard setting
As of the content cutoff date of this publication (October 15, 2016), the FASB has
an active project that may affect how disclosures are determined by the Board in
standard setting, as well as the assessments of materiality in footnote disclosures.
1-2 PwC
Financial statement preparers and other users of this publication are therefore
encouraged to monitor the status of the project, and if finalized, evaluate the
effective date of the new guidance and the implications on disclosure.
This guide details the required presentation and disclosures for each topical area.
However, S-X 4-01 requires that financial statements not be misleading. As a
result, reporting entities may need to supplement required disclosures with
additional information in some situations to provide context or further
clarification that they believe would be meaningful to users.
1.2.1 Basis of presentation
Regulation S-X 4-01(a)(1) requires financial statements filed with the SEC to be
presented in accordance with US GAAP, unless the SEC has indicated otherwise
(e.g., permitting the use of IFRS as issued by the IASB by foreign private issuers).
Regulation S-K Item 10(e) prohibits the inclusion of non-GAAP information in

financial statements filed with the SEC.
In practice, some reporting entities choose to provide a “Basis of Presentation,”

or similarly-titled footnote to disclose that the financial statements are presented
in accordance with US GAAP. Other reporting entities choose to include this
information in a “Significant Accounting Policies” footnote, as described in
FSP 1.2.4.
1.2.2 Reporting periods
Comparative financial statements provide historical context for reporting entities’

financial performance. Having more than one year of financial statements
presented together enables users to identify trends or other relationships.
For public companies, S-X 3-01(a) mandates that financial statements include
audited balance sheets as of the end of each of the two most recent fiscal years. S-
X 3-02(a) mandates audited statements of income and cash flows for the three
most recent fiscal years. SEC FRM 1110.1, Footnote 2, indicates that income
statement requirements also extend to the statement of comprehensive income.
Finally, S-X 3-04 requires information about changes in each caption of
stockholders’ equity to be presented in a separate statement or in the footnotes
for each period an income statement is presented. Qualifying Emerging Growth
Companies, as defined in the Jumpstart Our Business Startups (JOBS) Act, and
Smaller Reporting Companies, as defined in S-K 10, are permitted to present only
two years of audited financial statements.
Information presented for the comparative periods should be on a consistent

basis or otherwise disclosed as a reclassification, an accounting change, or
correction of an error (see FSP 30).
Although not required for private companies, ASC 205-10-45-2 encourages

comparative statements for all entities.
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ASC 205-10-45-2
In any one year it is ordinarily desirable that the statement of financial position,
the income statement, and the statement of changes in equity be presented for
one or more preceding years, as well as for the current year.
ASC 205-10-45-4 indicates that footnote disclosures should be repeated in the

next period’s comparative statements if they continue to be of significance.
1.2.3 Chronological ordering of data
The SEC staff has indicated no preference as to the order in which data is
presented in the financial statements (e.g., whether the most current fiscal period
should be displayed as the first or last column in the income statement).
However, it has stated that data presented in tabular form should read
consistently from left to right in the same chronological order throughout the
filing. Numerical data included in the footnotes should also follow the same
ordering pattern.
1.2.4 Disclosure of accounting policies
A reporting entity’s accounting policies are critical to facilitate a user’s ability to

understand and compare operating results with other reporting entities.
Reporting entities are therefore required to describe all significant accounting
policies in the financial statements.
Determining which accounting policies are considered “significant” is a matter of

management judgment. Management might consider materiality of the related
account, as well as the requirements of users, such as investors, analysts,
financial institutions, and other constituents.
ASC 235, Notes to Financial Statements, states the following regarding

accounting policy disclosures:
ASC 235-10-50-3
Disclosure of accounting policies shall identify and describe the accounting
principles followed by the entity and the methods of applying those principles
that materially affect the determination of financial position, cash flows, or
results of operations. In general, the disclosure shall encompass important
judgments as to appropriateness of principles relating to recognition of revenue
and allocation of asset costs to current and future periods; in particular, it shall
encompass those accounting principles and methods that involve any of the
following:
1-4 PwC
a. A selection from existing acceptable alternatives

b. Principles and methods peculiar to the industry in which the entity operates,
even if such principles and methods are predominantly followed in that
industry
c. Unusual or innovative applications of GAAP.
ASC 235 permits flexibility in matters of format (including the location) of the
policy footnote, as long as it is an integral part of the financial statements.
1.2.5 Use of estimates
Reporting entities are required to disclose that the preparation of financial

statements in accordance with US GAAP requires the use of management’s
estimates.
1.3 Enhancing disclosure effectiveness

In preparing footnote disclosures, reporting entities should consider their
intended purpose. A primary objective of financial reporting is to provide
information to investors, lenders, creditors, and others for use in making
decisions about whether to commit resources to the reporting entity. Disclosures
should assist users in assessing both a reporting entity’s historical performance
and cash flow prospects. They should amplify information reported on the face of
the financial statements, and focus users’ attention on matters that are most
relevant to understanding those financial statement areas.
Extensive footnote disclosure requirements impose costs on both reporting

entities and investors. The costs to reporting entities include preparing and
analyzing information, maintaining internal controls, and audit costs. In addition
to indirectly bearing such costs, investors’ costs include the time needed to assess
the large amount of data presented in the footnotes to determine whether it is
relevant for their decision-making.
Within established rules and legal requirements, we encourage reporting entities

to exercise well-reasoned judgment to determine which disclosures are most
relevant to their financial statement users.
Reporting entities can enhance the format and organization of the footnotes to
help focus users on the most decision-useful information. Hallmarks of
appropriate footnote disclosures include (1) clarity about relevant policies and
significant transactions, and (2) organization that eases navigation. Reporting
entities should consider employing best practices such as: using plain English to
describe industry and entity-specific policies, eliminating overly technical
references, grouping related data together and avoiding duplication, using
tabular formats, and cross-referencing information from the face of the primary
statements to the related footnote or between footnotes.
PwC 1-5
Chapter 2:
Balance sheet
PwC 2-1
Balance sheet

The balance sheet is one of the basic financial statements in a complete set of
financial statements by public and private companies alike. Although the balance
sheet is more formally referred to as the statement of financial position, the term
“balance sheet” will be used throughout this chapter.
This chapter details general balance sheet presentation requirements. It includes

an example of a balance sheet of a commercial company that illustrates the
requirements of SEC Regulation S-X, Article 5, Rule 5-02, which calls for the
presentation of a classified balance sheet. This chapter also addresses balance
sheet offsetting and the presentation of a noncontrolling interest (NCI) in
unconsolidated subsidiaries.
2.2 Scope
ASC 205, Presentation of Financial Statements, and ASC 210, Balance Sheet,
provide the baseline authoritative guidance for presentation of the balance sheet
for all US GAAP reporting entities. These rules closely align with SEC regulations,
except for certain circumstances when the SEC prescribes incremental
requirements.
SEC registrants subject to Article 5 for commercial and industrial companies

should also comply with the guidance regarding presentation of the balance sheet
in SAB Topic 11.E and Articles 3 and 4 within Regulation S-X.
SAB Topic 11.E provides guidance on the chronological ordering of financial data.
Article 3 provides general instructions applicable to all registrants. In particular,
S-X 3-01 stipulates that the registrant and its subsidiaries should file a
consolidated balance sheet as of the end of each of the two most recent fiscal
years. Article 4 (S-X 4-01 through 4-03) provides general application rules
regarding the form and order of the balance sheet and other statements.
Reporting entities subject to other SEC regulations include registered investment

companies (Article 6), employee stock purchase, savings and similar plans
(Article 6A), insurance companies (Article 7), smaller reporting companies
(Article 8), and bank holding companies (Article 9). While Article 5 requires a
classified balance sheet, no other Articles within S-X contain this requirement.
Reporting entities subject to those articles should refer to the applicable S-X
guidance to determine their requirements.
2.2.1 Sample balance sheets – updated May 2017
The captions included on a balance sheet will often vary for each reporting entity
based on the applicability of each account to its financial statements. Further,
certain required captions may not be applicable to all reporting entities.
Figure 2-1 is an illustrative balance sheet with the following conventions:
□ Captions required by S-X 5-02 are in bold font and other common captions
are in regular font.
2-2 PwC
Balance sheet
□ Captions not specifically required by SEC rules, but either required by US

GAAP or often included in a typical presentation are in regular font.
□ If S-X 5-02 specifically provides an option to include information in a

footnote rather than on the face of the balance sheet, the caption is in regular
font.
□ Detailed presentation and disclosure requirements are addressed in FSP

2.3.3 and the relevant Guide chapters noted in the last column of the figure.
Figure 2-1
Sample consolidated balance sheets under S-X 5-02
FSP Corp
Consolidated Balance Sheets
December 31, 20X6 and 20X5
FSP Guide
December 31, December 31, chapter
Assets 20X6 20X5 reference
(in millions $, (in millions $,

except per except per
share data) share data)
Current assets
Cash and cash equivalents $ xxx $ xxx FSP 6
Restricted cash1 xxx xxx FSP 6
Marketable securities (includes $xxx and
$xxx measured at fair value)15 xxx xxx FSP 9
Accounts receivable2, net of allowance for
doubtful accounts of $xx and $xx3 xxx xxx FSP 8
2
Notes receivable , net of allowance for
doubtful accounts of $xx and $xx3 xxx xxx FSP 8
Net investment in leased property, net of
unearned income4 xxx xxx FSP 14
Inventories xxx xxx FSP 8
Prepaid expenses xxx xxx FSP 8
Deferred income tax assets5 xxx xxx FSP 16
FSP 3/
Contract assets6 xxx xxx FSP 8
Other current assets xxx xxx FSP 8
Total current assets xxx xxx

Debt and equity securities xxx xxx FSP 9
Securities of related parties xxx xxx FSP 26
Indebtedness of related parties,
noncurrent xxx xxx FSP 26
Other investments xxx xxx FSP 9
Investments in unconsolidated subsidiaries xxx xxx FSP10
Derivative assets xxx xxx FSP 19
Deferred income tax assets, noncurrent5 xxx xxx FSP 16
Property, plant and equipment, net of
accumulated depreciation, depletion, and
amortization of $xx and $xx7 xxx xxx FSP 8
PwC 2-3
Balance sheet
FSP Guide
December 31, December 31, chapter
Assets 20X6 20X5 reference
Intangible assets, net of accumulated

amortization of $xx and $xx xxx xxx FSP 8
Goodwill8 xxx xxx FSP 8
Other assets xxx xxx FSP 8
Total assets $ xxx $ xxx
FSP Guide
Liabilities, redeemable preferred stock, and December 31, December 31, chapter
stockholders’ equity 20X6 20X5 reference
(in millions $, (in millions $,
except per except per
share data) share data)
Current liabilities
Accounts and notes payable8 $ xxx $ xxx FSP 11
Current portion of long-term debt xxx xxx FSP 12
Current portion of obligations under capital
leases xxx xxx FSP 14
Income taxes xxx xxx FSP 16
Derivative liabilities xxx xxx FSP 19
5
Deferred credits , current xxx xxx FSP 16
Deferred tax liabilities, current5 xxx xxx FSP 16
Dividends payable xxx xxx FSP 5
FSP 2/
Current liabilities6 xxx xxx FSP 11
Other current liabilities xxx xxx FSP 11
Total current liabilities xxx xxx
Bonds, mortgages and other long-term
debt, including capitalized leases,
Less: Unamortized discount and issuance FSP 12/
costs xxx xxx FSP 14
Indebtedness to related parties –
noncurrent xxx xxx FSP 26
9
Notes payable, noncurrent xxx xxx FSP 11
Employee benefit plan obligation xxx xxx FSP 13
Deferred credits, noncurrent5 xxx xxx FSP 16
Deferred tax liabilities, noncurrent5 xxx xxx FSP 16
Other liabilities xxx xxx FSP 11
Total liabilities xxx xxx
Commitments and contingent liabilities10 FSP 23

Redeemable preferred stock11 Class D - subject
to redemption ($0.01 par value; authorized – xxxx
shares; issued and outstanding – xxx and xxx
shares) xxx xxx FSP 5
Stockholders’ equity
Non-redeemable preferred stock Class C
($0.01 par value; authorized – xxxx shares;
issued and outstanding – xxx and xxx shares) xxx xxx FSP 5
Common stock – Class A ($0.01 par value;
authorized – xxxx shares; issued and
outstanding – xxx and xxx shares) xxx xxx FSP 5
2-4 PwC
Balance sheet
FSP Guide
Liabilities, redeemable preferred stock, and December 31, December 31, chapter
stockholders’ equity 20X6 20X5 reference
Treasury stock, at cost (xxx and xxx shares
held) (xxx) (xxx) FSP 5
12
Additional paid-in capital xxx xxx FSP 5
Accumulated other comprehensive income13 xxx xxx FSP 4
Retained earnings14 xxx xxx FSP 5
Total stockholders’ equity attributable to FSP Corp
stockholders xxx xxx
Noncontrolling interests in consolidated FSP 5/
subsidiaries xxx xxx FSP 18
Total stockholders’ equity xxx xxx
Total liabilities, redeemable preferred stock, and
equity $ xxx $ xxx
See Notes to the Consolidated Financial Statements

1 Regulation S-X 5-02(1) requires segregation on the balance sheet of funds legally
restricted as to withdrawal, including compensating balances.
2 The caption in S-X 5-02 is “accounts and notes receivable.” This balance sheet assumes
that each account is material and is included individually. S-X 5-02 does require separate
captions for amounts receivable from (1) customers (trade), (2) related parties,
(3) underwriters, promoters, and employees (other than related parties) that arose in
other than the ordinary course of business, and (4) others.
3 S-X 5-02 permits allowances to be set forth separately in the balance sheet or in a note.
ASC 210-10-45-13 requires allowances to be deducted from the asset group to which
they relate.
4 In practice, lessors typically show the contra-asset, unearned income, in the footnotes.
New guidance
After adoption of ASU 2016-02, Leases, codified in ASC 842, lessors will include the
same caption, net investment in leased property, to represent the aggregate net
investment in sales-type and direct financing leases. For operating leases, there will be
no change to lessors’ presentation. Lessors will not record anything pertaining to the
lease; they will retain the leased asset on their books.
Lessees will have captions called “right-of-use assets” and “lease liabilities” for all leases,
with the current and noncurrent portions separately reported using the guidance in
FSP 2.3.4. Right-of-use assets from operating leases and finance leases may not be
included in the same balance sheet line item. Similarly, lease liabilities from operating
leases and finance leases may not be included in the same balance sheet line item.
However, in both cases, while the amounts related to finance and operating leases
cannot be combined with each other, such balances could be combined with other
relevant line items on the balance sheet (e.g., a finance lease asset could be combined
with PPE). If such amounts are combined with other relevant line items, they must be
disclosed in the footnotes along with the balance sheet line item in which they are
included. See
LG 9.2.1.
See FSP 14 for information on the effective date of ASC 842.
PwC 2-5
Balance sheet
5 S-X 5-02 requires separate captions for (1) deferred income taxes, (2) deferred tax
credits, and (3) material items of deferred income. ASC 740 requires an entity to net all of
the deferred tax assets and liabilities classified as current and, separately, to net all of the
deferred tax assets and liabilities classified as noncurrent, when eligible, unless facts and
circumstances would prevent such netting. An example would be current assets and
current liabilities in different jurisdictions, in which case the right of offset is not permitted.
New guidance
After adoption of ASC 2015-17, Balance Sheet Classification of Deferred Taxes, entities
will classify net deferred tax assets and liabilities by jurisdiction, along with any related
valuation allowance, as noncurrent, when eligible, unless facts and circumstances
prevent such netting. An example would be assets and liabilities in different jurisdictions,
in which case the right of offset is not permitted.
See FSP 16 for information on the effective date of ASU 2015-17.
6 New guidance
After adoption of ASU 2014-09, reporting entities will present contract assets and
liabilities on their balance sheets when one of the parties to a contract has performed
before the other. See RR 12.2.1.
7 Per ASC 840-30-50-2, assets recorded under capital leases may be combined with
owned assets, and are often included in the Property, Plant, and Equipment line item.
After adoption of ASC 842, capital leases will be called finance leases.
8 Caption required by ASC 350-20-45-1.
9 The caption in S-X 5-02 is “accounts and notes payable.” This balance sheet assumes
that each account is material and is included individually. S-X 5-02 does require separate
captions for amounts payable to (1) banks for borrowings; (2) factors or other financial
institutions for borrowings; (3) holders of commercial paper; (4) trade creditors;
(5) related parties; (6) underwriters, promoters, and employees (other than related
parties); and (7) others. Amounts applicable to (1), (2), and (3) may be stated separately
in the balance sheet or in a footnote.
10 Required to be a separate caption, even without a dollar amount, if the reporting entity
includes a footnote describing commitments and contingencies. See FSP 23.
11 This is “mezzanine equity” or temporary equity and is only required for SEC registrants.
Determining whether certain instruments are required to be classified as mezzanine
equity is discussed in FG 4 and presentation and disclosure of mezzanine equity is
discussed in FSP 5.6.3.
12 If applicable, S-X 5-02 requires that other additional capital be shown separately.
13 Caption required by ASC 220-10-45-14.
14 S-X 5-02 requires separate captions for (1) appropriated and (2) unappropriated retained
earnings.
15 New guidance
After adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset (that is, securities or loans and
receivables) on the balance sheet or in the footnotes will be required.
2.3 General presentation requirements

The rules that govern the presentation of the balance sheet components are
intended to aid comparability between reporting entities. Reporting entities
should consider chronology, individually significant account balances that may
warrant further disaggregation, classified balance sheet requirements, and how
the operating cycle impacts classification. While most reporting entities present
the balance sheet in order of liquidity (i.e., starting with the most liquid asset,
cash), there is no specific requirement within US GAAP. Certain industries, such
2-6 PwC
Balance sheet
as public utility companies, may present prominent assets such as property, plant
and equipment as the first line on the balance sheet.
Comparative information provides a more comprehensive view of a reporting

entity’s financial position as compared to information that presents a single
period of results. A US GAAP balance sheet is typically presented for two fiscal
years in a comparative format, as described in ASC 205-10-45. However,
presenting a single fiscal year would also be in compliance with US GAAP as
comparative balance sheets are not required for private companies. However,
ASC 205-10-45-2 states that comparative statements are “desirable.”
The guidance for SEC registrants is more explicit regarding the required
reporting periods for balance sheets. S-X 3-01(a) requires that SEC registrants
file the most recent two fiscal years of audited balance sheets.
Prior-year figures presented in a comparative format are expected to be

comparable to those shown in the most recent fiscal year. There may be instances
when changes to prior year figures are necessary to achieve comparability, such
as reclassifications, changes in accounting principles, or corrections of errors. See
FSP 30 for further discussion of such changes.
2.3.2 Chronology
SAB Topic 11.E indicates that the chronology of the periods presented in the
balance sheet and tables within the financial statements do not require a
particular sequence (e.g., earliest period to latest period). However, the reporting
entity should consistently use the order chosen throughout the filing (i.e., same
chronological order from left to right). While this is specific to SEC registrants,
we encourage consistent ordering of financial statement presentation for all
reporting entities.
2.3.3 Individually significant account balances
S-X 5-02 requires SEC reporting entities to separately present individual balance
sheet amounts that exceed certain quantitative thresholds. The following are the
criteria for determining whether separate presentation is required on the face of
an SEC registrant’s balance sheet or in its footnotes:
□ Current assets with amounts greater than 5% of total current assets
□ Any other assets with amounts in excess of 5% of total assets that are not
properly classified in one of the existing asset captions
□ The aggregate amount of notes receivable, if it exceeds 10% of total

receivables
□ Each class of intangible assets with amounts in excess of 5% of total assets

(required to be on the face of the balance sheet per S-X 5-02)
□ Current liabilities with amounts greater than 5% of total current liabilities
PwC 2-7
Balance sheet
Reporting entities frequently separately present items such as accrued

interest under this criterion when those balances are individually significant.
The current portion of long-term debt is often required to be presented
separately as a result of this threshold.
□ Any other liabilities with amounts in excess of 5% of total liabilities that are
not properly classified in one of the existing liability captions
2.3.4 Classified balance sheet
S-X 5-02 requires a classified balance sheet and ASC 210-10-05-4 notes that most
reporting entities present a classified balance sheet. A classified balance sheet
provides useful information regarding a reporting entity’s level of working
capital, a metric used in analyzing liquidity and near-term financial condition.
The ASC Master Glossary defines current assets and current liabilities.
Definitions from ASC Master Glossary

Current Assets: Current assets is used to designate cash and other assets or
resources commonly identified as those that are reasonably expected to be
realized in cash or sold or consumed during the normal operating cycle of the
business.
Current Liabilities: Current liabilities is used principally to designate obligations

whose liquidation is reasonably expected to require the use of existing resources
properly classifiable as current assets, or the creation of other current liabilities.
ASC 210-10-45 provides guidance on what is included in current assets and

current liabilities that comprise working capital. The FASB guidance and the SEC
guidance are aligned on what is considered current. It is based on the reporting
entity’s operating cycle.
2.3.4.1 Operating cycle
Reporting entities generally use a 12-month cycle when determining whether

classification should be current or noncurrent. However, the classification should
align with the business’ operating cycle, which could be more, but not less, than
12 months. The ASC Master Glossary defines operating cycle.
Definition from ASC Master Glossary

Operating Cycle: The average time intervening between the acquisition of
materials or services and the final cash realization constitutes an operating cycle.
2-8 PwC
Balance sheet
Figure 2-2 illustrates an operating cycle.
Figure 2-2
Sample operating cycle for a commercial and industrial products company
ASC 210-10-45-3 provides guidance on the operating cycle that reporting entities
should use in various situations. Figure 2-3 summarizes those requirements.
Figure 2-3
How to determine time period for current classification
Operating cycle of the Operating cycle for determining

business current classification
Less than one year (such as in One year

Figure 2-2)
Longer than one year (such as a Same as the business’ operating cycle
tobacco, distillery, or lumber (i.e., the longer time period)
business)
Not clearly defined One year
Once the reporting entity determines its operating cycle, it should analyze each
asset and liability to determine if it should be classified as current or noncurrent
or if it should be separated into both a current and noncurrent classification.
Certain financial statement captions or account balances, such as deferred

income taxes (FSP 16), may have specific guidance with respect to classification
as current or noncurrent that does not necessarily align with the operating cycle
determination.
PwC 2-9
Balance sheet
Example 2-1 demonstrates the application of the operating cycle principle.
EXAMPLE 2-1
Classification of accrued rent obligation as current and noncurrent1
FSP Corp is the lessee of an office building for a lease term of five years beginning
on January 1, 20X6. The lease is classified as an operating lease and payments
increase by a stated amount in each of the five years to approximate inflation.
The expense is recognized on a straight-line basis over the lease term. The rent
payments by year and corresponding expense and accrued rent are as indicated
below:
Year ending Rental payment Rent expense Accrued rent
December 31, 20X6 $100 $110 ($10)
December 31, 20X7 $105 $110 ($15)
December 31, 20X8 $110 $110 ($15)
December 31, 20X9 $115 $110 ($10)
December 31, 20X0 $120 $110 ($ 0)
How should FSP Corp classify the accrued rent obligation at December 31, 20X8?
Analysis
On December 31, 20X8, FSP Corp should record a portion of the accrued rent,
$5, as a current liability. This is based on the definition of a current liability,
which is an obligation that will be liquidated by existing resources that are
classified as current. In this example, cash will be used to liquidate the $5
obligation during FSP Corp’s next operating cycle and therefore that obligation
meets the definition of a current liability. In 20X9, FSP Corp will be paying cash
in excess of the expense recorded, which will have the effect of liquidating the $5
accrued rent liability.
Not all assets and liabilities will have a current and noncurrent allocation. For
example, although a portion of property, plant, and equipment and intangible
assets will typically be depreciated or amortized during a reporting entity’s
operating cycle, the amount represents an allocation of the asset cost to operating
expenses rather than an amount that is directly realized in cash or through
consumption of the asset during the operating cycle; therefore, the entire asset
should be classified as noncurrent.
1 This example will change upon adoption of ASC 842.
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Balance sheet
2.4 Balance sheet offsetting

Balance sheet offsetting is permitted when a right of setoff exists and certain
criteria are met.
ASC 210-20-45-1 provides guidance on the right of setoff. It lists four criteria that
determine whether a right of setoff exists. If all four criteria are met, the
reporting entity may present the asset and liability as a net amount on the
balance sheet.
ASC 210-20-45-1
A right of setoff exists when all of the following conditions are met:
a. Each of two parties owes the other determinable amounts.
b. The reporting party has the right to set off the amount owed with the
amount owed by the other party.
c. The reporting party intends to set off.
d. The right of setoff is enforceable at law.
Three of these criteria are objectively determinable; however, determining the

intent of the reporting party may require judgment. ASC 210-10-45-5 notes that
historical precedent is an indicator to consider in evaluating intent of the
reporting entity. If the reporting entity has executed a settlement by offsetting
balances with the other party in prior transactions, it may be appropriate to
expect a similar offset in the future, provided the reporting entity asserts its
intention to offset the balances. Generally, a reporting entity cannot present an
asset and liability with another party net if the reporting entity does not intend to
offset, even if all other criteria are met, except for derivatives, repurchase/reverse
repurchase and stock lending agreements, which are subject to additional
offsetting requirements as discussed in FSP 19 and 22.
The offsetting guidance relates to presentation only; its scope does not extend to
derecognition of assets and liabilities. For example, presenting an asset and
liability of equal value net on the balance sheet does not result in the
derecognition of the contractual right and obligation. Therefore, reporting
entities should include the gross amounts in disclosure, despite the amounts
being all or partially eliminated from presentation on the balance sheet. Further,
the offsetting guidance does not permit a reporting entity to record or disclose
that debt or a note payable has been extinguished through the presence of a debt
service fund or similar collateral arrangement.
The following questions address basic scenarios. In practice, contracts may not be
as transparent as demonstrated in these scenarios when determining the ability
to offset. Reporting entities should consider discussion with legal counsel to
evaluate legal enforceability of set off rights.
PwC 2-11
Balance sheet
Question 2-1
A reporting entity issued industrial revenue bonds (IRBs) to construct pollution
control facilities. The bond proceeds are in a trust to be drawn down for
construction purposes based upon approved invoices. Can the reporting entity
offset the funds held in a trust against the IRB liability?
PwC response
No. The funds held in a trust are intended to be used for asset construction, not
debt repayment; therefore, not all of the criteria in ASC 210-20-45-1 are met.
Specifically, there is no intent to set off.
Question 2-2
Sub Co borrows money from a third-party lender and lends the funds to a
partnership, which uses the funds to pay existing debt of the partnership. The
partnership is 50%-owned by Sub Co’s parent company. Parent Co accounts for
its investment in the partnership using the equity method. Parent Co intends to
have Sub Co pledge its receivable from the partnership as collateral for the bank
loan.
In preparing its consolidated balance sheet, should Parent Co offset Sub Co’s note
receivable from the partnership against Sub Co’s note payable to the bank?
PwC response
No. It is only appropriate to offset an asset and liability under a legal right of
setoff when they represent amounts due to and from the same party.
2.5 Noncontrolling interests

Reporting entities should present any noncontrolling interest as a separate
component of stockholders’ equity, distinct from the equity attributable to the
controlling shareholders. If there are noncontrolling interests (NCI) in multiple
subsidiaries, the reporting entity may elect to aggregate them.
In some circumstances, reporting entities will classify NCI outside of

stockholders’ equity, either as a mezzanine instrument or as a liability. See
BCG 2.6.5 and ASC 480-10-S99-3A for a discussion of circumstances that may
require these alternative classifications. There are additional disclosure
requirements in these circumstances, similar to those for redeemable preferred
stock. Refer to FSP 5.6.3 for presentation and disclosure requirements for
redeemable preferred stock.
2.6 Considerations for private companies

The balance sheet presentation requirements for private companies are largely
the same as those for SEC registrants. One notable difference is the SEC rules on
mezzanine equity in ASR 268, which requires presentation of certain instruments
subject to redemption in mezzanine equity. While this is only applicable for SEC
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Balance sheet
registrants, we strongly encourage such presentation for all reporting entities.

See further discussion in FSP 5.6.3.
Other notable differences are:
□ The SEC requirement in S-X 3-01(a) that comparative statements be

presented
Although not required for private companies, ASC 205-10-45-2 states that
comparative financial statements are “desirable.”
□ S-X 5-02 quantitative thresholds for determining which balances should be

separately presented on the face of the balance sheet
PwC 2-13
Chapter 3:
Income statement
PwC 3-1
Income statement

This chapter provides an overview of the income statement, including its format,
organization, and contents. The example statement presented in this chapter
(1) provides presentation requirements for certain line items that are required to
be identified separately, and (2) includes references to other sections of this
chapter or other chapters of this guide for detailed presentation and disclosure
considerations. This chapter focuses solely on the income statement and does not
include discussion of the statement of comprehensive income, which is discussed
in FSP 4.
3.2 Scope
The statement of income is referred to by various names, such as the income
statement, statement of operations, statement of earnings, or others. Whatever
name is used, its purpose is the same: to provide users of the financial statements
with a measurement of a reporting entity’s results of operations over a period of
time. This allows users to make important investing, lending, and other decisions
by understanding trends of key measures such as sales and profitability. The
income statement contrasts with the balance sheet, which provides a measure of
financial position at a point in time. It also contrasts with the statement of
comprehensive income, which shows the change in a reporting entity’s equity
from all sources (net income, as well as revenues, expenses, gains, and losses
included in comprehensive income but excluded from net income).
Authoritative guidance
Various accounting standards include guidance on the income statement

presentation and related disclosure of certain transactions. The other chapters of
this guide provide such requirements for specific topics. This chapter covers
requirements that are more general in nature, or that are not covered by other
chapters. The list below includes some of the authoritative guidance that is more
pervasive for purposes of income statement presentation, but it is not a
comprehensive list.
Presentation
□ ASC 205, Presentation of Financial Statements
□ ASC 225, Income Statement
□ ASC 235, Notes to Financial Statements
Revenues
□ ASC 605, Revenue1
1The requirements of the new revenue recognition standard (ASC 606) are covered in PwC’s
accounting and financial reporting guide, Revenue from contracts with customers, global edition,
and are not discussed in this guide.
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Income statement
Expenses
□ ASC 720, Other Expenses
SEC
□ Regulation S-X Articles 3, 4, and 5
□ SAB Topic 1.B, Allocation Of Expenses And Related Disclosure In Financial

Statements Of Subsidiaries, Divisions Or Lesser Business Components Of
Another Entity
□ SAB Topic 5.P, Restructuring Charges
□ SAB Topic 13.A, Selected Revenue Recognition Issues
3.3 Format of the income statement

The income statement can be presented in a “one-step” or “two-step” format. In a
“one-step” format, revenues and gains are grouped together, and expenses and
losses are grouped together. These amounts are then totaled to show net income
or loss. In a “two-step” format, subtotals are used to show decision-useful line
items such as gross margin and operating income separately from non-operating
income and net income or loss. Many commercial and industrial reporting
entities use a “two-step” format.
Although income statements are generally presented in the formats noted above,
reporting entities can also present an income statement by function (e.g., cost of
sales, selling expense, administrative expense) or by nature (e.g., payroll expense,
advertising expense, rent expense). The latter approach may be easier to prepare
in some cases, but it does not present cost of sales, so no gross margin
information can be determined.
S-X 5-03 indicates the various line items that, if applicable, should appear on the
face of income statements filed with the SEC. Figure 3-1 illustrates the format of a
typical “two-step” income statement.
3.3.1 Sample income statement
The captions included in an income statement will vary across reporting entities
based on their applicability to each entity’s business. Figure 3-1 is a sample
income statement that includes the line items required by S-X 5-03 (in bold
font) and other commonly used captions. All required line items may not be
applicable to all reporting entities.
Certain captions are permitted to be presented separately in the income
statement by US GAAP. Those are indicated in regular font and footnoted.
Reporting entities should present these line items separately when material.
Other presentation requirements may be satisfied in the footnotes. If S-X 5-03
indicates the placement of the detailed information is optional, the caption is in
regular font.
PwC 3-3
Income statement
Detailed presentation and disclosure requirements are addressed in the relevant

sections of this chapter and other chapters of this guide (where applicable), as
noted in the last column of the figure.
Figure 3-1
Sample consolidated “two-step” income statement
FSP Corp
Consolidated Statements of Operations
For the years ended December 31, 20X6, 20X5, and 20X4
FSP
chapter
or section
20X6 20X5 20X4 reference
In millions $, In millions $, In millions $,

except per except per except per
share data share data share data
Net sales $xxx $xxx $xxx 3.5
Cost of sales (xxx) (xxx) (xxx) 3.6
Gross profit xxx xxx xxx 3.7.3
Other operating
expenses xxx xxx xxx 3.7
Selling, general, &

administrative
expenses (xxx) xxx (xxx) 3.7
Provision for doubtful

accounts and notes (xxx) (xxx) (xxx) 3.7.2
Depreciation expense1 (xxx) (xxx) (xxx) 3.7.3
Impairment loss2 — (xxx) — 3.7.4
Restructuring expense3 (xxx) (xxx) — 3.7.6
Other general expenses (xxx) (xxx) (xxx) 3.7.10
Non-operating income xxx xxx xxx 3.8
Interest and (xxx) (xxx) (xxx) FSP 12

amortization of debt
discount and expense
1 Reporting entities may choose to present depreciation expense separately in the income statement to
fulfill the requirements of ASC 360-10. Refer to FSP 3.7.3 for further details.
2 Reporting entities may choose to present impairment loss separately in the income statement to
fulfill the requirements of ASC 360-10.
3 Reporting entities may choose to present exit or disposal activities covered by ASC 420-10
separately within continuing operations as long as those activities do not involve a discontinued
operation.
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Income statement
FSP
chapter
or section
Non-operating
expenses (xxx) (xxx) (xxx) 3.8
Income (loss) from

continuing operations
before income tax
expense xxx xxx (xxx) 3.9.1
3.9.2/
Income tax expense (xxx) (xxx) (xxx) FSP 16
3.9.3/
Equity in earnings of
unconsolidated entities xxx xxx (xxx) FSP 10
Income (loss) from

continuing operations xxx xxx (xxx) 3.9.4
3.9.5/
Discontinued
operations — xxx — FSP 27
Income (loss) before

cumulative effects of
changes in accounting
principles xxx xxx (xxx) 3.9.6
Cumulative effects of 3.9.7/

changes in accounting
principles — xxx — FSP 30
Net income (loss) xxx xxx (xxx) 3.9.8
Less: Net income (loss)

attributable to 3.9.9/
noncontrolling interests xxx (xxx) (xxx) FSP 18
Net income (loss)

attributable to parent $xxx $(xxx) $(xxx) FSP 18
Net income (loss)

3.9.10/
attributable to entity per
FSP 7
common share—basic
3.9.10/
Continuing operations x.xx x.xx x.xx FSP 7
3.9.10/
Discontinued
operations N/A x.xx N/A FSP 7
3.9.10/
Net income (loss) x.xx x.xx x.xx FSP 7
PwC 3-5
Income statement
FSP
chapter
or section
Net income (loss)

3.9.10/
attributable to entity per
FSP 7
common share – diluted
3.9.10/
Continuing operations x.xx x.xx x.xx FSP 7
3.9.10/
Discontinued
operations N/A x.xx N/A FSP 7
3.9.10/
Net income (loss) x.xx x.xx x.xx FSP 7
See Notes to the Consolidated Financial Statements
3.4 General presentation and disclosure

requirements
ASC 225 is the primary guidance that provides the requirements for information
included in the income statement. This includes ASC 225-10-S45 and 10-S99,
which capture the guidance also included in Articles 3, 4, and 5 of SEC
Regulation S-X. For purposes of this guide, we have focused on commercial and
industrial companies, which are subject to Article 5. Other types of reporting
entities (i.e., registered investment companies, employee stock purchase and
similar plans, insurance companies, smaller reporting companies, banks and
bank holding companies, and brokers and dealers that file Form X-17A-5) are
subject to other SEC regulations not addressed in this guide.
An income statement is typically presented for at least two fiscal years in a

comparative format, as described in ASC 205-10-45. Presenting a single fiscal
year would also be in compliance with US GAAP. However, ASC 205-10-45-2
states that comparative statements are “desirable.”
The guidance for SEC registrants is more explicit regarding the required
reporting periods for income statements. S-X 3-02 requires that SEC registrants
present the most recent three fiscal years of audited income statements, except
for qualifying emerging growth companies and smaller reporting companies,
which are permitted to present only two years of audited financial statements.
Prior year amounts presented in a comparative format are expected to be

comparable to those shown in the most recent fiscal year. There may be instances
where changes to prior year amounts are necessary to achieve comparability,
such as changes in accounting principles. See FSP 30 for further discussion of
such changes.
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Income statement
3.4.2 Thresholds for presenting separate revenue categories and related

costs
S-X 5-03(1) requires separate presentation in the income statement for any of the
following revenue categories that exceed 10% of total revenues:
□ Net sales of tangible products (gross sales less discounts, returns, and
allowances)
□ Service revenues
□ Income from rentals
□ Operating revenues of public utilities
□ Other revenues
The cost and expenses related to each revenue category must also be reflected
separately in the income statement.
Any revenue categories that are individually 10% or less of total revenues for all
periods presented may be combined into one line item in the income statement.
The related costs and expenses should also be combined to be consistent with the
revenue categories presented. These threshold rules align with the principle
described in S-X 4-02, which indicates that items that are not material do not
need to be shown separately.
The following figure illustrates how revenue and cost of sales may be presented in
the income statement.
Figure 3-2
Presentation of revenue and related cost categories
Revenue:
Product $100
Service $80
Total revenue $180
Cost:
Product $40
Service $60
Total cost $100
Gross margin $80
This threshold requirement does not apply to interim financial statements,
though it is often followed in practice. Interim-specific requirements are
discussed in FSP 29.
PwC 3-7
Income statement
3.5 Sales and revenues

SAB Topic 13.A, Selected Revenue Recognition Issues, requires an SEC registrant
to disclose its revenue recognition accounting policy, primarily because of the
level of judgment generally involved in revenue recognition. Although the SAB
Topics are not applicable to private companies, we believe private companies
should generally provide similar disclosures.
If a reporting entity has different policies for different types of revenue

transactions, it should disclose the policy for each material type of transaction.
The same is true for sales transactions that have multiple units of account
(e.g., product and service). Additionally, the reporting entity should disclose how
units of account are determined and measured.
Reporting entities use various descriptions for the categories of revenue

presented on the face of the income statement. Such descriptions are based on
facts and circumstances of each reporting entity and may include industry
considerations. Some examples of these descriptions include:
□ Net revenues □ Software revenue
□ Net sales □ Hardware revenue
□ Product revenue □ Subscription revenue
□ Service revenue □ Advertising revenue
Question 3-1
When the revenue recognition guidance does not allow for separation of multiple
deliverables into different units of accounting specifically due to a lack of
evidence of fair value, how should a reporting entity separate the total revenue
into separate classes of revenues (e.g., software revenues and services revenues)
for income statement presentation purposes in order to comply with the
requirements of S-X 5-03(1)?
PwC response
Reporting entities should allocate revenue recognized into separate income
statement classes of revenue using a reasonable and systematic method that is
consistently applied. A reporting entity may not simply default to the contractual
value in the arrangement or to a subjective allocation. This is true even if that
model is consistently applied.
A reasonable basis generally consists of estimates based on objectively verifiable

inputs. For example, third party evidence of fair value would be a reasonable
basis for separately displaying software deliverables that require vendor specific
objective evidence (VSOE) of fair value for revenue recognition purposes.
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Income statement
If material to the financial statements, the reporting entity should also provide
transparent disclosures regarding the methodology and basis for separating the
elements for disclosure purposes.
If a reporting entity is not able to identify a reasonable basis for separately

displaying revenues from multiple deliverable transactions, presentation of a
single line item (i.e., combining service and product revenue in the same line
item for these types of arrangements) would be acceptable. We expect this
situation to arise in limited instances, such as those involving multiple-element
software arrangements. This is because the multiple-element arrangement
guidance allows for the use of the best estimated selling price (BESP) to separate
deliverables, except in certain circumstances (i.e., software revenue recognition).
EXAMPLE 3-1
Separately displaying revenues in a multiple-element arrangement
FSP Corp, a software company, has a multiple-element arrangement for $100

that includes products and services. The entire arrangement is accounted for
pursuant to revenue recognition guidance within ASC 985, Software. The stated
contractual values are $60 for the software and $40 for the services. FSP Corp
does not have VSOE of fair value for any of the deliverables. Accordingly, the
arrangement will be accounted for as a single accounting unit for recognition
purposes. FSP Corp determines that the appropriate revenue recognition model
is to recognize the $100 ratably over the period the services are delivered.
Although FSP Corp does not have VSOE for all of the deliverables, management
believes that separately presenting product and service revenues and the related
costs in the income statement provides more useful information to investors than
a single line item presentation.
Is it appropriate for FSP Corp to separately present product and service revenues
even though the reporting entity does not have VSOE for all the deliverables?
Analysis
Yes. Such presentation is acceptable as long as the allocation methodology is

consistently applied and clearly disclosed. In this case, FSP Corp determines an
allocation methodology based on its internal price list and allocates $45 to
software and $55 to services. FSP Corp will therefore present $45 as product
revenue and $55 as service revenue ratably in its income statement for this
arrangement over the service period. For example, if the service period is five
months, one-fifth, or $9 of product revenue and $11 of service revenue, will be
recognized after the first month of service delivery. The related product and
service costs will also be presented separately in the income statement, utilizing
the actual costs of the products and services.
3.5.1 Revenues versus gains
The ASC Master Glossary includes certain industry and topic-specific definitions
of revenues and gains, but does not provide broad definitions of these terms.
PwC 3-9
Income statement
However, CON 6, Elements of Financial Statements, provides some insight into

the types of activities that should be presented as revenues and those that should
be presented as gains.
Excerpts from CON 6, paragraphs 78 and 82

Revenues are inflows or other enhancements of assets of an entity or settlements
of its liabilities (or a combination of both) from delivering or producing goods,
rendering services, or other activities that constitute the entity’s ongoing major or
central operations.
Gains are increases in equity (net assets) from peripheral or incidental

transactions of an entity and from all other transactions and other events and
circumstances affecting the entity except those that result from revenues or
investments by owners.
Certain transactions clearly result in revenues as compared to gains, while the

distinction for other transactions may not be as clear.
Question 3-2
A reporting entity negotiates directly with scrap merchants to sell the scrap
materials resulting from its manufacturing process. How should the reporting
entity classify the sale of scrap raw materials in its income statement?
PwC response
There is no specific guidance addressing the classification of the proceeds from
scrap sales. As noted in CON 6, revenue results from activities representing
ongoing major or central operations. If the sale of scrap material meets this
criteria, it may be appropriate to characterize the sales as revenue. Judgment may
be required in this assessment.
For example, if the reporting entity has a business plan that focuses on sales and
profit targets with respect to scrap, this may indicate that scrap sales would be
appropriately reflected as revenue. Alternatively, if the reporting entity considers
sales of scrap when budgeting manufacturing overhead rates, this may indicate
scrap sales should be reflected as a reduction of costs of sales. Depending on the
facts and circumstances, scrap sales could alternatively be recorded as other
income in operations.
EXAMPLE 3-2
Sale of revenue-generating equipment
FSP Corp, an equipment rental entity, purchases equipment to be used to

generate rental revenue. The costs to acquire the equipment are capitalized as
revenue-generating equipment and depreciated over their useful lives. In 20X6,
several vehicles are sold to a third party at the end of their useful lives after being
3-10 PwC
Income statement
fully depreciated, resulting in an amount being recovered that exceeds the

residual value.
Should FSP Corp present some amount (i.e., either the total sale amount or the
excess over the residual value) as revenue?
Analysis
Based on the fact pattern, FSP Corp should not recognize any amount as revenue.
If the company’s “ongoing major or central operations” consist of renting
equipment, then the amounts resulting from the sale of revenue-generating
equipment should generally not be characterized as revenue. Rather, the activity
constitutes the disposal of an asset for which an operating gain (in this case)
should be recorded.
EXAMPLE 3-3
Sale of patent
FSP Corp is a pharmaceutical company that is in the business of licensing and

selling patents in its patent portfolio. FSP Corp enters into an agreement with a
third party to sell a recently approved patent for cash.
How should FSP Corp present the consideration received for the sale of the
patent?
Analysis
As FSP Corp is in the business of routinely licensing and selling patents in its
patent portfolio, it would be appropriate to present the consideration received as
revenue. If FSP Corp was not in the business of routinely licensing and selling its
patents, but nonetheless sold one of its patents to a third party, it would likely be
more appropriate to present a gain on sale of the patent.
3.5.2 Income from litigation settlements
Determining the appropriate presentation of amounts received from litigation

settlements can be particularly challenging. There are situations where the
receipt of litigation settlements represent revenue, and others where the
settlement receipts represent gains. When litigation settlements involve multiple
elements, a reporting entity must identify each item given and received and
determine how those items should be recognized and classified.
3.5.3 Gross versus net revenue presentation
Arrangements often involve two or more unrelated parties that contribute to

providing a good or service to a customer. ASC 605-45 provides guidance to
determine whether a reporting entity should present revenue based on the gross
PwC 3-11
Income statement
amount billed to a customer or the net amount retained (that is, the amount
billed to a customer less the amount paid to a supplier). The decision to record
revenue on a gross versus net basis is often a matter of significant judgment that
is dependent upon the relevant facts and circumstances. Once the accounting
determination is made, the presentation on the income statement should be clear
as to which method is being applied. Footnote disclosure should describe the
accounting policy and the basis for such determination.
Question 3-3
A reporting entity reports revenues on a net basis in accordance with
ASC 605-45. For those transactions reported net, the reporting entity considers
gross transaction volumes to be a useful statistic, and believes the best
presentation for such amounts is on the face of the income statement.
What forms of gross presentation on the income statement are considered

acceptable in this fact pattern?
PwC response
ASC 605-45 allows for the voluntary disclosure of gross transaction volumes for
revenues reported on a net basis. The following factors should be considered if
gross transaction volumes are disclosed on the face of the income statement:
□ Gross transaction volumes should not be characterized as revenues (e.g., a

description such as “gross billings” may be appropriate), nor should they be
reported in a column that sums to net income or loss.
□ While alternative formats may be permitted, the key is to ensure that the
income statement does not give the impression that it begins before the line
item that represents revenues reported on a net basis.
□ Gross transaction volumes should not be presented in a manner where the

gross transactions sum to the revenues reported on a net basis per
ASC 605-45.
3.5.4 Shipping and handling fees and costs
Any amounts billed to a customer in a sale transaction related to shipping and

handling represent revenues earned for the goods provided and should be
classified as revenue in accordance with ASC 605-45.
The definition of what is included in shipping and handling costs and their
classification on the income statement is an accounting policy decision. However,
deducting these handling costs from revenues (i.e., netting any such costs against
shipping and handling revenues) is not permitted. If the reporting entity does not
record shipping and handling costs in cost of sales, the reporting entity must
disclose the line item that includes the shipping and handling costs and the
related amount, if significant. Note that significance is measured with respect to
both absolute dollars and the effect on reported gross margin.
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Income statement
3.5.5 Out-of-pocket reimbursements
Expenses are often incurred by service providers while performing work for their
customers. These can include costs for travel, meals, accommodations, and
miscellaneous supplies. It is common for the parties to agree that the customer
will reimburse the service provider for some or all of these out-of-pocket
expenses. ASC 605-45 indicates that reimbursements received by a reporting
entity for its out-of-pocket expenses should be characterized as revenue.
3.5.6 Taxes collected from customers and remitted to governmental

authorities
ASC 605-45 also provides guidance on the income statement classification of

taxes collected from customers on behalf of a governmental authority. Taxes
within the scope of this guidance include any tax assessed by a governmental
authority that is imposed on a specific revenue-producing transaction, and may
include sales, use, value added (VAT), some excise, or other taxes. Tax schemes
that are based on gross receipts and taxes that are imposed during the inventory
procurement process are not within the scope of ASC 605-45.
Taxes within the scope of ASC 605-45 may be reported on either a gross basis
(included in revenues and costs) or on a net basis (excluded from revenues) as an
accounting policy election. A reporting entity should disclose its accounting
policy applied to each type of tax collected on behalf of governmental authorities.
Reporting entities should also disclose the amounts of any taxes reported on a
gross basis for each period for which an income statement is presented, if those
amounts are significant. This information can be disclosed on an aggregate basis.
S-X 5-03(1) requires that excise taxes amounting to 1% or more of total sales and
revenues be disclosed on the face of the income statement, parenthetically or
otherwise.
Question 3-4
A reporting entity collects sales taxes from customers in one jurisdiction and VAT
in another jurisdiction. Could the reporting entity elect to report the sales taxes
on a gross basis and the VAT on a net basis?
PwC response
Yes. We believe the accounting policy election may be applied to each type of tax
within the scope of ASC 605-45 (e.g., sales taxes may be presented on a gross
basis while VAT may be presented on a net basis).
3.5.7 Sales incentives
A sales incentive is any consideration given by a vendor to a customer to induce

current or future sales. Sales incentives can take many forms, and include
consideration given by vendors to either distributors or end users (customers).
Examples of sales incentives include, but are not limited to, credits, coupons,
PwC 3-13
Income statement
rebates, customer loyalty programs, price protection, and product placement

fees.
Reporting entities should carefully consider classification, timing, and
measurement of the consideration provided when recording sales incentives,
which can be a matter of significant judgment. ASC 605-50 provides guidance on
the accounting for consideration given by a vendor to a customer, including
whether such amounts should be presented as contra-revenue or an expense.
Footnote disclosure should describe the accounting policy and the basis for such
determination.
3.5.8 Negative revenue and upfront payments to customers
Negative revenue may arise from transactions or changes in estimates that are
required to be characterized as a reduction of revenue.
ASC 605-50-45-7
If amounts are required to be characterized as a reduction of revenue under this
or any other Topic, a presumption exists that no portion of those amounts shall
be recharacterized as an expense. However, if a vendor demonstrates that
characterization of those amounts as a reduction of revenue results in negative
revenue for a specific customer on a cumulative basis (that is, since the inception
of the overall relationship between the vendor and the customer), then the
amount of the cumulative shortfall may be recharacterized as an expense.
The illustrations in ASC 605-50-55 discuss some of the guidance and underlying
circumstances that could result in negative revenue.
With respect to vendor upfront cash consideration tendered at the start of a
customer relationship, ASC 605-50 includes the following guidance.
ASC 605-50-45-9
A vendor may remit or be obligated to remit cash consideration at the inception
of the overall relationship with a customer before the customer orders, commits
to order, or purchases any vendor products or services. Under the guidance in the
preceding two paragraphs, any resulting negative revenue may be recharacterized
as an expense if, at the time the consideration is recognized in the income
statement, it exceeds cumulative revenue from the customer. However,
recharacterization as an expense would not be appropriate if a supply
arrangement exists and either of the following circumstances also exists:
a. The arrangement provides the vendor with the right to be the provider of a
certain type or class of products or services for a specified period of time and
it is probable that the customer will order the vendor’s products or services.
b. The arrangement requires the customer to order a minimum amount of
vendor products or services in the future, except to the extent that the
consideration given exceeds probable future revenue from the customer
under the arrangement.
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When considering whether cumulative negative revenue exists for a specific

customer, a reporting entity should consider all transactions with the customer
that take place within the consolidated group.
3.5.9 Multiple-deliverable arrangements
Reporting entities with multiple-deliverable arrangements in the scope of

ASC 605-25 are required to disclose all of the following information by similar
type of arrangement:
□ The nature of such arrangements
□ The significant deliverables within the arrangements
□ The general timing of delivery or performance of service for the deliverables
□ Performance, cancellation, termination, and refund-type provisions
□ A discussion of the significant factors, inputs, assumptions, and methods

used to determine selling prices for the significant deliverables
□ Whether the significant deliverables in the arrangements qualify as separate

units of accounting and, if not, the reasons that they do not qualify
□ The general timing of revenue recognition for significant units of accounting
□ The effect of changes in either the selling price or the method or assumptions
used to determine selling price for a specific unit of accounting if either one
of those changes has a significant effect on the allocation of arrangement
consideration
The objective of the disclosure requirements is to provide both qualitative and

quantitative information necessary for a user of the financial statements to
understand the nature of the judgments made and any changes in those
judgments in recording arrangements with multiple deliverables, as they may
significantly affect the timing or amount of revenue recognition. Therefore, in
addition to the required disclosures above, reporting entities should disclose
other qualitative and quantitative information in order to satisfy this objective.
Question 3-5
ASC 605-25 requires that a reporting entity disclose information by similar type
of arrangement. What is meant by similar type of arrangement?
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PwC response
We believe reporting entities should consider the following aspects of its
multiple-deliverable arrangements when determining what constitutes similar
arrangements:
□ The products and services sold in the arrangements
□ The customers and markets to which the arrangements are sold
□ The terms of the arrangements
EXAMPLE 3-4
Presenting revenue in a multiple-deliverable arrangement
FSP Corp enters into an arrangement to sell Product A for $200 and Service B for
$200. It has concluded that the BESP for Product A is $300 and the BESP for
Service B is $200. Product A is delivered immediately following the signing of the
agreement. Service B will be delivered over a one-year period. Product A and
Service B qualify as separate units of accounting. All consideration is received
upfront, and there are no refund provisions or extended payment terms.
A relative allocation of the total contract consideration allocates the $400 of total
consideration in the following manner:
Deliverable Contract Amount BESP Relative Allocation

Product A $200 $300 (60%) $240 (60% of $400)
Service B $200 $200 (40%) $160 (40% of $400)
Total $400 $500 (100%) $400
However, the amount allocable to a delivered unit is limited to that amount that
is not contingent upon the delivery of additional units or meeting other specified
performance conditions (the non-contingent amount). Thus, the amount of
revenue recognized upon delivery of Product A is limited to $200.
How much revenue should FSP Corp present as product revenue and service
revenue from this arrangement?
Analysis
FSP Corp can select between two approaches to record the amounts allocated in
this example, which impact the classification, but not the timing, of amounts
recognized.
Approach 1
In this approach, $200 is recognized upon the delivery of Product A. Two

hundred dollars is the maximum amount allocable to Product A, since the
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contractual consideration for Product A is $200. The remaining $40 is allocated

to Service B and recognized as the service is performed. At the completion of this
contract, a total of $200 is recognized as product revenue and $200 recognized
as service revenue.
Approach 2
In this approach, $200 is recognized upon the delivery of Product A. The

remaining $40 allocated to Product A based on the relative allocation is
recognized pro rata as product revenue as Service B is performed, since that
amount of the contractual consideration is contingent upon the delivery of
Service B. At the completion of the contract under this approach, a total of $240
is recognized as product revenue and $160 recognized as service revenue.
3.5.10 Sales returns and exchanges
Although there are no explicit disclosure requirements for the sales returns
reserve, reporting entities may consider disclosing certain information about the
reserve if it is material or has changed significantly from prior periods. SEC staff
comment letters have focused on footnote disclosures related to reporting
entities’ right of return allowances (ASC 605-15), as well as disclosure of the
returns reserve activity (which is typically included in SEC filings as part of the
“valuation and qualifying accounts” schedule (Schedule II)). Additional
disclosure requests have included the method of determining the estimated
reserves, the amounts of returns and related reserves, and a discussion of the
impact of returns on a reporting period (including changes in estimated returns).
3.5.11 Milestone method of revenue recognition
Reporting entities that elect to apply the milestone method of revenue

recognition will need to comply with the disclosure requirements in
ASC 605-28-50-2. Specifically, a reporting entity is required to disclose:
□ A description of the overall arrangement
□ A description of each milestone and related contingent consideration
□ A determination as to whether each milestone is substantive
□ The factors considered in determining whether the milestone is substantive
□ The amount of consideration recognized during the period for milestones
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Question 3-6
Does each milestone within an arrangement need to be disclosed, or can
milestones be combined for disclosure purposes?
PwC response
Reporting entities should avoid aggregating milestones for disclosure purposes,
whenever practicable. However, in certain circumstances, a reasonable level of
aggregation may be necessary for reporting entities with a substantial number of
milestones. In such cases, instead of disclosing each individual milestone and
related contingent consideration, a reporting entity might provide disclosure for
each category of milestone within a given arrangement (e.g., clinical, regulatory,
or commercial), if that level of disclosure provides meaningful information to
allow users of the financial statements to understand the arrangement.
3.5.12 Advertising barter transactions
ASC 605-20 provides guidance on accounting for advertising-for-advertising

barter arrangements. These arrangements have specific disclosure requirements,
as follows.
ASC 605-20-50-1
Entities shall disclose the amount of revenue and expense recognized from
advertising barter transactions for each income statement period presented. In
addition, if an entity engages in advertising barter transactions for which the fair
value is not determinable within the limits of paragraphs 605-20-25-15 through
25-18, information regarding the volume and type of advertising surrendered and
received (such as the number of equivalent pages, the number of minutes, or the
overall percentage of advertising volume) shall be disclosed for each income
statement period presented.
3.5.13 Other nonmonetary transactions
Reporting entities that engage in nonmonetary transactions are required by

ASC 845 to disclose the nature of the transaction, the basis of accounting for the
assets transferred, and any gain or loss recognized on the transfer. For each
period in which a nonmonetary transaction occurred, reporting entities should
also disclose the amount of gross operating revenue recognized as a result of the
transaction. Finally, reporting entities must disclose the amount of revenue and
costs (or gains and losses) associated with inventory exchanges recognized at fair
value.
We believe that recording revenue on a gross basis is appropriate when the

nonmonetary asset exchanged is an asset that is held for sale in the normal
course of business (i.e., inventory). For transactions in which the asset or service
surrendered is not the reporting entity’s normal product or service, recording the
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transaction as other income is appropriate. For example, a gain in an exchange of

fixed assets for barter credits should be reported as other operating income.
3.5.14 Construction and production-type contracts
When accounting for contracts in accordance with ASC 605-35, a reporting entity
is required to disclose its accounting policy regarding revenue recognition and
cost accrual—specifically, whether the percentage-of-completion or the
completed-contract method is generally followed. The disclosure requirement
also applies when following guidance within ASC 910-605,
Contractors-Construction–Revenue Recognition.
A reporting entity that typically follows the percentage-of-completion method is

required to disclose the method or methods (e.g., cost-to-cost, labor hours) of
measuring the extent of progress toward completion. If this same reporting entity
uses the completed-contract method for certain contracts, as allowed by
ASC 605-35, disclosure of this departure from its basic accounting policy is
needed. Similarly, if the reporting entity typically follows the completed-contract
method but then applies the percentage-of-completion method as allowed,
disclosure is again needed. The specific criteria a reporting entity uses to
determine when a contract is substantially completed should be followed
consistently and disclosed in its accounting policy.
Reporting entities are required to disclose in annual and quarterly filings

material changes in estimates and the related impacts on income and earnings
per share. Comment letters indicate that the SEC staff expects, at a minimum,
disclosure of the aggregate net impact of changes in contract estimates on income
and earnings per share for each period presented, when material. Reporting
entities should also consider disclosure of the aggregate gross favorable and gross
unfavorable profit adjustments if such disclosure would be meaningful to an
investor. In addition to quantitative disclosures, a qualitative description of the
circumstances leading to the adjustments should be provided.
Claims (in the context of contract accounting) are amounts a contractor seeks to
collect from customers in excess of (or not included in) the agreed-upon contract
price due to customer delays, changes in scope, or similar circumstances.
Additional disclosure is required related to revenue from claims, including the
policy for recognizing such revenue, the amounts recognized, and the amount of a
resulting contingent asset. However, as with the disclosure of any contingent
asset or gain, a reporting entity should avoid misleading financial statement users
regarding the likelihood of realization.
Reporting entities that apply the contract accounting guidance in ASC 605-35
may be required to record a provision for the entire loss on a contract if estimated
costs for the contract exceed estimated revenue. The provision for loss should be
accounted for in the income statement as cost rather than as a reduction of
contract revenue. Unless the provision is material in amount or unusual or
infrequent in nature, reporting entities are not required to present the loss
provision separately in the income statement. If it is shown separately, it should
be shown as a component of the cost included in the computation of gross profit.
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In most instances, however, disclosure of significant losses in the footnotes is

sufficient.
Regulation S-X also requires certain balance sheet-related disclosures for
long-term contracts. These are discussed in FSP 8.
3.5.15 Research and development arrangements
ASC 730 requires disclosure of research and development arrangements that are
accounted for as a contract to perform research and development for others.
ASC 730-20-50-1
An entity that under the provisions of this Subtopic accounts for its obligation
under a research and development arrangement as a contract to perform
research and development for others shall disclose both of the following:
c. The terms of significant arrangements under the research and development
arrangement (including royalty arrangements, purchase provisions, license
agreements, and commitments to provide additional funding) as of the date
of each balance sheet presented
d. The amount of compensation earned and costs incurred under such contracts
for each period for which an income statement is presented.
ASC 730 does not require any specific disclosure regarding research and
development arrangements that are accounted for as liabilities. Although other
accounting literature may require additional disclosure for such obligations
(e.g., ASC 440 and ASC 850), we believe that, at a minimum, a reporting entity
should disclose when the obligation is to be repaid and the interest rate used in
recording the liability. Additionally, the amounts of, and accounting for, any
loans or advances by the reporting entity to other parties (including to any
partnerships formed in connection with the research and development
arrangement) should be disclosed.
3.6 Cost of sales

Cost of sales represents the costs that are directly related to creating the products
that a reporting entity sells, or providing the service that generates service
revenue. Costs may include direct costs, such as labor and raw materials, or
indirect costs, such as machinery depreciation, warehouse utilities, and
stock-based compensation. Judgment is required to determine which costs
should be allocated to cost of sales compared to other categories of expense.
Reporting entities should be consistent in their allocation methodology to ensure
all periods presented are comparable. The classification of warranty expense is
specifically discussed in FSP 11.
Although cost of sales typically represents one of the more material income
statement line items, there are minimal presentation and disclosure
requirements associated with it. As previously discussed, the cost and expenses
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related to each revenue category must be reflected separately in the income

statement.
Question 3-7
If a reporting entity defers both costs and revenue (in an amount equal to or
greater than the costs), there is an expectation that the capitalized costs will be
amortized over the same period and in proportion to the amount of deferred
revenue recognized as revenue. How should the amortization of such capitalized
costs be classified on the income statement?
PwC response
Although the deferred costs relate to a revenue-generating transaction, they do
not necessarily represent cost of sales. Various types of costs are capitalizable
(e.g., salaries, sales commissions, etc.); and therefore, the costs should be
recognized in accordance with the nature of the benefit provided (e.g., cost of
sales, sales & marketing, or general & administrative) as they are amortized.
3.7 Operating expenses

As indicated in Figure 3-1, S-X 5-03 requires registrants to separately identify
certain operating expense line items if they are material. In practice, many
reporting entities will separately identify selling, general, and administrative
costs (SG&A) as one line item, but the remaining operating costs may be
separately identified in a manner that differs from the named line items
prescribed by S-X 5-03. As such, this section discusses many of the common
operating expenses that reporting entities may or may not separately identify
depending on materiality, and what is most useful to their financial statement
users.
The selling, general, and administrative (SG&A) line item frequently includes the
sum of all direct and indirect selling expenses, as well as all general and
administrative expenses of the reporting entity. SG&A expenses include salaries
of employees (excluding those related to product manufacturing or capitalized
labor), depreciation (excluding those related to product manufacturing), bad debt
expense, advertising expenses, rent expense (excluding those related to product
manufacturing), and any other costs of selling product or administrating the
business.
3.7.1 Advertising expense
Advertising costs are generally presented as part of selling, general, and

administrative expenses in a reporting entity’s income statement. Advertising
costs can either be expensed as incurred or expensed the first time the
advertising takes place. The accounting policy selected from these two
alternatives must be applied consistently to similar kinds of advertising activities.
ASC 720-35-50-1 requires that disclosures include, at a minimum:
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□ The accounting policy selected for reporting advertising, indicating whether

such costs are expensed as incurred, or the first time the advertising takes
place
□ The total amount charged to advertising expense for each period an income
statement is presented
3.7.2 Provision for doubtful accounts and notes
Provision for doubtful accounts and notes is the current period expense
associated with losses from normal credit sales.
3.7.2.1 Presentation
These provisions are generally grouped within SG&A. However, if they are
material, they should be presented separately on the face of the income statement
as an operating expense. Although the SEC requires a rollforward of the doubtful
accounts and notes to be included in the filing as part of the “valuation and
qualifying accounts” schedule (Schedule II), some reporting entities include such
disclosures as part of the footnotes to the financial statements.
Reporting entities may have flexibility as to how they present expense associated
with changes in the provision for receivables.
Excerpt from ASC 310-10-45-5

The change in present value from one reporting period to the next may result not
only from the passage of time but also from changes in estimates of the timing or
amount of expected future cash flows. A creditor that measures impairment
based on the present value of expected future cash flows is permitted to report
the entire change in present value as bad-debt expense. Alternatively, a creditor
may report the change in present value attributable to the passage of time as
interest income.
ASC 310 requires reporting entities that choose the latter alternative to disclose
the amount of interest income that represents the change in present value of cash
flows attributable to the passage of time.
Additionally, ASC 310 provides guidance on how reporting entities should
present changes in the market price of an impaired loan or in the fair value of the
collateral of an impaired collateral-dependent loan.
ASC 310-10-45-6
The observable market price of an impaired loan or the fair value of the collateral
of an impaired collateral-dependent loan may change from one reporting period
to the next. Changes in observable market prices or the fair value of the collateral
shall be reported as bad-debt expense or a reduction in bad-debt expense.
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New guidance
Upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial

Instruments, ASC 310-10-45-5 and 45-6 will be superseded.
3.7.2.2 Disclosure
For balance sheet-related disclosure requirements for provisions for doubtful

accounts and notes, refer to FSP 8.
3.7.3 Depreciation and amortization of long-lived assets

Total depreciation and amortization of long-lived assets is required to be
disclosed in a reporting entity’s financial statements. Many reporting entities
choose to disclose this information as one or more lines in the statement of cash
flows.
Some reporting entities exclude from the cost of sales line item some or all of the
depreciation, depletion, and amortization related to the manufacturing of
products or the services provided. In this instance, SAB Topic 11.B, Depreciation
And Depletion Excluded From Cost Of Sales, precludes those reporting entities
from presenting a gross margin subtotal in the income statement unless
depreciation, depletion, and amortization is presented as a separate line item
before gross margin. Further, SAB Topic 11.B indicates that if cost of sales
excludes charges for depreciation, depletion, and amortization, the description of
the line item should reflect this (e.g., “Cost of sales (exclusive of items shown
separately below)” or “Cost of sales (exclusive of depreciation shown separately
below)”).
Reporting entities that present cost of sales excluding depreciation, depletion,
and amortization must also consider the requirements of S-K 302(a). This
guidance requires certain SEC registrants to disclose selected quarterly financial
data, including gross profit (i.e., net sales less costs and expenses associated
directly with, or allocated to, products sold or services rendered). Reporting
entities that exclude all or some allocation of depreciation, depletion, and
amortization from cost of sales must include these amounts in the gross profit
disclosure required by S-K 302(a), with appropriate footnote explanation.
Figure 3-3 depicts the alternative income statement presentations that comply
with the guidance in SAB Topic 11.B.
Figure 3-3
Alternative presentation of depreciation and amortization expense
Example A:
Net revenue $xxx
Cost of sales (exclusive of depreciation and amortization shown separately below) xxx
Selling, general, and administrative expense xxx
Research and development expense xxx
Depreciation and amortization xxx
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Other operating expenses xxx
Operating income xxx
Interest expense xxx
Other expense (income) xxx
Income before taxes xxx
Tax expense xxx
Net income $xxx
Example B:
Net revenue $xxx
Cost of sales (exclusive of depreciation shown separately below) xxx
Depreciation expense xxx
Gross margin xxx
Selling, general, and administrative expense xxx
Research and development expense xxx
Other operating expenses xxx
Operating income xxx
Interest expense xxx
Other expense (income) xxx
Income before taxes xxx
Tax expense xxx
Net income $xxx
Under Example A, although not required in the footnotes, reporting entities

could present the quarterly information required by S-K 302(a) as follows:
Note X — Unaudited Quarterly Financial Information
Results of operations for each of the four quarters in the years ended
December 31, 20X6 and 20X5 are as follows:
Net revenue
Gross Margin (defined as net revenue less cost of sales and depreciation and
amortization)1
Net Income
1 Alternatively, this parenthetical could be shown as a footnote to gross margin
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In addition to the items discussed above, it is also common for a reporting entity
to disclose how it determines the useful lives of its depreciable or amortizable
assets.
Refer to FSP 8 for disclosures required for property, plant, and equipment and
other long-lived assets, including depreciation and amortization disclosure
requirements.
3.7.4 Impairment of long-lived assets
Impairments of long-lived assets may be included in SG&A, or presented

separately on the income statement. Refer to FSP 8 for presentation and
disclosure requirements for impairments related to long-lived assets.
3.7.5 Research and development expense
Many reporting entities, especially those in certain industries (e.g.,

biotechnology), incur significant research and development expenses. ASC 730
requires reporting entities to expense research and development costs as they are
incurred, and disclose the following.
ASC 730-10-50-1
Disclosure shall be made in the financial statements of the total research and
development costs charged to expense in each period for which an income
statement is presented. Such disclosure shall include research and development
costs incurred for a computer software product to be sold, leased, or otherwise
marketed.
Impairment of in-process research and development costs initially capitalized as

part of a business combination should also be classified in the research and
development expense line.
Reporting entities that receive reimbursements of R&D expenses from another

party may question whether those reimbursements should be treated as revenue
or an offset to R&D expense since the guidance on income statement geography is
piecemeal and contained in several different areas of the accounting literature.
The SEC staff has acknowledged that, in some cases, a reporting entity may be
able to support more than one conclusion based on the existing accounting
literature. Reporting entities should evaluate the facts and circumstances of each
arrangement, apply reasonable judgment consistently, and disclose the method
of accounting used, as well as disclose the reason(s) that the chosen method is
appropriate.
3.7.5.1 Collaborative arrangements
Certain research and development transactions may be structured as

collaborative arrangements subject to the guidance in ASC 808, Collaborative
Arrangements.
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Reporting entities should evaluate payments related to collaborative

arrangements based on the nature of the arrangement, the nature of the
reporting entity’s business operations, and the contractual terms of the
arrangement. If there is other guidance that is applicable to payments in
collaborative arrangements, reporting entities should follow that guidance
(e.g., guidance on customer payments in ASC 605-50) for determining the
income statement classification. If the payments are not in the scope of other
guidance, or if there is no appropriate analogy, reporting entities should make a
consistently-applied accounting policy election, and should consider disclosure of
that policy election.
Reporting entities are required to disclose the following information about

collaborative agreements in the scope of ASC 808:
ASC 808-10-50-1
In the period in which a collaborative arrangement is entered into (which may be
an interim period) and all annual periods thereafter, a participant to a
collaborative arrangement shall disclose all of the following:
a. Information about the nature and purpose of its collaborative arrangements
b. Its rights and obligations under the collaborative arrangements
c. The accounting policy for collaborative arrangements in accordance with

Topic 235
d. The income statement classification and amounts attributable to

transactions arising from the collaborative arrangement between
participants for each period an income statement is presented.
Information related to individually significant collaborative arrangements shall

be disclosed separately.
3.7.6 Restructuring expense
SAB Topic 5.P, Restructuring Charges, requires reporting entities to present

restructuring charges and related asset impairment charges as a component of
income from continuing operations, separately disclosed if material. Reporting
entities are also permitted to separately present, in income from continuing
operations, exit or disposal activities covered by ASC 420, Exit or Disposal Cost
Obligations, that are not discontinued operations. The earnings per share effect
should not be disclosed on the face of the income statement. For more detail on
presentation and disclosure of restructuring expenses, refer to FSP 11.
3.7.7 Amortization of intangibles and impairment of goodwill
Amortization of intangibles and impairment of goodwill may be included in

operating expenses and are frequently aggregated with other line items, unless
material enough to necessitate separate disclosure. Refer to FSP 8 for
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presentation and disclosure requirements for intangibles and goodwill

post-acquisition.
3.7.8 Gains or losses on involuntary conversions
Involuntary conversions of nonmonetary assets to monetary assets are

considered monetary transactions. Examples of such conversions are total or
partial destruction or theft of insured nonmonetary assets and the condemnation
of property in eminent domain proceedings. Any gain or loss from the conversion
should be recognized as a component of ordinary income.
Any insurance recoveries (up to the amount of any loss recognized on the
nonmonetary asset) are required by ASC 605-40 to be recorded in the same
financial statement line item as the related loss (generally operating income). As
such, insurance recoveries would rarely, if ever, be presented as revenues because
they do not reflect payments from customers. Insurance proceeds in excess of the
related loss, such as replacement cost insurance, are typically included in
non-operating income.
3.7.9 Foreign currency transaction gains/losses
Foreign currency transaction gains/losses result from a change in exchange rates

between the functional currency and the currency in which a foreign currency
transaction is denominated. See FSP 21.3.1 for discussion of presentation and
disclosure considerations related to foreign currency.
3.7.10 Other general expenses
S-X 5-03 requires reporting entities to include items not normally included under
the caption “selling, general, and administrative expenses” under the caption
“other general expenses.” Any material items are required to be separately stated
(e.g., transaction costs related to business combinations).
3.7.10.1 Gains or losses from sale of long-lived assets
S-X 5-03(6) requires gains or losses from the sale of long-lived assets accounted
for under ASC 360-10-45-5 to be presented as “other general expenses.” Refer to
FSP 8 for further presentation and disclosure guidance on long-lived assets and
FSP 3.8.4 for further information on gains or losses on the sale of a business.
3.7.11 Unusual or infrequently occurring items
ASC 225-20 provides guidance on the presentation of unusual or infrequently

occurring items in the income statement. Specifically, the guidance describes an
unusual or infrequently occurring item in the following manner.
ASC 225-20-45-16
A material event or transaction that an entity considers to be of an unusual
nature or of a type that indicates infrequency of occurrence or both shall be
reported as a separate component of income from continuing operations. The
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nature and financial effects of each event or transaction shall be presented as a

separate component of income from continuing operations or, alternatively,
disclosed in notes to financial statements. Gains or losses of a similar nature that
are not individually material shall be aggregated. Such items shall not be reported
on the face of the income statement net of income taxes. Similarly, the EPS
effects of those items shall not be presented on the face of the income statement.
Disclosure of “unusual item” amounts, net of applicable income taxes, and their
earnings per share effect, net of applicable income taxes, is permissible only in
the footnotes. Such footnote disclosure may be desirable for items that affect the
comparability of income statements between periods. Reporting entities should
not separately disclose the earnings per share effect of inconsequential items and
items clearly of an operating nature (e.g., weather-related events, strikes, or
start-up expenses).
3.8 Non-operating income and expenses

S-X 5-03(7) and (9) prescribe separate income statement line item captions for
non-operating income and non-operating expense. Many SEC registrants prefer
to show one line item for non-operating income and expense on a net basis.
Generally, the combination of non-operating income and expense is permissible
as long as the individual amounts are not significant. Note that it is not the net
balance that determines materiality, but the offsetting gross amounts. However,
it is not permissible to combine non-operating income and expense if interest
income and interest expense are netted in such a combination. The SEC
presumes that all interest expense is shown in the caption for interest expense
prescribed by S-X 5-03(8).
3.8.1 Non-operating income
S-X 5-03 requires entities to present separately, in the income statement or in a

footnote, amounts earned from (a) dividends, (b) interest on securities, (c) profits
on securities (net of losses), and (d) miscellaneous other income. Amounts
earned from transactions in securities of related parties must also be disclosed as
required by S-X 4-08(k). Material amounts included under miscellaneous other
income should be separately presented in the income statement or in a footnote,
indicating clearly the nature of the transactions out of which the items arose.
3.8.2 Non-operating expenses
S-X 5-03 requires entities to present separately, in the income statement or in a

footnote, amounts of losses on securities (net of profits) and miscellaneous
income deductions. Material amounts included under miscellaneous income
deductions should be separately presented in the income statement or in a
footnote, indicating clearly the nature of the transactions out of which the items
arose.
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3.8.3 Interest expense and amortization of debt discount
S-X 5-03 requires interest expense and amortization of debt discount to be

presented on the face of the income statement. Refer to FSP 12 for discussion of
the presentation and disclosure requirements associated with debt discounts.
3.8.4 Gains or losses on sales of businesses
Some reporting entities present gains or losses resulting from sales of businesses
(that do not qualify as discontinued operations) within operating income in a
“two-step” income statement. However, others report such items as
non-operating gains or losses. The SEC has accepted both approaches. In a
“one-step” income statement format, gains or losses from the sale of businesses
(that do not qualify as discontinued operations) should be reported as “other
general expenses.”
The approach selected should be applied consistently. Any material items should
be presented separately on the face of the income statement or in the footnotes,
regardless of whether they are classified as operating or non-operating.
3.8.5 Government grants
A reporting entity may receive a government grant that provides financial

assistance for certain eligible expenditures—for example, to build and operate a
factory in a particular geographical location. There is currently no authoritative
guidance in US GAAP that indicates how reporting entities should account for
these reimbursements. However, depending on the nature of the grant, other
US GAAP may be applicable. For example, if the grant actually takes the form of a
tax credit, it may be subject to ASC 740, Income Taxes. Likewise, if a grant is
reported as revenue, a public reporting entity should apply the guidance in SAB
Topic 13.A.
If the grant is not subject to other US GAAP, and no other US GAAP guidance can
be applied by analogy, reporting entities may look to international accounting
standards. International accounting standards indicate that the grants may be
reflected as a deferred credit or a reduction of the constructed asset’s carrying
amount, or as other income or a reduction of expense, depending on the nature of
the grant.
Reporting entities should disclose their accounting policy for accounting for
government grants, if material, so it is clear which financial statement line item
reflects the grants.
3.9 Other presentation requirements

Regulation S-X prescribes certain line items and subtotals in the income
statements of SEC registrants. Reporting entities that are not SEC registrants
frequently follow this guidance as well.
PwC 3-29
Income statement
3.9.1 Income or loss before income tax expense
Income or loss before income tax expense is required to be presented separately

on the face of the income statement by S-X 5-03.
3.9.2 Income tax expense
S-X 5-03 requires only taxes based on income to be included under this caption.
Refer to FSP 16 for presentation and disclosure considerations related to income
taxes.
3.9.3 Equity in earnings of unconsolidated entities
Equity in the earnings of an unconsolidated entity accounted for using the equity
method should be separately stated. Refer to FSP 10 for presentation and
disclosure guidance for equity method investments.
3.9.4 Income or loss from continuing operations
S-X 5-03 requires income or loss from continuing operations to be presented

separately on the face of the income statement.
3.9.5 Discontinued operations
A component of a reporting entity that meets the requirements under

ASC 205-20 is reported as discontinued operations on the face of the income
statements. This is also consistent with the requirements of S-X 5-03. Refer to
FSP 27 for further guidance on presentation and disclosure guidance for
discontinued operations.
3.9.6 Income or loss before cumulative effects of changes in accounting

principles
Entities are required by S-X 5-03 to report income or loss before cumulative
effects of changes in accounting principles.
3.9.7 Cumulative effects of changes in accounting principles
ASC 250 includes guidance on presentation of the cumulative effect of a change

in accounting principles. Refer to FSP 30 for further discussion of the
requirements.
3.9.8 Net income or net loss
S-X 5-03 requires that net income or net loss be presented on the face of the
financial statements. ASC 225 includes guidance on what comprises net income.
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Income statement
ASC 225-10-45-1
Net income shall reflect all items of profit and loss recognized during the period
with the sole exception of error corrections as addressed in Topic 250. However,
the requirement that net income be presented as one amount does not apply to
the following entities that have developed income statements with formats
different from those of the typical commercial entity:
a. Investment companies
b. Insurance entities
c. Certain not-for-profit entities (NFPs).
Net income includes earnings attributable to both the controlling and

noncontrolling interests. ASC 810-10-45-18 through 21 indicate that reporting
entities that report a noncontrolling interest are required to apportion net income
for the period between controlling and noncontrolling interests on the face of the
income statement.
3.9.9 Net income attributable to noncontrolling interests
A parent company that has control of a reporting entity should record revenues,
expenses, gains, losses, net income (loss), and other comprehensive income (loss)
at the consolidated amounts from the acquisition date until the date on which the
parent ceases to control the subsidiary. For more on presentation and disclosure
requirements associated with noncontrolling interests, refer to FSP 18.
3.9.10 Earnings per share data
Entities with simple capital structures (i.e., those entities with only class of
common stock outstanding and no equity instruments outstanding, such as stock
options) must present basic per-share amounts for income from continuing
operations and for net income on the face of the income statement. All other
entities must present basic and diluted per-share amounts on the face of the
income statement for income from continuing operations and for net income
with equal prominence. Refer to FSP 7 for further discussion of the EPS
presentation requirements.
3.10 Allocation of expenses to subsidiaries or

carve-out entities
There are often several operating units or divisions within a consolidated group
of reporting entities or an individual reporting entity. These units or divisions
often are not themselves separate legal entities but individually or collectively
could qualify as a “business” as defined by S-X 11-01(d).
Circumstances may arise that require separate financial statements for these
businesses (sometimes referred to as “carve-out” financial statements), or may
PwC 3-31
Income statement
require financial statements for subsidiaries of the reporting entity. Separate

financial statements required by SEC regulations are generally required to be
prepared in accordance with Regulation S-X. However, this section only covers
certain aspects of preparing standalone subsidiary financial statements and is not
intended to be comprehensive.
When separate financial statements are required, both US GAAP and SEC
regulations provide guidance on their presentation and disclosure requirements.
Some circumstances that may require separate subsidiary/business financial
statements include:
□ Collateral pledge financial statements: If an affiliate securities constitute a

substantial portion of the collateral for any class of an SEC-registered (or to
be registered) reporting entity’s securities, the reporting entity may need to
include the affiliate financial statements in their financial statements. Refer
to SEC 4540 for further discussion.
□ Standalone subsidiary financial statements: Subsidiaries are sometimes

required to prepare standalone financial statements (including footnotes) for
bank debt, bonding, or other operations-related commitments. If the party
requesting such financial statements requires that they are prepared in
accordance with US GAAP, the subsidiary will need to apply the concepts
discussed in this section and may also consider applying the related SEC
guidance as US GAAP in this area is relatively limited.
Further, in the event reporting entities are required to provide subsidiary

standalone financial statements and pushdown accounting has been elected due
to a business combination, such entities will need to present predecessor and
successor financial statements. Reporting entities should keep in mind that such
presentation is generally not as simple as combining predecessor and successor
periods together. For further information, refer to BCG 13.
3.10.1 Presentation considerations
SAB Topic 1.B, Allocation of Expenses and Related Disclosure in Financial

Statements of Subsidiaries, Divisions or Lesser Business Components of Another
Entity, provides guidance to registrants regarding the allocation of costs incurred
by a parent on behalf of a carve-out entity in the carve-out financial statements.
However, the guidance is also useful for any separate financial statement
reporting of businesses/subsidiaries, not just carve-out financial statements.
SAB Topic 1.B emphasizes the importance of presenting operating results that
reflect all of the “costs of doing business” despite the fact that some of the costs
may not have been allocated historically to the carve-out entity. These expenses
include, but are not necessarily limited to, the following:
□ Officer and employee salaries
□ Rent and/or depreciation
3-32 PwC
Income statement
□ Advertising
□ Accounting and legal services
□ Other selling, general, and administrative expenses
□ Income taxes
□ Interest
Often, a reasonable method of allocating common expenses to the subsidiary

(e.g., incremental or proportional cost allocation) must be chosen because
specific identification of expenses is not practicable. In these situations,
SEC FRM 7410.2 states that reporting entities should include an explanation in
the footnotes of the allocation method used, together with management’s
assertion that the method is reasonable and disclosures of what expenses would
have been on a standalone basis, if materially different. Although SAB Topic 1.B
requires a reasonable estimate of expenses incurred on behalf of a subsidiary to
be reflected in the financial statements, changes to actual amounts on the basis of
expected future results is prohibited in the historical financial statements.
Example 3-5 illustrates the allocation of costs and expenses to a subsidiary.
EXAMPLE 3-5
Allocation of costs and expenses to a subsidiary
FSP Corp manufactures a wide range of product lines. It acquires the rights to
manufacture and sell a specific branded product (“Product A”) from Company Y.
Company Y has previously sold and marketed Product A through its sales force
and marketing department, which also sells other product brands not being
acquired by FSP Corp. The acquisition includes manufacturing facilities and
related employees, inventory, certain tangible assets, patents, manufacturing and
marketing rights, customer relationships, supply agreements, trade names, and
trademarks. FSP Corp does not acquire the sales force and marketing
department. FSP Corp will manufacture Product A at the acquired manufacturing
facilities and will market the product through its existing sales force.
FSP Corp is required to file with the SEC a full set of “carve-out” financial
statements if the acquisition is determined to be “significant” under S-X 3-05.
Should the carve-out financial statements reflect an allocation of Company Y’s
costs and expenses (e.g., marketing expenses) to Product A’s business?
Analysis
FSP Corp will need to obtain carve-out financial statements from Company Y for
historical financial information. These financial statements need to include all of
the appropriate revenues, expenses, assets, and liabilities related to the acquired
business, even though Company Y may not have maintained separate accounting
records for Product A. This would include an appropriate allocation of selling and
marketing expenses (even though Company Y’s sales force and marketing
PwC 3-33
Income statement
department was not acquired by FSP Corp), together with other costs such as
overhead expenses in accordance with SAB Topic 1.B.
3.10.2 Disclosure considerations
If a reporting entity’s financial statements include separate financial statements

(e.g., of a subsidiary or investee), ASC 850-10-50-4 indicates that the reporting
entity does not need to repeat disclosures in the separate financial statements.
This is permissible only if the separate financial statements also are consolidated
or combined in a complete set of financial statements and both sets of financial
statements are presented in the same financial report.
If separate financial statements are prepared for subsidiaries or investees of a

reporting entity, S-X 4-08(k)(2) requires those financial statements to indicate
the amount of related party transactions that are and are not eliminated in the
separate financial statements. In addition, it requires the financial statements to
include disclosure of any intercompany profits or losses resulting from
transactions with related parties that are not eliminated.
SAB Topic 1.B also requires additional disclosures of expense allocations from
parents to subsidiaries regarding income taxes as follows:
SAB Topic 1.B, Question 3

What are the staff’s views with respect to the accounting for and disclosure of the
subsidiary’s income tax expense?
Interpretive Response: Recently, a number of parent companies have sold
interests in subsidiaries, but have retained sufficient ownership interests to
permit continued inclusion of the subsidiaries in their consolidated tax returns.
The staff believes that it is material to investors to know what the effect on
income would have been if the registrant had not been eligible to be included in a
consolidated income tax return with its parent. Some of these subsidiaries have
calculated their tax provision on the separate return basis, which the staff
believes is the preferable method. Others, however, have used different allocation
methods. When the historical income statements in the filing do not reflect the
tax provision on the separate return basis, the staff has required a pro forma
income statement for the most recent year and interim period reflecting a tax
provision calculated on the separate return basis.
Virtually all standalone subsidiary income tax provisions are prepared on this
basis, given the SEC staff’s strong preference for the separate return method to be
utilized, as well as the need to prepare proforma separate return basis
information.
SAB Topic 1.B also requires specific disclosure related to financing arrangements
between a parent and a subsidiary.
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Income statement
SAB Topic 1.B, Question 4

Should the historical income statements reflect a charge for interest on
intercompany debt if no such charge had been previously provided?
Interpretive Response: The staff generally believes that financial statements are
more useful to investors if they reflect all costs of doing business, including
interest costs. Because of the inherent difficulty in distinguishing the elements of
a subsidiary’s capital structure, the staff has not insisted that the historical
income statements include an interest charge on intercompany debt if such a
charge was not provided in the past, except when debt specifically related to the
operations of the subsidiary and previously carried on the parent’s books will
henceforth be recorded in the subsidiary’s books. In any case, financing
arrangements with the parent must be discussed in a note to the financial
statements. In this connection, the staff has taken the position that, where an
interest charge on intercompany debt has not been provided, appropriate
disclosure would include an analysis of the intercompany accounts as well as the
average balance due to or from related parties for each period for which an
income statement is required. The analysis of the intercompany accounts has
taken the form of a listing of transactions (e.g., the allocation of costs to the
subsidiary, intercompany purchases, and cash transfers between entities) for
each period for which an income statement was required, reconciled to the
intercompany accounts reflected in the balance sheets.

The majority of presentation and disclosure requirements discussed in this
chapter are applicable to both public and private companies. Requirements
included in Figure 3-4 apply only to SEC registrants.
Figure 3-4
Presentation and disclosure requirements applicable only to SEC registrants
Description Reference Section
The various line items that, if applicable, S-X 4-01(a); 3.3

should appear on the face of the income
S-X 5-03
statements
Requirement to present three-year S-X 3-02(a) 3.4.1

comparative income statement
Requirement to separately report, under the S-X 5-03(3) 3.7

heading operating income/expense any
material amounts not included in the caption
“costs and expenses applicable to sales and
revenues”
PwC 3-35
Income statement
Requirement to present separate financial S-X 5-03(1); 3.4.2

statement line items based on
S-X 5-03(2);
thresholds – including sales/revenues and
corresponding cost of sales S-X 4-02
Precludes reporting entities from presenting a SAB Topic 11.B 3.7.3

gross margin subtotal in the income
statement unless depreciation, depletion, and
amortization is included in cost of sales or
presented as a separate line item before gross
margin
Requirement to disclose selected quarterly S-K 302(a)(1) 3.7.3

financial data for each full quarter within the
two most recent fiscal years in the annual
reports on Form 10-K
Requirement to report as “other general S-X 5-03(6) 3.7.10.1

expenses” gains or losses from the sale of
long-lived assets reported under
ASC 360-10-45-5
Requirement to include items not normally S-X 5-03(6) 3.7.1o

included under the caption “selling, general,
and administrative expenses” under the
caption “other general expenses”
Requirement to present separate income S-X 5-03(7) and 3.8

statement line item captions for non- (9)
operating income and non-operating expense
Requirement to present all interest expense in S-X 5-03(8) 3.8

the caption for interest expense
Requirement to state separately, in the S-X 5-03(7) 3.8.1

income statement or in a footnote, amounts
earned from (a) dividends, (b) interest on
securities, (c) profits on securities (net of
losses), and (d) miscellaneous other income
Requirement to disclose the amounts earned S-X 4-08 (k) 3.8.1

from transactions in securities of related
parties (if applicable)
Requirement to state separately, in the S-X 5-03(9) 3.8.2

income statement or in a footnote, amounts of
losses on securities (net of profits) and
miscellaneous income deductions
Requirement to present interest expense and S-X 5-03(8) 3.8.3

amortization of debt discount on the face of
the income statement
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Income statement
Requirement to only include taxes based on S-X 5-03(11) 3.9.2

income under the caption “income tax
expense”
Requirement to present specific earnings per S-X 5-03(b) 20 3.9.10

share captions on the face of the income
statement
PwC 3-37
Chapter 4:
Reporting
comprehensive income
Reporting comprehensive income

Comprehensive income/loss represents the change in a reporting entity’s equity
from all sources other than investments by, or distributions to, owners. It includes
all components of net income/loss and other comprehensive income/loss (OCI).
This chapter discusses the requirements for reporting OCI and its components
and changes in the components of accumulated other comprehensive income
(AOCI). It also discusses the presentation of OCI in spin-off transactions.
Reporting entities are not required to use the term “comprehensive income,” and
alternatives such as “total non-owner changes in equity” may be used in its place.
The disclosure guidance in this chapter applies to annual reporting periods.

Interim disclosure requirements for comprehensive income are addressed in
FSP 29.
4.2 Scope
ASC 220, Comprehensive Income, establishes standards for the presentation and
disclosure of comprehensive income and accumulated other comprehensive
income. ASC 220 establishes presentation and disclosure requirements only. It
generally does not address issues of recognition or measurement.
ASC 220 does not apply to not-for-profit organizations that follow ASC 958-205,
Not-for-Profit Entities. Certain investment companies, defined benefit plans, and
other employee benefit plans that are exempt from the requirement to provide a
statement of cash flows under ASC 230-10-15-4 are not exempt from the
requirements of ASC 220. However, these entities typically do not have items of
OCI.
A reporting entity that does not have items of OCI in any period presented does
not need to present comprehensive income.
4.3 Components of comprehensive income

Comprehensive income includes net income and OCI. OCI consists of revenues,
expenses, gains, and losses to be included in comprehensive income but excluded
from net income.
Reporting entities should present each of the components of other comprehensive

income separately, based on their nature, in the statement of comprehensive
income.
ASC 220-10-45-10A lists the major components of OCI.
ASC 220-10-45-10B lists items that are not considered OCI. These include:
□ Changes in equity resulting from investments by or distributions to owners
4-2 PwC
□ Items required to be reported as direct adjustments to additional paid-in

capital (APIC), retained earnings, and certain other non-income equity
accounts (e.g., reductions of stockholders’ equity related to employee stock
ownership plans, taxes not payable in cash, and net cash settlements of own
share transactions).
4.3.1 Displaying the tax effects of OCI components
Each component of OCI should be reported either (1) net of related tax effects, or
(2) before related tax effects with one amount shown for the aggregate income tax
effect of all OCI items. A reporting entity should disclose the income tax effect of
each component of OCI, including reclassification adjustments, either on the face
of the statement in which those components are displayed or in the footnotes.
ASC 220-10-55-7 through 55-8B provides examples of the alternative formats for
disclosing the tax effects of the components of OCI.
4.3.2 New guidance
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial

Liabilities, amended ASC 220 to require entities to present separately in OCI the
portion of the total change in the fair value of a liability resulting from a change in
the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option.
Although ASU 2016-01 is effective for public business entities for fiscal years
beginning after December 15, 2017 (including interim periods) and one year later
for all other entities, including not-for-profit entities and employee benefit plans
within the scope of ASC 960 through 965 (Plan Accounting), this provision may
be adopted immediately.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting,

addressed the question of where to recognize the unrealized holding gain or loss
on an available-for-sale equity security that becomes eligible for the equity
method before the entity adopts ASU 2016-01. The new guidance requires that
reporting entities recognize through earnings the unrealized holding gain or loss
in AOCI at the date the investment qualifies for use of the equity method.
ASU 2016-07 is effective for all entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2016, with earlier application
permitted. The impact on OCI will end when the entity adopts ASU 2016-01.
ASU 2016-09, Stock Compensation, removes the tax effects of certain items of
stock compensation from OCI, including expenses for employee stock options
recognized differently for financial reporting and tax purposes and dividends that
are paid on unallocated shares held by an employee stock ownership plan and that
are charged to retained earnings.
ASU 2016-09 is effective for public business entities for annual reporting periods
beginning after December 15, 2016, and interim periods within that reporting
period. For all other entities, it is effective for annual periods beginning after
PwC 4-3
December 15, 2017, and interim periods within annual periods beginning after
December 15, 2018. Early adoption is permitted in any interim or annual period,
with any adjustments reflected as of the beginning of the fiscal year of adoption.
4.4 Presenting comprehensive income

ASC 220 provides a definition of comprehensive income.
Definition from ASC 220-10-20

Comprehensive income: The change in equity (net assets) of a business entity
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
Comprehensive income comprises both of the following:
a. All components of net income
b. All components of other comprehensive income.
Comprehensive income may be presented in a single statement or in two

consecutive statements. Proponents of the single statement prefer its simplicity,
while proponents of the two-statement format cite as a benefit the increased
prominence of the “primary” performance measures of net income and earnings
per share.
Total comprehensive income per share should not be disclosed on the face of the
financial statements.
Figure 4-1 illustrates the reporting requirements of each format.
Figure 4-1
Formats for the presentation of comprehensive income
Format Presentation
Single □ Report net income, other comprehensive income, and

statement comprehensive income in a single financial statement of
comprehensive income.
□ Present total net income, other comprehensive income,
and comprehensive income.
□ Earnings per share is typically shown below net income
and before comprehensive income.
□ Refer to Figure 4-2 for a sample statement.
4-4 PwC
Format Presentation
Two □ Report net income in one financial statement.

consecutive
□ Report other comprehensive income and comprehensive
statements
income in a second separate, but consecutive, financial
statement.
□ Present total other comprehensive income and
□ Start the statement of comprehensive income with net
income.
□ Refer to Figure 4-3 for a sample statement.
Question 4-1
Is a change from a past format of a single statement of comprehensive income to
the two-statement format (or vice versa) considered a change in accounting
principle?
PwC response
No. We do not believe a change in the format of presentation of comprehensive
income would be considered a change in accounting principle as both formats
present the same information and are permitted under ASC 220. As such, there
would be no need to demonstrate the preferability of one format over the other.
4.4.1 Presenting comprehensive income attributable to noncontrolling

interest
Reporting entities are required by ASC 220-10-45-5 to separately present net

income and comprehensive income attributable to the parent and the
noncontrolling interest (NCI) on the face of the financial statements. This would
include the statement of comprehensive income and statement of income (if
presented as two separate statements).
4.4.2 Sample single statement of comprehensive income
Figure 4-2 illustrates the presentation of comprehensive income in a single

statement. It presents the “net changes” for each component of OCI, rather than
presenting reclassifications from AOCI separately, as depicted in ASC 220-10-55-7
and 55-8, since most reporting entities elect to include this detail in the footnotes
instead. Comparative statements are not shown for simplicity.
PwC 4-5
Figure 4-2
Sample consolidated single statement of comprehensive income
FSP Corp
Consolidated Statement of Comprehensive Income
Year ended December 31, 20X6
In millions $, except per share data
Revenues $1,400
Costs of goods sold (500)
Selling, general and administrative (20)
Gain on sale of securities 340
Income before tax 1,220
Income tax expense (320)
Equity in earnings of unconsolidated investee 100
Net income $1,000
Less: net income attributable to the noncontrolling

interest (100)
Net income attributable to FSP Corp stockholders $900
Earnings per share
Basic and diluted $1.25
Other comprehensive loss, net of tax:
Change in foreign currency translation adjustments 80
Change in unrealized gains related to available-for-sale

securities4 11
Equity in unrealized losses on available-for-sale

securities of unconsolidated investee4 (8)
Change in unrealized gains on cash flow hedges 15
Change in prior service cost and unrecognized loss for

defined benefit pension plans (150)
Change in fair value attributable to instrument-specific

credit risk of liabilities measured at fair value under the
fair value option5 5
Other comprehensive loss (47)
Comprehensive income $9531
4-6 PwC
FSP Corp
In millions $, except per share data
Less: comprehensive income attributable to the
noncontrolling interest2 (220)3
Comprehensive income attributable to FSP Corp stockholders $733
1
Represents net income of $1,000 less other comprehensive loss of $47.
2
ASC 220-10-45-5 requires presentation of comprehensive income attributable to NCI on the face of
the financial statements.
3
Represents net income attributable to NCI of $100 plus OCI attributable to NCI of $120.
4
After adoption of ASU 2016-01, captions will be “Changes in unrealized gains related to available-for-
sale debt securities” and “Equity in unrealized losses on available-for-sale debt securities of
unconsolidated investees.”
5
After adoption of ASU 2016-01, this will be another component of comprehensive income.
4.4.3 Sample statement of comprehensive income (that follows the income

statement)
A separate statement of comprehensive income should begin with net income

attributable to the consolidated reporting entity. If a reporting entity has NCI, it
should present net income before NCI as the starting point.
Figure 4-3 illustrates the consolidated statement of comprehensive income, which

would follow the consolidated statement of income. For simplicity, the statement
of income is not included, and comparative statements are not shown.
For purposes of illustration, this sample statement segregates the reclassifications

out of AOCI from other changes relative to that component of OCI; however, this
is not required, as illustrated in Figure 4-2. This information could also be shown
in a footnote, rather than on the face of the financial statements. This detail is not
consistent with the two statement approach, but is presented in Figure 4-3 for
purposes of illustrating the optionality in presentation. Refer to ASC 220-10-55-9
for an additional illustration.
PwC 4-7
Figure 4-3
Sample consolidated statement of comprehensive income (that would follow the
consolidated statement of income)
FSP Corp
In millions $
Net income $1,000
Other comprehensive loss, net of tax:
Change in foreign currency translation adjustments 80
Net changes related to available-for-sale securities:2
Unrealized gains during period 13
Reclassifications of losses to net income (2) 11
Equity in unrealized losses on available-for-sale

securities of unconsolidated investee2 (8)
Change in unrealized gains/losses on cash flow hedges:
Unrealized gains during period 43
Reclassifications of losses to net income (28) 15
Change in fair value attributable to instrument-specific

credit risk of liabilities measured at fair value under the
fair value option3 5
Changes in defined benefit pension plans:
Prior service cost arising during period (160)
Net loss arising during period (10)
Less: amortization of prior service cost included in

net periodic pension cost 20 (150)
Other comprehensive loss (47)
Comprehensive income $953
Less: comprehensive income attributable to the

noncontrolling interest (220)1
Comprehensive income attributable to FSP Corp

stockholders $733
1
Represents net income attributable to NCI of $100 plus OCI attributable to NCI of $120.
2
After adoption of ASU 2016-01, the captions will be for “available-for-sale debt securities.”
3
After adoption of ASU 2016-01, the portion of the total change in the fair value of a liability from a
change in the instrument-specific credit risk will be another component of comprehensive income.
4-8 PwC
4.5 Accumulated other comprehensive income

and reclassification adjustments
Reporting entities should display AOCI separate from retained earnings and
additional paid-in capital on the balance sheet. Changes in the components of
AOCI should be presented separately in the statement of changes in stockholders’
equity or in the footnotes. If the changes in AOCI are presented in the footnotes,
the reporting entity should provide the information for each period for which a
statement of stockholders’ equity is presented, that is, three years for public
reporting entities.
Other US GAAP dictates how amounts are recorded into AOCI and how amounts
are subsequently included in net income. To avoid double counting in
comprehensive income, OCI includes reclassification adjustments for those items
coming out of AOCI. Sometimes this is referred to as “recycling” AOCI.
ASC 220 requires reporting entities to aggregate the information about amounts
reclassified from AOCI into net income that is presented throughout the financial
statements and to provide a roadmap to the related disclosures.
Reporting entities have two distinct disclosure requirements with respect to

reporting AOCI. ASC 220-10-45-14A requires reporting entities to present the
changes in each component of AOCI, showing separately the amount due to
current period OCI and current period reclassifications out of AOCI. Separately,
ASC 220-10-45-17 through 17B requires an entity to provide additional
information about reclassification adjustments.
4.5.1 Types of reclassification adjustments
Figure 4-4 lists the types of reclassification adjustments, along with references to
the relevant guidance within the Codification that address the accounting for the
reclassification, and indicates where in this Guide the presentation of the
reclassification adjustments in the income statement is discussed.
Figure 4-4
Types of reclassification adjustments with Codification and Guide references
Codification reference
Reclassifications out of where accounting for the
accumulated other reclassification is
comprehensive income addressed Section
Release of cumulative 830-30-40-1 FSP 21.4.1.1

translation adjustments through 40-4
Realized gains and losses on 815-30-35-38 FSP

derivative instruments that through 35-41 19.5.3.4
qualify as cash flow hedges
PwC 4-9
Codification reference
Reclassifications out of where accounting for the
accumulated other reclassification is
comprehensive income addressed Section
Realized gains and losses on 320-10-40-2 FSP 9.3

available-for-sale
investments1
Pension and other 715-30-35-24 (pension) and FSP 13.3.4

postretirement benefits items 715-60-35-29 (OPEB)
amortized into net income
Changes in fair value 825-10-45-5 FV guide

attributable to instrument-
specific credit risk of liabilities
for which the fair value option
is elected2
adoption of ASU 2016-01, the caption will be “Realized gains and losses on available-for-sale
1 After
debt securities.”
2 Will apply after adoption of ASU 2016-01.
4.5.2 Presenting reclassification adjustments
A reporting entity is required to present the amount reclassified from each

component of AOCI based on its source (e.g., foreign currency, realized
gains/losses and other-than-temporary impairment on available-for-sale
securities,1 and realized gains/losses on cash flow hedges). This disclosure should
also provide the income statement line item affected by the reclassification (e.g.,
interest income or interest expense), unless the component is not required to be
reclassified in its entirety. Finally, the disclosure should include amounts
attributable to NCI. See FSP 4.5.5 for further information.
If a component of AOCI is not required to be reclassified to net income in its

entirety, the reporting entity should disclose that fact within the AOCI footnote. A
cross-reference is required within the footnote to the related disclosure with
additional details about the effect of the reclassification.
A reporting entity can present this information either (1) parenthetically on the
face of the financial statements or (2) in a single footnote. Therefore, for all
components of OCI, a reporting entity may either present a gross display on the
face of the financial statements or a net display with disclosure of the gross change
in the footnotes. If displayed gross, reporting entities should present
reclassification adjustments separately from other changes in the AOCI
component balance. If displayed net, reporting entities should combine
reclassification adjustments with other changes in AOCI. In both options, a
reporting entity can present these amounts either before tax or net of tax;
however, the presentation should be consistent in each reporting period.
1 After adoption of ASU 2016-01, this will be “available-for-sale debt securities.”
4-10 PwC
Figure 4-5 illustrates the options for presenting reclassifications out of AOCI.
Figure 4-5
Options for presenting amounts reclassified out of each component of AOCI
Presentation of
reclassifications out of AOCI Requirements of presentation
Parenthetically on the face of the □ Present parenthetically by

financial statement in which net component of AOCI the effect of
income is presented significant reclassification amounts
This presentation election can only on the respective line items of net
be made if the two requirements income
outlined in FSP 4.5.3 are met. □ Present parenthetically the aggregate
tax effect of all “significant
reclassifications” on the income tax
benefit or expense line item in the
statement presenting net income
□ If applicable, present amounts of
reclassifications attributable to NCI;
see FSP 4.5.5
Within a single footnote □ Present significant amounts by

component of AOCI
A reporting entity can elect this
option or may be required to follow □ Provide a subtotal of each
this guidance if the requirements component of comprehensive income
outlined in FSP 4.5.3 are not met. that corresponds to the components
presented on the face of the financial
statement in which comprehensive
income is presented
□ Identify each income statement line
item affected by each “significant
reclassification amount” for
reclassifications to net income in
their entirety
□ Provide a cross-reference to the
footnote for any significant
reclassification amount not made to
net income in its entirety
□ Present amounts either before tax or
net of tax, as long as the reporting
entity complies with requirements of
ASC 220-10-45-12 related to the
presentation of the income tax effects
on other comprehensive income
□ If applicable, present amounts of
reclassifications attributable to NCI;
see FSP 4.5.5
PwC 4-11
4.5.2.1 Example – insurance industry
One example of an amount not reclassified to net income in its entirety relates to
the accounting for deferred acquisition costs (DAC) by life insurance entities. For
certain products, the related DAC is amortized using the “estimated gross profit”
method. For those products, the insurer is required to record, as an adjustment to
OCI, the impact on DAC amortization of unrealized gains and losses as if those
gains and losses had been realized. This adjustment is required for certain DAC
and DAC in conjunction with purchase accounting balances, and is often referred
to as a shadow adjustment. The calculation of this shadow adjustment can be
complex, and the amounts reclassified from AOCI might be recorded through
income or recapitalized on the balance sheet.
Similarly, traditional long-duration insurance contracts could also require a

shadow adjustment. In performing a premium deficiency assessment, life
insurance entities must consider unrealized gains and losses. If a premium
deficiency would have resulted had the gain or loss been realized, the premium
deficiency would be recorded as either a reduction to DAC or an additional reserve
through OCI. These amounts may either be reclassified through income or be
reclassified to the balance sheet. Therefore, for both of these insurance-related
items, the FASB concluded in the Basis for Conclusions in ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, that a cross-reference to the relevant footnote would suffice. This is
similar to the way pension reclassifications are addressed. See FSP 13 for further
information on pension reclassifications.
4.5.3 Presenting reclassifications parenthetically on the face of the

financial statements
A reporting entity may only elect to present the information parenthetically on the
face of the financial statement in which net income is presented if the following
requirements are met:
□ All of the reclassification adjustments have been reclassified to net income in

their entirety.
□ The reporting entity can identify the income statement line item impacted by
the reclassification.
If a reporting entity elects to present the reclassification adjustments on the face

of the financial statement in which net income is presented, it is also required to
present parenthetically the aggregate tax effect of all of the reclassification
adjustments on the income tax expense/benefit line item. Thus, under this
approach, the reporting entity is also electing to present the reclassification
adjustments on a before-tax basis.
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4.5.3.1 Sample disclosure– reclassification adjustments in AOCI included in

statement of income
Figure 4-6 illustrates the disclosure requirements in ASC 220-10-45-14 through

17B when an entity elects to provide the required information for reclassification
adjustments parenthetically on the face of the income statement. The example
demonstrates how the entity complied with ASC 220-10-45-17 through 17B. To
comply with the requirements of ASC 220-10-45-14A, the reporting entity
provided a separate footnote. Comparative information is not shown for
simplicity.
Figure 4-6
Sample consolidated statement of income, with reclassification adjustments
presented on the face and a footnote showing changes in AOCI
This is partially excerpted from ASC 220-10-55-15A and 55-17F.
FSP Corp
Consolidated Income Statement
For the year ended December 31, 20X6
Revenues (includes $4,000 accumulated other comprehensive

income reclassifications for net gains on cash flow hedges) $122,500
Expenses (includes ($1,000) accumulated other comprehensive

income reclassifications for net losses on cash flow hedges) (32,000)
Other gains and losses 5,000
Gain on sale of securities (includes $4,000 accumulated other

comprehensive income reclassifications for unrealized net gains on
available-for-sale securities1) 4,000
Income from operations before tax 99,500
Income tax expense (includes ($1,750) income tax expense from

reclassification items) (24,875)
Net income $74,625
1After adoption of ASU 2016-01, the caption will be “Unrealized gains and losses on available-for-sale
debt securities.”
PwC 4-13
Note X: Changes in accumulated other comprehensive income by component

The following table presents a rollforward of accumulated other comprehensive income. All
amounts are net of tax.
Unrealized gains
Gains and and losses on
losses on cash available-for-sale
flow hedges securities 1 Total
Beginning balance, January 1,

20X6 $(5,000) $8,000 $3,000
Other comprehensive
income before
reclassifications 7,000 8,000 15,000
Amounts reclassified from

accumulated other
comprehensive income (2,250) (3,000) (5,250)
Net current-period other

comprehensive income 4,750 5,000 9,750
Ending balance, December 31,

20X6 $(250) $13,000 $12,750
1 Afteradoption of ASU 2016-01, the caption will be “Unrealized gains and losses on available-for-sale
debt securities.”
4.5.4 Presenting reclassifications in a footnote
Many reporting entities that have numerous reclassification adjustments elect to

present the amounts reclassified out of AOCI in a footnote rather than on the face
of the financial statement in which net income is presented. Some believe that
including multiple reclassification adjustments clutters the appearance of the
income statement.
Other reporting entities may not meet the requirements to present reclassified
amounts on the face of the financials. This could occur when a reporting entity has
a reclassification adjustment that is initially capitalized, or when it is unable to
identify the impacts on the income statement line items. Instead, the reporting
entity will present the information in the footnotes and cross-reference to the
other applicable notes.
One common example is a reporting entity that has a defined benefit pension plan
and capitalizes a portion of the net periodic pension cost in inventory. In this
instance, the amount reclassified from AOCI during a period is not recognized in
net income until the inventory is sold. Therefore, the reporting entity is not able to
present reclassification adjustments on the face of the financials. Instead, it
should disclose all of its reclassification adjustments in a single footnote (see
Figure 4-8). In that note, the income statement line item affected only needs to be
shown for components reclassified to net income in their entirety. Other
components, such as net periodic pension cost, should be cross-referenced to the
related footnote (e.g., the pension footnote).
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If a reporting entity elects, or is required, to present the information in a single

footnote, the disclosure can be presented before tax or net of tax as long as the
entity complies with the requirements of ASC 220-10-45-12 related to the
presentation of the income tax effects on OCI. The reclassification adjustments
should reconcile by component to the AOCI disclosure.
If a reporting entity presents the information in a single footnote,
ASC 220-10-45-17B requires that the subtotals for each component of the
disclosure agree to the AOCI rollforward required by ASC 220-10-45-14A.
4.5.4.1 Sample disclosure – Footnote displaying changes in AOCI

Figure 4-7 illustrates the disclosure requirements in ASC 220-10-45-14 through
17B when an entity elects to provide the required information in a single footnote.
The first table in the figure demonstrates how the reporting entity complied with
ASC 220-10-45-14A, while the second table demonstrates how the reporting entity
complied with ASC 220-10-45-17 through 17B. Comparative information is not
shown for simplicity.
Figure 4-7
Sample disclosure: Reclassification adjustments in AOCI by component – single
footnote presentation
This was partially excerpted from ASC 220-10-55-15 and 55-17E.
Changes in
Unrealized fair value
gains and attribu-
Gains and losses on Defined table to
losses on available- benefit Foreign instrument-
cash flow for-sale pension currency specific
hedges securities1 items items credit risk Total
Beginning balance,
January 1, 20X6 $(1,200) $1,000 $(8,800) $1,300 500 $(7,200)
Other
comprehensive
income before
reclassifications 3,000 2,500 (3,000) 1,000 200 3,700
Amounts
reclassified from
accumulated
other
comprehensive
income (750) (1,500) 4,500 - (100) 2,150
Net current-
period other
comprehensive
income 2,250 1,000 1,500 1,000 100 5,850
Ending balance,
December 31,
20X6 $1,050 $2,000 $(7,300) $2,300 600 $(1,350)
1
After adoption of ASU 2016-01, the caption will be “Unrealized gains and losses on available-for-sale
debt securities.”
PwC 4-15
The following table presents the income statement line items affected by the
reclassifications out of accumulated other comprehensive income:
Reclassifications out of accumulated other comprehensive income4

For the period ended December 31, 20X6
Reclassification
amount from
accumulated
Details about accumulated other
other comprehensive income comprehensive Affected line item in the
components income income statement
Gains and losses on cash flow

hedges
Interest rate contracts $1,000 Interest income (expense)
Credit derivatives (500) Other income (expense)
Foreign exchange contracts 2,500 Revenue1
Commodity contracts (2,000) Cost of sales
1,000 Total before tax
(250) Tax (expense) or benefit
$7503 Net of tax
Unrealized gains and losses on

available-for-sale securities5
$2,300 Realized gain (loss) on sale

of securities
(285) Impairment expense
Insignificant items (15)
2,000 Total before tax
(500) Tax (expense) or benefit
$1,5003 Net of tax
Changes in fair value due to

instrument-specific credit risk (100)
Amortization of defined pension

items
Prior-service costs $(2,000)2
Transition obligation (2,500)2
Actuarial gains/(losses) (1,500)2
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Reclassification
amount from
accumulated
Details about accumulated other
other comprehensive income comprehensive Affected line item in the
components income income statement
(6,000) Total before tax
1,500 Tax (expense) or benefit
$(4,500)3 Refer to pension footnote
Total reclassification for the period $(2,150)3 Net of tax
1
This foreign exchange contract represents a cash flow hedge of a forecasted sales transaction and
therefore affects revenue because the reporting entity has elected to reflect the impact of the
derivative on the same line item in the income statement as that of the hedged item. See FSP 19.4.2
for additional information.
2
These accumulated other comprehensive income components are included in the computation of net
periodic pension cost.
3
These amounts reconcile to the “Amounts reclassified from accumulated other comprehensive
income” in the first table in this figure.
4
Amounts in parentheses indicate debits.
5
After adoption of ASU 2016-01, the caption will be “Unrealized gains and losses on available-for-sale
debt securities.”
4.5.5 Presenting reclassifications attributable to noncontrolling interest
There is no explicit guidance in ASC 220 regarding how reporting entities should
present amounts attributable to NCI when a reporting entity elects to disclose
reclassifications from AOCI in a single footnote. Our view is that NCI should be
included in each of the relevant components. In other words, amounts attributable
to NCI would not be shown separately.
In practice, many reporting entities present the tax impact of NCI below the tax
expense/benefit line for each component. Additionally, the total reclassifications
in the rollforward of AOCI would be presented net of tax and inclusive of NCI, as
shown in Figure 4-7.
4.5.6 Income tax considerations for reporting reclassifications out of AOCI
As noted in FSP 4.3.1, each component of OCI should be reported either (1) net of
related tax effects or (2) before related tax effects with one amount shown for the
aggregate income tax expense or benefit related to the total OCI items.
ASC 740, Income Taxes, prohibits allocating tax impacts of transactions involving
AOCI based on past tax rates used in accumulating other comprehensive income
transactions, sometimes called “backward tracing.” Consistent with this principle,
when amounts are reclassified into net income out of AOCI, we believe it would
PwC 4-17
generally be appropriate to use the tax rate in effect at the time of the
reclassification rather than using the tax rate in effect when the AOCI amount was
initially recorded. This approach maintains consistency with the offsetting tax
effect recognized in net income under the intraperiod allocation requirements of
ASC 740.
Backward tracing could result in using different tax rates for different components
of AOCI if the reclassified items relate to different tax jurisdictions. It could also
result in items being reclassified using different tax rates than when the items
were originally recorded in AOCI (e.g., when there have been changes in the
valuation allowance). This result is consistent with the FASB’s desire to simplify
AOCI accounting, although it may seem different from the objective of OCI
reclassification to prevent double counting in comprehensive income. For further
considerations surrounding presentation and disclosure of income taxes, see
FSP 16.
ASC 220-10-55-7 through 55-8B provides examples of the alternative formats for
disclosing the tax effects related to the components of OCI.
4.6 OCI in spin-off transactions

In a spin-off transaction, which is a carryover basis transaction, no realization
occurs with respect to previously accumulated elements of OCI reported by the
parent and subsidiary. Thus, the post-spin financial statements of a subsidiary
should generally reflect the OCI that was previously accumulated in the parent’s
financial statements related to assets and liabilities of the subsidiary. Likewise, the
post-spin financial statements of the spinnor should only reflect its AOCI after the
spin. In the spinnor’s financial statements, this would not be considered a
reclassification adjustment. However, when the spinnor is disclosing its
rollforward of AOCI, the spinnor will need to show the impact of the spin-off.
Question 4-2
Parent Co plans to spin-off Sub Co. Prior to the spin, the consolidated financial
statements of Parent Co contain AOCI balances related to both Parent Co’s and
Sub Co’s assets and liabilities. For example, unrealized gains and losses on
available-for-sale debt securities, unamortized gain/loss or prior service cost on
subsidiary-specific pension plans, and cumulative translation adjustments (CTA)
have been accumulated in AOCI in the consolidated financial statements.
How would AOCI attributable to assets and liabilities of Sub Co be presented in

post-spin financial statements of Sub Co?
PwC response
AOCI related to Sub Co’s assets and liabilities existing at the date of the spin
should be maintained in the opening equity accounts of the post-spin entity. That
is, AOCI should not be collapsed into APIC as is typical for many other
components of pre-spin equity.
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Regarding CTA in AOCI of Parent Co, management should identify only the CTA
related to Sub Co’s subsidiaries or foreign operations. For example, if Sub Co has a
different functional currency from Parent Co, CTA arising from Parent Co’s
consolidation of Sub Co prior to the spin should not be reflected in Sub Co’s
post-spin financial statements.

The requirements discussed in this chapter are applicable to both public and
private reporting entities.
PwC 4-19
Chapter 5:
PwC 1

This chapter discusses the specific annual presentation and disclosure requirements
in the financial statements and footnotes for stockholders’ equity and noncontrolling
interest accounts. Interim presentation and disclosure requirements differ and are
Unlike the balance sheet and income statement, the statement of stockholders’ equity
is not a required financial statement. Both the FASB and the SEC allow changes in
stockholders’ equity accounts to be disclosed either in a statement or in the footnotes,
although most reporting entities do present changes in stockholders’ equity in a
statement.
The chapter begins with the disclosures required for all classes of equity, and then
details the presentation and disclosure considerations by classes of equity.
The impact of various types of equity on earnings per share is addressed in FSP 7.
Stockholders’ equity presentation and disclosure considerations related to limited
liability companies and partnerships are detailed in FSP 32.
5.2 Scope
ASC 505, Equity, S-X 3-04, and S-X 5-02 are the primary sources for the presentation
and disclosure requirements related to stockholders’ equity accounts. ASC 810-10
addresses the presentation and disclosure requirements of noncontrolling interests.
FRP 211 (SEC Accounting Series Release No. 268, Presentation in Financial
Statements of “Redeemable Preferred Stocks” (“ASR 268”)) requires certain securities
to be presented outside of permanent equity on the balance sheet.
Other relevant guidance for SEC registrants includes:
SAB Topic 3.C Redeemable Preferred Stock
SAB Topic 4.C Change in Capital Structure
SAB Topic 4.E Receivables from Sale of Stock
SAB Topic 4.G Notes and Other Receivables from Affiliates
S-X 4-07 Discount on Shares
S-X 4-08 General Notes to Financial Statements
FRP 213 Separate Financial Statements
5-2 PwC
5.3 Presentation of changes in stockholders’

equity
ASC 505-10-50-2 requires a reporting entity to disclose changes in each account that
comprise the reporting entity’s equity when both a balance sheet and income
statement are presented. This disclosure may take the form of a separate statement or
it may be in the footnotes.
While footnote disclosure is permitted, the most common presentation is as a separate
statement of changes in stockholders equity. For SEC registrants, S-X 3-04 also calls
for disclosure of dividends per share and in the aggregate for each class of shares.
Most commonly, reporting entities present the information about changes in
stockholders’ equity in a columnar format, but it is not required. Figure 5-1 shows an
example statement of changes in stockholders’ equity in columnar format.
Figure 5-1
Example consolidated statement of changes in stockholders’ equity
FSP Corp
Consolidated statement of changes in stockholders’ equity
For the year ended December 31, 20X6 (in millions $, except per share data)
Total
FSP Corp
Common Preferred Retained stock-holders Noncontrolling Total
shares Amnt shares Amnt APIC earnings AOCI equity interests equity
Balance at
December 31, 20X5 xx $xx xx $xx $xx $xx $xx $xx $xx $xx
Net income xx xx xx xx
Other comprehensive
income, net xx xx xx xx
Stock-based compensation xx xx xx xx xx
Tax benefit from
stock plans1 xx xx xx
Common stock issued xx xx xx xx xx
Retirement of
common shares (xx) (xx) (xx) (xx) (xx) (xx)
Cash dividends declared
($0.xx per share) (xx) (xx) (xx)
Stock dividends declared xx xx xx (xx)
Conversion of preferred
shares into common shares xx xx (xx) (xx)
Purchase of shares from
noncontrolling interests (xx) xx1 (xx) (xx) (xx)
Balance at
December 31, 20X6 xx $xx xx $xx $xx $xx $xx $xx $xx $xx
See Notes to Consolidated Financial Statements
1
The purchase of additional subsidiary shares once control is obtained by the Parent Company is accounted for as an equity transaction, and
no gain or loss is recognized. The components of accumulated other comprehensive income are proportionately reallocated from the
noncontrolling interest to the Parent.
1 After adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, all excess
tax benefits and tax deficiencies (including the tax benefits of dividends on stock-based compensation
awards) will be recognized as income tax expense or benefit in the income statement, not in APIC within
stockholders’ equity. As such, this line will no longer appear in the statement. See FSP 14 for information on
the effective date of ASU 2016-09.
PwC 5-3
As illustrated in Figure 5-1, if there is more than one item that comprises other
comprehensive income, the items may be presented net on the statement of
stockholders’ equity (the gross amounts of the items would be presented on the
statement of comprehensive income). However, reporting entities are not prohibited
from presenting the gross amounts of other comprehensive income in the statement
of stockholders’ equity as well. Refer to FSP 4 for presentation of comprehensive
income.
5.3.1 Noncontrolling interest
The statement of changes in stockholders’ equity should distinguish equity

attributable to the parent from equity attributable to noncontrolling interests. It
should present the noncontrolling interests’ portion of each component of
stockholders’ equity.
Reporting entities are required by ASC 810-10-50-1A(c) to present in the statement of

changes in equity, or disclose in the footnotes a reconciliation of the carrying amount
at the beginning and end of the period each of the following categories of equity:
(1) total equity, (2) equity attributable to the parent, and (3) equity attributable to the
noncontrolling interest.
In this reconciliation, the reporting entity should present the following details
separately when they have one or more less-than-wholly-owned subsidiaries:
□ Net income
□ Transactions with owners acting in their capacity as owners (contributions from,

and distributions to, owners should be shown separately)
□ Each component of other comprehensive income
There is also a requirement to disclose in the footnotes a separate schedule that shows
the effects of any changes in a parent’s ownership interest in a subsidiary on the
equity attributable to the parent. The schedule is only required in periods when a
parent’s ownership interest in a subsidiary changes. ASC 810-10-55-4M also provides
an illustration of this disclosure.
Question 5-1
Should redeemable noncontrolling interests classified outside of stockholders’ equity
be included in the equity reconciliation required by ASC 810-10-50-1A(c)?
PwC response
We believe a reporting entity should follow the SEC guidance for redeemable
preferred stock when disclosing changes in redeemable noncontrolling interest. That
is, an SEC registrant is required to include a rollforward of redeemable preferred stock
in either the statement of changes in stockholders’ equity, if presented, or in the
footnotes. If the reporting entity includes the rollforward of redeemable preferred
5-4 PwC
stock in the statement of changes in stockholders’ equity, it should consider an

appropriate title of the statement, since it will include amounts not included in
stockholders’ equity. S-X 5-02 (27) prohibits totaling preferred stocks subject to
mandatory redemption requirements or whose redemption is outside the control of
the issuer with equity-classified instruments.
Refer to FSP 5.6.3 for further information on presentation of redeemable preferred

stock.
5.4 Disclosures for all classes of securities

A reporting entity is required to explain the pertinent rights and privileges of all
outstanding classes of securities. ASC 505-10-50-3 includes the following examples of
information that should be summarized within the financial statements (either on the
balance sheet or in the statement of stockholders’ equity):
□ Dividend and liquidation preferences
□ Participation rights
□ Call prices and dates
□ Sinking-fund requirements
□ Unusual voting rights
□ Significant terms of contracts to issue additional shares
□ Conversion or exercise prices and pertinent dates
□ Number of shares issued upon conversion, exercise, or satisfaction of required

conditions during the most recent annual fiscal period and any subsequent
interim period presented
Public companies should show any discount on shares (or any unamortized discount
balance) separately as a deduction from the related shares’ account, as required by
S-X 4-07.
5.5 Common stock

Common stock represents the basic ownership interest in the reporting entity. It is the
residual corporate interest that bears the ultimate risk of loss, as it is subordinate to
all other stock. A reporting entity may have more than one class of common stock.
5.5.1 Balance sheet presentation
Public reporting entities are required by S-X 5-02 (29) to present the dollar amount
and number of shares issued or outstanding, as appropriate, on the face of the balance
sheet. If the common stock class is convertible, the reporting entity should label the
common stock as such on the face of the balance sheet. When multiple classes of
PwC 5-5
common stock exist, a reporting entity may aggregate them together on the balance
sheet and present the required information for each class of common stock in a
footnote.
The total number of outstanding shares disclosed on the face of the balance sheet is a
legal determination. The legal shares outstanding may be different from the number
of shares considered outstanding for accounting purposes and for earnings per share
computations.
5.5.2 Disclosure
S-X 5-02 (29) also requires the following information to be disclosed in the footnotes,
or on the face of the balance sheet, for each class of common stock:
□ The title of the issuance
□ The number of shares authorized
□ If convertible, the basis of conversion
□ Dollar amount of common shares subscribed but unissued, and the deduction of
subscriptions receivable
5.6 Preferred stock

Preferred stock is an equity security with preferential rights generally not associated
with common stock. Like common stock, reporting entities may have multiple classes
of preferred stock.
The balance sheet presentation of preferred stock depends on whether it is

(1) perpetual or non-redeemable (FSP 5.6.2.1), (2) mandatorily redeemable (FSP
5.6.3.1), or (3) contingently redeemable (FSP 5.6.3.1). The determination of how to
classify redeemable preferred stock is addressed in FG 4.
5.6.1 Disclosure
Preferred stock often has a preference in liquidation in which the preferred stock has a
claim on proceeds equal to its par value. However, there are situations when the
preferred stock has a preference that is considerably in excess of the par or stated
value of the stock. When such a preference exists, ASC 505-10-50-4 indicates that
reporting entities should disclose this on the face of the balance sheet. Further,
S-X 4-08(d)(1) requires public companies that have preferred stock with a liquidation
preference other than par or the stated value to disclose the preference on the face of
the balance sheet regardless of whether it is considerably in excess of the par or stated
value of the stock.
In addition to the general requirements outlined in FSP 5.4, ASC 505-10-50-5

requires a reporting entity with preferred stock with preferences to disclose the
following on the face of the balance sheet or in the footnotes:
5-6 PwC
□ Aggregate or per-share amounts at which the preferred stock is called or is subject

to redemption through sinking-fund operations or otherwise
□ Aggregate and per-share amounts of cumulative preferred dividends in arrears
Further, S-X 4-08(d)(2) requires public companies to disclose any restrictions on

retained earnings upon an involuntary liquidation that results from a preference that
exceeds the par or stated value of the related shares.
5.6.2 Perpetual preferred stock (no redemption)
Perpetual, or non-redeemable, preferred stock, by its legal terms, has no contractual

redemption provisions.
Balance sheet presentation
Absent any conversion or exchange provisions, preferred stock is generally classified

in equity. However, reporting entities should consider whether substantive
redemption features exist, in which case it may be classified outside of equity
(e.g., mezzanine equity), or as a liability. See FG 4.3.2.
In addition to the general disclosure requirements outlined in FSP 5.4, a reporting

entity with non-redeemable preferred stock should state on the face of the balance
sheet (or if more than one issue is outstanding, in the footnotes) the following for each
issue in accordance with S-X 5-02 (28):
□ Title
□ Dollar amount
□ Dollar amount of any shares subscribed but unissued and the deduction of
On the face of the balance sheet or in the footnotes, the reporting entity should
disclose the number of shares authorized and the number of shares issued or
outstanding for each issue. In the footnotes or in a separate statement, it should
disclose the changes in each class of non-redeemable preferred stock for each period
an income statement is presented.
5.6.3 Redeemable preferred stock
Preferred stock may have redemption features in which the preferred shares may be
exchanged for cash. Preferred stock that is redeemable at the option of the issuer
(i.e., the issuer has a call option) would follow the same presentation and disclosure
requirements as perpetual preferred stock. Refer to FSP 5.6.2. Preferred stock may
also have a mandatory redemption feature or a redemption feature outside of the
control of the issuer.
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A public reporting entity should state on the face of the balance sheet the following for
each issue of redeemable preferred stock in accordance with S-X 5-02 (27).
□ Title
□ Carrying amount
□ Redemption amount
□ Dollar amount of any shares subscribed but unissued and the deduction of
□ The number of shares authorized and the number of shares issued or outstanding
for each issue (either on the face of the balance sheet or in the footnotes)
If a reporting entity has multiple issues of such instruments outstanding, it may

combine the amounts on the face of the balance sheet if appropriate disclosure is
included in the footnotes.
Mandatorily redeemable
ASC 480-10-25-4 requires reporting entities to present mandatorily redeemable

preferred stock as a liability on the balance sheet. Financial instruments in the scope
of ASC 480 should be presented as liabilities in the balance sheet, and not as items in
the mezzanine section (i.e., not between the liabilities section and the equity section in
the balance sheet).
Further, reporting entities should present payments to holders of such instruments

(e.g., dividends on the “equity” shares) and related accruals as interest cost separate
from amounts due to other creditors in the income statement and statement of cash
flows.
There is a special presentation for entities that have all of their “equity” instruments
classified as mandatorily redeemable liabilities under ASC 480. The issuer should
describe those instruments as “shares subject to mandatory redemption” in the
balance sheet to distinguish them from other liabilities.
Redeemable outside control of the issuer
Public companies are required to present contingently redeemable preferred stock

(i.e., redeemable upon the occurrence of an event) and preferred stock that is
redeemable (outside the control of the issuer), including those instruments that are
redeemable at the option of the holder, in mezzanine equity. Mezzanine equity is
presented after liabilities and before stockholders’ equity on the balance sheet. The
purpose of this classification is to convey to the reader that such a security may not be
permanently part of equity and could result in a demand for cash or other assets of the
entity in the future.
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Reporting entities should present redeemable securities that are classified as

mezzanine equity separate from all other stockholders’ equity accounts that are
classified as permanent equity (e.g., non-redeemable preferred, common stock, and
retained earnings). ASR 268 specifically prohibits the use of the term “stockholders’
equity” as a caption to present the combined total of all equity securities and
redeemable preferred stock.
The SEC has stated that it will not accept liability classification for redeemable
instruments that do not meet the requirements for liability classification in ASC 480.
These instruments should be classified as mezzanine equity based on the guidance in
ASC 480-10-S99.
Private companies are not required to present contingently redeemable preferred

stock in mezzanine equity. However, mezzanine equity classification is strongly
encouraged for private companies, especially in those circumstances when there is not
a high likelihood that the capital is in fact permanent (e.g., when preferred stock is
redeemable at the option of the holder at any time). On the other hand, use of a
mezzanine presentation may be considered less relevant in other circumstances, such
as when preferred stock is redeemable by the holder only upon a remote event. If the
private company does not elect mezzanine presentation, it should consider separate
presentation from other items within equity. Regardless of whether a nonpublic entity
adopts the mezzanine equity presentation, ASC 505-10-50-11 requires specific
disclosures for redeemable securities. Refer to FSP 5.6.3.2 for further information.
Disclosure
For mandatorily and contingently redeemable securities whose redemption is outside

the control of the issuer, in addition to the information in FSP 5.4, S-X 5-02 (27)
requires disclosure of the following in a footnote labeled “Redeemable Preferred
Stocks:”
□ General description of each issue, including redemption features
□ Rights, if any, of the holders in the event of default, and any impact on junior
securities if a required dividend, sinking fund, or other redemption payment is not
made
□ Redemption requirements in the aggregate for all issues for each of the five years
following the latest balance sheet presented
□ Changes in each issue for each period an income statement is presented
□ A description of the accounting treatment for any difference between the carrying
value and redemption amount
ASC 505-10-50-11 requires a reporting entity to disclose the redemption requirements

for each of the five years following the latest balance sheet only for stock redeemable
at fixed or determinable prices and redeemable on fixed or determinable dates. In
contrast, S-X 5-02 requires this disclosure for all redeemable preferred stock issued by
SEC registrants.
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ASR 268 requires the following presentation/disclosure for public companies with
redeemable equity instruments that are classified outside of permanent equity:
FRP 211.04
ASR 268:
In the interest of clear and prominent disclosure of the future cash obligations
attendant with these types of securities, the rules require disclosure of the terms of
redemption, five-year maturity data, and changes in these securities in a separate note
to the financial statements captioned “Redeemable Preferred Stocks.” It should be
noted that although in the past a registrant may have disclosed changes in redeemable
preferred stocks in a statement of stockholders’ equity, such changes are now required
to be disclosed in a separate note as described above.
Excerpt from FRP 211.03

ASR 268:
Where redeemable preferred stocks are outstanding, the Commission will not prohibit
the combining of non-redeemable preferred stocks, common stocks and other equity
accounts under an appropriate designated caption (e. g., “Non-Redeemable Preferred
Stocks, Common Stocks, and Other Stockholders’ Equity”) provided that any
combinations be exclusive of redeemable preferred stocks.
As noted in the excerpt, FRP 211.04 indicates that changes in redeemable preferred
stock are required to be disclosed in a separate note. However, we believe that
presentation of redeemable securities within the statement of changes in stockholders’
equity is permitted provided the statement is appropriately titled. We believe either
alternative is appropriate.
Mandatorily redeemable
In addition to the disclosures in FSP 5.4, reporting entities that issue mandatorily
redeemable securities classified as liabilities are required to provide the following
disclosures in accordance with ASC 480-10-50:
□ Nature and terms of the financial instrument
□ Rights and obligations of the security, including any settlement alternatives in the
contract, and the entity that controls the settlement alternatives
This guidance also requires the following disclosures for each settlement alternative:
□ Amount that would be paid, or the number of shares that would be issued and
their fair value, determined based on the conditions in the contract if the
settlement were to occur at the balance sheet date
□ How changes in the fair value of the issuer’s equity shares would impact the
settlement amounts (see ASC 480-10-50-2(b) for example disclosure)
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□ If applicable, the maximum amount that the issuer could be required to pay to
redeem the instrument by physical settlement, the maximum number of shares
that could be required to be issued, and that a contract does not limit the amount
that the issuer could be required to pay or the number of shares that the issuer
could be required to issue
□ For a forward contract or an option indexed to an issuer’s equity shares, the

forward price or option strike price, the number of issuer’s shares that the
contract is indexed to, and the settlement date or dates of the contract
5.6.4 Convertible preferred stock
Convertible preferred stock is convertible into common stock upon the occurrence of
certain events. It may be contingently convertible (e.g., convertible at the option of the
issuer, upon an initial public offering, or when reaching a target stock price) or
mandatorily convertible. Refer to FG 9.3.2 to determine if convertible preferred stock
should be classified in permanent or mezzanine equity.
Convertible preferred stock classified in permanent equity should follow the balance
sheet presentation requirements for non-redeemable preferred stock outlined in
FSP 5.6.2.1.
Convertible preferred stock classified in mezzanine equity should follow the guidance
in terms of what information is to be included, but be presented in mezzanine equity.
Refer to the “contingently redeemable outside control of the issuer” section of
FSP 5.6.3.1 for presentation requirements of mezzanine equity.
Disclosure
Reporting entities are required to include the disclosures noted in FSP 5.4 for all
convertible preferred stock. In addition, ASC 505-10-50-6 requires reporting entities
to disclose all terms of contingently convertible securities to help financial statement
users understand both the nature of the contingency and the potential impact to the
ownership of the reporting entity upon conversion. These should include:
□ What events or circumstances would cause the contingency to be met and other
significant terms that will enable the user to understand the impact and potential
timing of those rights
□ The conversion price and the number of shares into which the contingently
convertible securities will potentially convert
□ If there are any events or circumstances that could change the contingency, the
conversion price, or the number of shares into which they will ultimately convert,
including the significant features of those circumstances
□ How the shares will settle upon conversion and if there are alternative settlement
methods (for example, cash, shares, or a combination)
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ASC 505-10-50-7 includes an example disclosure that addresses the preceding

requirements.

The Company is obligated to issue X shares and as the market price of the common
stock decreases, the Company is obligated to issue an additional X shares for each $1
decrease in the stock price.
Additionally, ASC 505-10-50-9 requires a reporting entity to indicate in the footnotes

if the convertible preferred stock is included in diluted EPS and the reasons why or
why not.
Contingently convertible preferred stock — with related derivatives
A reporting entity may enter into derivative instruments in connection with the
issuance of contingently convertible preferred stock. In that instance,
ASC 505-10-50-10 requires the reporting entity to explain in the footnotes the terms
of any derivatives and their potential impact on the contingently convertible
securities. The information might include:
□ The terms of the derivative instruments (including the terms of settlement)
□ How the derivative instruments relate to the contingently convertible securities
□ The number of shares underlying the derivative instruments
For additional information related to disclosures of derivatives, see FSP 19.
Discount on contingently convertible preferred stock
Preferred stock may be issued at a discount when the redemption value exceeds the
proceeds received. ASC 505-10-50-8 requires a reporting entity that issues
contingently convertible preferred stock at a discount to disclose in the footnotes the
excess of (1) the aggregate fair value of the instruments the holder would receive at
conversion, over (2) the proceeds received by the issuer, and the period over which the
discount is accreted.
5.7 Retained earnings

Retained earnings represents the earned capital of the reporting entity. Earned capital
is the capital that develops and builds up over time from profitable operations. It
consists of all undistributed income that remains invested in the reporting entity.
Retained earnings (or accumulated deficit) should be stated separately on the balance
sheet.
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5.7.1 Restrictions on retained earnings
When a reporting entity is materially restricted from paying dividends, they should
describe the restriction in the footnotes.
S-X 4-08(e) requires footnote disclosure of the following:
□ The most significant restrictions on the payment of dividends, including their

sources, their pertinent provisions, and the amount of retained earnings or net
income restricted or free of such restrictions
□ The amount of consolidated retained earnings that represents undistributed

earnings of 50% or less-owned entities accounted for by the equity method
□ The nature of any restrictions on the ability of consolidated and unconsolidated

subsidiaries to transfer funds to the parent, and the amounts of such restricted net
assets (if restricted net assets of consolidated and unconsolidated subsidiaries
plus the parent’s equity in 50% or less-owned entities accounted for by the equity
method exceed 25% of consolidated net assets)
The disclosure should not only include a description of the restriction, but also a
statement of the amount of retained earnings restricted or not restricted. Reporting
entities should not make any statement that a portion of retained earnings is
“available” for dividends because this statement ignores the possibility that it may be
unwise or impractical, for business reasons, to pay a dividend. If a reporting entity
chooses to make such a statement, we recommend they discuss the decision with legal
counsel.
Figure 5-2 is an example footnote disclosure of a restriction on retained earnings.
Figure 5-2
Example disclosure — retained earnings restrictions
Note D — At December 31, 20X6, consolidated retained earnings was restricted in the
amount of $3,500,000, representing the cost of 170,000 shares of common stock held
in the treasury.
Restrictions on retained earnings in loan agreements
Loan agreements may contain restrictions on earnings. In these circumstances, it is

usually not sufficient to describe only the provisions of loan or credit agreements that
restrict the amount available for dividends; the reporting entity should also state the
amount restricted.
Figure 5-3 is an example of a footnote to disclose restrictions on retained earnings in

loan agreements.
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Figure 5-3
Example disclosure — restrictions on retained earnings in a loan agreement
Note E — As stated more fully in the agreement, the corporation has agreed, among
other things, that it will not, without the consent of the banks, declare any dividend if
immediately thereafter the consolidated working capital would be less than $9
million. This working capital provision effectively limits the amount that might be
paid as cash dividends to $3 million, which represents the excess of consolidated
working capital
Subsidiary restrictions on retained earnings
Reporting entities should consider material amounts of consolidated retained

earnings that are restricted because of actions by subsidiaries. Restrictions on
consolidated retained earnings could, for example, arise at the subsidiary level in the
following situations:
□ A domestic subsidiary with a noncontrolling interest that capitalizes retained

earnings by declaring a stock dividend
□ Subsidiaries that capitalize retained earnings by transfers to common stock in

order to gain tax or other advantages
□ A foreign subsidiary that is required by statute to establish a legal reserve for the
protection of creditors
□ Debt covenant requirements that restrict a subsidiary’s ability to transfer funds to

the parent
□ Regulated subsidiaries, such as broker dealers and insurance companies, that

need to keep capital levels at certain amounts or have regulators approve
dividends
5.7.2 Appropriations on retained earnings
Retained earnings may be appropriated by:
□ Action of the board of directors (such as an authorization for the acquisition of

treasury stock)
□ Arrearages of cumulative preferred stock dividends
□ Preferences of preferred stock upon involuntary liquidation in excess of par or

stated value
□ Provisions in the corporate charter, loan agreements, and other contracts
ASC 505-10-45-3 permits an appropriation of retained earnings if it is shown within

stockholders’ equity on the balance sheet and is clearly identified as such. Reporting
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entities should not transfer any part of the appropriation to net income, nor should it
charge costs or losses directly to an appropriation of retained earnings.
5.8 Treasury stock

Treasury stock is created when a reporting entity reacquires its own common stock.
Treasury stock may be legally issued and outstanding but not considered outstanding
for accounting purposes; it is represented by a debit in the equity section for the
purposes of financial reporting. If the treasury stock is not constructively or actually
retired upon its reacquisition, the reporting entity may present it on the balance sheet
as a reduction from common stock, additional paid-in capital (APIC), or retained
earnings. Alternatively, reporting entities may follow the accounting requirements of
ASC 505-30-30-7 to 30-10, which govern the retirement of treasury stock.
5.8.2 Disclosure
Reporting entities with treasury stock should disclose its terms, similar to the way
they do for common stock. Reporting entities should consider disclosing the
following:
□ Basis at which it is carried
□ Number of shares
□ Commitments to repurchase capital stock
□ Restrictions imposed by state law
□ Reasons for acquisition
Shares may be repurchased at a price that is significantly in excess of the current

market price. As indicated in ASC 505-30-50-3, when this occurs there is a
presumption that the repurchase price includes amounts attributable to items other
than the shares. As a result, a reporting entity may be required to allocate amounts of
the repurchase price to other elements of the transaction as required by
ASC 505-30-30-2. There is significant judgment involved in allocating amounts
between treasury shares and other items. Disclosure is required in the footnotes of the
allocation of the amounts paid and the accounting treatment for these amounts in
accordance with ASC 505-30-50-4.
See FG 6.3 for accounting considerations related to treasury stock.
5.8.3 Presentation of a subsidiary investment in a parent
A subsidiary may hold an investment in its parent company’s common stock. The
manner in which the subsidiary presents its investment in the parent company’s
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common stock in the standalone subsidiary financial statements will ultimately

depend on whether the parent company is deemed to have substance.
If the parent company’s only significant asset is its investment in the subsidiary, then
the parent company would not be considered substantive and the subsidiary would
present its investment in its parent as a reduction of the subsidiary’s stockholders’
equity balance. This substance-based presentation approach treats the subsidiary’s
investment in the parent company as treasury stock. This is because there is no
distinction between the subsidiary acquiring its own shares directly or indirectly
through the acquisition of an interest in its parent if the parent’s only asset is its
investment in the subsidiary.
When a subsidiary’s investment in the stock of its parent is classified as a reduction to
stockholders’ equity, any dividends received should be recorded as a capital
contribution by the parent.
If the parent company has other significant assets in addition to its investment in its
subsidiary, the subsidiary would account for its interest in the parent as an investment
(as opposed to treasury stock). Any dividends received from the parent would be
presented as dividend income in the subsidiary’s financial statements. Disclosure
should be made of the nature of the related party transaction. This differs from the
treatment of intercompany dividend payments in consolidation as in consolidation,
the dividend income would eliminate against dividends paid.
5.9 Additional paid-in capital

Additional paid-in capital (APIC or sometimes referred to as capital in excess of par
value) is the excess amount paid by an investor over the par value of a stock issue. In
addition, non-stock-related contributions from an investor, such as cash or property,
are normally reflected in APIC. APIC may be shown as a separate caption in the equity
section of the balance sheet or combined with the related stock caption.
5.9.1 Notes received for common stock — updated May 2017
A reporting entity may receive a note, rather than cash, as a contribution to its equity.
The note may be for the sale of common stock or a contribution to paid-in capital. The
question arises as to whether the note should be presented as a receivable or as
contra-equity. The predominant practice is to present the note receivable as
contra-equity. ASC 505-10-45-2 indicates that reporting the note as an asset is
generally not appropriate, except in very limited circumstances when there is
substantial evidence of intent and ability to pay in a reasonably short time period.
SAB Topic 4-E indicates that the SEC would permit recording such a note as an asset
if the note is collected prior to issuance of the financial statements.
For nonpublic entities, evidence of intent and ability to pay in a reasonably short
period, and therefore the ability to include the note as an asset, may include
circumstances when the notes are secured by irrevocable letters of credit or other
liquid collateral, have a stated maturity in a short time period, or when the notes are
collected prior to issuance of the financial statements.
For other transactions with shareholders, see FG 5.
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5.10 Dividends
Dividends are distributions to owners or stockholders. They may be paid in cash,
stock, or as dividends in kind.
Cash dividends declared are generally reported as a deduction from retained earnings
until retained earnings is exhausted. In the absence of retained earnings, cash
dividends should generally be charged to APIC. Dividends declared or paid are
normally presented in the statement of stockholders’ equity at the amount per share,
and in total for each class of shares as required by S-X 3-04.
Figure 5-1, the example statement of changes in stockholders’ equity in FSP 5.1,
depicts this presentation. Whenever dividends are declared from other than parent
company retained earnings (e.g., from APIC, or retained earnings resulting from
parent’s equity in undistributed earnings of a subsidiary), the reporting entity should
consider obtaining an opinion of counsel as to the legality of the declaration. The
declaration of a dividend implies that there have been profits that justify the dividend.
5.10.1 Stock dividends
ASC 505-20-20 defines a stock dividend as a dividend paid-in the reporting entity’s
own shares. Like cash dividends, stock dividends declared are generally shown as a
deduction from retained earnings and added to common stock and APIC (“permanent
equity”). Unless this is done, the amount of earnings distributed will remain in
retained earnings, leading stockholders to believe these distributions are available for
further stock issuances or cash distributions. Therefore, the transfer from retained
earnings should not be shown as an appropriation of retained earnings, but as a
reduction of permanent equity.
Stock dividends declared or paid are normally presented in the statement of

stockholders’ equity at the amount per share and in total for each class of shares as
required by S-X 3-04. In the year declared, the reporting entity should disclose the
amount of retained earnings transferred to permanent equity.
Further, as noted in FSP 5.4, S-X 5-02 requires disclosure of the number of shares
issued and outstanding on the face of the balance sheet. When a stock dividend has
been declared, but not issued at the balance sheet date, the sum of the number of
shares declared as a stock dividend and the total number of shares outstanding should
usually be disclosed on the face of the balance sheet. When there are multiple classes
of shares, it may be appropriate to disclose this information in the footnotes.
Figure 5-4 illustrates two versions of this presentation on the balance sheet.
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Figure 5-4
Example balance sheet presentation — shares declared as a stock dividend and not
issued
December 31, 20X6
Common stock — $10 par; authorized

200,000 shares; issued and
outstanding 105,000 shares (including
5,000 shares declared as a stock
dividend on December 29, 20X3, and
issued on January 15, 20X4) $1,050,000
Or
December 31, 20X6
Shares Amount
Common stock — $10 par; authorized

200,000 shares
Issued and outstanding 100,000 shares $1,000,000
Issued on January 15, 20X4 as a stock

dividend 5,000 shares 50,000
105,000 shares $1,050,000
Stock dividend declared but not paid
Reporting entities may elect not to record a declared stock dividend and related per
share effects if there is a reasonable basis for concluding that the dividend may be
rescinded. Such a situation might exist when stockholder approval is required and
scheduled for a date subsequent to issuance of the financial statements, and there are
reasonable grounds to believe that stockholders will not approve the dividend. The
reporting entity should disclose such a situation in the footnotes.
If a balance sheet date falls between declaration and issuance of the stock dividend,
the reporting entity should show the credit in stockholders’ equity on the balance
sheet. The account is not shown as a liability because no corporate obligation is
created by the declaration of a stock dividend (and the future payment of the stock
dividend would not meet the definition of a liability under ASC 480). As such,
reporting entities should not use the caption “stock dividend payable” because it may
cause the reader to think of the item as a liability.
We believe an appropriate presentation is a charge to retained earnings for the fair

value of the stock dividend with an offsetting credit allocating the amount of the
dividend between the capital stock account (at par or at stated value) and APIC in the
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same manner as would be done if the dividend were issued before the balance sheet
date. This treatment eliminates any possible misinterpretation of the nature of the
credit or its eventual disposition. We do not believe showing the credit as
appropriated retained earnings or as a separate equity item, instead of being included
in common stock and APIC, would adequately identify the amount as part of
permanent equity.
5.10.2 Unpaid dividends
Reporting entities often declare dividends on common stock before the balance sheet
date, and then pay the dividends after the balance sheet date. Unpaid declared
dividends other than stock dividends should be presented as current liabilities.
However, if the dividend is payable in kind from noncurrent assets, the reporting
entity should present it as a noncurrent liability.
5.10.3 Liquidating dividends
A distribution that represents a return of capital is a liquidating dividend. When a

reporting entity pays such a dividend, usually on partial or complete dissolution, it
should advise the shareholders and disclose the facts in the financial statements. The
reporting entity may deduct “liquidating dividends” or “capital repayment” from APIC
in the balance sheet or show only the balance of capital after partial liquidation.
Figure 5-5 is an example of a footnote to disclose liquidating dividends.
Figure 5-5
Sample disclosure for a liquidating dividend — deducting from capital balance
Note X — Cash dividends paid during the year 20X6 equaled $1.00 per share on the
$3.00 par value common stock, of which $0.30 represented a liquidating dividend
paid from APIC.
5.10.4 Stockholders’ rights plans (“poison pill” takeover defenses)

To discourage unfriendly takeover attempts, reporting entities may adopt plans under
which rights are granted to existing stockholders that convert to common stock upon
the occurrence of certain events, such as the accumulation of a significant percentage
of the reporting entity’s outstanding shares by a single stockholder. These plans are
sometimes referred to as “poison pill” takeover defenses and have the characteristics
of a dividend. Reporting entities with poison pill takeover defenses should disclose in
their footnotes the terms of the plans, including events that cause conversion, the
potentially dilutive nature of the plan, and call provisions, if any. Accounting for these
plans is addressed in FG 8.4.
Earnings capitalized in prior years

Some reporting entities disclose the amount of cumulative retained earnings that was
capitalized in prior years as a result of stock dividends and other authorized transfers.
However, if the transfers are fully disclosed as they occur, there is no requirement for
a cumulative disclosure.
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Fractional shares
Stock dividends almost always create fractional shares. Frequently, the reporting
entity pays cash in lieu of issuing the fractional shares and reduces retained earnings
for the cash payment. When the balance sheet date is between the date of declaration
and the date of distribution, and the amount to be paid-in cash is determinable, it is
typically classified as dividends payable. The reporting entity may show the charge to
retained earnings as a separate item or as part of the stock dividend caption in the
statement of stockholders’ equity. If the amount is not determinable, the reporting
entity generally describes the transaction.
5.11 Stock splits

ASC 505-20-20 defines a stock split.

An issuance by a corporation of its own common shares to its common shareholders
without consideration and under conditions indicating that such action is prompted
mainly by a desire to increase the number of outstanding shares for the purpose of
effecting a reduction in their unit market price and, thereby, of obtaining wider
distribution and improved marketability of the shares. Sometimes called a stock
split-up.
ASC 505-20-30-6 states that in the event of a stock split, absent a legal requirement to
do so, it is not necessary to transfer the amount from retained earnings to APIC and
common stock (for the change in par value). Therefore, the only presentation
requirements in the event of a stock split are to update:
□ The shares outstanding
□ The par amount of the stock on the face of the balance sheet
5.11.1 Differentiation between stock dividends and stock splits
When a stock dividend is in the form of a stock split, as described in ASC 505-20-25-2,
to avoid confusion, a reporting entity should avoid solely using the word “dividend.”
Rather, one way to describe the transaction is as “a stock split effected in the form of a
dividend.”
Refer to FSP 7 for discussion of the impact of a stock dividend and stock split on
earnings per share.
5.12 Balance sheet restatement – stock dividend

and stock split
Refer to FSP 28.5.1.2 for guidance on the balance sheet presentation of capital
structure changes due to a stock dividend, stock split, or reverse split after the balance
sheet date. Since stock dividends and stock splits should be given retroactive
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recognition in computing earnings per share (ASC 260-10-55-12 and FSP 7.6), they
are also given retroactive recognition in computing dividends per share. When
dividends per share are presented on other than the historical basis, as a result of
retroactive recognition, reporting entities should disclose the basis of presentation in
the footnotes.
5.13 Change in capitalization at or prior to

closing of an IPO
Often in an IPO, outstanding debt or preferred stock will automatically convert into
common stock either upon the effective date or completion (i.e., closing) of the IPO.
Such conversions typically have a significant impact on an entity’s capital structure.
The conversion of securities on either the effective date or closing date of an IPO
cannot be reflected in the historical balance sheet. The security should be classified
according to its nature in the historical balance sheet at such date. In the financial
statements included in the IPO registration statement, the SEC staff generally expects
the reporting entity to present an unaudited pro forma balance sheet next to the
historical balance sheet to give effect to the assumed conversion of the security on
either the effective date or closing date. This pro forma balance sheet should not give
effect to the proceeds of the offering. See SEC 4220.76 for an example of a pro forma
balance sheet.

SEC guidance includes a number of specific requirements related to the presentation
and disclosure of stockholders’ equity for public reporting entities that are not
required for private companies. However, the guidance in ASR 268 requiring that
redeemable equity instruments be classified outside of permanent equity is strongly
encouraged for all reporting entities. Refer to FSP 5.6.3.1 for additional guidance on
mezzanine classification.
In addition, ASC 505-10-50-11 requires that all reporting entities disclose the amount
of redemption requirements for all issues of stock that are redeemable at fixed or
determinable prices on fixed or determinable dates in each of the five years following
the date of the latest balance sheet presented. In contrast, S-X 5-02 requires this
disclosure for all redeemable preferred stock issued by SEC registrants.
The following items discussed in this chapter are incremental requirements for SEC
registrants that are not required for private companies.
□ S-X 3-04 requires inclusion of dividends per share in the statement of changes in
□ S-X 4-07 requires that any discount on shares (or any unamortized discount) be
shown separately as a deduction from the related shares’ account.
□ While ASC 505-30-50-2 requires disclosure of restrictions on retained earnings

related to repurchase of treasury shares, S-X 4-08 goes further. It requires
disclosure of all restrictions, including any restrictions on retained earnings upon
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an involuntary liquidation that results from a preference that exceeds the par or
stated value of the related shares.
ASC 505-10-45-3 requires presentation of appropriations of retained earnings for

all entities, and ASC 505-10-50-4 requires disclosure of the involuntary
preference in liquidation.
□ S-X 5-02 requires disclosure on the face of the balance sheet of the following for
each issue of common and preferred stock, including redeemable preferred stock:
o Title
o Carrying amount
o Redemption amount
o Dollar amount of any shares subscribed but unissued, and the deduction of
o The number of shares authorized, issued, or outstanding for each issue (either
on the face of the balance sheet or in the footnotes)
There is a general requirement in ASC 505-10-50-3 to disclose the “pertinent

rights and privileges” of all classes of securities, so the above is likely to be
required under that guidance.
□ SAB Topic 4.C requires that a capital structure change due to a stock dividend,
stock split, or reverse split that occurs after the date of the latest reported balance
sheet, but before the release (issuance) of the financial statements or the effective
date of the registration statement, whichever is later, be given retroactive effect in
the balance sheet.
5-22 PwC
Chapter 6:
Statement of cash flows
PwC 6-1

This chapter discusses the concepts that guide classification within the statement of
cash flows. Proper presentation begins with understanding what qualifies as cash and
cash equivalents, and what does not. From there, classifying cash flows as operating,
investing, or financing can often be a challenge, especially for cash flows related to
non-recurring transactions. The following sections explore both of these topics and
provide examples and considerations that will offer financial statement preparers and
other users insight into appropriate presentation of the statement of cash flows in
accordance with US GAAP.
The principles of reporting cash flows are contained in ASC 230, Statement of Cash
Flows; however, ASC 230 is not a comprehensive source of authoritative guidance.
The following list contains some of the additional sources for guidance governing the
statement of cash flows:
□ FASB Concept Statement No. 5
□ ASC 320, Investments — Debt and Equity Securities
□ ASC 718, Compensation — Stock Compensation
□ ASC 815, Derivatives and Hedging
□ ASC 830, Foreign Currency Matters
6.2 Scope
ASC 230 requires a statement of cash flows as part of a full set of financial statements
for all reporting entities. The statement of cash flows is a primary financial statement
and is required for each period for which an income statement (or statement of
activities for not-for-profits) is presented. The statement of cash flows is also required
to be presented in guarantor condensed consolidating information and parent
company-only financial statements that include a balance sheet and an income
statement. There are no exclusions for specific industries or different types of
reporting entities except for:
□ An investment company that is subject to the registration and regulatory

requirements of the Investment Company Act of 1940, or that has essentially the
same characteristics by meeting the following conditions:
o Substantially all of the assets of the reporting entity are carried at fair value
and are classified as Level 1 or Level 2 under ASC 820, Fair Value
Measurement1
1
After adoption of ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset
Value per Share (or Its Equivalent), the requirement will be “Substantially all of the assets of the reporting
entity are carried at fair value and are classified as Level 1 or Level 2 under ASC 820, Fair Value
Measurement, or were measured using the practical expedient in ASC 820-10-35-59 to determine their fair
values and are redeemable in the near term at all times.” See FSP 20 for information on the effective date of
ASU 2015-07.
6-2 PwC
o The reporting entity has little or no debt (based on the average debt
outstanding during the period) in relation to average total assets
o The reporting entity provides a statement of changes in net assets
□ A common trust fund, variable annuity account, or similar fund maintained by a

bank, insurance entity, or other entity in its capacity as a trustee, administrator,
or guardian for the collective investment and reinvestment of moneys
□ A defined benefit or defined contribution postretirement plan
New guidance
ASU 2016-09, Improvements to Employee Share-Based Payment

Accounting
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee

Share-Based Payment Accounting, which amends ASC 718 and includes provisions
intended to simplify various provisions related to how share-based payments are
accounted for and presented in the financial statements. ASU 2016-09 has the
following impacts on the statement of cash flows:
□ The previous requirement to gross up the statement of cash flows between

financing and operating to reflect the impact of windfall tax benefits has been
eliminated. Instead, all tax related cash flows resulting from share-based
payments will be reported as operating activities in the statement of cash flows.
An entity may elect to apply these amendments using either a prospective
transition method or a retrospective transition method.
□ The previous practice of classifying cash outflows related to an employee’s

minimum statutory tax withholding as operating is no longer available. Instead,
all such payments should be classified as financing. Amendments related to this
issue should be applied retrospectively.
beginning after December 15, 2016, and interim periods within those reporting
periods. For all other entities, it is effective for annual periods beginning after
December 15, 2018. Early adoption is permitted in any interim or annual period, with
any adjustments reflected as of the beginning of the fiscal year of adoption. If a
reporting entity adopts the guidance early, all provisions of the guidance must be
adopted at the same time.
FSP 6.7.2.7 has been updated to reflect these impacts. Refer also to FSP 15 for further
discussion of ASU 2016-09.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued Accounting Standard Update 2016-15, Classification
of Certain Cash Receipts and Cash Payments. The new standard is intended to reduce
PwC 6-3
diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows.
ASU 2016-15 is effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those reporting periods. For all other
entities, it is effective for fiscal years beginning after December 15, 2018, and interim
periods within fiscal years beginning after December 15, 2019. Early adoption is
permitted, provided that all of the amendments within ASU 2016-15 are adopted in
the same period. Unless impracticable, ASU 2016-15 should be applied using a
retrospective transition method.
This chapter reflects the impact to issues specifically addressed in ASU 2016-15, as
well as other issues that we believe are impacted by analogy to the conclusions in
ASU 2016-15. The following is a brief summary of the eight issues specifically
addressed in ASU 2016-15, and the FSP sections where they are discussed in more
detail.
Issue Summary of amendments Section
Debt prepayment Cash payments for debt prepayment or debt 6.7.2.2 /

or debt extinguishment costs should be classified as cash
6.7.2.3
extinguishment outflows for financing activities.
costs
Settlement of Cash payments for settlement of zero-coupon debt 6.7.1.3 /

zero-coupon debt instruments, including other debt instruments
6.7.2.1
instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the
borrowing, should be classified as cash outflows
for operating activities for the portion attributable
to accreted interest and as cash outflows for
financing activities for the portion attributable to
principal.
Contingent Cash payments for contingent consideration made 6.7.1.2

consideration soon after an acquisition’s consummation date
payments made (the basis of conclusions in ASU 2016-15 describes
after a business three months or less as some Task Force
combination members’ views of “soon after”) should be
classified as cash outflows for investing activities.
Payments made thereafter should be classified as
cash outflows for financing activities up to the
original amount of the contingent consideration
liability (plus or minus measurement period
adjustments). Payments made in excess of the
original fair value of the contingent consideration
liability (plus or minus measurement period
adjustments) should be classified as cash outflows
for operating activities.
Proceeds from the Cash payments received from the settlement of 6.7.1.6
settlement of insurance claims should be classified on the basis
insurance claims of the nature of the loss.
6-4 PwC
Proceeds from the Cash payments received from the settlement of 6.7.1.7
settlement of COLI policies should be classified as cash inflows
corporate-owned from investing activities. Cash payments for
life insurance premiums on COLI policies may be classified as
(COLI) policies, cash outflows for investing, operating, or a
including bank- combination of investing and operating activities.
owned life
insurance policies
Distributions Entities have an accounting policy election (made 6.7.3.2

received from on an entity-wide basis for all of its equity method
equity method investments) for classifying distributions received
investees from equity method investments using either the
cumulative earnings approach or the nature of
distribution approach.
Under the cumulative earnings approach, an
investor should consider distributions received as
returns on investment and classify those cash
inflows as operating activities, unless the
investor’s cumulative distributions received less
distributions received in prior periods that were
determined to be returns of investment exceed
cumulative equity in earnings recognized by the
investor. When such an excess occurs, the
current-period distribution up to this excess
should be considered a return of investment and
classified as cash inflows from investing activities.
Under the nature of distribution approach, an
investor should classify the distributions based on
the nature of activities of the investee that
generated the distribution. If in the future, the
necessary information is not available for an
investee to determine the nature of the activities,
then the entity should revert to the cumulative
earnings approach for that investee and report a
change in accounting principle on a retrospective
basis.
Beneficial A transferor’s beneficial interest obtained in a 6.7.3.3

interests in securitization of financial assets should be
securitization disclosed as a noncash activity. Cash receipts from
transactions a transferor’s beneficial interests in securitized
trade receivables should be classified as cash
inflows from investing activities.
PwC 6-5
Separately Absent specific GAAP guidance, entities should 6.7.4

identifiable cash use reasonable judgment to separate discrete cash
flows and flows into separately identifiable sources and uses,
application of the and classify each separately identifiable cash
predominance source and use on the basis of the nature of the
principle underlying cash flows. For cash flows with aspects
of more than one class that cannot be separated,
the classification should be based on the activity
that is likely to be the predominant source or use.
ASU 2016-18, Restricted Cash – added May 2017
ASU 2016-18 provides new presentation and disclosure guidance for restricted cash.
For public business entities, the guidance is effective 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. Early adoption is
permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, it should reflect any adjustments as of the
beginning of the fiscal year that includes that interim period.
The guidance is required to be adopted using a retrospective transition method to

each period presented.
The effective date of the restricted cash guidance coincides with the effective date for
the eight cash flow issues addressed in ASU 2016-15. Both ASUs allow for early
adoption but preparers are not required to adopt them together. However, users will
likely prefer having all changes to the statement of cash flows made in the same
period.
FSP 6.5.7 has been updated to reflect this guidance.
6.3 Cash basis method of reporting

Reporting activity in the statement of cash flows is predicated on the cash method of
accounting rather than the accrual method used for other financial statements.
Accordingly, all debits and credits to a bank account that has the general
characteristics of an unrestricted demand deposit account should be reported as cash
outflows and cash inflows. FASB Concepts Statement No. 5, Recognition and
Measurement in Financial Statements of Business Enterprises, explains:
Excerpt from FASB Concepts Statement No. 5

Reporting cash flows involves no estimates or allocations and few judgments except
regarding classification in cash flow statements.
6-6 PwC
CON 5 further indicates that cash flows should be recognized when they occur.
Accordingly, reporting entities should generally only report cash flows that actually
affected cash and cash equivalents (see FSP 6.10.1 for a discussion of constructive
receipts and disbursements). A statement of cash flows should not reflect cash flows
that could have happened or are expected to happen. For example, when a reporting
entity takes title to a long-lived asset on the last day of a reporting period in exchange
for an accounts payable with normal 30-day trade terms, the reporting entity’s
statement of cash flows should not include an investing outflow for the acquisition of
the long-lived asset with an operating inflow for the increase in accounts payable, but
instead should disclose a noncash investing activity. The fact that the reporting entity
has sufficient cash to settle the accounts payable on the balance sheet date, or expects
to pay the accounts payable shortly after the balance sheet date is irrelevant.
6.4 Format of the statement of cash flows

ASC 230 allows a reporting entity to prepare and present its statement of cash flows
using either the direct or indirect method (discussed in detail in FSP 6.4.2), though
the guidance encourages using the direct method.
Sample statement of cash flows – updated May 2017
Figure 6-1 is an illustrative cash flow statement prepared using the indirect method,
updated to reflect ASU 2016-18. It reflects certain captions required by ASC 230
(bolded), and other common captions. All captions may not be applicable to all
reporting entities. In addition, some captions may be reflected in other classification
categories depending on facts and circumstances.
Presentation and disclosure requirements are addressed in the relevant sections of

this chapter and cross referenced in the last column of the figure. Not all items
discussed within this chapter are presented in the figure.
Figure 6-1
Sample consolidated statement of cash flows
FSP Corp
Consolidated Statement of Cash Flows
For the years ended 20x6, 20x5, and 20x4
Section
in millions in millions in millions

$ $ $
Cash flows from operating activities:
Net income $xxx $xxx $xxx 6.4.2
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
PwC 6-7
Section
Accretion (amortization) of
discount (premium) on issued xxx xxx xxx 6.7.2.1
debt securities
(Gain) loss on extinguishment 6.7.2.2 /

xxx xxx xxx
of debt 6.7.2.3
Depreciation and amortization xxx xxx xxx 6.7.3
Amortization of debt issue

xxx xxx xxx 6.7.3
costs
Share-based incentive
xxx xxx xxx 6.7.3
compensation
Impairment of assets xxx xxx xxx 6.7.3
Provision for bad debt expense xxx xxx xxx 6.7.3
Inventory obsolescence
xxx xxx xxx 6.7.3
impairment
Deferred taxes xxx xxx xxx 6.7.3
Noncash provisions for exit

xxx xxx xxx 6.7.3
costs
Loss (gain) on disposal of

xxx xxx xxx 6.7.3
property and equipment
(Income) loss from equity-

method investments, net of xxx xxx xxx 6.7.3.2
dividends received
Foreign currency transactions xxx xxx xxx 6.9
Changes in operating assets and liabilities, net of effects of

businesses acquired:
Decrease (increase) in
xxx xxx xxx 6.4.2
trade receivables
accounts receivable xxx xxx xxx 6.4.2
securitization program
xxx xxx xxx 6.4.2
inventories
Decrease (increase) in other

xxx xxx xxx 6.4.2
assets, net
Increase (decrease) in
xxx xxx xxx 6.4.2
accounts payable
6-8 PwC
Section
Increase (decrease) in accrued

xxx xxx xxx 6.4.2
liabilities
Increase (decrease) in income

xxx xxx xxx 6.4.2
taxes payable
Increase (decrease) in other

xxx xxx xxx 6.4.2
liabilities, net
Net cash provided by (used in)

xxx xxx xxx 6.7.3
operating activities
Cash flows from investing activities*:
Acquisition [sale] of equity

xxx xxx xxx 6.7.1
securities**
Acquisition [proceeds from

sale] of property, plant, and xxx xxx xxx 6.7.1.1
equipment**
Acquisition [sale] of a business, xxx xxx xxx 6.7.1.2

net of cash and cash
equivalents acquired [or sold]**
Impact to cash resulting from xxx xxx xxx 6.7.1

initial consolidation
[deconsolidation]**
Contributions and advances to

xxx xxx xxx 6.7.1.4
joint ventures

investing activities xxx xxx xxx 6.7.1
Cash flows from financing activities:
Bank overdrafts xxx xxx xxx 6.5.3
Payment of contingent
xxx xxx xxx 6.7.1.2
consideration
Proceeds from debt xxx xxx xxx 6.7.2
Repayments of debt xxx xxx xxx 6.7.2
Payments of debt issue costs xxx xxx xxx 6.7.2
Dividends paid xxx xxx xxx 6.7.2
Net payments of short-term

xxx xxx xxx 6.7.2
borrowings
Repurchases of equity
xxx xxx xxx 6.7.2
securities
PwC 6-9
Section
Acquisition of common stock

xxx xxx xxx 6.7.2.7
for tax withholding obligations
Distributions to noncontrolling
xxx xxx xxx 6.7.2.8
interests
Principal payments under

xxx xxx xxx 6.7.2
capital lease obligations
Net activity from derivatives

with an other-than-insignificant xxx xxx xxx 6.7.2.9
financing element

xxx xxx xxx 6.7.2
financing activities
Effect of exchange rate changes

on cash, cash equivalents and xxx xxx xxx 6.9
restricted cash
Cash, cash equivalents, and restricted cash:
Net change during the period xxx xxx xxx 6.5
Balance, beginning of period xxx xxx xxx 6.5
Balance, end of period $xxx $xxx $xxx 6.5
Supplemental cash flow information:
Cash paid for interest, net of

$xxx $xxx $xxx 6.4.2
amounts capitalized
Cash paid for income taxes xxx xxx xxx 6.4.2
Noncash investing and financing activity** xxx xxx xxx 6.10
* Before the adoption of ASU 2016-18, cash flows from investing activities would include the change in
restricted cash.
** These line items generally should be presented gross; however, for ease of reference in Figure 6-1, the
inflows and outflows are reflected in the sample statement on one line.
Direct versus indirect method
Cash flows related to operating activities may be presented in one of two ways — the
direct method or the indirect method. The presentation of investing and financing
activities are identical under the direct and indirect methods. Although the
presentation of operating cash flows differs between the two methods, both methods
should theoretically result in the same amount of net cash flows from operations.
While the FASB encourages the use of the direct method, the large majority of
6-10 PwC
reporting entities elect to use the indirect method. The concepts underlying
classification within ASC 230 were conceived and explained solely from the
perspective of the direct method. While the indirect method represents an alternative
presentation model, it is not an alternative classification methodology. Accordingly,
even when a reporting entity is using the indirect method, it should consider the direct
method framework when evaluating the proper classification of a cash flow.
The direct method requires the presentation of major types of gross cash receipts and
gross cash payments and their arithmetic sum, which represents the net cash flow
from operating activities. At a minimum, the following types of operating receipts and
disbursements are required in a direct method presentation:
□ Cash collected from customers, including lessees, licensees, etc.
□ Interest and dividends received (except for return of capital)
□ Other operating cash receipts, if any
□ Cash paid to employees and other suppliers of goods or services, including

suppliers of insurance, advertising, etc.
□ Interest paid
□ Income taxes paid
□ Other operating cash payments, if any
To illustrate how operating cash flows (prepared on the cash basis of accounting)
relate to net income (prepared on the accrual method of accounting), the direct
method also requires a reconciliation of net income to net cash flows from operating
activities. Net income, including earnings attributable to the controlling and
noncontrolling interests, is the starting point to reconcile cash flows from operating
activities. The reconciliation removes the effects of the following:
□ All deferrals of past operating cash receipts and payments, and all accruals of
expected future operating cash receipts and payments (for example, changes
during the period in receivables and payables pertaining to operating activities)
□ All items included in net income that do not affect operating cash receipts and
payments (for example, all items for which cash effects are related to investing or
financing activities (e.g., depreciation, amortization, and gains or losses on
dispositions of long-lived assets))
When the indirect method is used, a reporting entity does not report the gross cash
receipts and gross payments required by the direct method. Instead, only the
reconciliation of net income to net operating activities, as described above, is
reported. In addition, when the indirect method is used, amounts of interest paid (net
of amounts capitalized) and income taxes paid during the period must be disclosed,
either on the face of the statement of cash flow or in the footnotes.
PwC 6-11
Adjustments for noncash items in the reconciliation of net income to net cash flows
from operating activities may include items such as:
□ Depreciation and amortization relating to fixed assets, definite-lived intangible

assets, capital leases, premiums, or discounts on debt (including debt issuance
costs)
□ Provisions for bad debts and inventory
□ Share-based incentive compensation
□ Deferred income taxes
□ Impairment losses
□ Foreign currency transaction gains or losses
□ Gains or losses from the sale of long-lived assets or businesses
□ Gains or losses from the settlement of asset retirement obligations
□ Gains or losses from the extinguishment of debt
Reporting entities have latitude in how they present an indirect method reconciliation,
as there is no prescribed format. As with most forms of practical expediency, the
indirect method yields information that is less useful than the direct method. For
example, because the individual line items within a reconciliation of net income to net
operating cash flows do not represent cash flows, they by themselves provide no
incremental information about a reporting entity’s cash flows.6-1
Whether reporting entities use the direct or indirect method to present their operating
cash flows, they are prohibited from disclosing cash flow per share or any component
of cash flow per share. Once a method has been elected, a reporting entity may change
the method from the direct to the indirect method, or vice versa. Although ASC 230
encourages the use of the direct method, a change in presentation from the indirect to
direct method (or vice versa) is considered a change in presentation. This retroactive
change in the presentation of the statement of cash flows would not be considered a
discretionary accounting change and would not require the issuance of a preferability
letter.
6.5 Cash, cash equivalents, and restricted cash –

updated May 2017
After ASU 2016-18, the statement of cash flows must detail changes in cash, cash
equivalents, and restricted cash for the period. The beginning and ending balance of
cash, cash equivalents, and restricted cash shown on the statement of cash flows
should agree to a similarly-titled line item or subtotal on the balance sheet.
6-12 PwC
Definition of cash equivalents
While the definition of cash is generally understood, what constitutes a cash

equivalent is not as straightforward. ASC 230 defines cash equivalents.
ASC 230-10-20 Glossary

Cash Equivalents: Cash equivalents are short-term, highly liquid investments that
have both of the following characteristics:
a. Readily convertible to known amounts of cash
b. So near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.
Generally, only investments with original maturities of three months or less qualify
under that definition. Original maturity means original maturity to the entity holding
the investment. For example, both a three-month U.S. Treasury bill and a three-year
U.S. Treasury note purchased three months from maturity qualify as cash equivalents.
However, a Treasury note purchased three years ago does not become a cash
equivalent when its remaining maturity is three months. Examples of items commonly
considered to be cash equivalents are Treasury bills, commercial paper, money market
funds, and federal funds sold (for an entity with banking operations).
Note that the definition presumes that all cash equivalents have two attributes: they
must be (1) short-term and (2) highly liquid. The definition then provides two
characteristics that elaborate on the required attributes. In practice, reporting entities
sometimes place undue focus on the maturity characteristic (short-term), while
overlooking the readily convertible characteristic (highly liquid). While the FASB’s
definition seems to focus more on the maturity characteristic, this does not diminish
the requirement for a cash equivalent to be readily convertible to known amounts of
cash. The definition of “readily convertible to cash” is included in the FASB
Codification Master Glossary. To be considered “readily convertible to cash,” an
instrument must have both interchangeable units and quoted prices that are available
in an active market. The active market must be able to handle a reporting entity’s
conversion of an instrument to cash quickly and without significantly affecting the
quoted price.
Both characteristics included in the definition of cash equivalents must be met for an
investment to be considered a cash equivalent. Accordingly, an investment with a
maturity of less than three months that is not readily convertible to known amounts of
cash—received from the investment’s issuer or provided by an active market
mechanism—is not a cash equivalent. Similarly, an investment that is readily
convertible into a known amount of cash, but that has a maturity greater than three
months, is also not a cash equivalent.
In its deliberations of ASU 2016-18, the EITF considered whether restricted cash
could be a cash equivalent. Although they did not conclude, the Basis for Conclusions
PwC 6-13
provides a helpful way to think about the interaction between restricted cash and the
definition of cash equivalents.
Excerpt from BC9 in ASU 2016-18

… only those financial instruments that first meet the definition of cash or cash
equivalents before considering the restrictions that exist in a separate provision
outside those financial instruments should be included in the … total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash
equivalents on the statement of cash flows.
For an example of how slight degradations to liquidity can impact the ability to
classify an investment as a cash equivalent, refer to FSP 6.5.9 regarding an SEC rule
that impacts the classification of certain money market funds as cash equivalents.
Accounting policy defining cash equivalents
As discussed in ASC 230-10-45-6, not all investments that qualify as cash equivalents
are required to be classified as such. For example, a reporting entity with banking
operations may choose to present certain cash equivalents within investments.
Pursuant to ASC 230-10-50-1, a reporting entity must disclose its definition of cash
equivalents. Any subsequent change in the definition is a change in accounting
principle, requiring retrospective presentation in prior years and a determination that
such change is preferable.
Bank overdrafts
Bank overdrafts occur when a bank honors disbursements in excess of funds on

deposit in a reporting entity’s account. Such a feature is commonly referred to as
overdraft protection. Accordingly, bank overdrafts represent short-term loans from
the bank and should be classified as debt on the balance sheet and financing cash
flows in the statement of cash flows.
Some reporting entities have executed contractual agreements that link numerous
bank accounts within the same bank, or a group of banks. For example, multinational
entities that maintain cash balances in numerous consolidated subsidiaries, in
multiple currencies, in multiple countries sometimes enter into notional pooling
arrangements to facilitate their worldwide treasury activities. Under a notional
pooling arrangement, the balances of all bank accounts subject to the arrangement are
combined for purposes of determining the balance on deposit under the terms of the
agreement. Accordingly, the bank accounts of certain subsidiaries in the notional
pooling arrangement are allowed to be in an overdraft position if the bank accounts of
other subsidiaries in the notional arrangement have aggregated deposit positions in
excess of the aggregated overdraft accounts.
ASC 210, Balance Sheet, indicates that a reporting entity’s cash account at a bank is
not considered an amount owed to the reporting entity for purposes of determining
whether a right of offset exists. Accordingly, the ASC 210 offset model cannot be
6-14 PwC
utilized to offset a bank account in a deposit position against another bank account
with the same bank that is in an overdraft position. Notwithstanding the guidance in
ASC 210, we are aware that some reporting entities have concluded that the
contractual terms of their notional pooling arrangements preclude individual bank
accounts within the arrangement from being considered separate units of account. In
such circumstances, we believe it would be acceptable for the reporting entity to
aggregate all bank accounts that are subject to the notional pooling arrangement into
a single balance on its balance sheet and to combine these balances when assessing if
there is a bank overdraft. However, when a subsidiary that participates in the notional
pooling arrangement prepares its financial statements on a standalone basis, the
presentation of the subsidiary’s bank accounts should reflect the facts and
circumstances of the individual subsidiary without consideration of its parent’s
conclusions regarding the notional pooling arrangement at the consolidated level.
Book overdrafts
Book overdrafts are created when the sum of outstanding checks related to a specific
bank account are in excess of funds on deposit (including deposits in transit) for that
bank account. Unlike a bank overdraft, there is no cash flow impact from a book
overdraft. Book overdrafts related to a specific bank account should not be offset
against other cash or cash equivalent accounts (including time deposits, certificates of
deposit, money market funds, and similar temporary investments).
Non-authoritative guidance included in section 1100.08 of the AICPA Technical

Questions and Answers indicates that outstanding checks should be accounted for as a
reduction of both cash and the related liabilities. As a result, in practice, most
preparers reflect book overdrafts as a liability on the balance sheet and disclose that
such liability is a reinstatement of liabilities cleared in the bookkeeping process.
However, as discussed in FSP 6.5.3, a reporting entity may have a contractual banking
arrangement whereby the unit of account is the contractual arrangement, not the
individual bank accounts subject to the arrangement. In such circumstances, we
believe it may be acceptable for the reporting entity to assess the combined balance on
deposit for presentation within its balance sheet.
Question 6-1
How should changes in book overdrafts be reflected in the statement of cash flows?
PwC response
A book overdraft is not reflected in the statement of cash flows because it only
represents the reinstatement of accounts payable and does not result in cash changing
hands or credit being extended by a financial institution. Thus, this activity does not
represent “proceeds from short-term borrowings” as described in ASC 230-10-45-14
and is not a financing activity.
However, assuming that cash has been reduced for outstanding checks based on the
non-authoritative AICPA guidance discussed above, if a zero balance account is linked
to a bank overdraft credit facility and checks presented for payment are immediately
PwC 6-15
payable under the credit facility, the “book” overdraft would be, in substance, a “bank”
overdraft. This is because the bank can turn presented checks into legal liabilities
without further action by the payor. In that case, changes in the overdraft would be
classified as financing activities in the statement of cash flows and the overdraft would
be presented as debt on the balance sheet.
Checks written but not released
Checks that have not been released by the end of the accounting period (e.g., not
mailed) should not be reflected in the financial statements (e.g., the related balances
should still be reflected as cash).
Compensating balances
Some borrowing arrangements contain compensating balance requirements. Given

the lack of definitive guidance related to compensating balances and restricted cash,
determining when compensating balances are restricted cash can be challenging. If a
compensating balance arrangement legally restricts the use of cash, such amounts
should be considered restricted cash. That general principle is discussed in FSP 6.5.7.
Cash that cannot be withdrawn due to compensating balance arrangements should be

classified as a noncurrent asset if it relates to the noncurrent portion of the debt that
causes its restriction.
Compensating balance arrangements that do not legally restrict the use of cash should
be disclosed in the footnotes.
Regardless of whether the reporting entity has met the compensating balance
requirement, there should be disclosure of the sanctions for noncompliance under a
compensating balance arrangement. An example of such disclosure may be as simple
as stating, “Compensating balance deficiencies are subject to interest charges at the
average rate for 91-day Treasury Bills.”
As indicated in SEC FRP 203.02.b, when a reporting entity is not in compliance with a
compensating balance requirement at the balance sheet date, that fact should be
disclosed, together with stated or possible sanctions. SEC FRP 203 provides the
following additional guidance:
Excerpt from SEC FRP 203.02.b

An arrangement where the [compensating] balance required is expressed as an
average over time would ordinarily lead to additional footnote disclosure of the
average amount required to be maintained for arrangements in existence at the
reporting date since the amount held at the close of the reporting period might vary
significantly from the average balance held during the period and bear little
relationship to the amount required to be maintained over time. If arrangements
requiring maintenance of compensating balances during the year were materially
greater than those at year end, that fact should be disclosed. Disclosure may also
include a statement, if appropriate, that the amounts are legally subject to withdrawal
with or without sanctions, as applicable. If many banks are involved, the disclosure
should summarize the most common arrangements and aggregate the compensating
balances involved.
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When a company is not in compliance with a compensating balance requirement, that

fact generally should be disclosed along with stated or possible sanctions whenever
such possible sanctions may be immediate (not vague or unpredictable) and material.
In determining whether compensating balance arrangements are sufficiently material
to require segregation or disclosure, various factors should be considered. Among
these may be the relationship of the amount of the balances to total cash, total liquid
assets and net working capital, and the impact of the balances on the effective cost of
financing. In the usual case, reportable compensating balances which in the aggregate
amount to more than 15 percent of liquid assets (current cash balances, restricted and
unrestricted, plus marketable securities) would be considered to be material. Lesser
amounts may be material if they have a significant impact on the cost of financing.
Compensating balances related to future credit availability
Some borrowing arrangements do not prohibit the withdrawal of compensating

balances, but as a practical matter; future credit availability may be dependent on the
maintenance of such balances. Accordingly, reporting entities should disclose this
fact. Sample wording might be “the compensating balances may be withdrawn, but the
availability of short-term lines of credit is dependent upon maintenance of such
compensating balances.” If the borrower is not prohibited from withdrawing the
compensating balance and using such funds in current operations, it could be
appropriate to include such amounts in the cash and cash equivalent caption
depending on the reporting entity’s policy for defining restricted cash.
Related parties
Finally, compensating balances maintained by a reporting entity for the benefit of

affiliates, officers, directors, principal stockholders, or other related parties should be
disclosed as related party transactions. Similarly, compensating balances maintained
by related parties for the reporting entity’s benefit should be disclosed in the
footnotes.
Restricted cash
6.5.7.1 Definition
ASC 230, as amended by ASU 2016-18, does not define restricted cash. However,
ASC 210-10-45 contains some limited guidance on the balance sheet classification of
items that are restricted as to withdrawal or usage. Further, the SEC has some limited
guidance, which is discussed in FSP 6.5.7.2.
In its deliberations of ASU 2016-18, the EITF noted that the definition of restricted
cash has not been a significant source of diversity in practice. As a result, due to the
breadth of potential restrictions, it decided not to provide a formal definition, and
instead, allow a reporting entity to continue to use its own definition.
While not defined, we believe restricted cash should generally include any cash that is
legally restricted as to withdrawal or usage. Classification of additional amounts as
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restricted beyond those that are legally restricted should be subject to a reporting
entity's accounting policy. Consistent with the views of most EITF members, we
generally do not think that self-imposed designations should be presented as
restricted cash unless an entity has an existing policy to do so.
Evaluating the existence of a legal restriction
Generally, the fact that the entity maintains a separate bank account for funds it owes
to a third party does not require the cash to be restricted on the balance sheet. For
example, if the entity is named as the party that has the legal right to deposit into and
withdraw from the deposit account (as opposed to the entity for which the cash is
held), the separate bank account is a matter of internal recordkeeping and not a
legally-segregated cash balance. Such arrangements sometimes occur when the entity
is engaged to service a third party’s assets (e.g., a bank may handle collections and
remittances of principal and interest on loans owned by third parties).
If the reporting entity can access the cash without any legal or contractual
consequence (i.e., there is no requirement that the specific cash be set aside for
remittance), the cash is likely not legally restricted. Even if the entity has a liability for
the amount of cash it needs to remit to a customer, it is possible that the entity could
raise cash to pay its customer in another way. For example, assuming an entity
collects $100 to be remitted to a customer, it may be able to deploy that $100 for its
other operations and then draw $100 from a line of credit and repay the customer,
without regard for where the cash was sourced.
Change in accounting policy on restricted cash
A reporting entity cannot change its previously-established policy for determining

restricted cash when adopting ASU 2016-18. Instead, a change must be evaluated as a
change in accounting principle subject to a conclusion that the new principle is
preferable. This is because the EITF did not intend the new guidance to change how a
reporting entity determines what should be considered restricted cash.
6.5.7.2 Presentation – balance sheet
There is no GAAP requirement to segregate restricted cash. However, Regulation S-X

5-02(1) requires public companies to present funds legally restricted as to withdrawal,
including compensating balances, separately on the balance sheet. Because of this
guidance, public companies and many private companies present restricted cash on
the balance sheet.
6.5.7.3 Presentation – statement of cash flows
Before ASU 2016-18, ASC 230 did not specifically address how to classify changes in
restricted cash in the statement of cash flows.
Upon adoption of ASU 2016-18, reporting entities are required to explain the change
in the cash, cash equivalents, and restricted cash balances during the period in the
statement of cash flows. As a result, the statement of cash flows will reconcile the
beginning and ending balance of cash, cash equivalents, and restricted cash.
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As noted in FSP 6.5.7.1, ASU 2016-18 did not define restricted cash; instead, it refers
to “amounts generally described as” restricted cash or restricted cash equivalents. By
referring to restricted cash more broadly, the FASB intended it to encompass all
restricted cash accounts, regardless of their classification on the balance sheet.
In other words, amounts generally described as restricted cash will be included with
cash and cash equivalents on the statement of cash flows. As a result, a transfer
between restricted and unrestricted cash accounts will not be reported as a cash flow.
All cash receipts/payments with third parties directly to/from restricted cash accounts
will need to be reported as an operating, investing, or financing cash flow based on the
nature of the transaction.
The EITF considered concerns raised by some comment letter respondents that
including restricted and unrestricted cash balances together in the statement of cash
flows could mislead financial statement users about how much cash is available for an
entity’s operations. The respondents noted that restricted cash is fundamentally
different from unrestricted cash and may not be available to satisfy general
obligations. However, the EITF thought that information about the liquidity of the
amounts included in the statement of cash flows is best obtained from the balance
sheet, and that the additional required disclosures about the nature of restrictions on
cash should mitigate those concerns.
EXAMPLE 6-1
Restricted use financing
FSP Corp issues debt in a $100 million bond offering, and, per the bond agreement,
the proceeds are distributed to an escrow account that FSP Corp records as restricted
cash. FSP Corp never received the funds from the bond offering in its general cash
account as the proceeds were directly transferred from the investor to the trustee-
controlled escrow account. Per the bond agreement, the trustee is instructed to use
$40 million of the proceeds to repay FSP Corp’s existing debt, while the remaining
$60 million will be held in the restricted escrow account until FSP Corp incurs
qualifying construction expenditures. At that time, the trustee will make distributions
to FSP Corp’s general cash account for reimbursement of these incurred costs.
How should this arrangement be reflected in FSP Corp’s statement of cash flows?
Analysis
After adoption of ASU 2016-18
The cash flow statement should reflect a financing inflow of $100 million. Although it
is restricted cash, it is part of the change in cash, cash equivalents, and restricted cash.
Repayment of the $40 million existing debt is a $40 million financing outflow. When
the $60 million is used for construction expenditures, it will be reflected as an
investing outflow if it is for the payment of infrastructure, such as PP&E. When the
$100 million bond is ultimately repaid, it will be reflected as a financing outflow.
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Before adoption of ASU 2016-18
Prior to adoption of ASU 2016-18, the transaction would have been reflected in the
statement of cash flows as follows:
□ The cash flow statement should reflect what actually happened, rather than what
could have happened. In this scenario, FSP Corp did not receive the proceeds
from the bond offering. Since the bond proceeds were sent to the escrow account
by design and not for convenience sake, the cash from the $100 million bond
offering, the $40 million payment of the existing debt, and the funding of the $60
million restricted cash account would be reflected as noncash activities.
□ When FSP Corp incurs construction expenditures, those cash flows should be
classified as cash outflows from investing activities. When the qualifying
construction expenditures are reimbursed by the trustee with the funds in the
restricted cash account, the decreases in the restricted cash account would be
classified as cash inflows from financing activities because the restricted cash
account is a result of a noncash financing activity.
□ Alternatively, when the qualifying construction expenditures are reimbursed by

the trustee with the funds in the restricted cash account, the decreases in the
restricted cash account could be classified as cash inflows from investing
activities. While this would be consistent with the general rule that changes in
restricted cash are investing cash flows, there should be transparent disclosure
and a gross presentation in the investing category of the statement of cash flows.
A net presentation (i.e., single line item in the investing category of the statement
of cash flows) would not be consistent with the fact that the cash expenditures
actually occurred and as a result, capitalized costs on the balance sheet increased.
6.5.7.4 Disclosure
Reporting entities will be required to disclose (1) the nature of restrictions on cash
balances and (2) how the statement of cash flows reconciles to the balance sheet when
the balance sheet includes more than one line item of cash, cash equivalents, and
restricted cash. A reporting entity should also consider the significance of its restricted
cash balances and whether its definition should be disclosed as a significant
accounting policy pursuant to ASC 235-10-50.
Nature of restrictions
ASU 2016-18 requires an entity to disclose information about the nature of

restrictions on its cash and cash equivalents, but does not provide additional detail on
what is required to be included in the disclosure. This disclosure could be similar to
those already required by Regulation S-X 5-02(1) for public companies. While the
guidance does not detail what is meant by the “nature of restrictions,” it includes
sample disclosures that discuss the expected duration of the restriction, its purpose
and terms, and the amount of cash subject to the restriction. The sample disclosures
should not be considered a checklist of items to be disclosed. Reporting entities have
flexibility to disclose relevant information about the nature of the restrictions based
on their facts.
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How the statement of cash flows reconciles to the balance sheet
If cash, cash equivalents, and restricted cash are presented in multiple line items on
the balance sheet, entities are required to present on the face of the statement of cash
flows or disclose in the footnotes (in either a narrative or tabular format) the amounts
of cash, cash equivalents, and restricted cash and the balance sheet line item in which
each is presented. The total should sum to the end-of-period total amount of cash,
cash equivalents, and restricted cash shown on the statement of cash flows. This is
consistent with the requirement in ASC 230 for cash and cash equivalents to agree to
similarly-titled line items on the balance sheet.
Auction rate securities and variable rate demand notes
ASC 230-10-20 limits a cash equivalent’s maturity (to the reporting entity holding the
investment) to three months. The maturity is determined by reference to the stated
term of the security or the timeframe for exercising any put features to the issuer, not
by reference to the frequency with which liquidity may be available through an
auction, a put feature to a third party, or otherwise. Accordingly, auction rate
securities and variable rate demand notes that do not mature, or are not puttable to
the issuer, within three months from the date of acquisition do not demonstrate the
maturity characteristic of a cash equivalent. Instead, they should be accounted for as
investments in accordance with ASC 320-10.
When auction rate securities are subject to an auction, resetting the interest rate on
the securities is not considered equivalent to a sale and a purchase of such securities
when reporting cash flows. Therefore, cash flows should not be reflected when the
interest rate is reset. An actual purchase and sale of a security through the auction
process should be reflected as investing activities in the statement of cash flows.
Money market funds
Items commonly considered cash equivalents include treasury bills, commercial

paper, and money market funds. Although what constitutes a money market fund is
not defined in ASC 230, we believe it is appropriate for a fund to be classified as a cash
equivalent if it meets all of the qualifying criteria for a money market fund under the
1940 Act.
Reporting entities must assess whether it is appropriate to classify funds as cash

equivalents if they do not meet all of the qualifying criteria for a money market fund
under the 1940 Act. We believe it would be appropriate for a reporting entity’s
investment in a fund to be classified as a cash equivalent if all of the following
attributes are present:
□ A fund’s policies include a provision that requires the weighted average maturity
of the fund’s securities holdings not to exceed 90 days
□ The investor has the ability to redeem the fund’s shares daily in accordance with
its cash-management policy
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□ The fund’s investment attributes are consistent with the investment attributes of
an SEC-registered money market fund
If, however, there are increased credit and liquidity concerns associated with the fund,
especially if there is a significant decline in net asset value, a money market fund may
no longer have the attributes to be considered a cash equivalent. This analysis should
be performed at each reporting period. If a money market fund no longer qualifies as a
cash equivalent due to such analysis, we believe the corresponding outflow of cash
equivalents within the statement of cash flows should be reflected as an investing
activity.
In July 2014, the SEC issued a final rule that mandates the use of a floating net asset
value (NAV) for institutional prime money market funds. While the rule is not focused
on the financial reporting of entities that have investments in money market funds,
the changes could impact whether investments in money market funds are considered
cash equivalents. The SEC noted that under normal circumstances, qualifying money
market funds with floating NAVs will continue to be reported as cash equivalents.
However, if credit or liquidity issues arise, including the increased potential for
enactment of liquidity fees or redemption gates, investors will need to assess the
validity of continuing to account for such money market funds as cash equivalents.
Question 6-2
In the current year, classification of a money market fund was changed from a cash
equivalent to a short-term investment as a result of a periodic evaluation. Should the
prior period be reclassified to conform to this new classification?
PwC response
No, the prior period should not be reclassified. The evaluation of the classification is
based upon the facts and circumstances at each individual reporting period.
Balances created at subsidiaries by centralized treasury functions
Many large entities use centralized treasury functions in which the parent reporting
entity controls all cash transactions on behalf of its subsidiaries, and maintains all
cash accounts. This kind of arrangement results in due-to-parent or due-from-parent
balances in the subsidiaries’ standalone financial statements since the parent makes
all cash payments on behalf of the subsidiaries and sweeps all cash balances from the
subsidiaries. In such circumstances, the intercompany net due-to-parent or net
due-from-parent account is, in substance, the subsidiaries’ cash account, and changes
in the due-to-parent and due-from-parent accounts should be reflected as actual cash
flows in the subsidiaries’ standalone statement of cash flows.
If a subsidiary's balance sheet shows a net due-from-parent, an appropriate

classification in the subsidiary’s statement of cash flows would be investing, as this
balance is akin to making a loan, as contemplated by ASC 230-10-45-12a and 13a. If a
subsidiary’s balance sheet reflects a net due-to-parent, the appropriate classification
in the subsidiary’s statement of cash flows would be financing, as this balance is
similar to issuing debt. Alternatively, both a parent and its subsidiaries could classify
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the cash flow activity associated with due-from-parent and due-to-parent accounts as
financing activities based upon the consolidating statement of cash flows example
included in ASC 830-230-55-2.
6.6 Gross and net cash flows

Generally, information about the gross amounts of cash receipts and cash payments
during a period is more relevant than information about the net amounts of cash
receipts and payments. Accordingly, ASC 230 emphasizes gross, rather than net, cash
flows. However, netting cash flows in certain circumstances (e.g., receipts and
repayments of certain short-term borrowings, certain hedges and items being hedged,
and certain cash receipts and cash payments of banks, savings institutions, and credit
unions) is permitted. Account balances and transactions should be thoroughly
evaluated to determine whether the related cash flows should be presented on a gross
or net basis. Items that qualify for net reporting must have quick turnover, occur in
large volumes, and have short maturities (i.e., less than 90 days).
Examples that typically qualify for net reporting include:
□ Cash receipts and payments pertaining to trading investments, classified within

□ Balance sheet items in which a reporting entity is substantively holding or

disbursing cash on behalf of its customers (e.g., customer demand deposits of a
bank and customer accounts payable of a broker-dealer)
□ Debt (asset or liability) that has an original maturity of three months or less.
Items that are due on demand are considered to have maturities of three months
or less even though they may remain outstanding for longer periods.
□ Net borrowings under a revolving line of credit if the credit arrangement requires
the borrower to sign a series of notes having a maturity of 90 days or less.
However, it would not be appropriate to present the net change for a revolving
line of credit that utilizes notes with a term of more than three months.
Reporting entities that participate in securities lending arrangements may receive

cash as collateral. When a reporting entity holds collateral for 90 days or less, net
presentation may be appropriate, because the financing is considered short-term. In
such instances, the overall change in all collateral balances during the reporting
period may be shown on a net basis in financing activities. By analogy,
ASC 230-10-45-9 provides additional support for presenting these types of short-term
lending arrangements on a net basis. The cash flows must otherwise be shown on a
gross basis (i.e., separate line items of “Repayments of securities lending program”
and “Proceeds from securities lending program”).
ASC 942-230-45-1 permits banks, savings institutions, and credit unions to present
the following cash flows on a net basis:
□ Certain cash flows for deposits placed with other financial institutions and
withdrawals of deposits
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□ Time deposits accepted and repayments of deposits
□ Loans made to customers and principal collections
This provision is not available to finance companies, insurance companies, or other

financial intermediaries.
6.7 Classification of cash flows

ASC 230 identifies three classes of cash flows—investing, financing, and operating—
and requires a reporting entity to classify each discrete cash receipt and cash payment
(or identifiable sources or uses therein) in one of these three classes. The classification
is based on the nature of the cash flow, without regard to whether a cash flow stems
from another item (hereafter referred to as the Nature Principle). A cash flow is first
evaluated to determine if it meets the definition of an investing activity. If the cash
flow does not meet the definition of an investing activity, the cash flow is then
evaluated to determine if it is a financing cash flow. If a cash flow does not meet the
definition of an investing activity or a financing activity, the cash flow is classified as
operating. Cash flows from operating activities are generally the cash effects of events
that enter into the determination of net income (see FSP 6.7.3 for a discussion of
events that enter into the determination of net income that are not classified as
operating).
The definitions of the activity classes within ASC 230, combined with its waterfall
model, results in a bias toward classifying cash flows as operating activities. When
determining the appropriate classification, the FASB acknowledged that, in some
situations, a reasonable case can be made for alternative classifications. As a result, we
believe that a change in classification of a cash flow item (assuming both the old and
the new classifications are acceptable under US GAAP) represents a reclassification of
information and not a change in accounting principle. In such circumstances, all years
presented must reflect the reclassification, and the reclassification should be disclosed
in the footnotes.
Investing activities
Investing activities include making and collecting loans, purchasing and selling debt
or equity instruments of other reporting entities, and acquiring and disposing of
property, plant, and equipment and other productive assets used in the production of
goods or services.
The following items should be classified as investing activities:
□ Cash flows from purchases and sales of property, plant, and equipment and other
productive assets, including business combinations (see FSP 6.7.1.1 for further
discussion) and successful sale-leaseback transactions. Note that even though the
gain or loss associated with a disposition could theoretically represent a separately
identifiable source or use of cash, ASC 230-10-45-12(c) represents specific GAAP
that precludes such bifurcation.
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□ Insurance proceeds directly attributable to casualty losses related to productive

assets (see FSP 6.7.1.6 for further discussion)
□ Gross cash receipts or cash payments resulting from the acquisition or sale of debt
or equity securities of other reporting entities (classified as available-for-sale or
held-to-maturity). However, interest income or dividend income received in cash
on such investment securities is an operating cash inflow. Investments accounted
for as trading securities under ASC 320-10, when there is a stated intent to buy
and sell securities with the objective of generating trading profits, should be
classified as operating activities rather than investing activities.
□ Distributions received from equity method investees that are deemed a return of
investment (see FSP 6.7.3.2 for further discussion)
□ The impact on cash and cash equivalents of either consolidating or

deconsolidating a variable interest entity
□ Cash outflows and inflows associated with reverse repurchase agreements
□ Cash flows resulting from acquisitions and sales of loans originally classified as
loans held for long-term investment should be investing activities. Cash flows
should continue to be classified as cash flows from investing activities, even if the
reporting entity subsequently reclassifies the loans to be held for sale.
□ Proceeds from the settlement of corporate-owned life insurance policies,

including bank-owned life insurance policies (see FSP 6.7.1.7 for further
discussion)
6.7.1.1 Property, plant, and equipment and leasehold improvements
Payments made soon before, soon after, or at the time of purchase to acquire
property, plant, and equipment and other productive assets should be classified as
cash outflows for investing activities. Such amounts should include interest payments
capitalized as part of the cost of the acquired assets. If a purchase of property, plant,
and equipment and other productive assets is solely funded by issuing debt directly to
the seller, it is a noncash financing transaction. Subsequent payments of principal on
such debt are financing cash outflows.
Purchases of property, plant, and equipment that have not been paid for during the
period (i.e., liabilities exist in accounts payable or accrued liabilities to pay for the
purchase) represent noncash activities. As such, they should generally be excluded
from the relevant statement of cash flows line items (i.e., change in accounts payable
or accrued liabilities lines in the operating category, and purchases of property, plant,
and equipment in the investing category). Such noncash activity should be separately
disclosed. Refer to Example 6-10 for more information.
In a lease transaction, a lessor may agree to reimburse the cost of leasehold

improvements by making payments to either the lessee or directly to a third party.
When a lessor makes the payment directly to a third party, judgment is required to
determine whether such payment represents a cash flow for the lessee. If the payment
PwC 6-25
was made by the lessor on behalf of the lessee as a matter of convenience, we believe
the lessee has received a cash incentive from the lessor (which should be reflected as
an operating inflow) and acquired a fixed assets (which should be reflected as an
investing outflow). However, when a lessor makes a payment directly to a third party
based on a contractual requirement, the lessee should reflect the payment as a
noncash investing transaction. Determining whether the payment made by the lessor
was a matter of convenience is judgmental and requires an evaluation of the specific
facts and circumstances of the arrangement. See FSP 6.10.1 for a discussion of
constructive receipt and constructive disbursement.
ASC 230-10-45-14 indicates that donor contributions and investment income thereon,
which are stipulated by the donor for the purposes of acquiring, constructing, or
improving property, plant, and equipment, should be classified as financing activities.
As discussed in Question 6-3, not all payments to acquire or sell property are
necessarily investing activities.
Question 6-3
What is the appropriate classification in the statement of cash flows for the payments
made for real estate purchased by a developer to be subdivided, improved, and sold in
individual lots?
PwC response
The cash payments to purchase the real estate and the related cash receipts from sale
of the real estate should be classified as operating activities because the cash outflow
to purchase the real estate is specifically for resale. Thus, the nature of the cash flows
is similar to inventory in other businesses.
6.7.1.2 Business combinations

Business combinations may generate multiple types of cash flows. Their classification
can vary depending on the nature and source of the cash flows.
□ Business combinations: Cash flows from sales and for purchases of
productive assets, including the acquisition or sale of a business, are presented as
investing activities. In an acquisition, the unit of account is the acquired business,
and therefore the individual changes in assets and liabilities that occur on the
acquisition date in the consolidated financial statements are not reflected on the
individual line items in the statement of cash flows. Rather, the statement of cash
flows should reflect, as a single line item, cash paid to purchase a business (net of
cash acquired). The noncash effects of a business combination, including any
noncash consideration included in the purchase consideration and the significant
assets and liabilities of the acquirer, are required to be disclosed. Subsequent to
the acquisition of a business, cash flows of the newly acquired business are
combined with those of the consolidated entity and presented within operating,
investing, and financing activities as appropriate.
□ Transaction costs: The cash paid by the buyer for transaction costs incurred in
a business combination would be classified as operating activities in the statement
of cash flows. ASC 805-10-25-23 requires transaction costs to be expensed as
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incurred, thus establishing that the nature of transaction costs is that of an

operating activity.
□ Contingent consideration: Contingent consideration arrangements will often
be settled at an amount different than the amount initially included in the
measurement of the consideration transferred. Contingent consideration
classified as a liability is remeasured to fair value at each reporting date until the
contingency is resolved. Changes in fair value that are not measurement period
adjustments are recognized in earnings. These subsequent changes in the fair
value of the contingent consideration arrangement should be an adjustment to
reconcile net income to cash flows from operating activities
ASU 2016-152 indicates that the classification of contingent consideration in the
statement of cash flows depends on the timing and amount of the payment and
should be reflected as follows:
Timing of
payment after the
acquisition date Classification
Made soon after (e.g., All payments related to contingent consideration made
three months or soon after the acquisition date, including amounts
less)3 related to fair value remeasurements, should be
classified as investing cash outflows.
Not made soon after Liability is settled at an amount equal to or less
than the acquisition date fair value (plus or
minus measurement period adjustments): The
cash payment is akin to seller-provided financing and
should therefore be classified as a financing outflow in
the statement of cash flows.
Liability is settled at an amount greater than
the acquisition date fair value (plus or minus
measurement period adjustments): The portion
of the payment in excess of the acquisition date fair
value (plus or minus measurement period adjustments)
should be classified as an operating outflow, because it
has entered into the determination of net income. The
portion of the payment up to the amount of the
contingent consideration liability recognized at the
acquisition date (plus or minus measurement period
adjustments) should be classified as financing.
When determining whether the liability is settled at an
amount greater than the acquisition date fair value,
reporting entities should include all prior payments
made to satisfy the contingent consideration, even if
made soon after the acquisition and classified as
investing cash outflows.
2 Although ASU 2016-15 clarified guidance on this issue to address diversity in practice, this is not a
significant change from our existing guidance. Prior to the ASU, we did not provide specific guidance on
contingent consideration payments made soon after the acquisition date. However, it is our understanding
that it is not common for contingent consideration payments to be made within this time period. Therefore,
we do not believe that the ASU will have significant impact on this issue. However, if a reporting entity’s
cash flow classification is inconsistent with ASU 2016-15, it should continue to use such classification until
the ASU is adopted. See FSP 6.2 for effective date and transition guidance on ASU 2016-15.
3While the example of three months or less is not included in the codification, it was the period suggested
by some members of the EITF (referenced in the Basis for Conclusions of ASU 2016-15).
PwC 6-27
□ Pushdown accounting: When pushdown accounting is not applied to the

financial statements of the subsidiary as a result of a business combination, cash
flows should only be reported by the entity actually involved in the cash
transactions. When pushdown accounting has been elected, acceptable
alternatives, other than reporting the transaction cash flows only by the entities
actually involved in the cash flows, may exist in the financial statements of the
subsidiary. In all cases, appropriate disclosure of the form of the transaction and
the resulting cash flows should be made.
□ Debt extinguished in conjunction with a business combination: Debt

extinguished by the acquirer in connection with a business combination requires a
careful evaluation of the facts and circumstances of the arrangement to determine
how the cash flows should be presented. We believe the presentation of cash flows
should be based upon whether the acquirer legally assumed the debt.
When determining whether the acquirer legally assumed the debt, consideration
should be given to all relevant factors, which may include the following:
o If repayment of an acquiree’s debt is required by the terms of the acquisition

agreement, it is important to understand the reasons for including this
provision as well as the timing and method of settlement.
o If the lender provides a concession that allows the acquiree’s debt to be

assumed by the acquirer or settled after the acquisition date, such concession
indicates that the acquirer has assumed the debt. Therefore, it is important to
understand the specific terms of any change in control provisions, and
whether the lender was required to grant consent to allow the acquirer to
assume the debt.
o If the debt is settled after the acquisition date, it indicates the debt was
assumed by the acquirer in the acquisition. Therefore, understanding the
timing of extinguishment in relation to the acquisition date is also important.
If the acquirer legally assumed the debt, we believe it is appropriate to record the
debt at fair value on the acquirer’s balance sheet as a liability assumed in the
acquisition. It would therefore be included net in the “acquisition of a business,
net of cash acquired” line in investing activities, rather than as a financing inflow.
Any subsequent payments related to the debt would be classified as discussed in
FSP 6.7.2 since the debt is the legal obligation of the acquirer.
If an acquirer does not legally assume debt as part of an acquisition and the debt
is extinguished on the acquisition date, we believe any funds provided by the
acquirer to extinguish the acquiree’s debt should be reflected by the acquirer as
consideration transferred in the acquisition and classified as an investing cash
outflow.
In limited circumstances, it may be appropriate to consider debt that has been

legally assumed and extinguished by the acquirer to be acquisition consideration
transferred and an investing cash outflow. This should only occur when the
acquirer extinguishes the assumed debt as an integrated part of closing the
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acquisition, and it is accomplished in close proximity to the acquisition date (i.e.,

approximately 1 day), such that it is clear that the acquirer did not substantively
assume the risks inherent in the borrowing. In these circumstances, if a cash
payment to extinguish acquiree debt is considered part of the acquisition
consideration and therefore classified as an investing outflow, the extinguished
debt should not be disclosed elsewhere as a liability assumed in the business
combination.
6.7.1.3 Investment securities and securities measured under the fair value
option – updated May 2017
According to ASC 320, purchases of trading securities should be classified according

to their nature and purpose. If the reporting entity’s investment strategy is to actively
buy and sell securities with the objective of generating trading profits on short-term
differences in market prices, purchases and sales of trading securities should be
classified as operating activities. If the reporting entity’s investment strategy is not to
engage in such trading activities, purchases and sales of trading securities should be
classified as investing activities.
Similarly, we believe cash flows associated with investments in debt securities

accounted for using the fair value option under ASC 825, Financial Instruments,
should be classified according to their nature and purpose.
New guidance – debt and equity securities

Liabilities, changed the measurement guidance for equity securities such that they are
no longer classified as trading or available-for-sale. Classification categories of debt
securities remain unchanged. They will still be classified as trading, available-for-sale,
or held-to-maturity.
Although ASU 2016-01 amended the wording of ASC 230 to conform to the new
classification guidance, it carries forward the principle that reporting entities should
classify cash flows from purchases and sales of debt and equity securities based on the
nature and purpose for which it acquired them (ASC 321-10-45-1), effectively resulting
in no change to the statement of cash flow classification.
Equity securities
Although equity securities will be measured at fair value through net income, their
cash flows are not necessarily classified as operating. Rather, the cash flows will
continue to be classified according to their nature and purpose. Cash flows from
equity securities that are purchased with the objective of generating profits on
short-term price differences will be operating. If the reporting entity’s investment
strategy with regards to a specific security is not to actively buy and sell it with the
objective of generating trading profits on short term differences in market prices, the
cash flows associated with the investment should be classified as investing activities.
PwC 6-29
Debt securities
Cash flows from debt securities classified as available-for-sale or held-to-maturity are

investing activities.
Cash flows from trading debt securities may be classified either as investing or
operating depending on the nature and purpose of the instrument.
□ Cash flows from debt securities purchased with the objective of generating profits
on short-term differences in price are classified as operating activities
□ Cash flows from debt securities for which the reporting entity’s investment
strategy is not to actively buy and sell securities with the objective of generating
trading profits on short-term differences in market prices are classified as
investing activities
6.7.1.4 Contributions and advances to joint ventures
Initial and subsequent cash contributions by a reporting entity to joint ventures meet
the ASC 230 definition of investing activities and should be reflected as such in the
investor’s statement of cash flows. Contributions of other assets are noncash
transactions, which require separate disclosure.
In many cases, a reporting entity will loan money to their joint ventures with the
expectation of repayment. Such loans, and their subsequent repayment, should be
reflected as investing activities in the reporting entity’s statement of cash flows.
6.7.1.5 Derivatives – updated May 2017
Generally, cash flows related to a derivative, whether over-the-counter or

centrally-cleared, should be classified according to their nature (i.e., investing).
However, ASC 230-10-45-27 indicates that a reporting entity may elect an accounting
policy to classify the cash flows from derivatives designated in a qualifying hedging
relationship in the same category as the cash flows from the hedged items, provided
there is no other-than-insignificant financing element, as discussed in FSP 6.7.2.9,
and this treatment is disclosed.
Even under a policy to classify the cash flows from derivatives designated in a
qualifying hedging relationship in the same category as the cash flows from the
hedged items, some reporting entities may treat cash payments and receipts on
collateral as investing cash flows when the collateral account is in an asset position,
and as financing cash flows when the collateral account is in a liability position.
Centrally-cleared derivatives
As of May 2017, several central clearing parties, including the London Clearing House
(LCH) and Chicago Mercantile Exchange (CME), implemented rule amendments
designed to change the legal nature of variation margin so that it is considered a
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settlement payment, as opposed to the posting of collateral. For these contracts

(referred to as “settled to market” or STM contracts), the derivative contract, variation
margin, and interest on the cumulative variation margin (referred to as “price
alignment interest,” PAI, or “price alignment,” PA) are viewed as a single unit of
account.
With the changes to the legal nature of variation margin payments and the unit of
account, preparers raised questions about the presentation of these instruments
within the statement of cash flows. Specifically, preparers that had historically
reported cash flows relating to variation margin payments separately from settlements
of the derivative questioned whether this cash flow presentation would change.
For STM contracts, if a derivative does not have an “other-than-insignificant”

financing element, we understand that the SEC staff would not object to a registrant
continuing to report variation margin payments and “derivative settlements” in
different categories in the statement of cash flows. This is based on a view that
ASC 230 would support concluding that variation margin payments are separately
identifiable sources and uses of cash flows that are distinguishable from “other
derivative cash flows.” This view acknowledges that in this circumstance, the unit of
account for balance sheet purposes is not determinative of the presentation of
separately identifiable cash flows. We also understand that the SEC staff would not
object to classifying all of the payments related to an STM contract as a single unit of
account reported within the same classification in the statement of cash flows
Question 6-4
A reporting entity has a qualifying cash flow hedge related to the forecasted purchase
of inventory. The forecasted purchase has occurred and the hedging instrument has
been settled, but, at the reporting date, the inventory has not been sold. How should
the reporting entity classify the cash flows related to the qualifying hedging
instrument in the statement of cash flows?
PwC response
The reporting entity may present the cash flows from the hedging instrument as either
an investing activity or an operating activity (as a change in working capital
components because the hedged item in this example is the forecasted purchase of
inventory). However, if the reporting entity presents the cash flows from the hedging
instruments in the same category in the statement of cash flows as the category for the
cash flows from the hedged items, it must disclose its accounting policy in the
After hedge termination
Any cash flows subsequent to the date hedge accounting is discontinued should be
classified as investing. In some instances, a cash flow resulting from the termination
of a hedging instrument may be viewed as occurring simultaneously with
discontinuance – not subsequent to discontinuance. In this case, it would be classified
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in the same category as the cash flows from the hedged item when that accounting
policy has been elected.
Derivatives used in economic hedges
Reporting entities frequently enter into derivative transactions for hedging purposes,
but do not elect to apply the hedge accounting rules in ASC 815. Such transactions are
commonly referred to as “economic hedges.” The literature does not specifically afford
reporting entities the ability to elect an accounting policy to reflect the cash flows with
the hedged items (as ASC 230-10-45-27 permits for accounting hedges). We believe
that a literal application of the Nature Principle, as discussed in FSP 6.7, combined
with other guidance in ASC 230 pertaining to classifying cash flows related to
derivatives, would lead a reporting entity to classify the cash flows related to an
economic hedge as investing. However, we note that the predominant practice is to
classify such cash flows according to the economic “hedged item,” a practice which has
been acknowledged by regulators. Accordingly, we do not object to a reporting entity
electing a policy to classify cash flows related to an economic hedge following the cash
flows of the economic hedged item, assuming the practice is consistently applied and
clearly disclosed.
Example 6-2 illustrates an economic hedge.
EXAMPLE 6-2
Cash flows related to an economic hedge
FSP Corp, an oil and gas producing company, sells its daily oil production to third
parties for cash based upon a floating spot price specific to the production’s location.
To fix the cash proceeds for its anticipated oil production over the next twelve months,
FSP Corp enters into a derivative (a price swap), which requires the derivative
counterparty to pay FSP Corp a stated fixed price for a fixed volume of oil, while FSP
Corp must pay the counterparty a stated index price (that is variable) for the same
fixed volume of oil. The price swap is settled net, in cash, on a quarterly basis. Based
on common practice in the industry, FSP Corp does not employ hedge accounting and
instead records changes in the derivative’s fair value in net income (an “economic
hedge”).
At the first settlement date, FSP Corp receives a cash payment from the derivative
counterparty. How should the cash receipt be classified in the statement of cash flows?
Analysis
Because we do not object to a reporting entity electing a policy to classify cash flows
related to an economic hedge following the cash flows of the hedged item, we believe
FSP Corp may classify the cash flows as operating because the economic hedged item
would be reflected in operating.
Derivatives with an other-than-insignificant financing element
Borrowers should present all of the cash flows associated with derivative instruments
that contain an other-than-insignificant financing element at inception, other than a
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financing element inherently included in an at-the-market derivative instrument with

no prepayments, as cash flows from financing activities (see FSP 6.7.2.9 for further
discussion).
For STM contracts, since variation margin and interest received or paid on the
cumulative variation margin amount are now considered part of a single unit of
account, if a derivative has an “other-than-insignificant” financing element, cash flows
associated with variation margin and PAI/PA must also be reported as financing
activities.
Derivatives used in net investment hedges
Reporting entities with global operations frequently hedge the investment made in
their foreign subsidiaries with net investment hedges, as illustrated in Example 6-3.
EXAMPLE 6-3
Classifying cash flows from settlement of a net investment hedge
FSP Corp, a US parent company, enters into a foreign currency forward exchange
contract to sell British Pounds and receive US dollars, and designates the forward
exchange contract as a net investment hedge of its British subsidiary whose functional
currency is the British Pound. The effective portion of the changes in the fair value of
the forward exchange contract are recorded in the cumulative translation adjustment
(CTA) account, which is a component of OCI, and will remain there until the
investment in the subsidiary is sold or substantially liquidated in accordance with
ASC 830, Foreign Currency Matters. At the expiration of the forward exchange
contract, FSP Corp receives $2 million from the counterparty.
How should the cash received from the settlement of the derivative accounted for as a
net investment hedge be classified on the statement of cash flows?
Analysis
The cash received from settlement of the net investment hedge should be classified as
an investing activity in the statement of cash flows. Investing classification is
appropriate as the hedged item is the investment in a foreign subsidiary and the cash
paid or received from acquiring or selling the subsidiary would typically be classified
as investing under ASC 230-10-45. Additionally, the original Basis for Conclusions of
FASB Statement 95 (which is codified in ASC 230-10-45) further supports an
investing classification as the FASB believed that the purchase or sale of a forward
contract is an investing activity. Therefore, the $2 million received from the
settlement of the net investment hedge should be classified as an investing inflow.
If the hedging instrument in a net investment hedge is a non-derivative financial

instrument, such as foreign denominated debt, the cash flows related to the net
investment hedge would be classified according to the nature of the non-derivative
instrument. In the case of debt instruments, interest payments are operating activities
and the principal repayments are financing activities.
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6.7.1.6 Proceeds received from the settlement of insurance claims
ASU 2016-15 requires that cash proceeds received from the settlement of insurance
claims (with the exception of proceeds received from corporate-owned life insurance
policies and bank-owned life insurance policies, discussed in FSP 6.7.1.7) be classified
on the basis of the related insurance coverage. In other words, the classification
should be made based on the nature of the loss. For example, insurance proceeds
related to damage of equipment are investing inflows while proceeds related to
business interruption are operating inflows.4
6.7.1.7 Corporate-owned and bank-owned life insurance
Life insurance policies are purchased for a variety of purposes, including funding the
cost of providing employee benefits and protecting against the financial consequences
of the loss of key persons. These types of policies generally known as corporate-owned
life insurance and bank-owned life insurance. ASU 2016-15 requires that cash
proceeds received from the settlement of corporate-owned life insurance policies and
bank-owned life insurance policies be classified as investing cash inflows. Payments
for premiums on corporate-owned policies may be classified as cash outflows for
investing activities, operating activities, or a combination of investing and operating
activities. If a reporting entity’s cash flow classification is inconsistent with
ASU 2016-15, it should continue to use such classification until the ASU is adopted.
Financing activities
Financing activities include borrowing money and repaying or settling the obligation,
and obtaining equity from owners and providing owners with a return on, or return of,
their investment.
The following items should be classified as financing activities:
□ Payments for debt issue costs (i.e., third party costs)
□ Payments for debt prepayment or debt extinguishment costs (See FSP 6.7.2.2 for
further discussion)
□ Proceeds from failed sale-leaseback transactions
□ Proceeds received from issuing debt
□ Payments on seller-financed debt related to the purchase of property, plant, and

equipment and other productive assets. The incurrence of that debt is a noncash
financing transaction.
□ Stock issuance proceeds, net of stock issuance costs
□ Cash dividends and purchases of treasury stock
4Although ASU 2016-15 clarified guidance on this issue to address diversity in practice, adoption of the
ASU will not result in a change from our existing guidance.
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□ Cash activity related to stock subscriptions receivable
□ If a reporting entity has a “bank overdraft” at year end, the change in bank
overdrafts during the period (see FSP 6.5.3 for further discussion)
□ Cash proceeds received as collateral under a securities lending program and

subsequent repayment of the cash, because the cash received is considered a
borrowing
□ Cash inflows and outflows associated with repurchase agreements, including

transactions accounted for as a securitized borrowing. Net presentation for these
cash flows may be permitted
6.7.2.1 Discounts and premiums on debt securities – updated May 2017
When a debt security is issued at a discount, the cash proceeds received (i.e., face
value of the debt security less the discount) is classified as a financing inflow for the
issuer. The classification of payments for debt issued at a discount subsequent to debt
issuance can vary.
Zero coupon debt instruments and other deeply-discounted debt

instruments
The cash received when a zero coupon debt instrument is issued is classified as a
financing inflow and the discount accretion in subsequent periods is included as a
positive adjustment in the reconciliation of net income to operating cash flows.
ASU 2016-15 requires that cash payments for the settlement of zero-coupon debt
instruments, or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing, be allocated
between financing and operating5 as follows:
□ Operating: the portion of the cash payment attributable to accreted interest on the
debt discount
□ Financing: the portion of the cash payment attributable to the proceeds received
at issuance
Discount related to debt with a cash conversion feature
A convertible bond with a cash conversion feature allows the borrower to settle its
obligation upon conversion, in whole or in part, in a combination of cash or stock
either mandatorily or at the borrower’s option. It is accounted for under the cash
conversion subsections of ASC 470-20. The convertible bond is separated into a debt
component and an equity component at issuance, creating a debt discount on the debt
component (i.e., it creates a deeply discounted bond). Often, the stated rate of the
bond is insignificant compared to the effective interest rate created by the discount.
5Although ASU 2016-15 clarified guidance on this issue to address diversity in practice, adoption of the
ASU will not result in a change from our existing guidance.
PwC 6-35
The cash proceeds for the entire convertible bond are classified as financing inflows in
When the bonds are settled, the issuer should allocate the fair value of the
consideration transferred between (1) the debt component—to reflect the
extinguishment of the debt and (2) the equity component—to reflect the reacquisition
of the embedded conversion option. See FG 9.6.5 for further details. To determine
how to classify the cash paid to settle such bonds, a reporting entity must determine if
the stated rate of the bond is insignificant compared to the effective rate created by
the discount. If so, the reporting entity should follow the guidance in ASU 2016-15 for
deeply-discounted bonds as illustrated in Example 6-4.
EXAMPLE 6-4
Statement of cash flow classification of repayment of debt with cash conversion
feature
FSP Corp. issued convertible debt with a cash conversion feature with a par value of
$1,000. Cash proceeds received at issuance were $1,000. The debt matures in seven
years and is callable at par by FSP Corp. At issuance, FSP Corp. allocated $240 to the
equity component and $760 (i.e., $1,000 par less $240 discount) to the debt liability.
FSP Corp. determined that the initial $240 discount created an effective interest rate
that is significant in relation to the stated coupon of the bond.
Three years after issuance, FSP Corp. exercised its call option to prepay the debt and
paid the issuer $1,000 to settle the debt. At that time, FSP Corp. allocated $925 of the
consideration to extinguish the debt and $75 to reacquire the conversion option.
How should FSP Corp. classify the payments in its statement of cash flows?
Analysis
Consideration allocated to the debt extinguishment
Since FSP Corp. determined that the bond is deeply discounted, it would classify $780
as a financing activity (because that is the portion of the consideration attributable to
the proceeds received at issuance). The difference between the $925 allocated the
extinguishment and the $780 ($145) would be classified as an operating activity
because that is the amount associated with the accreted interest on the debt discount.
Consideration allocated to reacquire the conversion option
The $75 allocated to the reacquisition would be classified as a financing activity

because it was paid to reacquire an equity option.
Payment in kind interest (PIK notes)
The terms of debt instruments may permit or require the borrower to satisfy interest
payments on the debt by issuing additional paid-in-kind (PIK) notes having identical
terms as the original debt instead of paying in cash. We believe that a PIK note is in
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substance the same as a zero coupon bond. That is, in both a PIK note and a zero
coupon bond, the interest due on the original principal amount of debt is accrued and
added to the debt balance. Therefore, we believe the guidance for zero coupon bonds
should be followed for payments made to extinguish PIK notes as well. For example, if
debt with a $100 principal amount was issued at par and the issuer satisfied $15 of
interest by issuing additional notes, the borrower would pay $115 at maturity. $100 of
that amount would be classified as a financing outflow because it is attributable to the
proceeds received at issuance, and $15 would be classified as an operating cash
outflow because it is attributable to accreted interest.
All other debt instruments issued at a discount
The guidance in ASU 2016-15 for zero-coupon debt instruments or those with coupon
interest rates that are insignificant in relation to the effective interest rate of the
borrowing should not be applied to other debt instruments issued at a discount.
Therefore, when other debt instruments are retired, the entire cash outflow associated
with the repayment of principal should be reflected as a financing outflow. 6
During deliberations of ASU 2016-15, the EITF was concerned that if the scope was
not expanded beyond “zero-coupon” debt instruments, there could be reduced
comparability with the classification of economically similar instruments, such as
deeply discounted debt instruments with a near zero-coupon interest rate. As such,
the EITF reached consensus, which the FASB ratified, to include debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate
of the borrowing. ASU 2016-15 does not define what is meant by “insignificant in
relation to the effective interest rate of the borrowing” so preparers will need to apply
judgment in making this determination.
Debt issued at a premium
Consistent with the conclusion in ASU 2016-15 concerning debt discounts associated
with debt instruments with coupon interest rates that are not insignificant in relation
to the effective interest rate of the debt, we believe that it would be acceptable for the
proceeds from debt issued at a premium to be reflected as a financing inflow.
Premium amortization in subsequent periods is included as a negative adjustment in
the reconciliation of net income to operating cash flows. When the debt is repaid, it
would be acceptable for the entire cash outflow to be classified as a financing outflow.7
6This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we believed it was
appropriate to apply the model described for zero coupon bonds to all debt instruments issued at a
discount. Application of our pre-ASU 2016-15 guidance should continue until the adoption of ASU 2016-15.
7This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we believed there
should be symmetry between financing inflows and financing outflows related to the issuance and
repayment of debt principal, which resulted in adjustments being classified in the operating section.
Application of our pre-ASU 2016-15 guidance should continue until the adoption of ASU 2016-15.
PwC 6-37
6.7.2.2 Debt extinguishment costs
ASU 2016-15 requires that cash payments for debt prepayment or other debt
extinguishment costs, including third-party costs, premiums paid, and other fees paid
to lenders that are directly related to the debt prepayment or extinguishment, be
classified as financing activities in the statement of cash flows.8 The Basis for
Conclusions in ASU 2016-15 stated that some members of the EITF noted that this
was appropriate because such costs are associated with the extinguishment of the debt
principal and because many view these costs as being similar to debt issue costs,
which are also classified as financing outflows.
6.7.2.3 Debt restructurings accounted for under ASC 470-50
If a restructuring of debt is not a troubled debt restructuring, then term debt

restructuring is accounted for as either a modification or as an extinguishment.
Accounting for unamortized debt issue costs and new fees relating to modifications of
line of credit and revolving-debt arrangements is based on a borrowing capacity
analysis.
The following discussion addresses the cash flow classification for new fees incurred
in connection with a term debt restructuring. See FG 3 for a detailed discussion of
accounting for modifications and extinguishments, and accounting for modifications
to line of credit and revolving debt arrangements. The treatment of unamortized fees
or principal that remains outstanding is not addressed, as there is no cash flow effect.
Term debt modifications
In connection with a restructuring of term debt accounted for as a modification,

companies may incur creditor fees and fees to other parties. Creditor fees incurred in
these situations are capitalized as a debt discount and amortized. ASU 2016-15 states
than when a discount is repaid for debt instruments with coupon interest rates that
are not insignificant in relation to the effective interest rate of the debt, the repayment
of that discount should be a financing cash outflow. In a modification, the creditor
fees paid on the modification date are capitalized as a debt discount. Therefore, the
borrower is paying that portion of the discount on the modification date. By analogy
to the conclusion in ASU 2015-16, we believe that it is acceptable to classify all creditor
fees incurred in conjunction with a debt restructuring accounted for as a modification
as financing cash outflows.9
Fees paid to third parties associated with a term debt restructuring accounted for as a
modification are expensed. The payment, which has entered into the determination of
net income, is not considered a debt issuance cost since there is no new issuance of
8 This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we believed that
debt prepayment penalties paid to a creditor should be classified as operating activities as they were akin to
interest expense. Application of our pre-ASU 2016-15 guidance should continue until the adoption of ASU
2016-15.
9 This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we believed that
creditor fees in a modification should be classified as operating cash flows because these fees essentially
represent interest payments that have entered into the determination of net income. Application of our pre-
ASU 2016-15 guidance should continue until the adoption of ASU 2016-15.
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debt. Therefore, we believe it is acceptable to reflect the payment of these costs as an

operating cash outflow.
Term debt extinguishments
As a result of the guidance in ASU 2015-16, we believe all fees incurred in conjunction
with a debt restructuring that is accounted for as an extinguishment under
ASC 470-50 (irrespective of whether the fees are paid to creditors or third parties)
should follow the same classification as discussed in FSP 6.7.2.2 for debt
extinguishment payments costs, which are a financing outflow.10
Modifications to line of credit and revolving debt arrangements –

updated May 2017
Third-party and creditor fees incurred in connection with a modification to a line of

credit or revolving debt arrangements are considered to be associated with the new
arrangement and should therefore be capitalized.
We believe the classification of these costs in the statement of cash flows depends on
the purpose of the line of credit. Will it be drawn upon, or is it more like “insurance”
that enables the entity to access cash should it be needed?
□ If the reporting entity does not intend to draw down on the line: All third-party
and creditor fees should be classified as operating activities because the entity
does not expect them to be related to a borrowing.
□ If the reporting entity intends to draw down on the line: The fees are costs to
issue debt in the future, and should be classified as financing outflows.
6.7.2.4 Floor plan financing programs
Reporting entities often finance the purchase of their inventory by engaging in floor
plan financing arrangements with lenders that are not affiliated with the
manufacturer of the inventory. In such an arrangement, the unaffiliated lender pays
the manufacturer of the inventory directly, and is then repaid by the reporting entity
according to the terms negotiated between the reporting entity and the lender, which
are usually much longer than normal trade payables.
Application of the concepts of ASC 230 to such an arrangement results in the

reporting entity disclosing a noncash financing transaction for the acquisition of the
inventory, followed by a financing outflow when the reporting entity repays the
lender. As a result, operating activities will be asymmetrical, in that operating cash
flows will never include an outflow for the purchase of inventory that, when sold, will
produce an operating inflow. Such an outcome would appear consistent with
paragraph 54 of FASB Concepts Statement No. 5, which indicates that cash payments
10This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we generally
believed that cash payments made to third parties and creditors for a debt restructuring that results in an
extinguishment under the guidance in ASC 470-50 should be classified as operating. Application of our pre-
ASU 2016-15 guidance should continue until the adoption of ASU 2016-15.
PwC 6-39
are recognized when they occur, and ASC 230-10-50-5, which indicates that only the
cash portion of a transaction should be reported in the statement of cash flows.
However, the SEC staff has expressed the view that the lack of symmetry in such floor
financing programs does not depict the substance of the transaction because the
lender effectively acts as the reporting entity’s agent. To remedy the asymmetry, the
SEC staff believes that the reporting entity should report an operating cash outflow
and a financing cash inflow upon receipt of the inventory, even though neither cash
flow occurred. This view appears to be based on anti-abuse concerns. While we accept
the SEC staff’s view in regard to floor plan financing programs, we generally do not
believe that noncash investing and financing activities should be included in the
statement of cash flows.
6.7.2.5 Structured payables
Under structured payable programs, the reporting entity arranges for its vendors to
have the option to factor their receivables (i.e., the reporting entity’s payables) to a
bank. The balance sheet classification of the reporting entity’s payable depends on the
economic substance of the arrangement. See FSP 11.3.1.5 for additional discussion of
balance sheet classification of structured payables arrangements.
If the economic substance of the trade payables has changed as a consequence of

implementing a structured vendor payable program, an in-substance refinancing will
be deemed to have occurred. As a result, the affected trade payable balances should be
reclassified to debt on the reporting entity’s balance sheet. In this circumstance, the
SEC staff’s position (which is consistent with the view expressed concerning floor plan
financing programs discussed in FSP 6.7.2.4) is that a reporting entity’s statement of
cash flows should reflect an operating cash outflow and financing cash inflow related
to the affected trade payable balances. A financing cash outflow should be reflected
upon payment to the bank and settlement of the obligation.
6.7.2.6 Liabilities settled through paying agents
In some circumstances, a reporting entity may engage a financial institution to

operate solely as a paying agent by entering into arrangements that allow for the
financial institution to make payments on behalf of the reporting entity, and in some
instances, allow the reporting entity to participate in a rebates or “rewards” programs
for transaction volume generation. See FSP 11.3.1.6 for further discussion of these
arrangements.
With regard to classification in the statement of cash flows, reporting entities should
use the same guidance as in FSP 6.7.2.5 for structured payables.
6.7.2.7 Stock compensation
ASU 2016-09 requires that upon the settlement or exercise of stock-based

compensation awards, income taxes payable is reduced (or deferred taxes are
adjusted, subject to normal valuation allowance considerations) for the tax effect of
the deductions generated, and any windfalls or shortfalls are recorded in the income
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statement.11 Furthermore, ASU 2016-09 requires that all tax-related cash flows
resulting from share-based payments be reported as operating activities in the
When a reporting entity settles outstanding equity-classified stock awards with cash,
the classification of the outflow in the statement of cash flows is dependent upon the
amount of cash paid. If the cash paid to settle a stock award is less than or equal to the
fair value of the award on the settlement date, then the amount of cash paid is charged
to equity in the balance sheet and classified as financing activities in the statement of
cash flows. However, if the amount paid to settle a stock award exceeds the fair value
of the award on the settlement date, the amount paid in excess of fair value would be
charged to compensation cost. As such, the cash payment to settle the stock award
should be bifurcated in the statement of cash flows — a financing outflow equal to the
settlement date fair value and an operating outflow for the amount paid in excess of
the settlement date fair value.
If cash is paid to settle a liability-classified stock award, the amount of cash paid to
repurchase the award would settle the liability, which would have already been
charged to compensation expense. As such, a cash settlement of a liability-classified
stock award should be classified as an operating cash outflow in the statement of cash
flows.
Reporting entities may grant awards to employees that are exercisable prior to vesting
so that the employee’s holding period for the underlying stock begins at an earlier date
to achieve a more favorable tax position. These awards have an “early exercise”
feature. When employees “early exercise” stock options, we believe that the cash
received by the reporting entity should be presented as a cash inflow from financing
activities. Although the underlying shares are not considered “issued” for accounting
purposes when the cash is received (because the options are subject to vesting
conditions), the cash represents proceeds in connection with awarding equity
instruments that will not enter into the determination of net income.
Stock-based compensation plans may permit shares to be withheld by a reporting

entity in exchange for agreeing to fund an employee’s tax obligation. When the
reporting entity pays the withholding taxes to the appropriate taxing jurisdiction,
ASU 2016-0912 requires that the cash payment be presented as a financing outflow in
The presentation as a financing activity follows the view that while the reporting entity
made a cash payment to a taxing authority and not the employee, in substance the
11This guidance reflects a change as a result of the issuance of ASU 2016-09 and should only be applied
upon adoption of ASU 2016-09. When gross windfall tax benefits from the exercise or settlement of stock-
based compensation awards are realized, income taxes payable is reduced with a corresponding entry to
additional paid-in capital. Prior to the adoption of ASU 2016-09, ASC 230 required the statement of cash
flows to include a financing inflow with a corresponding operating outflow to reflect the realization of gross
windfall tax benefits.
12This guidance reflects a change as a result of the issuance of ASU 2016-09 and should only be applied
upon adoption of ASU 2016-09. Stock-based compensation plans may permit shares to be withheld by a
reporting entity in exchange for agreeing to fund an employee’s tax obligation. Prior to the adoption of ASU
2016-09, when the reporting entity pays the withholding taxes to the appropriate taxing jurisdiction, we
believed that the cash payment could be presented either as a financing outflow or an operating outflow in
PwC 6-41
reporting entity issued the gross number of shares to the employee, and then
repurchased from the employee shares commensurate with the statutory tax
withholding requirement. As a result, it would be appropriate to account for the “in
substance” repurchase of shares as a purchase of treasury shares, which is a financing
outflow.
6.7.2.8 Cash flows related to noncontrolling interests
Pursuant to ASC 810, noncontrolling interest holders are viewed as owners. ASC 230
indicates that financing activities include the provision of resources by owners and the
return on, and return of, their investment. Therefore, dividends paid to
noncontrolling interest holders should be classified as financing activities.
Cash paid to acquire a noncontrolling interest, or cash received from the sale of a
noncontrolling interest, should be presented as a financing activity when the parent
maintains control of the subsidiary. Cash received for the sale of an interest in a
subsidiary should be classified as an investing activity in the consolidated statement of
cash flows when the parent loses control of the subsidiary as a result of the
transaction.
Because there is no guidance regarding transaction costs related to purchases and

sales of noncontrolling interests, reporting entities may elect a policy to report such
costs as either an expense in the income statement, or as a direct charge to equity. The
classification of transaction costs in the cash flow statement should be consistent with
that accounting. Therefore, if a reporting entity reflects transaction costs in its income
statement, the related cash flows should be classified as an operating activity. If a
reporting entity instead reflects the transaction costs as a direct charge to equity, the
related cash flows should be classified as a financing activity.
6.7.2.9 Derivative transactions that contain a financing element
Per ASC 230-10-45-14d and 45-15d, all cash flows associated with an instrument
accounted for as a derivative (i.e., the normal purchases and normal sales assertion
has not been elected) that, at its inception, includes an “other-than-insignificant
financing element,” should be classified as financing activities by the borrower (i.e.,
the counterparty with a derivative liability ).
Derivatives with off-market terms and those that require upfront cash payments often
contain a financing element. ASC 815-10-45 does not establish bright lines for
determining when an inherent financing element should be considered other-than-
insignificant. Determining if a derivative contains another-than-insignificant
financing element requires judgment based on the facts and circumstances. We have
interpreted the term “insignificant” in this guidance as denoting an amount that is less
than 10% of the present value of an at-the-market derivative’s fully prepaid amount.
The term “at inception” is generally interpreted within ASC 815 to mean when the
reporting entity acquired the derivative position, not when the derivative instrument
was originated. While the requirement to classify all cash flows related to a derivative
with an other-than-insignificant financing element within the financing category was
an attempt to add transparency to the practice of effectively creating a borrowing in
the form of an off-market derivative, the interpretation of “at inception” combined
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with the lack of scoping attached to the guidance in ASC 230 potentially impacts
derivative instruments that did not provide any direct financing.
When the financing element is considered to be other-than-insignificant at inception,

all of the cash flows associated with the derivative (i.e., not just the cash flows
associated with the portion that represents the financing element) should be included
in financing activities by the borrower, as illustrated in Example 6-4.
EXAMPLE 6-5
Classifying cash flows associated with acquired derivatives
FSP Corp uses its common stock to acquire another company in a transaction
accounted for as a business combination under ASC 805. At the acquisition date, the
acquired company held derivatives in the form of physically settled commodity
forward contracts that the acquired company originated. Based on the difference
between market prices at the date of the acquisition and the historical terms of the
acquired forward contracts, all of the forward contracts are in a liability position, and
they all are deemed to contain an “other-than-insignificant” financing element.
Upon acquisition, FSP Corp accounts for the acquired forward contracts as derivative
instruments. Source documents obtained from the acquired company clearly indicate
that the fair value of all the acquired forward contracts were zero when originated by
the acquired company.
How should FSP Corp classify the cash flows associated with the acquired forward
contracts in its statement of cash flows?
Analysis
The inception of the physically settled forward contracts for FSP Corp is the date of
the business combination, not the date the acquired company originated the
derivative contracts. Because all of the forward contracts contain an other-than-
insignificant financing element, a literal read of ASC 230 would suggest that all the
cash flows associated with the physically settled forward contracts should be
presented in the financing section of the statement of cash flows.
While FSP Corp did not receive an up-front payment related to the acquired forward
contracts, one could argue that FSP Corp effectively received noncash “financing”
from the forward contracts because the liability position of the derivative contract on
the acquisition date effectively allowed FSP Corp to issue fewer shares to purchase the
acquiree. Of course, FSP Corp also acquired all the acquiree’s accounts payable and
accrued liabilities, and when FSP Corp settles those liabilities, ASC 230 requires those
outflows to be classified as operating, not financing.
Given that facts like these appear inconsistent with the transactions that the other-
than-insignificant financing element concept was intended to target (especially when
the derivative results in the physical delivery of an item used for operating purposes),
we rarely see the other-than-insignificant financing element guidance applied to
derivatives acquired in a business combination.
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Operating activities
Cash flows that are not investing or financing activities are operating cash flows.
Typically, operating cash flows are receipts and payments that enter into the
determination of net income.
Common examples of operating cash flows are:
□ Receipts from customers for sales of goods and/or services, as well as receipts
from short-term and long-term receivables under normal trade terms that arose
from sales of goods and/or services
□ Interest and dividend receipts related to investments in other reporting entities or

deposits with financial institutions (i.e., returns on investment). Interest income
is considered received when the bank posts the entry to a reporting entity’s
account.
□ Payments to vendors for inventory or services (including cash expenditures for

advertising). Similarly, payments on short-term or long-term credit extended by
the supplier or its affiliate finance subsidiary for the purchase of inventory or
other goods and services under normal trade terms would also qualify as
operating. In contrast, payments on credit extended by an entity other than the
supplier or its affiliate finance subsidiary is a financing activity.
□ Payments to creditors for interest
□ Insurance proceeds related to operating activities (e.g., inventory losses or

business interruption). See FSP 6.7.1.6 for further details.
□ Cash receipts or cash payments resulting from the acquisition or sale of debt or
equity securities of other reporting entities classified as trading securities
pursuant to ASC 320-10 that are part of an investment strategy to actively buy and
sell securities with the objective of generating profits on short-term differences in
market prices
□ Payments of all income taxes
□ Payments made to settle an asset retirement obligation
□ Cash receipts and cash payments resulting from acquisitions and sales of loans
originally classified as loans held for sale. Cash flows should continue to be
classified as operating activities, even if the reporting entity subsequently
reclassifies the loans to be held for long-term investment.
□ Restructuring payments, including severance
□ Cash contributions made to employee benefit plans
The definition of operating activities in ASC 230-10-20 says that Cash flows from
operating are generally the cash effects of transactions and other events that enter
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into the determination of net income. Common transactions that enter into the
determination of net income, but are not classified as operating cash flows include:
□ Foreign currency transactions (see FSP 6.9 for further discussion)
□ Gains and losses on the disposal of property, plant, and equipment, and other
productive assets (see FSP 6.7.1 for further discussion)
□ Derivative transactions (see FSP 6.7.1.5 for further discussion)
□ Debt extinguishment costs (see FSP 6.7.2.2 for further discussion)
□ Discounts on debt instruments with coupon interest rates that are significant in
relation to the effective interest rate of the debt (see FSP 6.7.2.1 for further
discussion)
□ Specified portions of contingent consideration settlements made soon after the

acquisition (see FSP 6.7.1.2)
6.7.3.1 Planned major maintenance
The accounting for planned major maintenance allows two alternative methods: direct
expensing and deferral. While these methods impact the income statement and
balance sheet differently, we believe that the nature of expenditures related to planned
major maintenance requires these cash flows to be classified as operating in the
statement of cash flows, regardless of which accounting method the entity uses. This
view is consistent with comments issued by the SEC staff.
6.7.3.2 Distributions received from equity method investees
ASC 230 indicates that cash flows that represent a “return on investment” are
operating and those representing a “return of investment” are investing (except for
equity method investments for which the fair value option has been applied), but does
not define either term. Prior to the issuance of ASU 2016-15, ASC 230 did not contain
specific guidance to determine whether distributions received from equity method
investees were a “return on investment” or a “return of investment.” While diversity in
practice existed, the cumulative earnings approach was the predominant methodology
used by reporting entities to make this determination.
Upon the adoption of ASU 2016-15, a reporting entity must elect an accounting policy
to classify distributions received from equity method investees using either the
cumulative earnings approach or the nature of distributions approach. This election
must be made on an entity-wide basis for all equity method investments. However, as
explained below, certain facts and circumstances may require a reporting entity to
utilize both methods.
ASU 2016-15 indicates that neither method is appropriate for an equity method
investment measured using the fair value option, but does not provide further
guidance. Through analogy to the inherent nature of a derivative (see FSP 6.7 for
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further discussion), we believe that all distributions received from an equity method
investment measured using the fair value option should be classified as investing.
The methodologies to determine if a distribution, or portions thereof, from an equity

investee is a return on investment or a return of investment are as follows:
□ Cumulative earnings approach: The cumulative earnings approach is

predicated on the rebuttable presumption that distributions received from equity
method investees represent “returns on investment,” which ASC 230 indicates are
operating, and differentiates between returns on investment and returns of
investment by comparing cumulative distributions received by a reporting entity,
less distributions received in prior periods that were deemed returns of
investment, to its cumulative share of equity earnings (as adjusted for basis
differences). When cumulative distributions less distributions received in prior
periods that were deemed returns of investment are in excess of cumulative equity
earnings, such excess should be considered a return of investment, and classified
as investing cash flows.
□ Nature of the distribution approach: Under the nature of distribution

approach, distributions received are classified as either a return on investment or
a return of investment on the basis of the nature of the activity or activities of the
investee that generated the distribution, when such information is available.
Subsequent to the adoption of ASU 2016-15, if an entity that elected to apply the
nature of the distribution approach is no longer able to obtain the information
needed to apply that approach to distributions received from an individual equity
method investee, the entity should report a change in accounting principle on a
retrospective basis by applying the cumulative earnings approach for that
investee. In such situations, an entity should disclose that a change in accounting
principle has occurred with respect to the affected investees due to the lack of
available information.
Because the nature of distribution approach does not include a presumption that
distributions are returns on investment, investors will need to understand the facts
and circumstances for each distribution in order to determine the proper
classification. This will require the investor to obtain information about the nature of
distributions received from investees, but ASU 2016-15 contains no description of the
information needed to make such an assessment. What constitutes sufficient
information to apply the nature of distribution approach is a matter of judgment. The
process used by investors to determine classification should be systematic, rational,
and applied consistently from period to period.
The following examples demonstrate the determination of a return of investment

versus return on investment using the cumulative earnings approach.
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EXAMPLE 6-6
Return of investment versus return on investment under the cumulative earnings
approach
FSP Corp is a calendar year-end SEC registrant with a 20% equity investment in a
joint venture, EM Company. The initial cash investment by FSP Corp on January 1,
20X6 for the 20% interest is $25,000. The investment is accounted for as an equity-
method investment, and there is no basis difference between FSP Corp’s equity
investment and the underlying equity of EM Company.
FSP Corp’s share of EM Company’s income/loss) and the related share of dividend
distributions for the last four years are as follows:
Share of net income/(loss) Share of dividend distributions
12/31/20X6 (2,000) 1,000
12/31/20X7 (1,000) 1,000
12/31/20X8 5,000 3,000
12/31/20X9 6,000 3,000
How should the distributions be classified in the statement of cash flows for each of
these periods?
Analysis
The following table summarizes the impact to FSP Corp:
FSP Corp’s share
of EM Company’s
FSP Corp’s 20% cumulative FSP Corp’s
share of EM earnings since 20% share of
Company’s annual investment dividend Statement of cash flows
End of period net income/(loss) inception distribution classification
Operating Investing
12/31/20X6 $(2,000) $(2,000) $1,000 $1,000
12/31/20X7 $(1,000) $(3,000) $1,000 $1,000
12/31/20X8 $ 5,000 $ 2,000 $3,000 $2,000 $1,000
12/31/20X9 $ 6,000 $ 8,000 $3,000 $3,000
If the investor’s inception-to-date distributions are greater than the investor’s

inception-to-date earnings, the presumption is that the equity-method investee
utilized a portion of the funds initially invested to pay all, or a portion of, the cash
distributions. As noted above, FSP Corp received distributions for the years ended
12/31/20X6 and 12/31/20X7 of $1,000 each year, when EM Company incurred net
losses. As such, it is determined that EM Company paid the distributions from its
capital balance, which would be considered a return of investment and classified as an
investing inflow within FSP Corp’s statement of cash flows. For the year ended
12/31/20X8, the distribution received by FSP Corp was allocated between return on
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investment and return of investment because, even though FSP’s inception-to-date

distribution exceeded its inception-to-date earnings, for the first time FSP Corp’s
inception-to-date earnings were positive and therefore eligible to be considered as a
portion of the 20X8 distributions. For the year ended 12/31/20X9, FSP Corp’s
inception-to-date earnings exceeded the inception-to-date distributions adjusted for
prior period distributions that were previously deemed returns of investment, and
therefore the entire 20X9 distribution would be considered a return on investment
and classified as an operating activity within FSP Corp’s statement of cash flows.
EM Company’s historical retained earnings balance prior to FSP Corp’s investment of

$25,000 is not relevant for purposes of determining the classification of the
distribution in FSP Corp’s statement of cash flows. FSP Corp should only consider EM
Company’s earnings for purposes of the cumulative earnings approach beginning
when FSP Corp made its investment in EM Company.
EXAMPLE 6-7
Return of investment versus return on investment during interim periods under the
cumulative earnings approach
FSP Corp receives a dividend from its equity-method investee during an interim
period. Based upon an analysis of inception-to-date distributions compared to
inception-to-date earnings, it would appear the dividend received in the interim
period should be considered a return of investment and classified as an investing
inflow by the reporting entity. However, when forecasted earnings for the entire fiscal
year are considered, inception-to-date earnings are expected to be greater than
inception-to-date distributions. Thus, the dividend exceeds the investee’s current
quarterly earnings (and the inception-to-date earnings), but does not exceed
forecasted annual earnings.
How should the reporting entity classify the cash dividend received in its interim
period statement of cash flows – return of investment or return on investment?
Analysis
We believe that it is acceptable for a reporting entity to consider the investee’s

forecasted annual earnings in classifying dividends as either a return on or return of
investment under the cumulative earnings approach. We also believe it is acceptable
to analyze dividends received on a quarter-by-quarter basis without consideration of
the investee’s forecasted earnings. In either case, the reporting entity should reassess
its estimate throughout the year to reflect the nature of the dividends in the annual
statement of cash flows. The approach followed should be disclosed and consistently
applied in all periods for similar investments.
6.7.3.3 Transfers of trade receivables with holdbacks or deferred purchase price

structures
Reporting entities sometimes sell trade receivables to banks or asset-backed

commercial paper conduits, frequently under revolving financing arrangements, to
accelerate cash inflows. Sellers may not receive the entire purchase price in cash at the
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transfer date. Rather, the seller may receive only a portion of the purchase price
(which is classified as operating in the statement of cash flows), with the difference
consisting of a receivable from the bank or conduit. The repayment of that receivable
is contingent on the subsequent collections of the underlying trade receivables sold.
This deferred payment arrangement, representing a beneficial interest in the
transferred trade receivables, is commonly referred to as the “deferred purchase
price,” or “DPP.”
ASU 2016-15 requires that a transferor’s beneficial interest obtained in a

securitization of financial assets be disclosed as a noncash activity, and subsequent
cash receipts from payments on a transferor’s beneficial interests in securitized trade
receivables be classified as cash inflows from investing activities. 13 The EITF
supported this classification because US GAAP supports treating a transferor’s
beneficial interests like an investment security. In addition, an investing activity
classification is consistent with the structure of securitization transactions, whereby
the trade receivables are transferred to the securitization entity (i.e., the transferor
does not retain ownership of the trade receivables).
Cash flows with aspects of more than one class
Certain cash receipts and payments may have aspects of more than one class of cash
flow. ASC 230 recognizes that the most appropriate classification of an item may not
always be clear. In ASU 2016-15, the FASB provided the following guidance for
classifying cash flows that have aspects of more than one class of cash flows:
1) Apply specific GAAP addressing the statement of cash flow

classification (if any): A reporting entity should first apply specific
guidance in GAAP addressing statement of cash flow classification to classify a
discrete cash flow. For example, there is specific US GAAP that states that the
payment for settlement of a zero coupon bond should be bifurcated between
financing and operating cash flows. In addition, specific US GAAP requires
settlements of corporate owned life insurance to be reflected entirely as
investing cash flows.
2) Bifurcate: Bifurcate discrete cash flows into separately identifiable sources

or uses on the basis of the nature of the underlying cash flows, and then
classify each separately identifiable source or use as either investing,
financing, or operating. Judgment may be necessary to determine how and
when cash flows should be bifurcated, as well as to estimate the amount of
each separately identifiable source or use. In making these determinations,
look to the application of other US GAAP. For example, when a reporting
entity makes a quarterly payment on amortizing debt, it uses ASC 835 to
13This guidance reflects a change as a result of the issuance of ASU 2016-15. Previously, we believed that the
appropriate classification of subsequent collections of DPP receivables in the statement of cash flows
depended on if the transfer of the receivables giving rise to the DPP qualified for sale accounting under ASC
860, Transfers and Servicing. Typically, if the transfer qualified for sale accounting, this would have led to
an investing conclusion, based on the view that the DPP receivable has the characteristics of a collateral-
dependent debt instrument issued by a securitization entity. However, in instances when the DPP was
collateralized by short-term trade receivables, subsequent receipts may have been reflected as an operating
cash inflow, subject to certain conditions. Application of our pre-ASU 2016-15 guidance should continue
until the adoption of ASU 2016-15.
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determine the portion of the payment that relates to interest expense (which
enters into the determination of net income) and the portion related to
principal. For purposes of the statement of cash flow, the different natures of
these separately identifiable uses cause the interest expense portion to be
classified as operating and the principal portion to be classified as financing.
We generally believe the application of other US GAAP will be indicative of
when and how cash flows should be bifurcated. However, the model created
by ASU 2016-15 will sometimes require reporting entities to bifurcate discrete
cash flows even when such bifurcation is not required by other US GAAP. See
Example 6-7 for an illustration of Step 2.
3) Predominant activity: When a discrete cash flow has aspects of more than
one class of cash flows, but it cannot be bifurcated (see Example 6-8), the
appropriate classification should depend on the nature of the expected
predominant activity.
EXAMPLE 6-8
Classification of equipment purchases when the equipment is either sold or rented to
customers
FSP Corp recently developed a new patented process to detect certain chemicals in
waste water. Starting nine months ago, FSP began marketing their product to
municipalities and corporate entities that manage waste water. FSP charges a fee each
time their patented process is used to analyze a sample, and their commercial process
is dependent on a proprietary sampling device, installed at the customer’s location,
which collects samples that are then sent to FSP for analysis. FSP sells or rents (under
an operating lease) the sampling device at cost, as the economics of their business is
based solely on the fee charged to analyze a sample. Said differently, FSP is indifferent
between selling and renting sampling devices, and will therefore accommodate a
customer’s individual preference.
Since inception, of the 1,000 sampling devices acquired by municipalities, 500 have
been rented and 500 have been sold. Of the 500 sampling devices acquired by
corporate customers, 100 have been rented and 400 have been sold. In total, 40% of
the devices have been rented and 60% have been sold. FSP Corp expects future
sales/rentals to be consistent with their recent history. The sampling devices are
manufactured and assembled for FSP by a third party, which delivers new sampling
devices once a month. FSP usually keeps a three-month supply of sampling devices on
hand.
What is the appropriate classification in the statement of cash flows for the purchase
of 100 sampling devices from the third party manufacturer?
Analysis
Based on the inception-to-date statistics for all customers and the fact that FSP Corp
expects future sales/rentals to be consistent with their recent history, the cost of 40%
of the devices should be classified as investing (representing the devices that will be
carried as long-lived assets and rented to customers) and the cost of 60% of the
6-50 PwC
devices should be classified as operating (representing the devices carried as inventory

that will be sold to customers).
By analogy to ASC 230-10-45-12e, if a sampling device that was originally considered

a long-lived asset is instead sold to a customer (i.e., the transaction did not follow
original expectations), the sales proceeds should be classified as an investing inflow.
Correspondingly, if a sampling device that was originally considered inventory is
transferred to long-lived assets and rented to customers, any salvage proceeds
received at the end of the device’s productive life should be classified as operating.
These subsequent balance sheet reclassifications of carrying amounts between
inventory and long-lived assets are noncash activities. As a result, it would be
inappropriate to adjust the cash flow classification as a result of the balance sheet
reclassifications. Going forward, FSP should continue to analyze how sampling
devices are deployed, and modify the allocations between operating and investing, as
appropriate.
EXAMPLE 6-9
Classification of equipment purchases when the equipment is rented and later sold
FSP Corp operates a chain of rent-to-own facilities offering household appliances. It

purchases new appliances, rents the appliances to third parties for a period of time,
and subsequently sells the used appliances.
What is the appropriate classification in the statement of cash flows for the purchase
of the appliances?
Analysis
Cash flows associated with purchasing an appliance to be used to rent to customers

would be classified as investing. Cash flows associated with purchasing an appliance
to sell to customers would be classified as operating. Since FSP Corp plans to both
rent and sell each appliance, the cash flow to purchase the appliance has aspects of
both operating and investing activities. Accordingly, FSP Corp would need to
determine the nature of the activity that is likely to be the predominant source of cash
flows in order to determine how the cash flow for the purchase of the appliances
should be classified.
For example, assume FSP Corp expects to rent the new appliances for only a short
period of time before selling them, and therefore the amount of cash flows that FSP
Corp expects to receive from rental income as compared to the proceeds that FSP
Corp expects to receive from the sale of the appliances is relatively small. In such
circumstances, the appliances would appear to have the nature of an inventory item,
and accordingly the cash flows related to the purchase and sale of the appliances
should be classified as operating activities.
If, however, FSP Corp expects to rent the new appliances for a longer period of time
before selling them, and the amount of cash flows that FSP Corp expects to receive
from rental income as compared to the proceeds received from the sale of the
appliances is relatively large, then the appliances have the nature of a long-lived asset.
PwC 6-51
In this case, the cash flows related to the purchase and sale of the appliances should
be classified as investing activities.
Application of this predominance principle could have applicability to a wide range of

fact patterns. For example, upon disposition of a business, a reporting entity may have
historically classified the net proceeds (i.e., gross proceeds net of transaction costs
paid at closing) as an investing inflow. Given that there is no specific guidance related
to the classification of transaction costs, application of ASU 2016-15 seems to suggest
that the gross proceeds should be classified as an investing inflow, while the
transaction costs should be classified as an operating outflow. Accordingly, reporting
entities should thoughtfully consider how this aspect of ASU 2016-15 could impact
their statement of cash flows.
6.8 Discontinued operations

In April 2014, the FASB released ASU 2014-08, Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity, which requires reporting
entities to present in the statement of cash flows or disclose in a footnote either (1)
total operating and investing cash flows for discontinued operations, or (2)
depreciation, amortization, capital expenditures, and significant noncash operating
and investing activities related to discontinued operations. This guidance was applied
prospectively to all new disposals beginning in 2015.
Reporting entities may have historically reported information about cash flows from
discontinued operations that are incremental to what is required by ASU 2014-08. For
example, a reporting entity may have presented information about financing activities
or additional details of operating and investing activities. While ASU 2014-08 does
not require presentation or disclosure of cash flow information from discontinued
operations related to financing activities, a reporting entity is not precluded from
presenting or disclosing such information. Similarly, we do not believe a reporting
entity would be precluded from providing information about operating or investing
activities for discontinued operations that is incremental to the requirements of
ASU 2014-08 (e.g., line item detail).
Guidance prior to ASU 2014-08 did not require reporting entities to separately
present or disclose cash flows from discontinued operations. However, if a reporting
entity elects to disclose cash flows from a discontinued operation separately, it must
disclose such cash flows consistently. This presentation should be continued until all
material cash flows related to the discontinued operation have occurred. A reporting
entity’s method of disclosure for periods prior to the adoption of ASU 2014-08 should
follow one of the following five alternatives:
□ Cash flows from a discontinued operation and the continuing business are
presented together without separate identification within operating, investing,
and financing activities
□ Detailed line items of discontinued operation cash flows are separately reported
within operating, investing, and financing activities
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□ A total of discontinued operation cash flows are separately reported within

operating, investing, and financing activities
□ Operating, investing, and financing activities of the continuing business are

presented, and then discontinued operation cash flows are presented below
financing activities of the continuing operation showing detailed line items
comprising operating, investing, and financing cash flows of the discontinued
operation
□ Operating, investing, and financing activities of the continuing business are

presented, and then discontinued operation cash flows are presented below
financing activities of the continuing operation showing the total amount of
activities from operating, investing, and financing cash flows of the discontinued
operation
If a reporting entity separately discloses cash flows pertaining to discontinued

operations, it should identify the respective categories (operating, investing, and
financing). Including all cash flows from discontinued operations separate from the
continuing operation cash flows, without breaking them out into their respective
categories (e.g., reflecting the entire net change as part of operating cash flows), is
unacceptable. Doing so violates the provisions of ASC 230-10-45-24, which states, in
part, “A statement of cash flows for a period shall report net cash provided or used by
operating, investing, and financing activities…”
Questions have arisen about the proper presentation of cash receipts from the sale of a
discontinued operation when a reporting entity elects to break out its cash flows from
discontinued operations separate from continuing operations. We believe it is
acceptable to present the cash inflow as either continuing-investing or
discontinued-investing as long as such presentation is applied consistently and is
accompanied by transparent disclosure. However, we believe the more intuitive
treatment is to classify such sales proceeds as discontinued-investing cash flows.
The cash and cash equivalents line item on the balance sheet may not include all of an
entity’s cash and cash equivalents if the entity has a discontinued operation (disposal
group) with cash and cash equivalents included within the assets held for sale caption.
In such cases (regardless of which alternative described above is used), the traditional
format of the cash flow statement will need to be adjusted in order to reconcile to the
cash and cash equivalents line item on the balance sheet. In this instance, we believe
there are two acceptable presentation methods: (1) include a reconciling item after
financing activities and before beginning cash balances to reflect the change in cash
balances included in the held for sale caption, or (2) for purposes of the statement of
cash flows, add the cash and cash equivalents included in assets held for sale at the
beginning and end of the period to the respective balances in the cash line item from
the balance sheet and include a reconciliation of the ending cash balance in the
statement of cash flows to the cash reported in the balance sheet within a footnote.
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6.9 Foreign currency cash flows

A reporting entity with operations in foreign countries or with foreign currency
transactions must report the reporting currency equivalent of foreign currency cash
flows using the exchange rates in effect at the time of the cash flows. If the pattern of
cash flows and exchange rates are relatively consistent throughout the period, the
reporting entity may use an average exchange rate for translation, as the cash flow
results would not be significantly different from the result if actual exchange rates on
the day of the cash flows were used. However, if the pattern of cash flows is not
consistent or the exchange rates are volatile, a simple average of the rates at the
beginning and end of the period may not yield an appropriately-weighted average
exchange rate, especially for large and infrequent investing and financing
transactions. In such circumstances the rate in effect at the time of the transaction
should be disclosed.
Foreign currency activities require specific presentation on the statement of cash

flows as follows:
□ Foreign currency transaction gains and losses reported on the income statement
should be reflected as a reconciling item from net income to cash flows from
□ The effect of exchange rate changes on cash and cash equivalents denominated in
currencies other than the reporting currency should be a separate line item as part
of the reconciliation of the change in cash equivalents during the period
The effect of exchange rate changes on cash and cash equivalents reflected in the
statement of cash flows is not a “plug.” It is a balancing amount and may be proven
using the following formula:
The net cash flow activity for the The fluctuation in the exchange
period measured in the functional rates from the beginning of the
currency multiplied by the difference year to the end of the year
between the exchange rates used in + multiplied by the beginning cash
translating functional currency cash balance denominated in currencies
flows and the exchange rate at year other than the reporting currency.
end.
See Step 3 in Example 6-9 for further illustration of how to calculate this number.
Preparing the statement of cash flows for a reporting entity with foreign
operations
When preparing the statement of cash flows for a reporting entity with foreign
operations, the reporting entity should perform the following steps:
□ Step 1: The statement of cash flows for each distinct and separable operation
should be prepared on a standalone basis in its respective functional currency.
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□ Step 2: The statement of cash flows for each distinct and separable operation that
is a foreign entity (as defined in ASC 830) should be translated into the reporting
entity’s reporting currency.
□ Step 3: The reporting entity should prepare a consolidating statement of cash

flows using the individually translated statements of cash flows for each distinct
and separable operation. The effect of exchange rate changes on cash and cash
equivalents denominated in currencies other than the reporting currency should
be calculated for each distinct and separable operation.
Example 6-9 illustrates the preparation of a statement of cash flows for a reporting
entity with foreign operations. ASC 830-230-55 also includes an example of how to
calculate the effect of exchange rate changes on cash.
EXAMPLE 6-10
Statement of cash flows — foreign subsidiary
FSP Corp is located in the US and has one wholly-owned subsidiary, Britain Limited
(Britain).
Britain’s integrated manufacturing facility is in Great Britain, with the sales market
for its products mainly in Great Britain. Financing is primarily denominated in US
dollars. Financing from FSP Corp is in the form of a demand note, but settlement of
the note is not planned for, or anticipated in, the foreseeable future.
The functional currency of Britain is the British Pound (GBP). The reporting currency
for FSP Corp is the US Dollar (USD). The year-end for FSP Corp is December 31,
20X6.
The British Pound to US Dollar exchange rates are as follows:
Code Description GBP to USD

B Current rate, beginning of year GBP 1 = USD 1.45
E Current rate, end of year GBP 1 = USD 1.55
A Average rate for the year GBP 1 = USD 1.50
R Rate in effect at time of transaction GBP 1 = USD Varies
Britain sold a piece of equipment with a net book value of 20,000 GBP and received
proceeds of 10,000 GBP. The exchange rate on the date of the transaction was GBP 1 =
USD 1.46.
Britain made one property, plant, and equipment purchase for 155,000 GBP. The
exchange rate on the date of purchase was GBP 1 = USD 1.47.
Britain paid cash dividends of 100,000 GBP. The exchange rate on the date of the
dividend was GBP 1 = USD 1.54.
Britain has a bank note denominated in US dollars. There were no payments or

additional borrowings on the bank note. As a result of movements in the exchange
rate, a transaction gain of 26,000 GBP was recorded at 12/31/20X6.
PwC 6-55
Britain has an intercompany note denominated in US dollars. There were no

payments or additional borrowings on the intercompany note. As a result of
movements in the exchange rate, a transaction gain of 9,000 GBP was recorded at
12/31/20X6.
The GBP to USD exchange rate is deemed to not have significantly fluctuated
throughout the period.
The balance sheet for Britain in GBP as of 12/31/20X5 and 12/31/20X6 is as follows:
Functional currency (GBP)

12/31/20X5 12/31/20X6 Change
Assets
Cash and cash equivalents 256,000 457,000 201,000
Accounts receivable 225,000 250,000 25,000
Inventory 478,000 500,000 22,000
Property, plant and equipment, net 1,000,000 1,050,000 50,000
Total assets 1,959,000 2,257,000 298,000
Liabilities
Accounts payable 300,000 340,000 40,000
Accrued expenses 120,000 190,000 70,000
Debt, denominated in USD 413,000 387,000 (26,000)
Debt, denominated in GBP 50,000 50,000 –
Debt, intercompany 138,000 129,000 (9,000)
Deferred income taxes 100,000 80,000 (20,000)
Total liabilities 1,121,000 1,176,000 55,000
Common stock 500,000 500,000 –
Retained earnings 338,000 581,000 243,000
Total stockholders’ equity 838,000 1,081,000 243,000
Total liabilities and stockholders’ equity 1,959,000 2,257,000 298,000
The income statement and changes in retained earnings for Britain in GBP for the
year ended 12/31/20X6 is as follows:
Functional currency (GBP)

12/31/20X6
Revenue 2,000,000
Cost and expenses
Cost of sales 1,000,000
Selling and administrative expenses 341,000
Interest expense 86,000
Depreciation 85,000
Loss on sale of equipment 10,000
Foreign currency transaction gain (35,000)
Total costs and expenses 1,487,000
Income before income taxes 513,000
Current 190,000
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Deferred (20,000)
Total provision for income taxes 170,000
Net income 343,000
Retained earnings, beginning 338,000

Cash dividends (100,000)
Retained earnings, ending 581,000
How should FSP Corp prepare Britain’s statement of cash flows as of 12/31/20X6 in
US dollars?
Analysis
Step 1:
Prepare the statement of cash flows in Britain’s functional currency (GBP) based on
the changes in assets, liabilities, and stockholders’ equity noted. Refer to the table
contained in Step 2 for an illustration.
The transaction gain created by the USD denominated debt balances is reflected in the
reconciliation of net income to operating cash flows.
Step 2:
Translate the functional currency statement of cash flows into the reporting currency,
USD.
Step 1 Step 2
GBP USD
12/31/20X6 Code Exchange Rate 12/31/20X6
Cash flows from operating activities
Net Income 343,000 A GBP 1 = USD 1.50 514,500
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 85,000 A GBP 1 = USD 1.50 127,500
(Gain) loss on sale of equipment 10,000 R GBP 1 = USD 1.46 14,600
(Gain) loss on foreign currency exchange
rates (35,000) A GBP 1 = USD 1.50 (52,500)
Deferred income taxes (20,000) A GBP 1 = USD 1.50 (30,000)
Change in operating assets and liabilities
Accounts receivable (25,000) A GBP 1 = USD 1.50 (37,500)
Inventory (22,000) A GBP 1 = USD 1.50 (33,000)
Accounts payable 40,000 A GBP 1 = USD 1.50 60,000
Accrued expenses 70,000 A GBP 1 = USD 1.50 105,000
Net cash provided by operating activities 446,000 668,600
Cash flows from investing activities

Proceeds from sale of equipment 10,000 R GBP 1 = USD 1.46 14,600
Purchases of property, plant and equipment (155,000) R GBP 1 = USD 1.47 (227,850)
Net cash used in investing activities (145,000) (213,250)
Cash flows from financing activities

Payment of dividends (100,000) R GBP 1 = USD 1.54 (154,000)
Net cash used in financing activities (100,000) (154,000)
PwC 6-57
Effect of exchange rate changes on cash — 35,800

Change in cash 201,000 337,150
Cash, beginning of the year 256,000 B GBP 1 = USD 1.45 371,200
Cash, end of the year 457,000 E GBP 1 = USD 1.55 708,350
Because the pattern of cash flows and the GBP to USD exchange rate has not
significantly fluctuated throughout the year, an average exchange rate can be used to
translate most of the cash flows from operating activities (Code “A” in the example
above). For specific transactions such as dividends, significant purchases, and
dispositions of equipment, the rate in effect at the time of transaction should be used
(Code “R” in Example 6-9).
Step 3:
Upon consolidating the statement of cash flows of each distinct and separable
operation, the reporting entity should record elimination entries for the reporting
currency equivalent of intercompany transactions. Since the information for FSP
Corp’s US operations has not been provided in this example, the consolidating
statement of cash flows for FSP Corp is not presented. However, the effect of exchange
rate changes on cash held by Britain is presented below.
When a reporting entity holds cash and cash equivalents in a currency other than the
reporting currency, the resulting transaction gains and losses and translation
adjustments are not cash flows, but should instead be reported within the effect of
foreign currency exchange rates on cash and cash equivalents.
Calculation of effect of exchange rate changes on cash

Code Calculation Result
Effect on beginning cash balance
Beginning cash balance in local currency 256,000
Net change in exchange rate during the year (E - B) 0.10
Effect on beginning cash balance 25,600
Effect from operating activities during the year

Cash provided by operating activities in local currency 446,000
Year-end exchange rate E 1.55
Operating cash flows based on year-end exchange rate 691,300
Operating cash flows reported in the statement of cash flows 668,600
Effect from operating activities during the year 22,700
Effect from investing activities during the year

Cash provided by investing activities in local currency (145,000)
Investing cash flows based on year-end exchange rate (224,750)
Investing cash flows reported in the statement of cash flows (213,250)
Effect from investing activities during the year (11,500)
Effect from financing activities during the year

Cash provided by financing activities in local currency (100,000)
Financing cash flows based on year-end exchange rate (155,000)
Financing cash flows reported in the statement of cash flows (154,000)
Effect from financing activities during the year (1,000)
Effect of exchange rate changes on cash 35,800
6-58 PwC
6.10 Noncash investing and financing activities

ASC 230 requires separate disclosure of all investing or financing activities that do not
result in cash flows. This disclosure may be in a narrative or tabular format. The
noncash activities may be included on the same page as the statement of cash flows, in
a separate footnote, or in other footnotes, as appropriate.
ASC 230-10-50-4 provides examples of noncash investing and financing transactions:
□ Converting debt to equity
□ Acquiring assets by assuming directly related liabilities
□ Obtaining an asset by entering into a capital lease14
□ Obtaining a building or investment asset as a gift
□ Exchanging noncash assets or liabilities for other noncash assets or liabilities
Other examples include:
□ Issuing stock in connection with a stock compensation plan where no cash

payment is required
□ Obtaining a residual interest in a securitization
□ Acquiring a business through the issuance of stock
ASC 230-10-45-13(c) indicates that payments at the time of purchase or soon before
or after purchase to acquire plant, property, or equipment and other productive
assets are investing activities. This phrase does not mean that cash flows can be
reflected in a statement of cash flows before they occur. The words “or soon before or
after purchase” are intended to highlight that some payments made subsequent to the
acquisition of a long-lived asset should be classified as investing (i.e., payments made
shortly after acquisition of the long-lived asset according to normal trade terms),
while other payments made subsequent to the acquisition of a long-lived asset should
be classified as financing (i.e., the timing of the payments are not consistent with
normal trade terms and instead indicate that the long-lived asset was acquired with
debt financing). Determining if the payment terms received by a reporting entity are
consistent with the trade terms the seller normally makes available to its other
customers is an important consideration when evaluating if seller financing was
provided.
Separately, reporting entities may undertake transactions in which cash is received or

disbursed on its behalf by another entity. ASC 230 does not address these situations.
As explained in FSP 6.10.1, we believe a reporting entity may be able to recognize
14 After adoption of ASC 842, Leases, caption will read “obtaining a right-of-use asset in exchange for a lease
liability.”
PwC 6-59
those cash flows as if they had received or disbursed the cash from its bank account
under a constructive receipt and disbursement concept.
Constructive receipts and disbursements
Numerous processes and protocols have developed in which financial institutions or

other entities act as quasi-agents on behalf of reporting entities in regard to transfers
of cash. Thus, a reporting entity may have certain transactions that do not result in an
exchange of currency or an entry into its cash account, but for which the same
economic results are obtained as if an exchange of currency or an entry into its cash
account had occurred.
For example, assume a reporting entity engages a lender to service its customer cash
receipts that are mailed to a lockbox. Per the lockbox servicing arrangement, at the
end of each business day the lender is obligated to transfer all funds received to the
reporting entity’s account at another bank. While not addressed in the lockbox
servicing arrangement, on the last day of every month the lender does not transfer
that day’s lockbox receipts to the reporting entity’s bank account, and instead, the
reporting entity wires the lender funds equal to the difference between the principal
and interest payment on its loan from the lender, and that day’s lockbox receipts.
In this situation, the question arises as to whether this netting should be reflected as a
noncash transaction, or if it should gross up its statement of cash flows to reflect that
cash was constructively received from a customer (an operating inflow) and then cash
constructively disbursed to the lender in the form of principal and interest (a
financing outflow and operating outflow). While we generally do not believe that
noncash investing and financing activities should be included in the statement of cash
flows, it may be appropriate in certain situations for reporting entities to invoke
constructive receipt and constructive disbursement.
Judgment is required when determining if constructive receipt and constructive

disbursement is appropriate. Generally, we believe if the processes or protocols that
allow a reporting entity not to be directly involved in a cash flow are predicated on
convenience, then constructive receipt and disbursement may be considered.
However, if a reporting entity’s lack of direct involvement in a cash flow was by design
such that the reporting entity was purposely excluded from the cash exchange, then
constructive receipt and disbursement should not be considered.
Examples of noncash investing and financing activities
The following examples demonstrate the identification and presentation of noncash

investing and financing activities.
EXAMPLE 6-11
Noncash investing or financing activity — purchased equipment not yet paid for
On December 20, 20X6, FSP Corp purchases and takes title to equipment costing
$100, and accordingly debits property, plant, and equipment and credits accounts
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payable. As of December 31, 20X6, FSP Corp has not yet made cash payment to settle
the accounts payable.
How should the equipment acquisition be reflected in FSP Corp’s December 31, 20X6
statement of cash flows?
Analysis
Until FSP Corp has made a cash payment related to the equipment, the equipment
acquisition is a noncash activity that should not be reflected in the statement of cash
flows. Understanding if FSP Corp’s equipment acquisition is a noncash activity
requires an understanding of the words “or soon before or after purchase.”
Regardless, it would be incorrect to include a $100 investing outflow and a
corresponding $100 operating inflow (created by the increase in accounts payable) in
FSP Corp’s December 31, 20X6 indirect method statement of cash flows, because
neither of those cash flows occurred.
EXAMPLE 6-12
Noncash investing and financing activity — equipment partially financed by a note
FSP Corp acquires computer equipment for $100 cash and a $400 installment note
payable to the seller. Providing installment notes payable to its customers is not a
normal trade term for the seller.
How should the $100 cash payment be recorded in the statement of cash flows? How
should the $400 installment note payable to the seller be reflected?
Analysis
The $100 cash payment should be reported as an investing activity outflow and
included with purchases of property, plant, and equipment. The noncash investing
and financing transaction of $400 should be disclosed.
The subsequent principal payments on the debt should be classified as financing cash
outflows, whereas the payments of interest on the debt should be classified as
operating cash flows.
Alternatively, if the $400 was borrowed from a third-party lender who disbursed the
funds to the buyer, the loan would be a financing cash inflow and the full purchase
price of the equipment would be an investing cash outflow.
6.11 Considerations for private companies –

updated May 2017
The requirements of ASC 230, as amended by ASU 2016-15 and 2016-18, apply
equally to SEC registrants and private companies.
Figure 6-2 summarizes the presentation and disclosure items discussed in this chapter
that are only required for SEC registrants.
PwC 6-61
Figure 6-2
Compensating balances must be segregated

on the balance sheet SEC FRP 203.02.b 6.5.6
Restricted cash must be segregated on the

balance sheet S-X 5-02(1) 6.5.7
Based on the guidance in ASC 210-10-45-4, we believe private companies may present
cash and restricted cash together in one caption on the balance sheet, provided: (1) the
legally-restricted cash relates to a current asset or liability (for example, a short-term
borrowing), and (2) there is disclosure of the restricted amounts in the footnotes. If
the restricted cash relates to a long-term borrowing, it should be a noncurrent asset.
6-62 PwC
Chapter 7:
Earnings per share (EPS)
PwC 7-1

The objective of earnings per share (EPS) is to measure the performance of an entity over
a reporting period. This chapter highlights key provisions for the computation,
presentation, and disclosure of EPS.
The chapter explains several methodologies used in computing EPS and highlights some
of the key considerations in determining how to include particular instruments and
transactions, including financing transactions and stock-based compensation awards, in
EPS.
The chapter also includes sample computations of both basic and diluted EPS.
7.2 Scope
ASC 260, Earnings Per Share, requires the presentation of EPS for all entities that have
publicly traded common stock or potential common stock, e.g., options or warrants. A
public market includes a stock exchange (domestic or foreign) or over-the-counter
markets, including circumstances where the securities are quoted only locally or
regionally.
Presentation of EPS is also required for a reporting entity that has made a filing or is in
the process of filing with a regulatory agency in preparation for the sale of securities in a
public market.
Private companies may elect to report EPS provided they comply with the guidance in
ASC 260.
ASC 260-10-15-3 states that the presentation of EPS is not required for investment
companies that comply with the requirements of ASC 946, Financial Services—
Investment Companies, or in the financial statements of wholly-owned subsidiaries.
SAB 98 includes information that should be considered that is incremental to ASC 260,
including SAB Topics 1.B (carve-out entities), 3.A (convertible securities), 4.D (nominal
issuances), 6.B (income or loss applicable to common stock), and 6.G (quarterly per share
results).
New guidance
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, results in

some changes to the EPS treatment of stock-based compensation.
7.3 Types of EPS computations

ASC 260-10 requires the reporting of both basic and diluted EPS for each reporting
period.
□ Basic EPS
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Computed by dividing income available to common stockholders by the number of

weighted average common shares outstanding
Figure 7-1
Summary of basic EPS
** Presumes the securities are not considered participating securities
□ Diluted EPS
Computed by dividing income available to common stockholders, adjusted for the

effects of the presumed issuance of potential common shares, by (1) the number of
weighted average common shares outstanding, plus (2) potentially issuable shares,
such as those that result from the conversion of a convertible instrument or exercise
of a warrant.
In other words, diluted EPS is basic EPS adjusted for the hypothetical effect of
potentially dilutive securities.
Figure 7-2
Summary of diluted EPS
7.3.1 Basic EPS
EPS should be presented for income from continuing operations, if applicable, and for net
income on the income statement.
PwC 7-3

Basic Earnings Per Share: The amount of earnings for the period available to each share
of common stock outstanding during the reporting period.
Basic EPS is detailed in FSP 7.4.
7.3.2 Diluted EPS
Reporting entities with outstanding potential common stock should present diluted EPS
for income from continuing operations, if applicable, and net income with equal
prominence on the face of the income statement.

Diluted Earnings Per Share: The amount of earnings for the period available to each
share of common stock outstanding during the reporting period and to each share that
would have been outstanding assuming the issuance of common shares for all dilutive
potential common shares outstanding during the reporting period.
Diluted EPS is detailed in FSP 7.5.
7.3.3 Presentation of basic and diluted EPS
Reporting entities should present EPS for each class of common stock for all periods for
which an income statement is presented. If the reporting entity reports diluted EPS data
in one period, it should report it for all periods presented, even if the amounts are the
same as basic EPS. If basic and diluted EPS are the same amount for all periods, dual
presentation can be accomplished in one line. If the reporting entity elects to present a
single statement of comprehensive income, EPS should be presented after net income
and before OCI. Reporting entities are not required to present EPS for preferred stock,
but can elect to do so.
In SAB Topic 6.B, the SEC staff requires that income or loss available to common
stockholders be presented on the income statement when it is materially different from
reported net income or loss. While the SAB acknowledges that a materiality assessment
consists of quantitative and qualitative factors, it highlights that for differences of less
than 10%, the staff would generally not insist on disclosure on the income statement.
Refer to Figure 7-3 for examples of adjustments which can create differences between net
income and income available to common stockholders.
The terms “basic EPS” and “diluted EPS” are used in ASC 260 to identify EPS data to be
presented. However, ASC 260-10-45-4 notes they are not required captions in the income
statement; terms such as “earnings per common share” and “earnings per common
share—assuming dilution,” respectively, are acceptable alternatives.
A reporting entity that reports a discontinued operation should present basic and diluted
EPS amounts for that line item either on the income statement or in the notes. However,
if disclosure of these amounts in the notes is elected, basic and diluted EPS for continuing
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operations, if applicable, and for net income, must still be presented on the income
statement. ASC 260-10-55-49 illustrates the presentation of the captions on the income
statement.
Other per-share performance measures
ASC 225-20-45-16 precludes disclosure of the EPS effects of individual events or

transactions on the face of the income statement. Therefore, the EPS impact of
restructurings, charges subject to ASC 420, Exit or Disposal Cost Obligations, and
impairments, may not be presented on the face of the income statement. Reporting
entities may disclose such EPS effects in the footnotes.
ASC 230-10-45-3 prohibits presentation of cash flow per share. Similarly, SEC FRP
202.04 notes that per share data other than that relating to net income, net assets, and
dividends should be avoided in reporting financial results.
If the reporting entity chooses to report per-share amounts not required by ASC 260,
such amounts should be computed in accordance with ASC 260 and presented only in the
notes (i.e., not on the face of the financial statements) and labelled as pretax or net-of-tax.
7.3.4 Disclosure related to EPS
ASC 260-10-50-1 requires a reporting entity to disclose the following for each period for
which an income statement is presented:
□ For basic and diluted EPS, a reconciliation of the numerators and denominators for
income from continuing operations
The reconciliation should include the individual income and share amount effects of
all securities that affect EPS. ASC 260-10-55-51 provides an example of this
presentation.
□ The effect of preferred dividends on income available to common stockholders in

computing basic EPS
□ Securities that were anti-dilutive for diluted EPS for the period(s) presented but
which could potentially dilute EPS in the future (the concept of anti-dilution is
addressed in FSP 7.5.1)
A reporting entity should provide a description of any subsequent event that occurs after
the end of the most recent balance sheet, but before issuance of the financial statements,
that will materially change the number of common shares or potential common shares
outstanding. Examples of those events may include:
□ the issuance or acquisition of common shares
□ the resolution of a contingency under a contingent stock agreement
□ a stock dividend or stock split
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In certain circumstances, pro forma EPS may be required as well. Refer to FSP 7.6.1 for
details.
ASC 505, Equity, requires reporting entities to disclose participation rights on its
outstanding securities (see ASC 505-10-50-3). Refer to FSP 7.4.2 for details.
Lastly, a reporting entity should also disclose its accounting policy election for the
treatment of the accretion of capitalized interest in applying the if-converted method for
diluted EPS. Refer to FSP 7.5.6.1 for details.
7.4 Basic EPS

Basic EPS is computed as:
Income available to parent company common stockholders

(the “numerator”)
Weighted average number of common shares outstanding
(the “denominator”)
The numerator may be impacted by transactions with preferred stockholders (dividends,

accretion, repurchases, etc.) and by the required allocation of income to other classes of
securities with participation rights.
The denominator may be impacted by share issuances and repurchases, as well as certain
forward share purchase agreements, vested stock-based compensation awards, and
certain contingent share arrangements.
7.4.1 Numerator
The starting point for the calculation of the numerator is income from continuing
operations and net income (after allocation of income to noncontrolling interests under
ASC 260-10-45-11A, if applicable). The reporting entity adjusts these amounts by
deducting (1) dividends declared in the period on preferred stock (whether or not paid),
and (2) cumulative dividends on preferred stock (whether or not declared), regardless of
the form of payment of the dividends (e.g., cash, stock, or other assets).
When a stock dividend on preferred stock is paid in another class of stock, the reporting
entity should capitalize retained earnings to the extent of the fair value of the dividend.
See FG 5.4.4.1 for further information. As discussed in ASC 260-10-45-12, dividends
declared on preferred stock that are payable in the reporting entity’s common shares
should be deducted from earnings available to common shareholders when computing
earnings per share. Accordingly, an adjustment to net income for preferred stock
dividends is required regardless of the form of the payment (whether the dividend is paid
in cash, common shares, or additional preferred shares of the same or another class).
When there is a loss from continuing operations or net income, the adjustment for
preferred dividends will increase the loss. Preferred dividends that are cumulative only if
earned should be deducted only to the extent they are earned.
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In addition, the reporting entity should deduct any amount of undistributed earnings
allocated to participating securities from the numerator. Refer to FSP 7.4.2.2 for details.
There are a number of other adjustments to arrive at the numerator, as illustrated in

Figure 7-3.
Figure 7-3
Possible adjustments made in computing income available to common stockholders for
basic EPS
Adjustments for cumulative undeclared dividends
A reporting entity may not be required to record undeclared dividends on cumulative

preferred stock in its accounting records. However, the absence of accounting for
undeclared dividends on cumulative preferred stock does not change the requirement to
include the cumulative undeclared dividends in the EPS computation.
There are two common situations in which the accounting for the cumulative undeclared
preferred dividends would differ from the EPS treatment. In these instances, the
reporting entity is not required to record the accumulated undeclared dividends in its
balance sheet, but should still deduct the cumulative undeclared dividends from the EPS
numerator.
□ Perpetual cumulative preferred stock
Because there are no redemption features in perpetual preferred stock, the preferred
stock is classified within permanent equity. As such, no dividend entry is recorded in
the balance sheet or the statement of stockholders’ equity for any undeclared
dividends.
□ Cumulative preferred stock that is redeemable only upon a change of control of the
reporting entity, the redemption price includes cumulative undeclared dividends,
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the reporting entity has not declared any preferred stock dividends, and the change
in control is not probable at the reporting date
While the preferred stock would be classified as mezzanine equity on the balance
sheet for reporting purposes, the redemption feature is contingent, and, therefore,
accretion to the redemption price (including undeclared cumulative dividends) is not
necessary until the redemption event is probable. In such cases, reporting entities
should disclose why redemption of the security is not probable. When redemption
becomes probable, the cumulative undeclared dividends would increase the
mezzanine equity carrying value. Only dividends declared are reported as dividends
payable.
If the reporting entity subsequently declares preferred dividends that had accumulated
over prior periods, it should only reduce the numerator by the dividends related to the
current period, as the amounts related to the prior periods would have already been
included in the EPS computations of the prior periods.
Adjustments for accretion/decretion of equity
The accretion/decretion of equity, such as mezzanine equity, should be considered in the

calculation of the numerator.
The impact of accretion/decretion on the computation of EPS may vary depending on

whether the mezzanine equity is common stock, preferred stock, or a noncontrolling
interest issued by a subsidiary.
Impact of mezzanine equity in the form of common stock
ASC 480-10-S99-3A requires common stock reported as mezzanine equity that is

redeemable at an amount other than fair value to be treated as having a right to
distributions that differs from other common stockholders. As such, changes in the
mezzanine carrying amount generally impact income available to common stockholders.
ASC 480-10-S99-3A, paragraph 21 (FN 17), provides two acceptable approaches for
allocating earnings to a common security that is redeemable at other than fair value. A
reporting entity should make an accounting policy election to either:
□ Treat the entire adjustment to the security’s carrying amount as being akin to a
dividend, or
□ Treat the portion of the adjustment to the security’s carrying amount that reflects the
change during the period in the amount by which the redemption price exceeds fair
value as being akin to a dividend.
The impact may result in either an increase or decrease in income available to common
stockholders. However, under either approach, increases cannot exceed the cumulative
amount previously reflected as a reduction of income available to common stockholders.
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For common stock that is redeemable at fair value, no adjustment to the EPS numerator
is required because redemption at fair value is not considered an economic distribution
different from other common stockholders.
Paragraph 21 (FN 18) of ASC 480-10-S99-3A also states that common stock redeemable
based on a specified formula is considered to be redeemable at fair value if the formula is
designed to approximate fair value. However, a formula based on a fixed multiple of
EBITDA does not approximate fair value, as the appropriate multiple for determining fair
value may change over time.
Example 7-1 illustrates how to calculate income available to common stockholders when
mezzanine equity in the form of common stock is redeemable for cash at an amount other
than fair value.
EXAMPLE 7-1
Accretion of mezzanine common stock in the calculation of the numerator for basic EPS
FSP Corp has 200 outstanding shares of common stock. One hundred shares of the
common stock are redeemable for cash at an amount other than fair value.
During the reporting period, there is a $100 increase in the redemption value of the stock
($20 of which is in excess of changes in the stock’s fair value) and income of $500.
How should FSP Corp determine the numerator for basic EPS?
Analysis
The numerator depends on FSP Corp’s accounting policy choice. If FSP Corp elects to
treat the entire adjustment as being akin to an actual dividend, the numerator would be
$400 ($500 less $100). If it elected to treat only the portion of the adjustment that is in
excess of fair value as being akin to an actual dividend, the numerator would be $480
($500 less $20).
Impact of mezzanine equity in the form of preferred stock
Any accretion/decretion of preferred stock classified as mezzanine equity should

reduce/increase the numerator. Decretion can only be recorded to the extent of prior
accretion on that instrument, until actual redemption occurs (see FSP 7.4.1.3).
Impact of mezzanine equity in the form of a noncontrolling interest in a

consolidated subsidiary
The same EPS concepts for parent-issued common and preferred mezzanine equity apply
to noncontrolling interests in the form of common and preferred equity.
For mezzanine equity-classified noncontrolling interests in the form of preferred stock,

presentation of the impact to the numerator may vary, depending on the terms of the
redemption feature. If the redemption feature in the preferred securities is issued or
guaranteed by the parent, the resulting increases or decreases in the carrying amount of
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the redeemable noncontrolling interest are treated in the same manner as dividends on
nonredeemable stock. Therefore, increases or decreases in the carrying amount of a
redeemable preferred stock will reduce or increase the numerator in the computation of
the parent’s EPS.
If the subsidiary issued the preferred security (not guaranteed by the parent), the
adjustment is attributed to the parent and the noncontrolling interest in accordance with
ASC 260-10-55-20 and Example 7 in ASC 260-10-55-64 through 55-67. As explained in
these references, the per-share earnings of the subsidiary are included in the consolidated
EPS computations based on the consolidated group’s holding of the subsidiary securities
pursuant to the two-class method at the subsidiary level.
For mezzanine equity-classified noncontrolling interest in the form of common stock, no

adjustment is needed if the common stock is redeemable at fair value, as redemption at
fair value is not considered an economic distribution different from other common
stockholders. For mezzanine equity-classified noncontrolling interest in the form of
common stock that is redeemable at a value other than fair value, the manner in which
the adjustments affect the numerator may differ, depending on how a reporting entity
considers the terms of the redemption feature in its calculation of net income attributable
to the parent.
If the terms of the redemption feature are fully considered in the attribution of net
income to the parent, the reporting entity would not adjust the numerator, as it has
already been included in the attribution of net income. However, if the terms of the
redemption feature are not considered in the attribution of net income, then the parent
adjusts its numerator for the impact of the redemption feature.
Adjustments for redemption or induced conversion of preferred stock
ASC 260-10-S99-2 notes that in a redemption of preferred stock when the fair value of
consideration paid upon redemption exceeds the carrying amount, net of its issuance
costs, the excess represents a return to preferred stockholders, and the difference should
be deducted from the EPS numerator. Reporting entities should deduct the commitment
date beneficial conversion feature (BCF) related to the preferred stock from the fair value
of consideration paid. Refer to FG 9.7 for a more detailed discussion of beneficial
conversion features.
The calculation is as follows:
Carrying
Fair value of original value, net of Adjustment
minus less equals
consideration BCF issuance to
transferred costs numerator
When the consideration is less than the carrying amount, for example, when a
redemption is effected at a discount to the carrying amount of the preferred security, the
reporting entity should add the difference between the carrying amount and the
consideration to the EPS numerator.
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This guidance applies to redemptions of convertible preferred stock regardless of whether

the embedded conversion feature is “in-the-money” or “out-of-the-money” at the time of
redemption. Example 7-2 illustrates the impact of a redemption of preferred stock on the
computation of basic EPS.
EXAMPLE 7-2
Impact of redemption of preferred stock on the calculation of basic EPS
FSP Corp issued perpetual preferred stock on January 1, 20X5 that is convertible in four
years. The par value (and issuance price) of the convertible preferred stock is $1,000,000.
The convertible preferred stock also contains a beneficial conversion feature with an
intrinsic value of $200,000 on the commitment date1. The BCF is recorded as a discount
on the preferred stock, with a related credit to APIC, and is being amortized to the first
date at which the preferred stock is convertible.
On December 31, 20X6, FSP Corp paid shareholders $1.2 million in cash to redeem the
preferred stock.
What is the impact of the redemption of the convertible preferred stock on the calculation
of basic EPS?
Analysis
The difference between the fair value of the consideration transferred to preferred
stockholders less the original BCF, and the carrying value of the preferred stock,
including any amortized discount related to the BCF, is treated as a “deemed dividend” to
preferred shareholders and results in a reduction to the numerator in the computation of
basic EPS.
In this example, the reduction to the numerator in the computation of basic EPS is
determined as follows:
Fair value of consideration transferred $1,200,000
Less: BCF (at original intrinsic value) (200,000)
Less: Carrying value of preferred stock (950,000)1
Reduction in numerator related to “deemed dividend” $50,000
1
$1,000,000 par value less $50,000 remaining discount associated with the BCF.
If a reporting entity issues preferred shares that are conditionally redeemable (e.g., at the
holder’s option, or upon the occurrence of an uncertain event not solely within the
1The accounting model for reacquisition of debt securities that contain a BCF and its impact on the gain/loss on
extinguishment in ASC 470-20-40-3 differs from that of preferred stock, which is in ASC 260-10-S99-2. See FG
9.7.10.2.
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reporting entity’s control) and the uncertain event occurs, the condition is resolved, or the
event becomes certain to occur, then the shares become mandatorily redeemable under
ASC 480, and would require reclassification from mezzanine equity to a liability.
ASC 480-10-30-2 requires the issuer to measure the liability initially at fair value, and
reduce equity by the amount of the initial measurement, recognizing no gain or loss in the
income statement. This reclassification of shares to a liability is akin to the redemption of
such shares by the issuance of debt.
Similar to the accounting for the redemption of preferred shares in ASC 260-10-S99-2, if
the fair value of the liability differs from the carrying amount of the preferred shares upon
reclassification, the reporting entity should deduct the difference from, or add to, the
numerator (i.e., as a deemed dividend or as a return from preferred stockholders).
ASC 810-10-40-2 provides guidance that a redemption of a subsidiary’s preferred stock,

either directly by the subsidiary or by its parent, that is not classified as a liability in the
parent’s consolidated balance sheet, is treated in the parent’s consolidated financial
statements as an equity transaction and not recorded in the income statement. The
related retained earnings charge or credit is reflected in EPS in the same manner
described above.
While ASC 260-10-S99-2 states that the excess consideration requires an adjustment to
the numerator, it does not address the treatment of the redemption of preferred stock of a
subsidiary when that subsidiary’s operations will be classified as a discontinued
operation. We believe that, because the adjustment is directly associated with the
subsidiary being discontinued, it should be attributed to discontinued operations in
computing EPS.
Additionally, ASC 260-10-S99-2 indicates that in an induced conversion of preferred

shares, the excess of the fair value of securities issued over the fair value of securities
issuable pursuant to the original contractual conversion terms also represents a return to
preferred stockholders and should reduce the numerator of EPS.
Question 7-1
A reporting entity issued warrants (which have been classified as equity) to certain
common stockholders who are not also lenders, customers, vendors, or others who would
have a commercial relationship with the company. During the exercise period, the
reporting entity induces the warrant holders to early exercise by offering the warrant
holders additional common shares if the warrants are exercised by a certain date.
Does the issuance of the additional shares offered as an inducement to early exercise
impact earnings per share?
PwC response
Yes. Because there is incremental value being transferred to a group of equity holders, the
fair value of the inducement provided to the warrant holders should be considered an
allocation against income applicable to common stockholders in the computation of
earnings per share based on the guidance in ASC 260-10-S99-3. Because the value is only
transferred to a sub-group of common stockholders, it is akin to a preferential
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distribution to that group and is reflected in EPS even though there is no impact to net
income in this fact pattern.
Adjustments related to beneficial conversion features
For convertible preferred securities, any amortization of the discount resulting from an
allocation of proceeds to a BCF is analogous to a dividend. The reporting entity should
recognize the amortization as a return to the preferred stockholders (a deemed dividend),
following the guidance in ASC 470-20-30. The deemed dividend should be deducted from
the numerator.
The reporting entity should also consider the deemed dividend when determining the
dilutive impact of the convertible security in the computation of diluted EPS. That is, the
adjustment to the numerator should be reversed if conversion is assumed.
For convertible debt securities, the discount created by recording the beneficial
conversion feature represents an adjustment of the effective interest rate of the security,
and the reporting entity should reflect it as a charge to interest cost.
For basic EPS, convertible debt instruments with BCFs would not result in an adjustment
to the numerator, as the interest cost is already included in net income. However, the
interest on the debt (inclusive of amortization of the discount), net of associated tax, is
added back to the numerator if the security is assumed to be converted for purposes of
calculating diluted EPS.
7.4.2 Participating securities and the two-class method
The capital structures of some reporting entities include:
□ Securities that may participate in dividends with common stock according to a

predetermined formula (for example, two for one) with, at times, an upper limit on
the extent of participation (for example, up to, but not beyond, a specified amount
per share).
□ A class of common stock with different dividend rates from those of another class of
common stock but without priority or senior rights.
These characteristics represent participation rights and should be considered in the

computation of basic EPS.

Participating Security: A security that may participate in undistributed earnings with
common stock, whether that participation is conditioned upon the occurrence of a
specified event or not. The form of such participation does not have to be a dividend—that
is, any form of participation in undistributed earnings would constitute participation by
that security, regardless of whether the payment to the security holder was referred to as
a dividend.
In accordance with ASC 260-10-45-60A, any securities meeting the definition of a

participating security, irrespective of whether the securities are convertible,
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nonconvertible, or potential common stock securities, are included in the computation of

basic EPS using the two-class method.

The two-class method is an earnings allocation formula that treats a participating security
as having rights to earnings that otherwise would have been available to common
shareholders…
Overview of the two-class method
The key to applying the two-class method is identifying the instruments that, in their
current form (e.g., prior to exercise, settlement, conversion, or vesting), are entitled to
receive dividends if and when declared on common stock.
The reporting entity is required to allocate any undistributed earnings between the
common stockholders and the participating security holders based on their respective
rights to receive dividends, as if all undistributed earnings for the period were distributed.
A participating security, including those which are noncumulative, will reduce EPS
regardless of whether dividends are actually paid, because the two-class method allocates
earnings away from common stockholders to the participating security holders. This
process is explained in FSP 7.4.2.2.
The reporting entity is not required to present basic and diluted EPS for participating
securities, other than a second class of common stock, under the two-class method, but it
is not precluded from doing so.
The following figure illustrates when and how to use the two-class method in computing
basic EPS.
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Figure 7-4
EPS decision tree
Allocating undistributed earnings to participating securities
Reporting entities need to allocate undistributed earnings for the period to a participating
security based on the contractual participation rights of the security to share in those
earnings, as if all of the earnings for the period had been distributed. However, if the
terms of the participating security do not specify objectively-determinable,
nondiscretionary participation rights, undistributed earnings would not be allocated
based on arbitrary assumptions.
In addition, if a reporting entity can avoid a distribution of earnings to a participating

security, even when all of the earnings for the period are distributed, the reporting entity
would not allocate undistributed earnings to that participating security.
The use of the two-class method requires an assumption of the hypothetical distribution
of all earnings each period to all common stock and participating security holders
according to the terms of the securities. Reporting entities should consider whether there
are preferential distribution rights between classes of common or other participating
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security holders, or whether the distributions are made without preference between
classes of common stockholders and other participating securities’ classes.
As required by ASC 260-10-45-60B, reporting entities should perform the hypothetical

distribution of all earnings, regardless of whether those earnings would actually be
distributed from an economic or practical perspective, and regardless of whether there
are other legal or contractual limitations on its ability to pay dividends (e.g., debt
covenants or state law considerations on the payment of dividends). The allocation of
undistributed earnings is generally based on the weighted average number of common
shares and participating securities outstanding for the period, not based on the shares or
participating securities outstanding at the end of the period.
When an entire class of participating securities is created, sold, converted, or redeemed

during the period, we believe a reporting entity has the option of performing the
allocation of undistributed earnings for the pre- and post-transaction period as an
alternative to the weighted average allocation. Under this method, net income for the pre-
and post-transaction portions of the period are allocated to the securities outstanding
during each respective portion of the period. This earnings allocation methodology may
be used only if the underlying accounting systems and controls provide that the net
income amount reflects all appropriate entries that a normal close process would include.
The allocation methodology is an accounting policy choice and should be consistently
applied.
Question 7-2
In some entities (especially those with noncorporate structures), all distributions may
follow a stated “waterfall” that requires that any distributions be first paid to Class A
preferred unitholders until those holders receive a compounded cumulative annual return
(e.g., 10%), as well as the return of all of their invested capital. Subsequent distributions
are then paid to other unitholders, including common units.
In such a situation, in calculating earnings per share under the two-class method, does
the hypothetical distribution of earnings in each period to all security holders following
the terms of the organizing documents mean that all book net income up to the amount of
invested capital of Class A preferred units should be allocated to the Class A preferred
units, as that is how cash would be distributed?
PwC response
No. When considering the allocation of earnings between classes of securities, the focus is
generally on the return on capital of each security, not the return of capital. As described
above, the two-class method is an allocation of earnings of the reporting entity. This
reflects the change in the net assets of the entity, and how each security holder shares in
those increases and decreases. It is often the case that a reporting entity may be
prohibited from paying any dividends on common stock while a class of preferred stock is
outstanding. This effectively operates in a similar economic fashion as the situation
described in the question but, as noted above, contractual limitations on the ability to pay
dividends are ignored in the application of the two-class method.
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Accordingly, we believe that in the above situation, earnings should generally be allocated
first to the Class A preferred unitholders for their 10% cumulative dividends, and then
shared between the common and preferred unitholders based on their right to receive
dividends once dividends are being paid to the different classes. To do otherwise would
often allocate all earnings in all periods to the preferred unitholders (as each year is
evaluated independently and if the principal is not actually paid, each year’s allocation
would assume that principal still needs to be paid), which we do not believe is consistent
with the sharing of earnings (i.e., increases in net asset value) of the reporting entity
between the classes of unitholders.
Allocating losses to participating securities
As noted in ASC 260-10-45-67 and 45-68, a reporting entity should only allocate losses to
convertible and nonconvertible participating securities if, based on the contractual terms
of the participating securities, the securities have a contractual obligation to share in the
losses of the reporting entity and the basis on which losses are shared is objectively
determinable.
ASC 26o-10-45-67 provides criteria to determine whether the holder of a participating

security has a contractual obligation to share in the losses.
Since this is often not the case, participating securities will generally be allocated earnings
in periods of net income, but not allocated losses in periods of net loss. Although this
treatment is not symmetrical, it is consistent with the notion that EPS should reflect the
most dilutive results. The reporting entity should determine whether a participating
security holder has an obligation to share in its losses in each period.
In computing year-to-date EPS, reporting entities should use year-to-date income (or
loss) in determining whether undistributed earnings should be allocated to participating
security holders. For example, if there is a quarter-to-date loss but year-to-date income
for a given period, the year-to-date EPS computation should include an allocation to
participating security holders even if the quarter-to-date computation did not.
We believe the discussion of allocating losses in ASC 26o-10-45-67 and 68 was written in
the context of preferential securities. If the participating security is a second class of
common stock (such as a nonvoting class with different dividend rates) that shares
equally in residual net assets, losses would generally be allocated equally to each class of
common stock.
Allocating losses to restricted stock
Restricted stock may share in residual net assets after it vests because, once vested, the
fair value of the restricted stock would reflect any losses that have been incurred.
However, unvested restricted shares do not share in residual net assets and, therefore, do
not economically absorb the loss. As such, reporting entities should not allocate losses to
unvested restricted shares.
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Example 7-3 illustrates how to apply the two-class method to participating securities.
EXAMPLE 7-3
Application of the two-class method of EPS
FSP Corp has 10 million shares of common stock and 2 million shares of convertible
preferred stock (issued at $10 par value per share) outstanding.
FSP Corp’s net income is $50 million.
Each share of preferred stock is convertible into 3 shares of common stock.
The preferred stock participates on a 1:1 basis in any common dividends that would have
been payable had the preferred stock been converted immediately prior to the record date
of any dividend declared on the common stock (i.e., as-converted basis).
At year-end, FSP Corp pays dividends of $2 per share to the common stockholders and
$6 per share to the preferred stockholders, since each preferred share converts into 3
common shares.
How would FSP Corp compute basic EPS under the two-class method?
Analysis
Step 1: Calculate the undistributed earnings
Net income $50,000,000
Less dividends declared:
Common stock ($20,000,000)1
Participating preferred stock (12,000,000)2 (32,000,000)
Undistributed earnings $18,000,000
1
10 million shares x $2 dividend/share
2
2 million preferred shares x $6 dividend per preferred share
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Step 2: Allocate undistributed earnings to the two classes
To common:
[(Common shares outstanding) / (common shares outstanding + “as converted” shares of

preferred)] x undistributed earnings
[(10,000,000) / (10,000,000 + 6,000,000)] x $18,000,000 = $11,250,000
To preferred:
[(“As-converted” common shares) / (common shares outstanding + “as converted” shares

of preferred)] x undistributed earnings
[(6,000,000) / (10,000,000 + 6,000,000)] x $18,000,0o0 = $6,750,000
Step 3: Compute basic EPS for common stockholders
Less: Earnings attributable to preferred stockholders (18,750,000)1
Income available to common stockholders $31,250,000
Divided by common shares outstanding 10,000,000
Basic EPS $3.13
1
$12,000,000 dividend plus undistributed earnings of $6,750,000 allocated to preferred stockholders.
Applying master limited partnership guidance to other types of corporate

entities when allocating excess distributions
ASC 26o has certain provisions that specifically address the application of the two-class
method to master limited partnerships (as addressed in FSP 32) when cash distributions
exceed earnings for the period. We believe this guidance may be applied by analogy to
other types of corporate entities that have dividend distributions in excess of current
period earnings. Therefore, in these situations, if the participating securities are
contractually obligated to participate in the losses of the reporting entity, a portion of the
excess distribution is allocated to these security holders based on their contractual
participation in losses. If they do not participate in losses, all of the excess distribution is
allocated to common stockholders.
Example 7-4 illustrates how to apply the master limited partnership guidance when a
reporting entity has participating securities and dividend distributions in excess of
earnings.
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EXAMPLE 7-4
Allocating earnings to common shares when there are participating securities and
dividends in excess of earnings
FSP Corp reports net income of $1o million in the quarter ended June 30, 20X6, and has
9.5 million shares of common stock outstanding.
FSP Corp has granted 1 million shares of unvested restricted stock to certain employees.
The restricted stock is entitled to nonforfeitable dividends and, as such, is deemed to be a
participating security. Requisite service is expected to be rendered for all shares of
restricted stock.
During the quarter, FSP Corp pays dividends of $1/share, totaling $10.5 million ($9.5
million to the common stockholders and $1 million to the restricted stockholders).
How should FSP Corp allocate income to the common shares?
Analysis
By analogizing to the master limited partnership guidance, we believe FSP Corp may
allocate the excess of distributions over earnings to the common shares, as the restricted
shares have no obligation to participate in losses. As such, the excess of distributions over
earnings would be allocated as follows.
Common stock Restricted stock Total
Distributed earnings $9,500,000 $1,000,000 $10,500,000
Excess distributions (500,000) — (500,000)
Net income $9,000,000 $1,000,000 $10,000,000
Allocating earnings to participating securities when there is income from

continuing operations and an overall net loss, or loss from continuing
operations and overall net income
In a reporting period when there are different combinations of income and loss on
different line items, and the participating securities are not contractually obligated to
share in losses, there is no clear guidance in ASC 260 as to how earnings should be
allocated to participating securities. We believe an acceptable approach is to allocate
earnings to participating securities based on the “control number,” as discussed in
ASC 26o-10-45-18 and FSP 7.5.1.
The “control number” concept requires that income from continuing operations (adjusted
for preferred dividends, as described in paragraph ASC 260-10-45-11) be used to
determine whether potential common shares are dilutive or anti-dilutive. Using this
concept by analogy, if a reporting entity has income from continuing operations but
losses from discontinued operations resulting in an overall net loss, it could allocate the
loss using the two-class method. However, if there was a loss from continuing operations
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but income from discontinued operations results in overall net income, nothing would be
allocated to participating securities for any of the categories.
Another acceptable method is to treat each line item as an independent calculation and
only allocate earnings to participating securities for those line items for which income is
reported. There would be no allocation of losses to participating securities for those line
items for which a loss is reported.
For example, in a reporting period in which there is a loss from continuing operations,
gain from discontinued operations and overall net income, we believe an acceptable
approach is to not allocate losses from continuing operations to the participating
securities, as the participating securities do not have a contractual obligation to
participate in losses. However, the gain from discontinued operations and net income
would be allocated to participating securities. Under this method, the sum of the
individual EPS income statement line items would not reconcile to the total net income
per share.
Other allocation methods may also be appropriate. The reporting entity should make and
disclose an accounting policy election related to the allocation methodology and
consistently apply the policy elected.
Other securities which may be considered participating
Consistent with ASC 26o-1o-45-60A, potential common shares (securities or other

contracts that may entitle their holders to obtain common stock such as options,
warrants, forwards, or other contracts) may be participating securities if, in their current
form, they are entitled to receive dividends when declared on common stock.
Stock options, warrants, and other contracts to issue common stock
A nonforfeitable right to dividends is a non-contingent transfer of value and one in which

paid dividends are not forfeited if the award does not vest. ASC 260-10-45-61A notes that
an unvested share-based payment award that includes nonforfeitable rights to dividends
or dividend equivalents meets the definition of a participating security in its current
form—that is, prior to the requisite service having been rendered for the award. Share-
based payment awards that include forfeitable rights to dividends would not be
considered participating securities.
ASC 26o-10-45-68B discusses the computation of EPS when share-based payment

awards with nonforfeitable rights to dividends or dividend equivalents are present.
ASC 718, Compensation—Stock Compensation, requires that nonrefundable dividends or
dividend equivalents paid on awards for which the requisite service is not (or is not
expected to be) rendered be recognized as additional compensation cost, and that
dividends or dividend equivalents paid on awards for which the requisite service is (or is
expected to be) rendered be charged to retained earnings. As a result, a reporting entity
should not include dividends or dividend equivalents that are already accounted for as
compensation cost in the earnings allocation to participating securities because that
amount has already reduced net income. However, when allocating the remaining
undistributed earnings, all amounts attributable to the participating awards should be
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included, as these amounts are not reflected in compensation cost but will reduce what is
available for common shareholders either way.
A reporting entity should apply a change in the estimate of the number of awards for
which the requisite service is not expected to be rendered in the period the change in
estimate occurs. This change in estimate will affect net income in the current period;
however, a current period change in an entity’s expected forfeiture rate would not affect
prior period EPS computations. The example in ASC 26o-10-55-76A through 55-76D
(Case D: Participating Share-Based Payment Awards) illustrates this.
Reporting entities should allocate undistributed earnings to all outstanding share-based

payment awards that have nonforfeitable rights to dividends, including those for which
the requisite service is not expected to be rendered.
Convertible securities and options
Participation may not always involve the right to receive dividends in cash. For certain
securities, including share-based payment awards, dividends do not get paid to the
holders when declared on common stock. Instead, the conversion or exercise price of the
security may be adjusted for dividends to keep the holder whole. In some cases, those
adjustments may constitute participation rights.
Dividends or dividend equivalents transferred to the holder of a convertible security in

the form of an adjustment or reduction of the conversion price or an increase in the
conversion ratio of the security do not represent participation rights if conversion is
optional (i.e., at the election of either the holder or the reporting entity). This conclusion
also applies to other securities that could be converted into a reporting entity’s common
stock (e.g., options or warrants), if those securities provide for an adjustment to the
exercise price that is tied to the declaration of dividends by the issuer.
Since obtaining the benefit of an adjustment to the conversion or exercise price is

dependent on the actual conversion or exercise of the security, which may or may not
occur, these types of adjustments may not result in an actual transfer of value to the
holder of the security (they are referred to as contingent transfers of value) and are,
therefore, not a participation right. Accordingly, reporting entities need not allocate any
undistributed earnings to these securities.
However, if a convertible security has a mandatory conversion date, and if dividends or

dividend equivalents are transferred to the holder of the convertible security in the form
of a reduction of the conversion price or an increase in the conversion ratio of the
security, then such feature would represent a participation right, because the transfer of
value is not contingent on a decision to exercise (similar to a forward contract). In such
cases, the reporting entity would reflect the participating feature in EPS as a participation
right.
Forward contracts
A provision in a forward contract to issue a reporting entity’s own equity shares that
reduces the contractual price per share when dividends are declared on the issuing
entity’s common stock is a participation right, because it results in a non-contingent
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transfer of value to the holder of the forward contract for dividends declared during the
forward contract period.
Because a forward contract will be settled (i.e., it is not an option which could expire
unexercised), the value transferred to the holder is not contingent. Thus, a forward
contract in which the strike price is adjusted for dividends is a participating security,
regardless of whether a dividend is declared during the period the contract is
outstanding.
Variable share-settled instruments (such as FELINE PRIDES, ACES and

DECS)
Certain equity-linked securities involve arrangements with variable settlement features,

referred to as “variable share forwards,” or “variable share forward delivery agreements.”
These instruments are marketed by financial institutions by different proprietary names
(e.g., FELINE PRIDES, ACES, and DECS).
Variable share forward delivery arrangements differ from fixed-term forwards through
which the holder will always receive the benefit of dividends if declared (i.e., the transfer
of value is non-contingent). Under variable share forwards, the holder is required to pay a
certain amount of money to the reporting entity at the settlement date, and either of the
following will occur:
□ If the reporting entity’s stock price at settlement falls within the established range,
commonly referred to as the “dead zone,” there is no transfer of value, and the holder
receives a variable number of shares of reporting entity stock with value equal to the
contractual amount owed by the holder.
□ If the reporting entity’s stock price at settlement is above or below a certain range, the
holder receives a fixed number of shares of reporting entity stock and realizes a
benefit or loss.
The terms of these arrangements typically include a provision that, if the reporting entity
declares a dividend on common stock while the arrangement is outstanding, the stock
prices associated with the end points of the range, and the number of shares delivered
when the stock price at settlement is outside of the range, are adjusted according to a
formula. However, there is no adjustment to the number of shares delivered when the
stock price at settlement is within the range.
Economically, these securities act as a combination of a written call option and a

purchased put option, each with different strike prices. An adjustment to a potential
common security, such as convertible debt or a warrant, is typically not considered a
participation right because the value of the dividend is contingently received (i.e., only if
the option is exercised). In contrast, an adjustment to a forward sale contract in which the
holder will always receive the benefit of dividends if declared (i.e., there is always a
transfer of value) is considered a participation right. The issuer of a variable share
forward delivery agreement should determine whether any adjustment provisions
included in its contract convey a contingent or a non-contingent transfer of value.
Generally, a variable share forward delivery agreement is not considered a participating
security provided:
PwC 7-23
□ The agreement does not entitle the holder to participate in dividends if the final
settlement is within the range; and
□ At issuance, it is at least reasonably possible that the final settlement of the contract
will be at a price within the range.
To determine whether it is reasonably possible for a particular variable share forward

delivery agreement to settle at a price within the dead zone, the reporting entity may need
to perform a quantitative evaluation that incorporates:
□ The contractual terms of the agreement, including the method of adjusting for
dividends and the maturity date,
□ Volatility of the issuer’s stock,
□ Historical and expected dividends, and
□ The width of the dead zone, and whether the issuer’s stock price is inside or outside
the dead zone at issuance.
We believe the assessment as to whether these variable share forward agreements

constitute participating securities need only be performed at issuance of the instrument,
or upon a subsequent modification.
Mandatorily redeemable stock
Under ASC 480, Distinguishing Liabilities from Equity, mandatorily redeemable

financial instruments are accounted for as a liability. If these instruments have a right to
dividends declared on the common shares, they are considered a participating security.
Therefore, in computing the numerator, reporting entities should deduct any amounts,
including contractual (cumulative) dividends and participation rights (e.g., of senior
securities) in undistributed earnings that are attributable to mandatorily redeemable
financial instruments (regardless of form), unless those amounts have already been
recognized as interest in the income statement.
Targeted stock
Some registrants issue classes of stock that they characterize as “targeted” or “tracking”
stock. The dividend rates associated with these classes of stock differ and are based upon
the earnings of a specific business unit, activity, or assets of the registrant. As such, they
are subject to the two-class method of ASC 260.
Reporting entities with targeted stock should ensure they are compliant with the
contractual terms of the arrangement as to how the reporting entity’s overall earnings
would be allocated to the different classes of stock, especially if there are inter-unit
transactions that are eliminated in consolidation. The total amount of earnings
attributable to all the classes of stock under the two-class method for EPS purposes
should be equal to consolidated income. In addition, EPS with respect to any class of the
reporting entity’s securities should be presented only in the reporting entity’s
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consolidated financial statements, or in its related consolidated information, as that is the

entity that issued the stock, and not the targeted business.
7.4.3 Denominator
The denominator of the basic EPS computation starts with the weighted-average number
of common shares outstanding.

Weighted-average number of common shares outstanding: The number of shares
determined by relating the portion of time within a reporting period that common shares
have been outstanding to the total time in that period. In computing diluted EPS,
equivalent common shares are considered for all dilutive potential common shares.
The number of weighted-average common shares outstanding is the average of shares

outstanding and assumed to be outstanding (e.g., contingently issuable shares when the
contingency has been met). While a daily calculation would be the most precise, other
averaging methods may be used as long as they produce reasonable results. As noted in
ASC 260-10-55-2, methods that introduce artificial weighting are not acceptable. The
reporting entity should weight shares issued and shares reacquired during the period for
the portion of the period they were outstanding.
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Figure 7-5
Impact of selected securities on the denominator of basic EPS
Contingent shares
In accordance with ASC 260-10-45-12A, contingently issuable shares, including shares

issuable for little or no consideration, are included in the denominator for basic EPS only
when the contingent condition has been met and there is no longer a circumstance in
which those shares would not be issued. For example, if the issuance of shares were
subject to a shareholder vote, they would not be included in EPS until the vote occurs.
The shares are included in the computation of basic EPS as of the date that all conditions
have been satisfied (i.e., issuance of the shares is no longer contingent), even if the shares
are not legally issued until a later date.
However, awards for which restrictions have lapsed, and shares to be issued to settle a
deferred compensation obligation that may only be settled in shares (for example, Plan A
in ASC 710-10-25-15), are included as outstanding shares for basic EPS. Outstanding
common shares that are contingently returnable are treated in the same manner as
contingently issuable shares.
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Mandatorily convertible instruments
Current practice is not to include shares issuable pursuant to conversion of a mandatorily

convertible instrument in the computation of basic EPS as shares issuable for little or no
consideration.
In August 2008, the FASB issued an exposure draft (ED) that proposed amendments to
FASB Statement No. 128, Earnings Per Share (FAS 128), the source of ASC 260. The
Basis for Conclusions of the ED stated that the shares to be issued upon conversion of a
mandatorily convertible instrument should be included in basic EPS only if the holder has
the present right or is deemed to have the present right to share in current-period
earnings with common shareholders. As such, mandatorily convertible instruments
would only be included in the computation of basic EPS if they were considered
participating securities.
Although the 2008 ED was never issued, we believe that the proposed guidance reflects
the most current thinking of the FASB. As such, we believe that shares issuable pursuant
to a mandatorily convertible security should not be included in the computation of the
denominator of basic EPS, but should be included in the computation of diluted EPS
using the if-converted method. Such shares would be included in the numerator of basic
EPS only if the instrument was determined to be a participating security.
Prepaid variable share forwards
Prepaid variable share forwards require a company to issue a variable number of shares
at a future stipulated date. The number of shares to be issued is generally dependent on
the volume weighted average price of the company’s stock as of the stipulated
date.Generally, there is a minimum number of shares that will be issued. The August
2008 ED to amend FAS 128 stated the following:
Excerpt from August 2008 proposed amendment to FAS 128

The Board agreed that including an instrument in basic EPS that does not give the holder
the present ability to become a common shareholder provides an inaccurate depiction
that, in all cases, the holder has the same claim to current-period earnings as a common
shareholder even if the holder has stated participation rights that differ from common
shareholders. Accordingly, the Board decided that the holder of (a) an instrument that is
currently exercisable for little or no cost to the holder or (b) a share that is currently
issuable for little or no cost to the holder has the present ability to become a common
shareholder and, therefore, has the present right to share in current-period earnings with
common shareholders.
Although there seems to be some diversity in practice, we believe that the minimum
number of shares issuable pursuant to this type of contract generally should be included
in the weighted average number of shares outstanding in the computation of basic EPS.
In addition, we believe that any additional number of shares that would be issuable
pursuant to the contract based on the period-end stock price, assuming the reporting date
were the settlement date, should be included in diluted EPS.
PwC 7-27
If the condition is based on an average of market prices over some period of time (e.g., a
10-day average), the corresponding average for the period (i.e., the 10 days leading up to
the period-end date) should be used.
Restricted stock-based compensation awards
Unvested restricted stock or restricted stock units are excluded from the denominator of
basic EPS, because the employee has not yet earned the shares (i.e., there is still a further
“payment” in the form of future employee services). While the shares may be considered
legally issued and outstanding under the terms of the restricted stock agreement, they are
not considered issued for accounting purposes. Once vested, the reporting entity includes
the shares in basic EPS as of the vesting date, regardless of whether they have been legally
issued.
Unvested restricted stock that immediately vests upon an employee’s retirement is

included in the denominator in the computation of basic EPS at the earlier of (1) the
stated vesting date, or (2) the date the employee becomes eligible for retirement.
At the date the employee becomes eligible for retirement, any remaining stated vesting
period is considered nonsubstantive because issuance of the shares is not dependent on
any service after that date.
Employee stock options
Stock options are excluded from the basic EPS denominator because they are not
considered outstanding shares. However, at the time the options are exercised, they are
included in the denominator as outstanding shares.
Reporting entities should consider the substance, rather than the legal form, of all awards
to determine the appropriate EPS treatment. For example, unvested stock options that
allow the employee to “early exercise” but for which the reporting entity has the right to
repurchase the shares at the exercise price (or the lesser of the current fair value or
original exercise price) if the employee terminates employment prior to vesting should
not be included in the basic EPS denominator prior to the stated vesting date. The shares
issued upon early exercise are treated as contingently returnable pursuant to the
guidance in ASC 260-10-45-13 and still subject to a substantive vesting period, and,
therefore, should not be included in basic EPS.
Mandatorily redeemable common stock and common stock subject to

forward purchase contracts requiring physical settlement
ASC 480-10-45-4 requires the following to be excluded from the denominator: (1)
mandatorily redeemable shares of common stock requiring liability classification under
ASC 480, and (2) shares of common stock subject to forward purchase contracts that
require physical settlement of a fixed number of shares in exchange for cash.
Reporting entities may execute separate legal forward contracts that should be evaluated
together. For example, when two or more forward contracts, including one that is for a
fixed number of shares, together act as a forward contract on a variable number of shares,
the shares underlying the forward contracts should be included in the denominator for
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basic EPS. This is because, in substance, the settlement is not in a fixed number of shares
and so would not be excluded under the provision in ASC 480-10-45-4.
Forward contracts that do not meet the criteria above impact the computation of the
diluted EPS denominator under the guidance in ASC 260-10-45-35. Refer to FSP 7.5.5.9
for details.
Share lending agreements
A reporting entity that is a convertible bond issuer may enter into a share lending
agreement with an investment bank. A share lending agreement is intended to facilitate
the ability of investors, primarily hedge funds, to borrow shares to hedge the conversion
option in the convertible debt. They are often executed when the issuer’s stock is difficult
or expensive to borrow in the conventional stock loan market.
Typically, share lending arrangements require the issuer to issue shares to the investment
bank in exchange for a small fee, generally equal to the common stock’s par value and a
promise by the investment bank to return the loaned shares to the issuer upon conversion
or maturity of the convertible debt. The shares issued are legally outstanding, and are
entitled to vote and receive dividends. However, under the terms of the arrangement, the
investment bank may agree to reimburse the issuer for dividends received and may agree
to not vote on any matters submitted to a vote of the reporting entity’s stockholders.
ASC 470-20-45-2A states that loaned shares are excluded from EPS unless default of the
share lending arrangement occurs, at which time the loaned shares would be included in
the computation of basic EPS. If dividends on the loaned shares are not reimbursed to the
reporting entity, the reporting entity would deduct any amounts, including contractual
(accumulated) dividends and participation rights in undistributed earnings, attributable
to the loaned shares from the numerator, in a manner consistent with the two-class
method.
See FG 9.10.4 for a discussion of the recognition and measurement considerations of a

share lending arrangement.
Employee stock purchase plans (ESPPs)
Many companies offer ESPPs in which employees have a specified amount of their pay
withheld for purposes of purchasing the reporting entity’s shares at a discount to the then
current fair value. If employees can withdraw the amount of salary withheld during the
offering period or must remain employed through the end of the offering period in order
to purchase the shares, their continued participation in the plan is a contingency that can
only be satisfied at the end of the offering period. Until then, the contingency has not
been met, and shares calculated based on the employees’ withholding and the ESPP’s
terms would not be included in the denominator of basic EPS. In such circumstances, the
withholdings are a liability of the reporting entity that can be settled in cash or shares at
the option of the employee. To be included in the basic EPS denominator, the shares have
to be unequivocally issuable by the reporting entity.
If, however, the employee’s participation is irrevocable (even if employment was to

terminate), the employee has no ability to obtain a refund of the amounts withheld, and
PwC 7-29
the number of shares is fixed, there is no contingency. The reporting entity has received
cash and has an irrevocable obligation to issue the shares. Therefore, the reporting entity
would include the shares in the computation of basic EPS based on the amounts withheld
and the ESPP’s purchase price formula.
In our experience, it is unusual for an ESPP to allow an employee to continue to

participate in the plan after termination of employment; as a result, the employee is
generally refunded any amounts withheld upon termination. Therefore, shares issuable
under an ESPP are contingently issuable (i.e., based on continued employment) and will
typically not be included in basic EPS until the shares are actually purchased.
Penny warrants
As noted in ASC 260-10-45-13, shares issuable for little to no consideration (sometimes

referred to as “penny warrants”) should be included in the number of outstanding shares
used for basic EPS. There is no guidance on what is considered “little to no”
consideration, and whether this literature should be applied to unexercised warrants or
options. In their proposed amendments to pre-Codification FAS 128 (the source of
ASC 260) in 2008, the FASB proposed that warrants or options exercisable for little to no
cost be included in the denominator of basic EPS once there were no further vesting
conditions or contingencies associated with them. The vesting conditions are relevant as
future service is considered a form of “consideration.” Contingent shares are not included
in basic EPS until the contingency is resolved. Determination of what is considered little
to no consideration still requires judgment, and would typically be assessed at the
issuance (or grant) date of the instrument in relation to the stock price at that time.
7.5 Diluted EPS

Diluted EPS gives effect to all dilutive potential common shares outstanding during a
period. The computation of diluted EPS is similar to the computation of basic EPS except
that the denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had been
issued. The potential common shares are weighted for the period the instruments were
outstanding (i.e., as of the beginning of the period or the date of issuance, if later).
In computing diluted EPS, reporting entities may have to adjust the numerator used in
the basic EPS computation, subject to sequencing rules addressed in FSP 7.5.1, to make
adjustments for any dividends and income or loss items associated with potentially
dilutive securities that are assumed to have resulted in the issuance of common shares.
ASC 260-10-55-32 indicates that these income or loss items should also include the fair
value adjustments on instruments accounted for as liabilities, but which may be settled in
shares that would result from the assumed issuance of potential common shares.
Because the numerator and denominator used for basic EPS are the starting point in
computing diluted EPS, the concepts discussed in FSP 7.4 which address the computation
of basic EPS remain relevant when computing diluted EPS.
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Potential common stock: A security or other contract that may entitle its holder to obtain
common stock during the reporting period or after the end of the reporting period.
This definition encompasses options, warrants, convertible securities, and contingent

stock agreements.
Reporting entities should include dilutive instruments that are (1) issued, (2) expire
unexercised, or (3) are cancelled during the period in the denominator of diluted EPS for
the period they were outstanding.
Additionally, reporting entities should include dilutive instruments exercised during the
period in the denominator of diluted EPS for the period prior to exercise. Thereafter,
reporting entities include the actual shares issued in the denominator for both basic and
diluted EPS.
7.5.1 Anti-dilution and sequencing – the control number concept
Computations of diluted EPS should generally not give effect to any individual class of
potential common stock instrument for any period in which its inclusion would have the
effect of increasing EPS (or decreasing the loss per share) otherwise computed (i.e., it is
anti-dilutive).
Reporting entities use the control number concept to determine whether a potential
common stock instrument is dilutive. The control number to be used is income/loss from
continuing operations (adjusted for preferred dividends, as described in
ASC 260-10-45-20). The control number concept requires that the same number of
potentially dilutive securities applied in computing diluted EPS from continuing
operations be applied to all other categories of income or loss, even if they would have an
anti-dilutive effect on such categories.
For example, if a reporting entity were to report income from continuing operations, a
loss from discontinued operations, and a net loss, the number of potential common
shares used in the computation of diluted EPS from continuing operations would be used
in determining diluted per share amounts of loss from discontinued operation and net
loss, although this would result in reduced (or anti-dilutive) reported per share losses for
those items.
In determining whether potential common shares are dilutive or anti-dilutive, the

reporting entity should consider each issue or series of issues of potential common shares
separately, rather than in the aggregate.
To reflect maximum potential dilution, the reporting entity should consider each issue or
series of issues of potential common shares in sequence, from the most dilutive to the
least dilutive (refer to Example 4 in ASC 260-10-55-57 through 55-59). That is, dilutive
potential common shares with the lowest earnings per incremental share are included in
diluted EPS before those with higher earnings per incremental share. It would not be
PwC 7-31
appropriate to simply calculate the impact of all potential common shares in the
aggregate to determine if the end result is dilutive to basic EPS (see Example 7-21).
7.5.2 Participating securities
Reporting entities should consider the effects of participating securities when computing
diluted EPS. When there are participating securities, the computation under the two-class
method for basic EPS may be more dilutive than the diluted EPS computation (using
either the if-converted or treasury stock method, whichever is appropriate for that type of
instrument). For example, the allocation of net income to a participating share of
unvested stock that shares equally in all dividends with outstanding shares would be
based on the full weighted-average number of unvested shares. However, the number of
potential common shares that would be included for the unvested stock under the
treasury stock method would be lower than the nominal number of shares because of the
incorporation of unamortized compensation cost as “proceeds,” as described at FSP 7.5.5.
Therefore, the dilution to actual outstanding shares under the treasury stock method will
be smaller than the dilution under the two-class method.
In these cases, because of the anti-dilution provision in ASC 260-10-45-17 through 45-20,
conversion should not be assumed. Rather, the allocation of earnings to participating
security holders performed under the two-class method should be followed. Therefore,
the numerator should be reduced for both basic and diluted EPS, and since the
participating securities are not considered converted/exercised, the denominator should
not be adjusted.
The impact of participating securities on the calculation of diluted EPS for other types of
potential common shares is discussed at FSP 7.5.7 and 7.5.8.
7.5.3 Contingently issuable shares
Shares (including those issued in connection with a business combination) whose

issuance is contingent upon the satisfaction of certain conditions are considered
outstanding and included in the computation of diluted EPS as follows:
□ If all necessary conditions have been satisfied by the end of the period (the events
have occurred), the shares are included as of the beginning of the period in which the
conditions were satisfied (or as of the date of the contingent stock agreement, if
later).
□ If all necessary conditions have not been satisfied by the end of the period, the
number of contingently issuable shares to be included in diluted EPS is based on the
number of shares, if any, that would be issuable if the end of the reporting period
were the end of the contingency period (e.g., the number of shares that would be
issuable based on current period earnings or period-end market price), if the result is
dilutive. These contingently-issuable shares are included in the denominator of
diluted EPS as of the beginning of the period (or as of the date of the contingent stock
agreement, if later).
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General guidelines for the application of these principles for different types of
contingencies are as follows:
□ If attainment or maintenance of a specified amount of earnings is the condition, and

if that amount has been attained, the additional shares are considered to be
outstanding for the purpose of computing diluted EPS if their effect is dilutive. The
diluted EPS computation should include those shares that would be issued under the
conditions of the contract based on the assumption that the current amount of
earnings will remain unchanged until the end of the agreement, but only if the effect
would be dilutive. No projection of future results is made.
□ The number of shares contingently issuable may depend on the market price of the
stock at a future date. In that case, computations of diluted EPS should reflect the
number of shares that would be issued based on the current market price at the end
of the period being reported on, if their effect is dilutive. If the condition is based on
an average of market prices over some period of time (e.g., a 10-day average of
prices), the corresponding average for the period (i.e., the 10 days leading up to the
period-end date) is used.
□ If the number of shares contingently issuable depends on both future earnings and
future prices of the shares, the determination of the number of shares included in
diluted EPS must be based upon both conditions—that is, earnings to date and
current market price—as they exist at the end of the reporting period. Unless both
conditions are being met at the end of the reporting period, no contingently issuable
shares are included in diluted EPS.
□ If the contingency is based on a condition other than earnings or market price (for
example, opening a certain number of retail stores), the contingent shares are
included in the computation of diluted EPS based on the assumption that the current
status of the condition will remain unchanged until the end of the contingency period.
□ Each period is evaluated independently.
Outstanding common shares that are contingently returnable are treated in the same
manner as contingently issuable shares.
Example 7-5 illustrates the treatment of a business combination earn-out provision in the
computation of diluted EPS.
EXAMPLE 7-5
Impact of an earn-out based on earnings on diluted EPS when cumulative earnings
fluctuate
An earn-out provision for a 20X5 business combination is payable in shares if cumulative

earnings from the date of the business combination, January 1, 20X5, through December
31, 20X6 exceed a specified target.
The cumulative earnings target is first achieved in the 20X5 year-to-date fourth quarter
results.
PwC 7-33
Because of a loss in the first quarter of 20X6, cumulative results fall below the target at
the end of that period.
What is the impact on the EPS computation?
Analysis
The shares should be included in the denominator of diluted EPS from the beginning of
the fourth quarter for 20X5. They would not be included in diluted EPS before that time.
However, because cumulative results do not meet the target at the end of the first quarter
of 20X6, the shares would not be included in that quarter’s EPS computations and would
not be included again until the earnings target is achieved. Prior period EPS should not
be revised.
When the earn-out is classified as a liability, an adjustment also needs to be made to the
numerator in the EPS calculation related to the impact of any mark-to-market
adjustments. See FSP 7.5.6.
For contingently issuable financial instruments other than shares, e.g., a contingently
exercisable warrant, if the potential common shares may be assumed to be issuable based
on the conditions specified for its issuance as described above, the impact on the
computation of diluted EPS is determined by use of the treasury stock guidelines for
options and warrants (see FSP 7.5.5.1), the if-converted method for convertible securities
(see FSP 7.5.6), or the provisions for contracts that may be settled in stock or cash (see
FSP 7.5.7.1), as appropriate.
Year-to-date computations for contingent shares
As noted in ASC 260-10-45-49, for year-to-date computations, contingent shares are

included in diluted EPS on a weighted-average basis. That is, contingent shares are
weighted for the interim periods in which they were included in the computation of
diluted EPS. This methodology can result in a lack of comparability from quarter to
quarter. Moreover, the sum of quarterly EPS data will not necessarily equal cumulative
EPS data, and transactions considered dilutive or anti-dilutive in certain quarters may
not be in other quarters. This is illustrated in ASC 260-10-55-50.
Example 7-6 illustrates the treatment of contingent shares in the year-to-date diluted EPS
computation when the contingency is met during the year.
EXAMPLE 7-6
Impact of an earn-out on year-to-date diluted EPS
An earn-out provision for a 20X5 business combination is payable in shares if cumulative

earnings from the date of the business combination, January 1, 20X5, through December
31, 20X6 exceed a specified target.
The cumulative earnings target is first achieved in the 20X5 third quarter and remains
above the threshold at December 31, 20X5.
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What is the impact on the EPS computations in 20X5?
Analysis
In the year-to-date diluted EPS computation for 20X5, the shares associated with the
earn-out would be included as if issued on the first day of the third quarter of 20X5 (not
the first day of the year) on a weighted-average basis. The shares would also be included
in the quarterly EPS computation for the third and fourth quarters of 20X5. The shares
would not be included in the quarterly or year-to-date EPS computations for either the
first or second quarter of 2oX5 as the earnings target was not achieved at that time.
7.5.4 Methods of incorporating potentially dilutive securities in diluted EPS
The following figure summarizes which methods of including potentially dilutive

securities in diluted EPS should be used for various securities.
Figure 7-6
Methods of incorporating potentially dilutive securities in diluted EPS
7.5.5 Treasury stock method
The treasury stock method considers the dilutive effect of issued, exercised, or expired
options and warrants (and their equivalents) issued by a reporting entity in the
computation of diluted EPS for the period they were outstanding. Equivalents include
restricted stock, stock purchase contracts, and partially-paid stock subscriptions.

Treasury stock method: A method of recognizing the use of proceeds that could be
obtained upon exercise of options and warrants in computing diluted EPS. It assumes
that any proceeds would be used to purchase common stock at the average market price
during the period.
PwC 7-35
Like other types of potential common stock, each issue or series of issues should be
considered separately in determining whether potential common shares are dilutive or
anti-dilutive.
A nonrecourse note issued by an option holder to the reporting entity to exercise the
option should be treated as if the option remains outstanding. Accordingly, the
nonrecourse loan amount should be considered as exercise proceeds in the application of
the treasury stock method.
If the option holder issues a recourse note to the reporting entity to exercise the option,
the reporting entity should perform additional analysis to determine the substance of the
arrangement. The relevant factors are more fully described in SC 1.7.9.
Written options and warrants
Options and warrants that are equity-classified will be dilutive when the average market
price of the common stock during the period exceeds the exercise price (i.e., they are “in-
the-money”). Options and warrants that are liability-classified should be evaluated under
the guidance in FSP 7.5.7.1 pertaining to instruments settleable in cash or shares when
their presumed exercise would result in incremental common shares.
ASC 260-10-45-23 provides guidelines for applying the treasury stock method:
1. Assume exercise or settlement of the instrument at the later of the time of issuance or
the beginning of the period
2. Assume the proceeds from exercise or settlement have been used to repurchase the
reporting entity’s common shares at their average market price during the period
3. Include the incremental shares (shares assumed to be issued less shares assumed to
have been repurchased) in the denominator
Example 7-7 illustrates how to calculate the number of incremental shares that would
result from the assumed exercise of options for purposes of computing diluted EPS.
EXAMPLE 7-7
Application of the treasury stock method for warrants on common stock
FSP Corp has outstanding warrants to issue 500,000 shares of its common stock with a
strike price of $10 per share. These options are equity classified (i.e., derivative
accounting under ASC 815 is not required) and can only be settled in shares.
The average market price of the common stock during the period is $20.
How should FSP Corp include the warrants in the diluted EPS computation for the
period?
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Analysis
FSP Corp should include the incremental shares in the denominator of diluted EPS using
the treasury stock method. The incremental shares are calculated assuming the warrants
are exercised at the beginning of the period, as follows:
Step 1: Calculate the assumed proceeds
Assumed proceeds = Number of options x strike price

$5,000,000 = 500,000 x $10/share
Step 2: Calculate the shares to be repurchased
Shares = Assumed proceeds / average market price

250,000 shares = $5,000,000 / $20/share
Step 3: Calculate the incremental shares assumed to be issued
Incremental shares = Common shares issued upon exercise of warrants – shares to be

repurchased
250,000 shares = 500,000 shares – 250,000 shares
The assumed proceeds under the treasury stock method are calculated differently for
stock-based compensation awards. See FSP 7.5.5.5.
Purchased options
ASC 260-10-45-37 notes that purchased options (both purchased puts and calls) held by
the reporting entity on its own stock should not be included in the denominator of diluted
EPS because including them would be anti-dilutive. The put options would be exercised
only when the exercise price is higher than the market price, and the call option would be
exercised only when the exercise price is lower than the market price. In both instances,
their effect would be anti-dilutive under the treasury stock method and the reverse
treasury stock method, respectively. The reverse treasury stock method is addressed in
FSP 7.5.5.9.
Reporting entities may enter into arrangements that include two contracts: (1) a separate
purchased option, and (2) a written option. The changes in the value of the purchased
option and written option may offset or hedge each other. We believe it would generally
be inappropriate to combine the purchased option and the written option in the
computation of EPS (this is consistent with pre-Codification FAS 128, paragraph 112
(Basis for Conclusions)), unless these transactions were otherwise combined for US
GAAP. Conversely, if the reporting entity entered into a single contract for a net
purchased option (such as a “capped call option”), exclusion from the EPS computations
would generally be appropriate.
See FSP 7.4.3.6 for a discussion of arrangements involving multiple legal contracts.
PwC 7-37
Options or warrants to purchase convertible securities
Written options or warrants to purchase convertible debt or preferred stock (that is

classified as mezzanine equity) are liabilities under ASC 480-10-25-13.
Reporting entities should assume options or warrants to purchase convertible securities

are exercised when the average prices of both the convertible security and the common
stock obtainable upon its conversion are above the exercise price of the option or warrant.
However, reporting entities should not assume exercise unless they assume conversion of
similar outstanding convertible securities, if any. After considering the anti-dilution
sequencing rules, the reporting entity should determine the number of incremental
shares of the convertible security (which will then be converted to common stock) using
the treasury stock method similar to other options or warrants. There is no need to
impute interest or dividends on the incremental shares, as these items would be reversed
by the if-converted adjustments for the assumed conversions. See further discussion of
conversion adjustments in FSP 7.5.6.
Unit structures
In a unit structure, a reporting entity issues debt to an investment bank, which will be
remarketed to investors at a date in the future, and concurrently issues a forward sale
contract on its own shares. A unit structure is economically similar to convertible debt;
however, unlike convertible debt, the forward contract for the reporting entity’s shares is
legally detachable from the debt. Generally, the conversion option in convertible debt is
not separable from the debt. Further, in the case of a unit structure, the debt often
matures at a different (usually later) time than the forward contract does.
If the remarketing of the debt in the unit structure is successful, which is the expected
outcome, the investor will use the cash received from the remarketing to settle the
obligation under the forward. In the unlikely event of a failed remarketing of the debt, the
debt is tendered by the holder as payment upon the exercise of the forward contract.
We believe the reporting entity should use the treasury stock method for the forward
purchase contract to compute diluted EPS if the chances of a failed remarketing are
remote. In applying the treasury stock method, the reporting entity should determine the
number of shares to be issued based on the average stock price and the terms of the
forward contract.
The reporting entity should review the assumptions leading to this conclusion at the end
of each reporting period. If the chance of a failed remarketing of the debt is no longer
remote, the unit structure is, in effect, convertible debt under ASC 260-10-55-9. In that
case, the reporting entity should use the if-converted method to compute diluted EPS,
because the debt will be tendered by the investor in satisfaction of the investor’s
obligation under the forward contract.
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Stock-based compensation under the treasury stock method – before

adoption of ASU 2016-09
The calculation of assumed proceeds under the treasury stock method for stock-based
compensation awards requires additional considerations because the reporting entity can
receive the benefit of future service and tax benefits upon exercise, which are considered
additional proceeds.
The assumed proceeds under the treasury stock method include:
□ The exercise price of the stock options, if any
□ Average unrecognized compensation cost for future service
□ Any windfall tax benefits that would be credited to APIC when the award generates a
tax deduction
Reporting entities should calculate the windfall tax benefit using the average stock
price for the period. If there would be a charge to APIC (i.e., shortfall), such an
amount would be a reduction of proceeds. Shortfalls that would be charged to income
tax expense (i.e., because there is no pool of windfall tax benefits) should not be
included as a reduction of proceeds.
Although compensation cost is recognized only for awards that are expected to vest
(determined by applying the pre-vesting forfeiture rate assumption), all options and
shares outstanding that have not been forfeited are included in diluted EPS. In other
words, the amount of stock-based compensation cost in the numerator includes a
forfeiture rate assumption, while the number of shares in the denominator does not.
See Example 7-8 for an illustration of the difference between the compensation cost
recorded for share-based payment awards in the income statement and the amounts
included in the assumed proceeds calculation.
When calculating the assumed proceeds under the treasury stock method, reporting
entities should not include potential windfall tax benefits if the award does not ordinarily
result in a tax deduction (e.g., an incentive stock option), or if the reporting entity does
not believe it is more likely than not that such benefits will ultimately be realized.
This analysis should include consideration of the impact of ASC 718-740-25-10, which
does not permit a reporting entity to record windfall tax benefits until the deduction
reduces taxes payable (see SC 4.16 for further guidance) and consideration of future
taxable income. Further, the reporting entity should elect the same approach for
calculating the assumed proceeds as it does in evaluating the potential impact of
ASC 718-740-25-10 (i.e., with-and-without or tax law ordering). Reporting entities should
consider ASC 718-740-25-10 based on estimated annual taxable income.
ASC 718, Compensation-Stock Compensation, did not provide transition guidance (under
the “long-form” and “short-cut” methods to calculate the historical pool of windfall tax
benefits) for calculating the potential windfall tax benefit or shortfall under the treasury
stock method for awards that were partially or fully vested as of the adoption date. If a
PwC 7-39
reporting entity adopted ASC 718 under the modified prospective transition method, it
would have made an accounting policy decision to calculate potential windfalls and
shortfalls under the treasury stock method either: (1) including the impact of pro forma
deferred tax assets (i.e., the “as if” windfall or shortfall), or (2) excluding the impact of
pro forma deferred tax assets (i.e., the windfall or shortfall that would be recognized in
the financial statements upon exercise of the award).
Applying the treasury stock method to in-the-money options could be anti-dilutive if the
sum of the proceeds, including the unrecognized compensation and windfall tax benefits,
exceeds the average stock price. In that case, those options would be excluded from the
computation of diluted EPS. For example, if the average market price of the underlying
stock was $12, an option with an exercise price of $10 (i.e., $2 in-the-money), average
unrecognized compensation for the period of $4, and an estimated tax windfall of $1,
would be anti-dilutive because the assumed proceeds of $15 ($10 +$4 + $1) is greater
than the average market price of the underlying share of $12. As a result, these awards are
excluded from the diluted EPS denominator.
Conversely, it is possible that applying the treasury stock method to out-of-the-money

options could be dilutive as a result of including a potential tax shortfall in the calculation
of assumed proceeds. However, the FAS 123(R) Resource Group reached a consensus that
out-of-the-money options (i.e., based on a comparison of the strike price to the average
stock price) should not be included in the computation of diluted EPS, even if the
treasury stock method would result in the options having a dilutive effect. Because the
dilutive effect of each award is determined individually rather than for all outstanding
awards in the aggregate, reporting entities need to maintain detailed records of each
award, including the amount of unrecognized compensation cost and tax attributes
associated with each.
The conclusion that out-of-the-money options should not be included in the computation
of diluted EPS should not be analogized to other instances. For example, the effects of
potentially dilutive convertible debt would be included under the if-converted method,
even if the conversion price is out-of-the-money.
It may also be possible to have “negative proceeds” when applying the treasury stock
method (e.g., if the potential shortfall exceeds the sum of the exercise price and average
unrecognized compensation expense). When the assumed proceeds are negative, the
reporting entity cannot repurchase any common stock as a result of the exercise/vesting
of the award. Therefore, all outstanding shares for the award would be included in diluted
EPS. We do not believe it would be appropriate to assume a hypothetical “sale of common
stock” equal to the negative value of the assumed proceeds for the award such that the
number of shares included in diluted EPS exceeds the total number of shares issuable
under the award.
Stock options
Stock options with service conditions are included in the computation of the denominator
of diluted EPS using the treasury stock method if the option is dilutive. In computing
diluted EPS, reporting entities should include all outstanding options that are dilutive,
without considering the impact of a forfeiture-rate assumption applied for purposes of
recognizing compensation cost under ASC 718.
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Reporting entities should include stock options with performance or market conditions in
the computation of diluted EPS if the options are dilutive and if their conditions (1) have
been satisfied at the reporting date (the events have occurred), or (2) would have been
satisfied if the reporting date was the end of the contingency period (for example, the
number of shares that would be issuable based on current period earnings or period-end
market price). When making the determination, a reporting entity should not use
projections that look beyond the current reporting period. In essence, it should follow the
contingently issuable share guidance described in FSP 7.5.3.
For example, assume that a stock option has a performance condition under which the
option vests when earnings before interest, taxes, depreciation, and amortization
(EBITDA) reaches $15 million. At the end of the third quarter, EBITDA is $13 million and
the company believes that EBITDA will be $17 million at the end of the year. The option
would be excluded from the third quarter diluted EPS computation because the
performance condition had not been achieved as of the end of that period, as required by
ASC 260-10-45-51.
If the performance or market condition was satisfied, or would have been satisfied if the
performance or market metric was measured as of the reporting date, the stock options
would be included in diluted EPS from the beginning of the period (or date of grant, if
later) using the treasury stock method if the option is dilutive.
Stock options often contain both performance and market conditions. If the award vests if
either the performance or market condition is met, then assuming the options are
dilutive, the award would be included in the computation of diluted EPS if either
condition has been satisfied at the reporting date or would have been satisfied if the
reporting date was the end of the contingency period. If both conditions must be met in
order to vest, the award would be included in the computation of diluted EPS if the
options are dilutive and both conditions have been satisfied at the reporting date or
would have been satisfied if the reporting date was the end of the contingency period.
The accounting treatment for options with performance conditions under ASC 718
requires a probability assessment as to whether the option will vest; the accounting
treatment under ASC 260 does not call for an assessment of the probability of vesting.
Therefore, the numerator in the EPS computations may include compensation cost
related to the performance awards, but the performance awards themselves may be
excluded from the denominator.
The following examples illustrate the impact of stock options granted to employees on the
computation of diluted EPS.
EXAMPLE 7-8
Stock option with a service condition and windfall tax benefits (before adoption of ASU
2016-09)
Ten thousand nonqualified stock options were granted on January 1, 20X5, with an
exercise price of $10. Each stock option has a $4 fair value at the grant date. 25% of the
shares vest each year over a four-year period. The employee must be employed by the
reporting entity on each vesting date to become vested in each tranche.
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The reporting entity has elected a policy of straight-line attribution of compensation cost.
The assumed forfeiture rate is 5% each year. No options were forfeited during 20X5.
The market price of the common stock is: $10 on January 1, 20X5; $26 on December 31,
20X5; $18 average for 20X5.
Applicable tax rate is 40% for all periods. In each year, there is sufficient taxable income
such that the company realizes any windfall tax benefits generated from the exercise of an
award.
Treasury stock computation:
The treasury stock calculations use actual forfeitures rather than the forfeiture
assumption used for compensation cost recognition purposes. The results of the
calculations are hypothetical for EPS purposes and would not agree to the financial
statement amounts. The calculations are only used to determine the number of options to
include in the diluted EPS computation.
□ Hypothetical total book compensation expense = $40,000
$4 (fair value per option on grant date) multiplied by 10,000 (options outstanding)
□ Hypothetical expense will be recognized ratably over four years ($10,000 per year)
□ Hypothetical unrecognized compensation expense at December 31, 20X5 = $30,000
$40,000 (hypothetical total book compensation cost) minus $10,000 (hypothetical

book compensation cost recognized in 2014)
□ Hypothetical future total deferred tax asset = $16,000
$40,000 (total stock-based compensation expense for all outstanding options)

multiplied by 40% applicable tax rate
How many potential common shares should be included in diluted EPS for the year
ended December 31, 20X5 for these stock options, assuming the shares are dilutive at the
end of 20X5?
Analysis
The options are included in the diluted EPS computation by applying the treasury stock
method and assuming that the proceeds will be used to buy back shares. Proceeds equal
the hypothetical average unrecognized compensation, plus exercise price and
hypothetical windfall tax benefits (or a reduction for shortfalls that would be credited to
APIC).
□ Hypothetical average unrecognized compensation expense for 20X5 = $35,000
Average of $40,000 (hypothetical unrecognized compensation expense at January 1,

20X5) and $30,000 (hypothetical unrecognized compensation at December 31,
20X5)
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□ Hypothetical tax benefit at December 31, 20X5 = $32,000
10,000 shares (options assumed exercised) multiplied by ($18 (20X5 average stock
price) less $10 (exercise price)) multiplied by 40% (applicable tax rate)
□ Hypothetical windfall tax benefit = $16,000
$32,000 (hypothetical tax benefit) less $16,000 (hypothetical deferred tax asset once
all compensation expense has been recorded)
□ Assumed proceeds = $151,000
$100,000 (exercise price) plus $35,000 (hypothetical average unrecognized

compensation) and $16,000 (hypothetical windfall tax benefit)
□ Shares assumed repurchased = 8,389 shares
$151,000 (assumed proceeds) divided by $18 (20X5 average stock price)
□ Incremental shares to be included in the December 31, 20X5 diluted EPS

computation = 1,611 shares
10,000 (shares issuable upon exercise) minus 8,389 (shares assumed repurchased)
EXAMPLE 7-9
Stock option with a service condition and a tax shortfall (before adoption of ASU 2016-
09)
All of the assumptions are the same as in Example 7-8 except:
The market price of the reporting entity’s common stock is: $10 on January 1, 20X5; $17
on December 31, 20X5; $13.50 average for 20X5.
The reporting entity’s pool of windfall tax benefits as of December 31, 20X5, is $1,500.
How many potential common shares are included in diluted EPS for the year ended
December 31, 20X5 for these stock options, assuming the shares are dilutive at the end of
20X5?
Analysis
The options are included in the diluted EPS computation by applying the treasury stock
method and assuming that the proceeds will be used to buy back shares. Proceeds equal
the hypothetical average unrecognized compensation plus exercise price and hypothetical
windfall tax benefits (or a reduction for shortfalls that would be credited to APIC).
□ Hypothetical average unrecognized compensation expense for 20X5 = $35,000
Average of $40,000 (hypothetical unrecognized compensation expense at January 1,

20X5) and $30,000 (hypothetical unrecognized compensation at December 31,
20X5)
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□ Hypothetical tax benefit at December 31, 20X5 = $14,000
10,000 shares (options assumed exercised) multiplied by ($13.50 (20X5 average

stock price) less $10 (exercise price)) multiplied by 40% (applicable tax rate)
□ Hypothetical shortfall charged to APIC = $1,500
$14,000 (hypothetical tax benefit) less $16,000 (hypothetical deferred tax asset once
all compensation expense has been recorded) = $2,000 total hypothetical shortfall
The reporting entity should assess whether the shortfall would be recorded as a
reduction of APIC based on the reporting entity’s current pool of windfall tax
benefits. Since the reporting entity’s pool of windfall tax benefits is only $1,500, $500
of the hypothetical shortfall would be recognized in income tax expense. Therefore,
only $1,500 of the hypothetical shortfall is included as a reduction of assumed
proceeds.
$100,000 (exercise price) plus $35,000 (hypothetical average unrecognized

compensation) less $1,500 (hypothetical shortfall charged to APIC)
□ Shares assumed repurchased = 9,889 shares
$133,500 (assumed proceeds) divided by $13.50 (20X5 average stock price)
□ Incremental shares to be included in the December 31, 20X5, diluted EPS

computation = 111 shares
10,000 (shares issuable upon exercise) minus 9,889 (shares assumed repurchased)
Restricted stock
A reporting entity should include both of the following in its computation of diluted EPS
using the treasury stock method:
□ Unvested restricted stock with service conditions
□ Unvested restricted stock with a performance or market condition that is considered

contingently issuable shares pursuant to ASC 260-10-45-48
Assumed proceeds under the treasury stock method would include unamortized
compensation cost and potential windfall tax benefits or shortfalls. If dilutive, the
unvested restricted stock would be considered outstanding as of the later of the beginning
of the period or the grant date for diluted EPS computation purposes. If anti-dilutive, the
reporting entity would exclude it from the diluted EPS computation.
The following examples illustrate the impact of restricted stock granted to employees on
the computation of diluted EPS.
7-44 PwC
EXAMPLE 7-10
Restricted stock with a service condition and an IRC Section 83(b) election (before
adoption of ASU 2016-09)
Ten thousand shares of restricted stock are granted on January 1, 20X5. The shares are
legally issued and outstanding, and the employee is not required to pay for the restricted
stock. Ten thousand shares are expected to and actually vest.
Twenty-five percent of the shares vest each year over a four-year period. The employee
must be employed by the reporting entity on each vesting date to become vested in each
tranche. The company has elected a policy of straight-line attribution.
The market price of the common stock is: $10 on January 1, 20X5; $20 on December 31,
20X5; $15 average for 20X5.
The tax deduction will equal book compensation cost because the employee made an IRC
Section 83(b) election for tax purposes and thus will be taxed based on the grant-date fair
value of the restricted stock (i.e., there will not be a windfall tax benefit upon settlement
of the award).
Applicable tax rate is 40% for all periods.
In each year, there is sufficient taxable income so the reporting entity realizes any tax
benefits generated.
Expense computation:
□ Total book compensation cost = $100,000
$10 (fair value per share on January 1, 20X5) multiplied by 10,000 shares
□ Compensation cost will be expensed ratably over four years ($25,000 per year)
□ Unrecognized compensation expense at December 31, 20X5, is $75,000
($100,000 minus $25,000)
How many shares are included in diluted EPS for the year ended December 31, 20X5,
assuming the shares are dilutive at the end of 20X5?
Analysis
The unvested shares are included in the diluted EPS computation by applying the
treasury stock method and assuming that the proceeds will be used to buy back shares.
Proceeds equal the average unrecognized compensation plus any purchase price and
windfall tax benefits.
□ Average unrecognized compensation for 20X5 = $87,500
Average of $100,000 (unrecognized compensation at January 1, 20X5) and $75,000

(unrecognized compensation at December 31, 20X5)
PwC 7-45
□ There are no assumed proceeds from exercise (because the employee is not required
to pay for the restricted stock) or windfall tax benefits (because of the IRC Section
83(b) election)
□ Assumed repurchase = 5,833 shares

10,000 (unvested shares outstanding) minus 5,833 shares (assumed repurchased)
EXAMPLE 7-11
Restricted stock with a service condition and windfall tax benefits (before adoption of
ASU 2016-09)
All of the assumptions are the same as in Example 7-10, except the employee did not
make an IRC Section 83(b) election.
How many shares are included in diluted EPS for the year ended December 31, 20X5
Analysis

□ There are no assumed proceeds from exercise price because the employee is not
required to pay for the restricted stock
□ Deferred tax asset once all compensation expense has been recorded = $40,000
10,000 unvested shares outstanding multiplied by $10 grant date fair value
multiplied by 40% applicable tax rate
□ Potential windfall tax benefit = $20,000
(10,000 unvested shares outstanding multiplied by $15 average stock price multiplied
by 40% tax rate) less $40,000 (deferred tax asset once all compensation expense has
been recorded)
$20,000 (potential windfall tax benefit) plus $87,500 (average unrecognized

compensation)
7-46 PwC
□ Incremental shares to be included in the December 31, 20X5 diluted EPS

10,000 shares (unvested shares outstanding) minus 7,166 shares (assumed

repurchased)
EXAMPLE 7-12
Restricted stock with a performance condition and an IRC Section 83(b) election (before
All of the assumptions are the same as in Example 7-10, except that the vesting provision
now includes a performance condition that requires the reporting entity’s revenues to
exceed $100 million in 20X5; $115 million in 20X5; $130 million in 20X6; and $145
million in 20X7 for the respective year’s award to vest.
The requirements for a grant date are met on January 1, 20X5, for all tranches.
Each tranche is based on performance within that year; therefore, each tranche is treated
as a separate award with a service inception date of January 1 of each year and a one-year
requisite service period.
The reporting entity recognizes compensation cost for each tranche over the respective
one-year requisite service period if it is probable that the target established for that year
will be met.
Revenues for the year ended December 31, 20X5 were $120 million.
Analysis
Using the treasury stock method, the diluted EPS computation would reflect the number
of shares that would be issued based on the assumption that the current amount of
revenue achieved will remain unchanged through the end of the performance period.
Revenues for 20X5 were $120 million. Therefore, the 20X5 performance condition for
revenues exceeding $100 million has been satisfied at the reporting date, and the 20X5
performance condition for revenues exceeding $115 million would have been satisfied if
the reporting date was the end of the contingency period.
The performance conditions for 20X6 and 20X7 would not have been satisfied by revenue
of $120 million. Therefore, 5,000 shares (20X5 and 20X5 tranches) are included in the
diluted EPS computation process. The 20X6 and 20X7 tranches are not included.
Average of $50,000 (unrecognized compensation at January 1, 20X5, related to

shares for which achievement of the performance condition is assumed) and $25,000
PwC 7-47
(unrecognized compensation at December 31, 20X5, related to shares for which

achievement of the performance condition is assumed)
The unrecognized compensation related to shares for which achievement of the

performance condition is assumed includes unrecognized compensation for shares
related to the 20X5 and 20X5 performance goals ($25,000 in compensation cost per
tranche multiplied by 2 tranches for which achievement of the performance condition
is assumed). The unrecognized compensation related to the 20X6 and 20X7
performance goals is excluded because it is assumed those performance goals will not
be met.
□ There are no assumed proceeds from exercise or windfall tax benefits (because of the
IRC Section 83(b) election)
$37,500 (assumed proceeds) divided by $15 (20X5 average stock price).

5,000 (unvested shares outstanding for which achievement of the performance

condition is assumed) minus 2,500 shares (assumed repurchased)
EXAMPLE 7-13
Restricted stock with a market condition and an IRC Section 83(b) election (before
All of the assumptions are the same as in Example 7-10, except that the vesting provision
is a market condition that all of the restricted stock will cliff vest if the stock price is
higher than $18 on December 31, 20X7, and the recipient is still employed at that date.
Each share of restricted stock has an $8 fair value on the grant date; the effect of the
market condition is reflected (i.e., discounted) in the award’s fair value.
The market price of the underlying stock is $20 on December 31, 20X5.
Expense computations:
□ Total book compensation cost = $80,000
$8 (fair value per share on January 1, 20X5) multiplied by 10,000 shares
□ Expense will be recognized ratably over four years ($20,000 per year)
□ Unearned compensation at December 31, 20X5, is $60,000
$80,000 minus $20,000
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Analysis
Using the treasury stock method, the diluted EPS computation should reflect the number
of shares that would be issued based on comparing the market price at the end of the
period to the market condition metric. Because the stock price at the end of 20X5 is
higher than the threshold price, all of the restricted shares are included in the calculation.

□ There are no assumed proceeds from exercise or windfall tax benefits (because of the
IRC Section 83(b) election)
□ Incremental shares to be included in December 31, 20X5, diluted EPS computation =

5,334 shares
10,000 (unvested shares outstanding) minus 4,666 shares (assumed repurchased)
If the stock price were below $18 at the end of 20X5, which is less than the threshold
price, then none of the restricted shares would be included in the diluted EPS
computation.
Stock award modifications
In computing diluted EPS, a reporting entity should treat the modification of a share-
based award as if there was a cancellation and new issuance of an award. This includes
modifications that are made in conjunction with an equity restructuring, such as a spin-
off or large cash dividend.
Consistent with the approach described in ASC 260-10-45-26, the reporting entity should
treat the “before” and “after” awards (i.e., the original and the modified awards)
separately and include each for the weighted average period that each was outstanding.
Therefore, the reporting entity will perform two treasury stock method calculations.
□ Based on the terms of the award and the average stock price for the period prior to
the modification (weighted for the appropriate period)
□ Based on the terms of the award and the average stock price for the period after the
modification (weighted for the appropriate period)
The sum of the two calculations will equal the number of incremental shares to be
included in the diluted EPS computation. The reporting entity does the “as if”
PwC 7-49
cancellation and reissuance for any share-based payment award whose terms have
changed.
Employee stock purchase plans (ESPPs)
Under ASC 718, ESPPs are treated as options which are granted at the start of the offering
period. Similarly, ESPPs are considered options to be included in diluted EPS using the
treasury stock method because granting an employee the ability to purchase stock at a
defined price through an ESPP is very similar to a conventional employee stock option
with a vesting period. Both awards give the employee the ability to purchase reporting
entity stock in the future at a potentially discounted price. Accordingly, an ESPP
represents potential common shares that reporting entities should include in the
denominator for the computation of diluted EPS. The same is true for non-compensatory
ESPPs, except there would be no unrecognized compensation expense included in
assumed proceeds under the treasury stock method.
Because the vesting of an ESPP is typically based on service, not performance, reporting
entities should consider the plan in the denominator for EPS purposes from the start date
of the offering period. The fact that employees have amounts withheld from their
paychecks to pay for the shares over time is a funding mechanism for the ultimate
payment of the exercise price; it does not change the nature of the potentially dilutive
option arrangement.
At each reporting date during the offering period, reporting entities should apply the
guidance in ASC 260-10-45-48 through 45-52 for contingently issuable shares, and
ASC 260-10-45-22 through 45-26 for the treasury stock method. Under this guidance, the
number of incremental potential common shares included in diluted EPS is based on the
number of shares that would be issuable if the reporting date were the end of the
contingency period, net of the hypothetical shares that could be repurchased under the
treasury stock method.
The employees’ withholding elections at period-end, the stock price at the beginning of
the offering period and at the reporting date, and the purchase price formula for the ESPP
will determine the number of shares issuable under the plan, consistent with
ASC 260-10-45-52, for market price contingencies. Therefore, if the plan requires the
purchase price to be the lesser of the beginning or ending stock price in the offering
period, the reporting entity would compare the stock price at the beginning of the offering
period to the stock price at the reporting date and use the lower of those two stock prices
in the calculation of purchase price.
The reporting entity should calculate the assumed proceeds under the treasury stock
method based on the sum of (1) the cash assumed to be received over the course of the
offering period, and (2) the average unrecognized compensation expense related to the
ESPP during the period.
There should typically be no income tax effects for the shares issued because ESPPs
generally are qualified plans for tax purposes and are not expected to result in a tax
deduction for the reporting entity. Disqualifying dispositions should not be recognized
until they occur and, therefore, no deferred tax assets are recognized for qualified plans.
The reporting entity would divide the total assumed proceeds by the average stock price
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for the reporting period to determine the hypothetical number of shares that can be
repurchased under the treasury stock method.
In calculating the dilutive effect of an ESPP on EPS, reporting entities should base the
number of shares issued on the aggregate expected amount of withholdings during the
entire offering period, rather than only the withholding amount received up to the
reporting date. Reporting entities should consider the entire offering period because the
ESPP is treated as an option for both accounting and EPS purposes. Accordingly,
reporting entities should consider all amounts to be withheld from employees to purchase
shares under the plan, both current withholdings and expected withholdings, part of the
assumed proceeds under the treasury stock method for EPS.
Because the amount withheld from employees is recorded by the reporting entity as a
liability (as it belongs to the employees until the offering period has ended), it is not
considered a prepayment of the purchase price of the shares for EPS purposes and
therefore, continues to be included in the assumed proceeds for the treasury stock
method calculation.
At the beginning of the ESPP offering period, management can determine, based on the
employees’ withholding elections and the current stock price, how many shares of stock
will eventually be purchased, assuming that the employees continue their employment
through the offering period. Changes to employee withholding elections are considered
modifications for EPS purposes, and are reflected in EPS on a prospective basis.
Accordingly, in order to determine the ESPP’s impact on EPS, the reporting entity should:
□ Assess employment status and employee participation as of the reporting date to

ensure that employees’ elections are appropriately considered in the computation
□ Determine the exercise price by utilizing the stock price as of the beginning of the
offering period, the stock price at the reporting date, and the purchase price formula
defined in the ESPP
□ Project total withholdings over the course of the offering period
□ Calculate the number of shares to be issued under the ESPP and hypothetical
repurchases under the treasury stock method (considering total expected
withholdings and average unrecognized compensation expense as assumed proceeds)
Example 7-14 illustrates the computation of diluted EPS for an ESPP.
EXAMPLE 7-14
Impact on EPS of an employee stock purchase plan
The ESPP begins its six-month offering period on September 1, 20X5, which ends on
February 28, 20X5.
The ESPP allows employees to elect to withhold a certain amount of their salary (up to
15%) to purchase the reporting entity’s stock at a discounted price.
PwC 7-51
The ESPP provides for shares to be purchased at 85% of the lesser of the stock price at the
beginning or end of the offering period (i.e., a look-back option) and is considered
compensatory. Since the plan is compensatory, the reporting entity recognizes
compensation cost for the ESPP.
Employees are allowed to withdraw from the ESPP at any time during the offering period,
are required to withdraw if terminated, and upon withdrawal will be reimbursed any
amount withheld.
The ESPP is a qualified plan under Section 423 of the Internal Revenue Code. Therefore,
no windfall tax benefits are assumed for purposes of applying the treasury stock method.
The stock price on September 1, 20X5, the beginning of the six-month offering period, is
$25. After applying the ESPP’s discount, the formula price would be $21.25 ($25 × 85% =
$21.25).
The stock price on December 31, 20X5, the reporting date, is $20. After applying the
ESPP’s discount, the formula price would be $17 ($20 × 85% = $17).
Employee withholdings at December 31, 20X5, total $4,500,000. Expected withholdings

for the remaining offering period, based on current employee elections, is $2,300,000.
Therefore, the expected total withholdings are $6,800,000.
Average stock price during the period from September 1 to December 31, 20X5, is $22.
Average unrecognized compensation expense during the period from September 1 to

December 31, 20X5 = $1,650,000.
Analysis
The number of shares projected to be issued at December 31, 20X5 under the ESPP =
400,000
$6,800,000 (expected total withholding amount) divided by $17 (purchase price per
share determined by the ESPP purchase price formula).
The formula price of $17 per share on the reporting date is used because the ESPP
contains a look-back option and this price is lower than the formula price at the
beginning of the offering period. If the stock price on the reporting date was greater than
the stock price at the beginning of the offering period, the reporting entity would have
used the formula price at the beginning of the offering period to calculate the shares
projected to be issued due to the look-back option.
Total assumed proceeds = $8,450,000
$6,800,000 (expected total withholding amount) plus $1,650,000 (average unrecognized

compensation expense during the reporting period).
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There are no assumed proceeds from windfall tax benefits because the ESPP is a qualified
plan.
Shares assumed repurchased = 384,091 shares
$8,450,000 (assumed proceeds) divided by $22 (average stock price)
Incremental shares to be included in the December 31, 20X5 diluted EPS computation =
5,303 shares
[400,000 (gross number of shares to issue under the ESPP) minus 384,091 shares
(assumed repurchased)] x 4 / 12 (ESPP is outstanding for 4 of 12 months in 20X5)
Because most ESPPs provide for the purchase of shares at a discount to the market price,
there is typically a dilutive effect on EPS. However, the inclusion of unrecognized
compensation expense in the calculation of assumed proceeds tends to mitigate the
impact, particularly in the earlier portions of the offering period. Once there is an
obligation to issue shares (on March 1 in the above example), the shares would be
included in basic EPS on a prospective basis. During the quarter ending March 31, along
with being included in basic EPS for the one month from March 1 to March 31, the ESPP
would also affect diluted EPS on a weighted average basis for the period from January 1 to
February 28.
Stock-appreciation rights
A stock-appreciation right (SAR) is a contract that gives the employee the right to receive
an amount of stock that equals the appreciation in a company’s stock from an award’s
grant date to the exercise date. SARs generally do not involve payment of an exercise
price and may be settled in cash or in stock.
If a SAR will be settled in cash, the only effect the cash-settled SAR would have on the
numerator is through the recognition of compensation cost in net income.
If a SAR will be settled in stock, it will be included in the computation of diluted EPS (if
the award is dilutive) based on the net number of shares issuable using the average stock
price for the period. Because an employee typically does not pay to exercise a
stock-settled SAR, only unrecognized compensation expense and any windfall tax benefits
or shortfalls are considered proceeds when calculating the dilutive effect under the
treasury stock method.
If the reporting entity or the employee can decide whether a SAR will be settled in cash or
in stock, refer to FSP 7.5.7.1 for the appropriate EPS treatment.
Some cash and share-settled SARs may be treated differently for determining the
classification of an award and related compensation cost to be recorded, and for EPS
purposes. For example, a SAR that provides the employee with the choice of settlement
method is a liability-classified award; however, EPS will be computed on the assumption
that the award will be settled in shares because it is more dilutive. In accordance with
ASC 260-10-55-33, the reporting entity should not adjust the numerator in that situation.
PwC 7-53
New guidance ─ stock-based compensation under the treasury stock

method
Under ASU 2016-09, tax windfalls and shortfalls will no longer be recognized in
additional paid-in capital (APIC). Therefore, when applying the treasury stock method for
computing diluted EPS, the assumed proceeds will no longer include any windfall tax
benefits or tax shortfalls. As a result, fewer hypothetical shares can be repurchased under
the treasury stock method than prior to adoption of the new standard, resulting in an
assumption of more incremental shares being issued upon the exercise of share-based
payment awards. Therefore, equity awards will have a more dilutive impact on EPS.
Example 7-15 illustrates the impact of the new standard on the treasury stock method.
After adoption of ASU 2016-09, the guidance illustrated in Examples 7-8 to 7-13 will still
apply, except that the proceeds would no longer include the effects of tax windfalls or
shortfalls.
EXAMPLE 7-15
Calculating diluted EPS under the treasury stock method before and after adoption of
ASU 2016-09
FSP Corp grants 1,000,000 restricted stock units (RSUs) on January 1, 20X7, which cliff
vest in five years.
The grant date fair value was $20.
The average stock price for 20X7 is $25.
The applicable tax rate is 30%.
No shares were forfeited during 20X7.
How does the calculation of the number of potential common shares to include in the
diluted EPS computation differ under the current and new standards?
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Analysis
Current standard New guidance

Diluted EPS calculation 1,000,000 shares issuable 1,000,000 shares
under RSU award - issuable under RSU
780,000 hypothetical award - 720,000
repurchased shares = hypothetical repurchased
220,000 dilutive potential shares = 280,000 dilutive
common shares potential common shares
Calculation of ($0 exercise price + $18 ($0 exercise price + $18
hypothetical repurchase million average million average
shares unrecognized unrecognized
compensation + $1.5 compensation) / $25
million anticipated average stock price =
windfall tax benefit) / $25 720,000 shares
average stock price =
Average unrecognized
780,000 shares
compensation is the
Average unrecognized average of $20 million
compensation is the (unrecognized
average of $20 million compensation at January
(unrecognized 1, 20X7) and $16 million
compensation at January (unrecognized
1, 20X5) and $16 million compensation at
(unrecognized December 31, 20X7).
compensation at
December 31, 20X7).
Anticipated windfall tax
benefit is calculated as
($25 million2 - $20
million3) x 30% tax rate.
Market prices used in the treasury stock method
In applying the treasury stock method, a simple average of market prices usually will be
adequate. As noted in ASC 260-10-55-5, closing market prices are generally adequate for
use in computing the average market price. When prices fluctuate widely, however, an
average of the high and low price usually would be more representative. A reporting
entity should consistently apply the method used to compute the average market price,
unless it is no longer representative because of changed conditions.
When market prices are unavailable (e.g., the pre-IPO period for a reporting entity going
public, or a reporting entity that has been delisted) for periods presented in the financial
statements, management should use its best estimate of the fair value of the entity’s
shares during the period. Management’s determination of fair value of its shares should
2 Hypothetical tax deduction based on $25 average stock price for period x 1,000,000 shares issuable under
RSU grant.
3 Tax deduction based on $20 grant date stock price x 1,000,000 shares issuable under RSU grant. Also equal to
total book compensation cost.
PwC 7-55
be consistent with the fair values and assumptions used in the calculation of the reporting
entity’s stock compensation expense and disclosures.
Year-to-date computations in the treasury stock method
Earnings per share for a quarter should be based on the weighted average number of
shares of common stock and dilutive potential common shares outstanding during that
quarter, rather than calculated as the difference between year-to-date earnings per share
and cumulative earnings per share for previous quarters of the fiscal year. When
performing year-to-date computations for the treasury stock method, the reporting entity
does not perform the year-to-date computation independently using the whole year as the
averaging period; rather, it is an average of the quarters’ weighted average incremental
shares under the treasury stock method. For the purpose of determining the weighted
average number of shares in applying the treasury stock method to year-to-date
computations, reporting entities should use the guidance in ASC 260-10-55-3.

…the number of incremental shares to be included in the denominator shall be
determined by computing a year-to-date weighted average of the number of incremental
shares included in each quarterly diluted EPS computation.
However, in computing year-to-date diluted EPS, reporting entities should use

year-to-date income (or loss) from continuing operations as the basis for determining
whether or not dilutive potential common shares not included (or included) in one or
more quarterly computations of diluted EPS are included in the year-to-date
computation.
For example, if a reporting entity had a year-to-date loss from continuing operations that
included quarters with income, any incremental shares included in the quarters with
income would not be included in the denominator for the year-to-date diluted EPS
computation, and vice versa.
Disclosure in the annual report of the quarterly per share data required by S-K 302
should reflect the average shares outstanding during each particular quarter. If the sum
of such quarterly EPS amounts differs significantly from annual EPS, the reason for the
difference should be explained in a note to the quarterly financial data included in the
annual report.
See ASC 260-10-55-3A, Example 1 in ASC 260-10-55-38 through 50, and Example 12 in
ASC 260-10-55-85 for an illustration of this concept.
Modifications to use of the treasury stock method
Options or warrants may permit or require the holder of the option to tender debt or
other securities of the issuer (or its subsidiary or parent) in payment of all or a portion of
the exercise price.
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In computing diluted EPS, the reporting entity assumes (1) those options or warrants are
exercised, and (2) the debt or other securities is tendered (this is, effectively, the
if-converted method which is discussed in FSP 7.5.6). The reporting entity adds back
interest (net of tax) on any debt assumed to be tendered to the numerator and also
adjusts the numerator for any nondiscretionary adjustments based on income (net of
tax), such as profit-sharing and royalty agreements.
If tendering cash, however, would be more advantageous to the option or warrant holder,
and the contract permits tendering cash, the reporting entity should apply the treasury
stock method.
The terms of certain options or warrants may require that proceeds received from their
exercise be applied to retire debt or other securities of the issuer (or its parent or
subsidiary). In computing diluted EPS, the reporting entity assumes those options or
warrants are exercised and the proceeds applied to purchase the debt at its average
market price rather than to purchase common stock under the treasury stock method. In
doing so, it should add back interest, net of tax, on any debt assumed to be repurchased to
income available to common stockholders. It also adjusts the numerator for any
nondiscretionary adjustments based on income (net of tax). However, the reporting entity
should apply the treasury stock method for excess proceeds received from the assumed
exercise (i.e., proceeds received on exercise exceed the amount of debt retired).
Convertible securities that permit or require the payment of cash by their holder at
conversion are deemed to be warrants. In computing diluted EPS, the reporting entity
applies the proceeds assumed to be received to purchase common stock using the
treasury stock method, and assumes the convertible security is converted under the
if-converted method.
Written put options and use of reverse treasury stock method
Contracts that require the reporting entity to repurchase its own stock (such as written
put options and forward purchase contracts) are reflected in the computation of diluted
EPS if their effect is dilutive.
If, during the reporting period, the exercise price of these contracts is above the average
market price for that period (i.e., they are “in-the-money”), reporting entities should
compute their dilutive effect using the “reverse treasury stock” method. Under that
method:
□ Assume issuance of sufficient common shares at the beginning of the reporting

period (at the average market price during the period) to raise enough proceeds to
satisfy the contract.
□ Assume the proceeds from issuance are used to satisfy the contract (i.e., “buy back”
the shares).
□ Include the incremental shares (the difference between the number of shares
assumed to have been issued and the number of shares assumed to have been
repurchased) in the denominator.
PwC 7-57
See FSP 7.4.3.6 for a discussion of physically-settled forward purchase contracts for a
fixed number of shares under ASC 480. If the contract is required to be carried at fair
value with changes recorded in net income under other US GAAP (as is frequently the
case for written put options), then reporting entities should also consider the guidance in
FSP 7.5.7.1 regarding numerator adjustments when determining the EPS impact.
Example 7-16 illustrates the application of the reverse treasury stock method to written
put options.
EXAMPLE 7-16
Reverse treasury stock method
FSP Corp sells a put option that allows the investor to sell 100 shares to FSP Corp at an
exercise price of $25; the average market price for the period is $20.
How should FSP Corp compute EPS?
Analysis
The incremental number of shares to be included in diluted EPS is 25. This is computed
as follows:
□ Shares are issued at the beginning of the period to raise enough proceeds to satisfy
the put option of $2,500 (100 shares at $25). 125 shares are assumed to have been
issued ($2,500 in required proceeds divided by the average market price of $20 per
share for the period).
□ The $2,500 in proceeds from issuance of new shares is then used to satisfy the put on
100 options.
□ Twenty-five incremental shares are included in the EPS computation—125 shares

assumed to be issued less the 100 shares assumed to have been repurchased.
7.5.6 If-converted method for convertible securities
ASC 260 considers all convertible securities, including convertible debt and convertible
preferred stock, which by their terms may be converted into common stock of the
reporting entity, as potential common shares.
Share-settled convertible debt and convertible preferred stock are generally included in
diluted EPS using the if-converted method described in ASC 260-10-45-40. However,
convertible debt with a cash conversion feature, specifically Instrument C (as discussed in
FG 9.6 and FSP 7.5.6.3), is typically included in diluted EPS using the net share
settlement method described at ASC 260-10-55-84 through 84B.
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If-converted method: A method of computing EPS data that assumes conversion of
convertible securities at the beginning of the reporting period (or at time of issuance, if
later).
Under the “if-converted” method:
□ If a reporting entity has convertible preferred stock outstanding, it adds back the
preferred dividends (declared or cumulative undeclared) applicable to the convertible
preferred stock to the numerator. Such add-back would also include deemed
dividends in the period from amortization of a BCF and any adjustments charged or
credited to equity in the period to accrete preferred stock classified as mezzanine
equity to its cash redemption price, or recorded upon a redemption or induced
conversion.
□ If a reporting entity has convertible debt outstanding, the reporting entity should:
(1) Add back interest charges applicable to such convertible debt, including interest
expense from the amortization of a BCF, to the numerator,
(2) Adjust the numerator if nondiscretionary adjustments based on income made

during the period would have been computed differently had the interest on
convertible debt not been recognized, and
(3) Adjust the numerator for the income tax effect of adjustments (1) and (2),
computed on a “with or without” basis. See TX 3 for tax considerations related to
BCF on convertible debt.
Nondiscretionary adjustments include any expenses or charges that are determined based
on the income (loss) for the period, such as profit-sharing and royalty agreements, and an
allocation of participating dividends.
When the conversion feature embedded in a convertible debt instrument is bifurcated

from the debt host and accounted for separately pursuant to the derivative accounting
literature, the debt host and the separated conversion feature are each treated as a
separate unit of account. The discount created on the debt by separation of the conversion
feature should be amortized through interest expense over the contractual life of the debt,
and the conversion feature should be marked to fair value each reporting period with
changes in fair value included in earnings.
Despite the fact that the debt and conversion feature are considered separate units of
account for accounting purposes, they are treated as one instrument for EPS purposes (as
it is a single convertible debt instrument) and included in the diluted EPS calculation
using the if-converted method.
In addition to the adjustment for interest expense (which includes amortization of the
discount created upon bifurcation of the conversion option from the debt), the
PwC 7-59
mark-to-market gain or loss each period related to the bifurcated conversion option
should be deducted from/added back to the numerator in calculating diluted EPS.
ASC 260-10-55-32 requires that the income statement impact of instruments assumed to
be settled in shares for EPS purposes, and that are required to be reported as assets or
liabilities, be excluded from the numerator in the diluted EPS calculation. The
mark-to-market adjustment is nondiscretionary in all periods, whether a gain or loss, and
so should be added to/deducted from the numerator. As a result of the adjustments to the
diluted EPS numerator for the interest expense and mark-to-market gain or loss and the
denominator adjustment for the number of shares assumed to be converted, the security
may be dilutive or antidilutive. If antidilutive, the security should be excluded from the
diluted EPS calculation altogether.
If a reporting entity enters into an interest rate swap as a hedge of the interest associated
with convertible debt that automatically terminates upon settlement or conversion of the
debt (i.e., nondiscretionary), the interest expense adjustment to the numerator is
inclusive of the impact of the interest rate swap. If the swap arrangement does not
automatically terminate upon conversion, the reporting entity should exclude the impact
of the swap from the add-back, and add back only the contractual interest on the debt in
the numerator.
Conversion is not assumed for purposes of computing diluted EPS if the effect would be
anti-dilutive:
□ Convertible debt is anti-dilutive when its interest and nondiscretionary adjustments,

net of tax, per common share obtainable on conversion exceeds basic EPS.
□ Convertible preferred stock is anti-dilutive when the amount of the dividend declared
in, or accumulated for, the current period, including any deemed dividends or related
accretion and participation in dividends, per common share obtainable on conversion
exceeds basic EPS.
Similarly, in periods of net loss, the application of the if-converted method to convertible
participating securities is generally anti-dilutive (see FSP 7.5.7.1 for a situation where it
may not be).
The adjustments discussed above are not affected by the reporting entity’s current stock
price in relation to the conversion price. That is, a convertible security has the same effect
on diluted EPS when the conversion option is far out of the money (i.e., the security has
little chance of being converted), as it does when it is deep in the money (i.e., the security
has a high likelihood of being converted).
Reporting entities should include convertible securities that have a dilutive effect on EPS
in the denominator of diluted EPS from the beginning of the period or from the date of
issuance, if later. They should also include dilutive convertible securities that are
extinguished or redeemed, and securities in which the conversion options lapse, in the
denominator for the period they were outstanding. Consistent with ASC 260-10-S99-2, in
circumstances when dilutive convertible securities are extinguished or redeemed and
there is a gain or loss on extinguishment or induced conversion reflected in the
numerator of basic EPS, that gain or loss should be reversed in the numerator of diluted
7-60 PwC
EPS because the shares are assumed to have been converted at the beginning of the
period.
Dilutive convertible securities converted during the period are included in the
denominator of diluted EPS for the period prior to their conversion. Thereafter, the
shares issued are included in the denominator of both basic and diluted EPS.
If the number of shares to be issued upon conversion varies based on (1) the stock price at
the conversion date, (2) an average of stock prices around the conversion date, or (3) a
formula based on stock prices, the reporting entity should determine the number of
shares included in the diluted EPS denominator by applying the conversion formula to
the corresponding stock prices at the end of the reporting period. For example, if the
number of shares issued upon conversion is based on the average stock price for the 10
days prior to conversion, the stock price on the last 10 days of the reporting period should
be used to calculate the number of shares included in the diluted EPS denominator for
the period.
The following examples illustrate the application of the if-converted method for
convertible debt.
EXAMPLE 7-17
Application of the if-converted method to convertible debt
On January 1, 20X5, FSP Corp issued $10 million of convertible bonds (10,000 bonds in
$1,000 increments, at par). On the issuance date, FSP Corp’s common stock price was
$100 per share. The terms of the bonds include:
□ A coupon rate of 2% per year, which results in after-tax interest expense of $30,000
per quarter ($10 million x 2% x 1/4 = $50,000 less income tax of $20,000 (40% tax
rate x $50,000)).
□ A requirement that FSP Corp deliver 8 shares per bond to bond holders upon
conversion (which equates to a conversion price of $125), or 80,000 shares (10,000
bonds x 8 shares per bond) in total.
FSP Corp has 10 million weighted average common shares outstanding, and net income
for the quarter ended March 31, 20X5 is $50 million.
How should FSP Corp include the convertible bonds in the diluted EPS computation for
the period ended March 31, 20X5?
PwC 7-61
Analysis
FSP Corp should include the convertible bond in diluted EPS using the if-converted
method, if it is dilutive.
Basic EPS Adjustments Diluted EPS
Earnings $50,000,000 $30,000 $50,030,000
Weighted average common

shares and common share
equivalents
10,000,000 80,000 10,080,000
EPS $5.00 $4.96
EXAMPLE 7-18
Computing year-to-date diluted EPS when convertible debt is anti-dilutive in certain
periods and dilutive in others
FSP Corp is profitable for the year but has net losses in the first and second quarters of
20X5. FSP Corp issued convertible debt in the prior year, which has been outstanding for
all of 20X5.
When adding back interest expense on the convertible debt and adjusting the weighted
average shares to reflect conversion at the beginning of those periods, the results are
anti-dilutive for both the discrete quarters and for the year-to-date EPS computation for
the first and second quarters. The result of assuming conversion in the third and fourth
quarters is dilutive.
How would FSP Corp compute year-to-date EPS for the third and fourth quarters of
20X5?
Analysis
For the nine- and twelve-month period computations, the assessment of whether the
convertible debt is anti-dilutive should consider the entire period for which the
convertible debt was outstanding (the nine- or twelve-month periods). The fact that there
are discrete quarters in which the conversion was anti-dilutive does not matter, and those
periods would not be excluded from the nine- and twelve-month year-to-date
assessments. Example 1 (transaction e) in ASC 260-10-55 illustrates this point.
7-62 PwC
Question 7-3
In the second quarter, FSP Corp declared and paid a special dividend to holders of
common stock. As a result, the conversion rate on FSP Corp’s convertible notes was
reduced in accordance with their contractual terms. How should the change in the
conversion rate be treated for purposes of computing diluted EPS?
PwC response
We believe that either of the following approaches would be acceptable.
1. By analogy to ASC 260-10-45-42 (which addresses convertible securities issued,

converted, or extinguished during the period), FSP Corp could calculate the
number of shares to include in the denominator for the period by adding:
a) the number of shares issuable based on the conversion rate in effect before
the special dividend, weighted for that period, and
b) the number of shares issuable based on the new conversion rate, weighted for
the appropriate period.
2. By analogy to ASC 260-10-45-52 (which addresses contingently issuable shares),

FSP Corp could calculate the number of shares to include in the denominator for
the period by using the number of shares issuable upon conversion determined
solely by the end-of-period conversion price. This would reflect a maximum
amount of dilution based on the number of shares that would be issuable as of
the end of the period and going forward.
Choosing which approach to follow is an accounting policy decision and should be

consistently applied in all periods for similar instruments.
In addition, FSP Corp should consider whether the change in the conversion rate creates
a contingent beneficial conversion feature (BCF) under the guidance in
ASC 470-20-25-20.
Treatment of capitalized interest on convertible debt
Capitalized interest from convertible debt could present a conceptual problem in applying
the if-converted method. Application of the if-converted method requires the add-back of
interest expense and certain other non-discretionary adjustments to net income when
convertible securities are assumed to be converted. Accordingly, when any portion of
convertible debt interest has been capitalized during a period, it is appropriate, in the
EPS computations only, to assume that such interest was not incurred during the period
and, therefore, neither capitalized nor expensed, and to make an “as-if” recomputation of
interest that would have been capitalized based on interest on other debt.
In this situation, the reporting entity would adjust the numerator to eliminate any effect
of the convertible debt interest that was expensed, and to eliminate any other interest
expense that would have been capitalized on other debt instruments had the convertible
debt not been in existence. As usual, the effect of the “if converted” method cannot be
anti-dilutive.
PwC 7-63
To illustrate, assume a reporting entity has convertible debt that is included using the
“if-converted” method for diluted EPS purposes. In general, the reporting entity should
determine the amount of interest related to the convertible security included in interest
expense and include only that amount (net of tax) in the “if-converted” method
calculation. In other words, the reporting entity should not add back to the numerator of
diluted EPS the interest attributable to convertible debt that has been capitalized based
upon the requirements of ASC 835-20, which requires the capitalization of interest
related to the initial investment in an asset.
The rationale is that capitalized interest is, by definition, not an expense of the current
period and, therefore, assumed conversion of the debt at the beginning of the current
period generally would not have affected net income if the interest was capitalized.
However, the reporting entity should consider whether assumed conversion at the
beginning of the period would have affected the overall amount of interest capitalized on
other debt, and thus income. The reporting entity should perform a “with conversion”
and “without conversion” calculation of capitalized interest to determine if assumed
conversion at the beginning of the period would have affected income. If the capitalized
interest would have been different if conversion had occurred at the beginning of the
period, the reporting entity should treat that difference as a nondiscretionary amount,
and include that amount as an adjustment in the diluted EPS computation in accordance
with ASC 260-10-45-40.
As it relates to interest that has been capitalized in prior periods and is now included in
depreciation expense of the fixed asset in the current period, neither ASC 260 nor
ASC 835-20 specifically addresses this question. Reporting entities can elect to either
reverse depreciation expense attributable to previously capitalized interest when applying
the if-converted method, or elect not to. While both methods are acceptable, we believe it
may be very difficult in practice to reverse depreciation expense due to the administrative
difficulties in tracking the capitalized interest and related depreciation expense. Choosing
which approach to follow is an accounting policy decision and, therefore, reporting
entities should consistently apply it in all periods for all convertible securities and
disclose it.
Impact of partial redemption or conversion on diluted EPS
As discussed in FSP 7.4.1.3 and 7.5.6, a reporting entity may offer an incentive to
preferred stockholders to either redeem or convert their outstanding shares.
If a reporting entity effects a redemption or induced conversion of only a portion of the

outstanding securities of a class of preferred stock, any excess consideration is attributed
to only those shares that are redeemed or converted. ASC 260-10-S99-2 indicates that, in
determining the dilutive effect of the preferred stock, each group—those remaining
outstanding and those redeemed or converted—are considered separately, as they have
different effective dividend yields resulting from the excess consideration.
Example 7-19 illustrates how to determine if conversion is dilutive.
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EXAMPLE 7-19
Determining whether redemption of a portion of outstanding shares is dilutive
FSP Corp has shares of common stock and 100 shares of convertible preferred stock
outstanding at the beginning of a period.
The convertible preferred stock was issued at fair value, which was equal to its par value
of $10 per share, has a stated dividend of 5%, and each share of preferred stock is
convertible into one share of common stock.
During the reporting period, 20 preferred shares were redeemed at a per share price of
$12.
How should FSP Corp determine whether conversion is dilutive?
Analysis
In this example, FSP Corp should apply the guidance in ASC 260-10-S99-2 and
determine whether conversion is dilutive for 80 of the preferred shares (the shares
remaining outstanding) by applying the if-converted method from (1) the beginning of
the period to the end of the period using the stated dividend of 5%, and (2) for the 20
shares redeemed by applying the if-converted method from the beginning of the period to
the date of redemption, using both the stated dividend of 5% and the $2 per share
redemption premium.
Convertible debt with a cash conversion feature
Traditional share-settled convertible debt provides the holder with the full number of
shares underlying the bond upon conversion (i.e., no cash is received). However, a
convertible bond with a cash conversion feature allows the issuer to settle its obligation
upon conversion, either in whole or in part, in a combination of cash or stock, either
mandatorily or at the issuer’s option. Convertible debt with a cash conversion feature
(FG 9.6) in which the principal amount must be settled in cash is not included in diluted
EPS using the if-converted method. The treatment of these instruments, which is
discussed further in ASC 260-10-55-84 through 55-84B, is illustrated in the following
figure.
PwC 7-65
Figure 7-7
EPS treatment of convertible debt with a cash conversion feature
The number of shares included in the denominator of diluted EPS is determined by

dividing the “conversion spread value” of the share-settled portion of the instrument by
the share price. The “conversion spread value” is the value that would be delivered to
investors in shares based on the terms of the bond upon an assumed conversion. An
issuer should elect a policy of determining the share price to be used to calculate the
number of shares included in diluted EPS. We believe it is permissible to use either (1) an
average share price over the reporting period, or (2) the share price formula stated in the
agreement, which would be applied to the corresponding stock prices at the end of the
period.
However, the issuer of a debt instrument that may settle in any combination of cash or
stock at the issuer’s option (known in practice as an “Instrument X” bond) should
consider the guidance on instruments settleable in cash or shares. Refer to FSP 7.5.7.1 for
details.
Contingently convertible instruments
Some conversion options can only be exercised by the holder upon satisfaction of a
contingency. There are two broad categories of conversion option contingencies:
□ Contingencies tied to the issuer’s stock price

For example, the investor cannot exercise the conversion option until the issuer’s
stock price reaches a level of 120% of the conversion price.
□ Contingencies tied to an event or index other than the issuer’s stock price
For example, the investor can only exercise the conversion option upon the issuer’s
successful completion of an IPO.
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If the instrument’s conversion is based on achieving a substantive contingency based on

an event or index other than the issuer’s stock price, the reporting entity would not
include the instrument in diluted EPS until the non-market based contingency has been
met or is being met based on circumstances at the end of the reporting period. For
example, if the contingency was based on an IPO, and an IPO had not been completed by
period end, the contingently convertible instruments would not be included in diluted
EPS for the period.
However, based on the guidance in ASC 260-10-45-44, contingently convertible

instruments that are tied to the reporting entity’s stock price should be treated in the
same manner as other convertible securities and included in diluted EPS, if the effect is
dilutive, regardless of whether the stock price trigger has been met.
Further, delayed convertibility based solely on the passage of time does not avoid
including the security immediately in the if-converted method based on the requirements
above, even if the security is not convertible for many years.
Figure 7-8 illustrates the treatment of the two types of contingencies.
Figure 7-8
EPS treatment of contingently convertible securities in diluted EPS
ASC 260-10-45-44 applies to all issued securities that have embedded

market-price-contingent conversion features, including contingently convertible debt,
contingently convertible preferred stock, and convertible debt for which, upon
conversion, the issuer must satisfy the principal amount of the debt in cash, and may
satisfy the conversion premium in either cash or stock. ASC 260-10-45-44 does not cover
freestanding instruments and contingent conversion features that are based on a
contingency other than a market price trigger, nor does it apply to stock warrants or
options that are only exercisable upon achieving a market condition (see FSP 7.5.3).
Depending on the terms of the security, it could be included in diluted EPS using either
the if-converted method (convertible securities), or a method similar to the treasury stock
method (convertible debt with a cash conversion feature, i.e., Instrument C).
PwC 7-67
□ If upon conversion, the reporting entity could deliver the full number of shares, it
should use the if-converted method.
□ If upon conversion, the reporting entity is required to deliver cash for the par value of
the security, and could deliver shares only for the differential between the stock price
and the conversion price, it should use the net share settlement method described in
ASC 260-10-55-84 through 55-84B.
7.5.7 Other arrangements potentially impacting diluted EPS
There are various other arrangements that could result in the issuance of additional
shares of stock by the reporting entity and, therefore, impact the computation of diluted
EPS. These include: financial instruments settleable in cash or shares, subsidiary share
agreements, and escrow share arrangements.
Instruments settleable in cash or shares or classified as liabilities but

potentially settleable in shares
Certain instruments may allow the issuer, at its election, to settle in cash or shares. The
guidance in this section would also apply to financial instruments classified as liabilities
due to the application of other guidance, such as ASC 815 or ASC 480.
Under ASC 260-10-55-32 through 55-36A, when the reporting entity has the choice, and
controls the settlement method, it should presume share settlement for EPS purposes.
However, it may overcome this presumption, and assume cash settlement, when there is
a past practice or substantive stated policy that provides a reasonable basis to believe that
the contract will be paid partially or wholly in cash.
We understand the SEC staff looks to a number of factors in evaluating whether a

reporting entity’s stated policy to cash-settle a portion of its convertible debt instruments
is substantive, including:
□ Settlement alternatives as a selling point
The extent to which the ability to share settle factored into senior management’s
decision to approve the issuance of the instrument rather than an instrument that
only allowed for cash settlement
□ Intent and ability to cash settle
The extent to which the reporting entity has the positive intent and ability to cash
settle the face value and interest components of the instrument upon conversion
The reporting entity should consider both current and projected liquidity in
determining whether positive intent and ability exists. Management’s representation
attesting to the positive intent and ability to cash settle is also a factor.
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□ Disclosure commensurate with the reporting entity’s intention
The extent to which the disclosures included in current period financial statements,
and those included in the instrument’s offering documents, acknowledge and support
the reporting entity’s positive intent and ability to adhere to its stated policy
□ Past practice
Whether the reporting entity has previously share-settled contracts that provided a
choice of settlement alternatives
If the instrument provides the counterparty with the choice of settlement method, the
reporting entity should use the more dilutive outcome each period (cash vs. shares); past
experience or a stated policy is not determinative.
When computing the numerator in the diluted EPS computation, the reporting entity
needs to make independent quarterly and year-to-date determinations of the most
dilutive method of settlement, similar to the treatment of the convertible preferred stock
in Example 1 of ASC 260-10-55-38 through 55-50.
The computation of EPS can be more complex if the presumption of share settlement
changes to cash settlement or vice versa. In these situations, the computation of EPS
should reflect the change in the settlement assumption on a prospective basis, and the
change in presumption should be disclosed. If, subsequent to issuance, a reporting entity
could overcome the share settlement presumption and assume cash settlement, the
computation of EPS would reflect the contract as share-settled up until the date the
assumption was changed. Thereafter, EPS would reflect the contract as cash-settled. The
ability to overcome the presumption of share settlement will become difficult if a
reporting entity has a past practice of changing its assumption from cash settlement to
share settlement.
Question 7-4
A reporting entity issues a convertible debt instrument with a cash conversion feature
that allows the reporting entity to settle the entire obligation, both the par value and the
conversion spread value, in any combination of cash or stock upon conversion (i.e.,
Instrument X).
Can the reporting entity assert that the instrument will be fully settled in cash for
purposes of its diluted EPS calculation?
PwC response
No. Generally, it would not be appropriate to assume that the entire instrument will be
cash-settled for purposes of diluted EPS because the value of the conversion spread is
limitless (i.e., there is no limit to how high the reporting entity’s stock price may rise),
which would make it difficult for a company to assert that it would have the intent and
ability to always settle the arrangement in cash.
PwC 7-69
For a security that is accounted for as a liability, or in some cases an asset, with changes
in fair value recorded in earnings, the calculation of assumed share settlement would
include an adjustment of the diluted EPS numerator to eliminate the effects of the
contract that have been recorded in net income and an adjustment of the denominator to
include the impact of the share-settled contract, if dilutive in the aggregate. However, in
accordance with ASC 260-10-55-33, this adjustment to the numerator would not be made
for stock-based compensation awards with assumed share settlement.
If a reporting entity reports a net loss for the period, potential common shares are
generally anti-dilutive. However, if the net loss includes a mark-to-market (MTM) gain on
an instrument that is classified as an asset or liability, and share settlement is assumed,
this could result in the instrument being dilutive because the reversal of a gain in the
numerator creates a larger loss and potentially a larger loss per share. For the instrument
to be dilutive, the mark-to-market gain that is reversed in the numerator (i.e., the
increase to the net loss) must exceed the impact of the potential common shares that are
added to the denominator as a result of presumed share settlement. When evaluating
whether the instrument is dilutive, the collective impact of both the numerator and
denominator adjustments on diluted EPS should be considered, versus evaluating the
impact to the numerator and denominator separately. The reporting entity would not
adjust the numerator of diluted EPS unless the application of the treasury stock method
to the options and warrants in question would result in incremental potential common
shares.
Reporting entities may treat such contracts differently for accounting recognition
purposes and for EPS purposes. For example, certain contracts that provide the reporting
entity with the choice of settlement method would be treated as equity instruments for
accounting purposes. Regardless of the balance sheet classification, however, if the
reporting entity has a past practice or stated policy of settling such contracts in cash, the
EPS computations would assume cash settlement.
For contracts accounted for as equity that are treated as cash settled for EPS, the
reporting entity should also adjust the numerator when computing diluted EPS to reflect
the income or loss on the contract that would have resulted during the period if the
contract had been reported as an asset or liability. These adjustments are only permitted
to the extent that accounting for the instrument as equity versus an asset or liability has
an effect on net income.
Example 7-20 illustrates the impact of a liability-classified warrant on the computation of

diluted EPS.
EXAMPLE 7-20
Determining whether cash or share settlement is more dilutive for a liability-classified
warrant
FSP Corp has net income of $10 million for 20X5 and 1 million shares of common stock
outstanding for the period.
FSP Corp has outstanding warrants to issue 50,000 shares of its common stock with a
strike price of $10 per share. These warrants are liability-classified and are MTM each
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reporting period. The after-tax MTM adjustment related to the warrants is a $0.5 million
charge for the period (warrant fair value increased in the period, resulting in an income
statement charge for FSP Corp). The warrants were outstanding for the entire period.
FSP Corp has no other potential common shares. The average market price of the
common stock during the period is $15. The holder of the warrants has the choice of
settlement in cash or shares. FSP Corp believes, based on past experiences, that the
warrants will be share-settled.
How should FSP Corp include the warrants in the diluted EPS computation for the
period?
Analysis
For warrants that may be cash- or share-settled at the holder’s election, past experience
or a stated policy for settlement is not relevant. Accordingly, EPS should be based on the
more dilutive of the settlement alternatives. If the warrants are assumed to be
cash-settled, diluted EPS for the period is $10 per share ($10 million net income /
1 million shares), as no adjustment is required to either the numerator or denominator.
If the warrants are assumed to be share-settled, diluted EPS for the period is $10.33 per
share (calculated below), as both the numerator and the denominator should be adjusted
for the assumed exercise.
Calculation of diluted EPS with assumed share settlement:
Add back of MTM loss 500,000
Income available to common stockholders $10,500,000
Common shares outstanding 1,000,000
Shares issued upon exercise of warrants 50,000
Less: shares repurchased with proceeds1 (33,333)
Incremental shares issued 16,667
Weighted average shares outstanding 1,016,667
Diluted EPS $10.33
1
Calculated as: [(50,000 warrants multiplied by the $10 strike price) / $15 average share price]
The warrants should be presumed to be cash-settled, as that is more dilutive.
PwC 7-71
Securities of subsidiaries and of other investees
The effect on consolidated EPS of options, warrants, and convertible securities issued by
a subsidiary or investee depends on whether the securities issued by the subsidiary or
investee enable their holders to obtain common stock of the subsidiary or investee, or the
common stock of the parent. In computing consolidated diluted EPS, including for
investments in common stock of corporate joint ventures and investee companies
accounted for under the equity method, reporting entities should use the following
general guidelines:
□ Securities issued by the subsidiary that enable the holder to obtain the subsidiary’s
common stock should be included by the subsidiary in its computation of diluted EPS
data. Those diluted per-share earnings should then be included in the parent’s
consolidated EPS computation based on the parent’s share of the subsidiary’s
securities (diluted EPS of subsidiary times the number of shares owned by parent
equals earnings included in the numerator of consolidated EPS). Therefore, a
reduction of subsidiary diluted EPS due to increased potential common shares issued
by the subsidiary results in a reduction in the numerator of consolidated diluted EPS.
□ The parent reporting entity should consider securities of a subsidiary that are
convertible into its common stock as potential common shares in computing
consolidated diluted EPS.
A detailed example of the EPS computations for the parent and the subsidiary when the
subsidiary’s securities enable their holders to obtain subsidiary common stock is
presented in Example 7 in ASC 260-10-55-64 through 55-67. The same approach should
be used by an investor in an equity method investment.
The reporting entity should use the if-converted method in determining the EPS impact
of securities issued by a parent that are convertible into common stock of a subsidiary or
an investee reporting entity accounted for under the equity method. The securities are
assumed to be converted, and the income available to parent company common
stockholders is adjusted as necessary. That is, the numerator is adjusted appropriately for
any change in the income reported by, or allocated to, the parent (such as dividend
income or equity method income) due to the increase in the number of common shares of
the subsidiary or equity method investee as a result of the assumed conversion. However,
the denominator of the diluted EPS computation would not be affected, because the
number of shares of parent company common stock outstanding would not change upon
assumed conversion.
Escrow share arrangements
There are potential accounting implications when stockholders place a portion of their
shares in escrow in connection with an initial public offering (IPO) or other financing
transactions. In ASC 718-10-S99-2, the SEC staff expressed a view that escrow
arrangements that involve the release of shares based on performance-related criteria are
presumed to be equivalent to reverse stock splits that are followed by a grant of restricted
stock awards under a performance-based plan. See further discussion in SC 3.5.1.
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Escrowed shares are legally outstanding and reported as such on the face of the balance
sheet. However, reporting entities should consider these arrangements share-based
payment awards for EPS purposes and apply the guidance as to when contingently
issuable shares are included in diluted EPS in ASC 260-10-45-48.
7.5.8 Illustrative computation of diluted EPS
ASC 260-10-55-57 through 55-59 (Example 4: Anti-dilution Sequencing) illustrates

sequencing in the computation of diluted EPS. Example 7-21 also illustrates this concept.
EXAMPLE 7-21
Diluted EPS and the application of anti-dilution sequencing
FSP Corp has 10,000,000 shares of common stock and 2,000,000 shares of convertible
preferred stock (issued at $10 par value per share) outstanding during 20X5 and has net
income of $50,000,000.
Each share of preferred stock is convertible into two shares of common stock. The
preferred stock is entitled to a cumulative annual dividend of $0.50 per preferred share
(5% of the $10 par value), and then participates on a 1:1 basis in any common dividends
that would have been payable had the preferred stock been converted immediately prior
to the record date of any dividend declared on the common stock (i.e., on an “as-
converted” basis).
For the year ended December 31, 20X5, dividends of $2 per share are paid to the common
stockholders and, accordingly, participating dividends of $4 per preferred share are paid
to the preferred stockholders, since each share of preferred converts into 2 common
shares, in addition to the cumulative annual preferred dividend of $0.50. FSP Corp also
has 1,200,000 stock options outstanding that were issued with an exercise price of $10
per share.
This example assumes that all compensation expense was recorded in prior years and the
options are qualified incentive stock options (ISOs) and, therefore, have no tax effect
upon exercise. The weighted average market price of FSP Corp’s common stock for 20X5
is $15 per share.
How should diluted EPS be computed?
PwC 7-73
Analysis
Step 1: Allocate undistributed earnings under the two-class method
Less: Dividends declared:
Common stock 20,000,000
Cumulative annual preferred stock dividend 1,000,0001
Participating preferred stock dividend 8,000,0002
Undistributed 20X5 earnings $21,000,000

1
2 million shares multiplied by $0.50 per share dividend
2
4 million “as-converted” shares of common stock [2 million preferred shares multiplied by 2 shares of common
stock per share of preferred] multiplied by $2 per share dividend paid on common stock
Common stock Preferred stock Total
Distributed earnings $20,000,000 $ 9,000,000 $29,000,000
Undistributed earnings 15,000,0001 6,000,0002 $21,000,000
$35,000,000 $15,000,000 $50,000,000
1
10 million common shares / (10 million + 4 million as-converted) = 71% multiplied $21 million
2
4 million as-converted shares / (10 million + 4 million as-converted) = 29% multiplied by 21 million
Step 2: Calculate Basic EPS
Common stock Preferred stock
Distributed earnings $2.00 $4.50
Undistributed earnings 1.50 3.00
Basic EPS $3.50 $7.50
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Step 3: Calculate the potential common shares related to options under the
treasury stock method
Number of shares issued upon exercise 1,200,000
Less: shares repurchased with proceeds
Cash proceeds (1,200,000 multiplied by $10) $12,000,000
Unamortized compensation cost1 —
Windfall tax benefits upon exercise1 —
Total proceeds $12,000,000
Divided by average stock price $15
Shares repurchased (800,000)
Incremental shares issued 400,000
1
None in this example as all compensation cost was previously recorded and the options are qualified ISOs
(i.e., no tax impact upon exercise)
Step 4: Determine the earnings per incremental share for each class of
security
Increase in Earnings add-back

Add-back to number of per incremental
income common shares share
Options 0 400,000 —
Convertible preferred
stock $15,000,000 4,000,000 $3.75
The security with the lowest earnings per incremental share has the most dilutive impact
on EPS. In this case, the options are most dilutive, followed by the convertible preferred,
so this is the sequence that is followed for determining diluted EPS.
Further, because the EPS associated with the convertible preferred stock is greater than
basic EPS, the convertible preferred stock is considered anti-dilutive, as illustrated below.
PwC 7-75
Step 5: Compute diluted EPS
Income Common shares Diluted EPS
As reported for
basic $35,000,000 10,000,000 $3.50
Options — 400,000
$35,000,000 10,400,000 $3.37 Dilutive
Convertible
15,000,000 4,000,000
preferred stock
$50,000,000 14,400,000 $3.47 Anti-dilutive
Because diluted EPS increases from $3.37 to $3.47 when convertible preferred shares are
included in the computation, the convertible preferred shares are anti-dilutive, and are
excluded from the computation of diluted EPS. Therefore, diluted EPS is reported as
$3.37.
This example illustrates the importance of following the proper sequencing when
determining whether potential common shares are dilutive or anti-dilutive. If all potential
common shares had been included in the diluted EPS computation without proper
sequencing, it would have appeared that diluted EPS is $3.47, because $3.47 is dilutive
versus the $3.50 computed for basic EPS. However, computing diluted EPS in the
manner required by ASC 260 produces a more dilutive result, and the reporting entity
reports $3.37.
7.5.9 Diluted EPS under the two-class method (as proposed in an exposure draft
of FAS 128)
ASC 260 does not provide an example of how to compute diluted EPS under the two-class
method. In the August 2008 ED of FAS 128, which was never finalized, the FASB
included guidance on computing diluted EPS under the two-class method, as well as three
examples.
The three examples are:
□ Common stock with participating preferred security
□ Two classes of common stock with different dividend rights when one is convertible
into the other
□ Two classes of common stock with different dividend rights when one class is
convertible into the other and there are convertible bonds outstanding
Although the computation methodology included in the exposure draft is not currently a
required methodology, it does represent useful guidance that should be considered.
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In computing diluted EPS under the two-class method described in the exposure draft to
FAS 128, undistributed earnings allocated away from common stockholders in the basic
EPS computation are reversed, and then re-allocated to each class of common or
potential common shares and participating securities that are assumed to be outstanding
for the period.
Continuing with the facts in Example 7-21, Example 7-22 illustrates the computation of
diluted EPS under the two-class method (as proposed in the exposure draft to FAS 128):
EXAMPLE 7-22
Diluted EPS under the two-class method proposed in the exposure draft to FAS 128
How does use of the two-class method for participating securities impact the computation
of diluted EPS?
Analysis
Step 1: Re-allocate undistributed earnings to preferred stockholders after assumed

exercise of options
4,000,000 if-converted shares / (10,000,000 + 4,000,000 if-converted + 400,000

incremental shares from options) = 28% multiplied by $21,000,000 = $5,833,333.33
Step 2: Re-compute diluted EPS after the reallocation of undistributed earnings to

preferred stockholders
Undistributed and
distributed earnings to Common Earnings per
common stockholders shares share
As reported-Basic $35,000,000 10,000,000 $3.50
Add-back:
Undistributed
earnings allocated
to preferred shares
in basic
computation $6,000,000
Options 400,000
Less: Undistributed
earnings reallocated
to preferred shares ($5,833,333) —
Subtotal $35,166,667 10,400,000 $3.38 Dilutive
Add-back:
Undistributed
earnings re-
allocated to
preferred shares $5,833,333 —
PwC 7-77
Undistributed and
distributed earnings to Common Earnings per
common stockholders shares share
Add-back:
Distributed earnings
to preferred shares $9,000,000 4,000,000
$3.47 Anti-
Total $50,000,000 14,400,000 dilutive
Because diluted EPS increases when convertible preferred shares are included in the
computation, the convertible preferred shares are anti-dilutive, and are ignored in the
computation of diluted EPS. Therefore, diluted EPS is reported as $3.38.
Summary of total amount allocated:
Common stock Preferred stock Total
Distributed earnings $20,000,000 $ 9,000,000 $29,000,000
Undistributed
earnings $15,166,667 $5,833,333 $21,000,000
Total $35,166,667 $14,833,333 $50,000,000
Summary of diluted earnings per share amounts:
Common stock Preferred stock
Distributed earnings $1.92 $2.25
Undistributed earnings $1.46 $1.46
Diluted EPS $3.38 $3.71
As the example demonstrates, when using the reallocation method proposed in the
exposure draft to amend FAS 128, diluted EPS is $3.38 per common share, as opposed to
$3.37 per common share. This incremental $0.01 per common share results from the
reallocation of undistributed earnings performed under this method. Assuming that the
options have been outstanding as common shares from the beginning of the period, the
reallocation method proposed in the exposure draft to amend FAS 128 results in less
undistributed earnings being allocated away from the common stock to the preferred
stock, and, as a result, EPS per common share is higher.
Reporting entities using the two-class method for the first time may use the method of
computing diluted EPS under the two-class method proposed in the August 2008 ED to
FAS 128. However, reporting entities that have not historically used this two-class
method should continue to compute diluted EPS in the manner they have historically
applied.
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7.6 Change in capital structure

EPS is affected by various changes in capital structure. In this section, we address those
relating generally to the financial statements. Other statements and schedules, such as
registration statements, are addressed in PwC’s SEC Volume. Changing from an LLC or
partnership to a C-corp is addressed in FSP 32.
7.6.1 Stock splits/reverse stock splits/stock dividends
If the number of common shares outstanding increases as a result of a stock dividend or

stock split, or decreases as a result of a reverse stock split, the reporting entity should
adjust the computations of basic and diluted EPS retroactively for all periods presented to
reflect that change in capital structure. If changes in common stock resulting from stock
dividends, stock splits, or reverse stock splits occur after the close of the period but either
(1) before issuance of the financial statements, or (2) before the effective date of the
registration statement, whichever is later, as applicable, the per-share computations for
those and any prior period financial statements presented should be based on the new
number of shares. If per-share computations reflect such changes in the number of
shares, ASC 260-10-55-12 requires disclosure of those changes, including the retroactive
treatment, explanation of the change made, and the date the change became effective.
The effective date of a stock split (i.e., the distribution date, which is the date that the
shares begin trading at their new split-adjusted price) may affect the form of disclosure in
the financial statements. Figure 7-9 illustrates the appropriate financial statement
presentation in various situations for a registrant that is already a public entity.
Figure 7-9
Presentation of EPS upon stock splits
The following assumptions are applicable in each case:
□ The latest balance sheet date is December 31, 20X4.
□ The accountant’s report date and financial statement issuance date through filing of
the Annual Report on Form 10-K is January 31, 20X5.
□ The variable assumptions are the declaration dates and effective dates of the stock
split.
PwC 7-79
Split Date
Case Declared Effective Financial statement presentation
I 11/15/X4 12/16/X4 Split would be reflected in 12/31/X4 balance sheet,

or 20X4 statement of changes in stockholders’ equity,
1/16/X5 and in per share data for all periods presented.
II 1/16/X5 1/31/X5 Same as I.
III 1/20/X5 2/20/X5 Split would be disclosed in a footnote along with

the pro forma effect (labeled unaudited) on the
12/31/X4 balance sheet. Historical per share data
would remain on a pre-split basis, and pro forma
per share data (labeled “unaudited”) on a post-split
basis would be disclosed in the notes to the
Case III illustrates the appropriate presentation when, at the time financial statements
are issued, a split has been declared, but is not effective. In this situation, historical EPS
must be disclosed on a pre-split basis since the subsequent event “triggering” the split
(i.e., its effectiveness) has not occurred as of the time the financial statements are issued.
However, once the split is effective, the reported historical EPS becomes irrelevant in
relation to post-split shares outstanding, as well as to post-split market price.
Consequently, if a split has been declared, but is not effective at the date the financial
statements are issued, pro forma EPS (labeled “unaudited”) on a post-split basis should
be presented in the footnotes in addition to historical EPS, which is presented on a
pre-split basis. If the financial statements are reissued after the effective date, the
aforementioned pro forma amounts would become historical EPS and the
previously-disclosed historical amounts would be deleted.
For financial reporting considerations related to the filing of a registration statement,

refer to SEC 4220.25.
7.6.2 Securities issued for nominal consideration
Securities issued for "nominal consideration" (or "nominal issuances") should be

reflected in a manner similar to a stock split or stock dividend, for which retroactive
treatment is required by ASC 260-10-55-12. Accordingly, in computing basic EPS,
nominal issuances of common stock would be included for all periods. In computing
diluted EPS, nominal issuances of common stock and potential common stock (e.g.,
options) would be included for all periods. In addition, retroactive treatment is required
even if antidilutive.
While there is no specific guidance on what constitutes "nominal consideration," SAB 98

states that it should be determined based upon facts and circumstances by a comparison
of the "consideration an entity receives" to the security's fair value (at the date of
issuance). Based on discussions with SEC staff, it is our understanding that the definition
of "consideration an entity receives" would include cash consideration (including cash to
be paid upon exercise of a warrant/option) as well as goods and services to be received,
7-80 PwC
such that any compensation expense associated with the value of the securities issued
(whether already recognized or deferred to future periods as a result of vesting
provisions) would be considered part of the consideration. The total of the consideration
would be utilized in evaluating whether at the issuance or grant date such amounts are
nominal.
As a result of this definition, it would be extremely rare for a security to be considered to

have been issued for nominal consideration. Accordingly, virtually all pre-IPO security
and option issuances would follow the guidance in ASC 260.
7.6.3 Stock rights plans
A rights issue whose exercise price at issuance is less than the fair value of the stock
contains a bonus element that is similar to a stock dividend. If a rights issue contains
such a bonus element and it is offered to all existing stockholders, the reporting entity
should adjust basic and diluted EPS retroactively for the bonus element for all periods
presented. If this occurs after the close of the period but before issuance of the financial
statements, the per-share computations for those and any prior period financial
statements presented are based on the new number of shares, reflecting the bonus
element.
If the ability to exercise the rights issue is contingent on an event other than the passage
of time (e.g., change in control), the reporting entity need not consider the bonus element
in the denominator of either basic or diluted EPS until such time as the contingency is
resolved. See further discussion in ASC 260-10-55-14.
7.6.4 Distributions to stockholders with components of stock and cash
ASC 260-10-55-12 provides guidance for real estate investment trusts (REITs) that
declare a distribution that stockholders can elect to receive in cash or shares of equivalent
value, with a potential limitation on the total amount of cash that stockholders can elect
to receive in the aggregate.
The stock portion of a distribution to stockholders that allows them to elect to receive
cash or shares with a potential limitation on the total amount of cash that all stockholders
can elect to receive in the aggregate is considered a share issuance. Therefore, for EPS
computation purposes, the stock portion of the distribution is reflected in EPS
prospectively, consistent with the treatment of other new share issuances.
7.6.5 IPO or spin-off of a subsidiary and recapitalizations
When a reporting entity completes an IPO or a spin-off of either an existing subsidiary or

a “carve-out” business, questions often arise as to how to compute EPS in the historical
financial statements of the subsidiary or carve-out business.
In computing basic EPS for a carve-out business, the number of shares issued to the
owner upon the legal formation of the entity that holds the business and contribution of
that business to the entity is used as the denominator for all periods presented, akin to
the treatment of a stock split. In this case, the number of shares issued simply reflects a
recharacterization of the capital account previously held by the owner.
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With respect to an existing subsidiary (i.e., an entity with a separate legal identity), the
historical number of shares outstanding during each period is reflected in the
denominator for all periods presented. However, issuance of shares to new investors in
connection with the IPO/spin-off is treated prospectively from the issuance date. In
connection with a stock split, EPS is restated for all periods presented. See FSP 7.6.1 for
details.
In computing diluted EPS for a carve-out business or an existing subsidiary whereby

parent options are exchanged for options in the affiliate at the date of the IPO/spin-off,
the dilutive effect of the affiliate options exchanged for the parent options is included in
the denominator on a prospective basis. Previous periods are not affected, as the
exchange of parent options for affiliate options is considered a modification of the terms
of the original award. However, if the affiliate issues options and warrants to the parent
company as part of the initial capitalization of the carved-out business, then the options
are treated as if they were outstanding for all periods presented. It is also common for
reporting entities to recapitalize or reorganize their legal entity structure in preparation
for an IPO. There is limited guidance on such transactions. However, ASC 260-10-55-17
provides guidance on computing EPS in reorganizations.
ASC 260-10-55-17
When common shares are issued to acquire a business in a business combination, the
computations of EPS shall recognize the existence of the new shares only from the
acquisition date. In reorganizations, EPS computations shall be based on analysis of the
particular transaction and the provisions of this Subtopic.
The reporting entity should evaluate the facts and circumstances of each situation when
concluding on the appropriate EPS treatment. For example, some transactions may result
in an exchange of equity interests, but no change in relative shareholder rights, rank, or
value before and after the transaction. Such reorganizations may be equivalent to a stock
split (simply changing the form of legal ownership to a new structure) and require
retrospective treatment for EPS purposes, even if effected after the latest balance sheet
date. Any financial statements issued, or SEC filings made, after the effective date of such
an event should reflect the transaction retrospectively (i.e., it should be pushed back to
prior periods).
In other transactions, often involving more complex capital structures, the reorganization
transaction may affect a value-for-value exchange of equity interests at the point of the
recapitalization, which results in a change in relative shareholder rights or rank before
and after the transaction. This transaction may be more akin to the repurchase of equity
interests through the issuance of new equity interests, and be afforded prospective
treatment in the EPS computation.
If, in conjunction with an IPO, a conversion of outstanding securities will occur

subsequent to the latest balance sheet date and the conversion will result in a material
reduction of earnings per share (excluding effects of offering proceeds), pro forma EPS
for the latest year and interim period should be presented giving effect to the conversion
(but not the offering proceeds).
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Question 7-5
Under ASC 805, Business Combinations, a common control merger is recorded at
carryover basis, and the receiving entity should reflect the acquired business for all prior
periods (or since the date common control was obtained, if later), as if the entities had
always been combined. How should the entity reflect the impact of the merger on EPS?
PwC response
If the receiving entity issued shares to the stockholders of the contributing entity, this
should be reflected in EPS in a similar fashion as a stock split (i.e., recharacterization of
the historical common ownership) and reflected retrospectively for all periods presented
under common control. The ratio of exchange of receiving entity shares issued for each
share of the transferred entity should be multiplied by the weighted average number of
shares and potential shares of the transferred entity for each reporting period, and added
to the number of shares and potential shares of the receiving entity.
If the receiving entity paid cash to the stockholders of the contributing entity, there
should generally be no impact to EPS. However, if the receiving entity issued shares to
new investors to raise that cash, consideration should be given as to the treatment of the
shares in the historical or pro forma EPS computations.
7.6.6 Computing EPS when dividends are paid from the proceeds of an IPO
A private company or subsidiary may use the proceeds of an IPO to pay a dividend to its
promoters/owners or parent company. In some situations, the dividend may exceed
earnings in the most recent year. In such a case, the reporting entity should include
unaudited pro forma per share data (for the latest year and interim period only) on the
face of the income statement, giving effect to the number of shares whose proceeds would
be necessary to pay the portion of the dividend that exceeds the current year’s earnings.
The pro forma EPS requirement also applies to both of the following situations.
□ A dividend that is declared after the date of the latest balance sheet included in the
registration statement if the dividend exceeds earnings for the previous twelve
months
□ A planned (but not yet declared) dividend if the planned dividend exceeds earnings
for the previous twelve months, even if the dividend will not be funded from the
proceeds of the IPO (e.g., the dividends were/will be funded from the proceeds of a
line of credit or cash on hand)
SEC FRM 3420.2 addresses the application of SAB Topic 1.B.3 when the dividend to be
paid exceeds both the last twelve months’ earnings and the proceeds from the equity
offering. In that instance, the pro forma EPS computation should not reflect more shares
than will be outstanding after the offering.
To present a transparent picture for the investor, reporting entities should also adjust the
numerator of the pro forma EPS computation to reflect the incremental interest expense
(net of tax) relating to the portion of the dividend that exceeds both the gross proceeds
from the equity offering and the previous 12 months’ earnings.
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7.6.7 Partially paid shares and partially paid stock subscriptions
If a reporting entity has common shares issued in a partially paid form, and those shares
are entitled to dividends in proportion to the amount paid, the common-share equivalent
of those partially paid shares is included in the basic EPS computation if they were
entitled to participate in dividends.
Partially paid stock subscriptions that do not share in dividends until fully paid are
considered the equivalent of warrants, and are included in the diluted EPS computation
using the treasury stock method. The unpaid balance is assumed to represent proceeds
used to purchase stock, and the incremental number of shares to be included is the
difference between the number of shares subscribed and the number of shares assumed
to be purchased.
7.6.8 Bankruptcy
Under ASC 852-10-45-16, EPS is computed during the bankruptcy period following all of
the provisions of ASC 260. This standard specifically notes that any potential changes in
the capital structure as a result of the plan of bankruptcy are disclosed but not reflected in
the computation of EPS.
7.6.9 Computing EPS when changing from S-corp to C-corp, partnership to

C-corp, or LLC to C-corp
EPS should be presented for all periods based on historical net income unadjusted for
income taxes or other pro forma adjustments.
7.7 EPS in prior period adjustments

In the event of a restatement of prior period earnings, retrospective application of a new
accounting principle, or a discontinued operation, the reporting entity should restate
prior EPS data and disclose the per-share effect of the restatement in the period of
restatement.
The reporting entity should compute restated EPS as if the restated income or loss had
been reported originally in the prior periods. It is possible that common stock assumed to
be issued upon exercise, conversion, or issuance of potential common shares may not be
included in the computation of restated EPS amounts. That is, retroactive restatement of
income from continuing operations could cause potential common shares originally
determined to be dilutive to become anti-dilutive or vice versa. Retroactive restatement
may also cause the numerator of the EPS computation to change by an amount that
differs from the amount of the retroactive adjustment.

EPS is only required for entities with publicly-traded equity securities, including those
that have filed a registration statement to sell equity securities. Entities that choose to
present EPS are required to comply with the requirements of ASC 260.
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Chapter 8:
Other assets
PwC 8-1
Other assets

This chapter provides the presentation and disclosure requirements for assets that
are not covered in other chapters of this guide. This includes:
□ Receivables
□ Inventory
□ Prepaid assets and other current and noncurrent assets
□ Property, plant, and equipment
□ Assets held for sale
□ Intangible assets subject to amortization
□ Goodwill and intangible assets not subject to amortization
□ Long-term contracts
Presentation and disclosure requirements for common assets that are not
included in this chapter are covered elsewhere in this guide, as follows: cash and
restricted cash are covered in FSP 6; investments are covered in FSP 9; equity
method investments are covered in FSP 10; lease receivables are covered in
FSP 14; recognition of intangible assets and goodwill in connection with a
business combination are covered in FSP 17; securitized receivables and
repurchase agreements are discussed in FSP 22; and receivables from related
parties are covered in FSP 26.
8.2 Scope
The prevailing presentation and disclosure guidance comes from US GAAP and is
applicable to all reporting entities. The primary authoritative guidance is listed
below for each type of asset. If other guidance exists on specific points related to
the asset type, it is noted in the respective asset section.
ASC 310, Receivables
ASC 330, Inventory
ASC 340, Deferred Costs and Other Assets
ASC 350, Intangibles – Goodwill and Other
ASC 360, Property, Plant and Equipment
ASC 910, Contractors – Construction
ASC 912, Contractors – Federal Government
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Other assets
S-X 5-02 applies only to SEC registrants, and provides guidance on certain assets
that are required to be presented as individual balance sheet line items, if
material.
New guidance
ASU 2015-11, Simplifying the Measurement of Inventory, requires that inventory

within the scope of the guidance be measured at the lower of cost and net
realizable value and impacts the presentation and disclosure of inventory. The
guidance is effective for public business entities for fiscal years, including interim
periods within those fiscal years, beginning after December 15, 2016. For all other
entities, the guidance is effective for fiscal years beginning after December 15,
2016, and interim periods within fiscal years beginning after December 15, 2017.
Prospective application is required. Early adoption is permitted as of the
beginning of an interim or annual reporting period.

Liabilities, impacts the presentation and disclosure of financial assets and
financial liabilities, including trade receivables and payables. See FSP 9 for
information on the effective date of ASU 2016-01. Presentation and disclosure
guidance related to the recognition and measurement of financial instruments is
included in LI 12.
8.3 Receivables
Receivables exist in virtually every reporting entity, though their nature varies
depending on the characteristics of the business. Accordingly, the guidance
governing the receivables will also vary. This section addresses presentation and
disclosure considerations for the following topics:
□ Accounts and notes receivable and financing receivables, including allowances

for credit losses and impaired loans
□ Shareholder and other receivables
□ Discounts or premiums on note receivables
□ Loan origination and other fees, including net fees and costs
□ Hypothecation or other pledging of receivables
8.3.1 Accounts and notes receivable and financing receivables
The term “accounts and notes receivable” is used in S-X 5-02 and is generally
consistent with the “financing receivable” terminology used in US GAAP.
Financing receivables are contractual rights to receive cash either on demand or
on fixed or determinable dates, and are recognized as an asset on the balance
sheet. Examples of financing receivables include trade accounts receivable, notes
receivable, credit card receivables, loans, and certain receivables relating to a
lessor’s rights to payments from a lease.
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Other assets
8.3.1.1 Presentation requirements
ASC 310 permits loans or trade receivables to be presented as aggregate amounts.

However, major categories of loans or trade receivables should be presented
separately either on the balance sheet or in the footnotes. Receivables that are
held for sale should be presented separately on the balance sheet from other
receivables.
Receivables whose amounts include unearned discounts (other than cash or

quantity discounts), finance charges, or prepaid interest should reflect those items
as deductions from the related receivable. Allowance for doubtful accounts should
be shown as a reduction of the related receivables.
Notes and accounts receivable from officers, employees, or affiliated companies

are required to be disclosed separately on the balance sheet. Additionally,
ASC 310-10-45-14 requires notes received as equity contributions to be presented
in equity. Reporting such a note as an asset is generally not appropriate.
SEC registrants are required to separately disclose major categories of accounts

and notes receivable, including receivables from customers (trade); related
parties; underwriters, promoters, and employees (other than related parties)
which arose in a manner other than the ordinary course of business; and
receivables held for sale (reported at lower of cost or fair value).
In addition, if the aggregate amount of notes receivable exceeds 10 percent of the

aggregate amount of receivables, SEC registrants must separately disclose
accounts receivable and notes receivable either on the balance sheet or in a
footnote.
8.3.1.2 Disclosure requirements
ASC 310-10-50-2 specifies the information required to be addressed in an

accounting policy footnote for all loans and trade receivables.
ASC 310-10-50-2 [edits applicable upon adoption of ASU 2016-13]

The summary of significant accounting policies shall include the following:
a. The basis for accounting for loans and trade receivables

b. The method used in determining the lower of cost [amortized cost basis] or
fair value of nonmortgage loans held for sale (that is, aggregate or individual
asset basis)
c. The classification and method of accounting for interest-only strips, loans,
other receivables, or retained interests in securitizations that can be
contractually prepaid or otherwise settled in a way that the holder would not
recover substantially all of its recorded investment
d. The method for recognizing interest income on loan and trade receivables,
including a statement about the entity’s policy for treatment of related fees
and costs, including the method of amortizing net deferred fees or costs.
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Other assets
Reporting entities are also required to disclose the allowance for credit losses
(i.e., allowance for doubtful accounts), unearned income, unamortized premiums
and discounts, and net unamortized deferred fees and costs in its financial
statements. In addition, reporting entities should disclose their policy for writing
off uncollectible trade accounts receivable (excluding credit card receivables) that
have a contractual maturity of one year or less, and arose from the sale of goods or
services.
Receivables are generally considered to be financial assets, and as such, reporting

entities are required to comply with the fair value disclosure requirements of
ASC 825, Financial Instruments, discussed in FSP 20. However, reporting entities
do not need to provide the fair value disclosures for trade receivables whose
carrying value approximates fair value. After adoption of ASU 2016-01, reporting
entities will not need to provide the fair value disclosures for trade receivables due
in one year or less.
ASC 310-10-50-6 through 50-7A require accounting policy disclosures by class of

financing receivables, except for the following types of financing receivables, as
detailed in ASC 310-10-50-5A and 5B:
□ Receivables measured at fair value through earnings (see FSP 20)
□ Receivables measured at lower of cost or fair value (see ASC 948-310-50)
□ Trade accounts receivable (other than credit card receivables) that have a
contractual maturity of one year or less, and arose from the sale of goods or
services
□ Participant loans in defined contribution pension plans
□ Loans acquired with deteriorated credit quality (see discussion under

“troubled debt restructuring by a creditor” below)
The accounting policy disclosures should include the following:

a. The policy for placing financing receivables, if applicable, on nonaccrual
status (or discontinuing accrual of interest)
b. The policy for recording payments received on nonaccrual financing
receivables, if applicable
c. The policy for resuming accrual of interest
d. Subparagraph superseded by Accounting Standards Update No. 2010-20
e. The policy for determining past due or delinquency status.
As required by ASC 310-10-50-7 and 7A, reporting entities should also disclose the
amount of financing receivables on nonaccrual status and the amounts that are 90
days or more past due and still accruing, as of each balance sheet date. They
PwC 8-5
Other assets
should also disclose the aging for financing receivables that are past due at the end
of the reporting period.
Reporting entities may have credit exposure related to off-balance-sheet loan

commitments, standby letters of credit, certain financial guarantees, and other
similar instruments (other than those within the scope of ASC 815, Derivatives
and Hedging). In addition to the disclosures required by ASC 450, Contingencies
(discussed in FSP 23), reporting entities should also describe the accounting
policies and methods used to estimate its liabilities related to off-balance-sheet
credit exposures and related charges. The disclosure should discuss factors that
influenced management’s judgment and the risk elements relevant to their
financial instruments.
In addition, reporting entities are required to disclose quantitative and qualitative

information by class that indicates the credit quality of their financing receivables.
This information should include all of the following:
□ A description of the credit quality indicator
□ The recorded investment in financing receivables by credit quality indicator
□ The date/range of dates for which each credit quality indicator was updated
In addition, if the reporting entities disclose internal risk ratings, they should
provide qualitative information on how those ratings relate to the risk of loss.
New guidance
Upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial

Instruments, ASC 310-10-50-6 will be superseded.
Allowance for credit losses related to financing receivables
The disclosure requirements discussed in this section apply to financing

receivables, except for the receivables listed in ASC 310-10-50-7B (e.g., certain
trade accounts receivable, receivables measured at fair value with changes in fair
value reported in earnings, receivables measured at lower of cost or fair value, and
participant loans in defined contribution pension plans), and a lessor’s net
investment in leveraged leases.
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Other assets
ASC 310 requires reporting entities to disclose information about financing

receivables’ allowance for credit losses at a portfolio segment level.
The following disclosures related to the allowance for credit losses are required by
portfolio segment.
ASC 310-10-50-11B
a. A description of the entity’s accounting policies and methodology used to

estimate the allowance for credit losses, including all of the following:
1. A description of the factors that influenced management’s judgment,

including both of the following:
i. Historical losses
ii. Existing economic conditions.
2. A discussion of risk characteristics relevant to each portfolio segment
3. Identification of any changes to the entity’s accounting policies or

methodology from the prior period and the entity’s rationale for the
change.
b. A description of the policy for charging off uncollectible financing

receivables
c. The activity in the allowance for credit losses for each period, including all of
the following:
1. The balance in the allowance at the beginning and end of each period
2. Current period provision
3. Direct write-downs charged against the allowance
4. Recoveries of amounts previously charged off.
d. The quantitative effect of changes identified in item (a)(3) on item (c)(2)
e. The amount of any significant purchases of financing receivables during

each reporting period
f. The amount of any significant sales of financing receivables or

reclassifications of financing receivables to held for sale during each
reporting period
g. The balance in the allowance for credit losses at the end of each period
disaggregated on the basis of the entity’s impairment method
h. The recorded investment in financing receivables at the end of each period

related to each balance in the allowance for credit losses, disaggregated on
the basis of the entity’s impairment methodology in the same manner as the
disclosure in item (g).
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Other assets
In order to disaggregate the information required by items (g) and (h) above on
the basis of the impairment methodology, ASC 310-10-50-11C requires reporting
entities to separately disclose:
□ Amounts collectively evaluated for impairment (determined under

ASC 450-20)
□ Amounts individually evaluated for impairment (determined under

ASC 310-10-35)
□ Amounts related to loans acquired with deteriorated credit quality

(determined under ASC 310-30)
In addition, asset valuation allowances for losses should be deducted from the
assets or group of assets to which the allowances relate and should have
appropriate footnote disclosures.
Finally, if loan products have contractual terms that expose the reporting entities
to risks and uncertainties, the disclosure requirements of ASC 275, Risks and
Uncertainties, may be required. See FSP 24 for discussion of disclosure
requirements associated with risks and uncertainties.
New guidance
Upon adoption of ASU 2016-13, ASC 310-10-50-11B will be superseded.
Impaired loans
ASC 310-10-35-16 defines impaired loans.

A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
For financing receivables that meet the definition of impaired loans, reporting
entities are required to disclose both the accounting policy and the amounts of
such loans. In addition, the following disclosures are required for partially
charged off loans. These disclosures are not applicable to fully charged off loans
since both the recovered investment and allowance for credit losses will equal
zero.
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Other assets

An entity shall disclose all of the following information about loans that meet
the definition of an impaired loan in paragraphs 310-10-35-16 through 35-17 by
class of financing receivable:
a. As of the date of each statement of financial position presented:

1. Subparagraph superseded by Accounting Standards Update No. 2010-
20
2. Subparagraph superseded by Accounting Standards Update No. 2010-

20
3. The recorded investment in the impaired loans and both of the

following:
i. The amount of that recorded investment for which there is a related

allowance for credit losses determined in accordance with
Section 310-10-35 and the amount of that allowance
ii. The amount of that recorded investment for which there is no

related allowance for credit losses determined in accordance with
Section 310-10-35.
4. The total unpaid principal balance of the impaired loans.
b. The entity’s policy for recognizing interest income on impaired loans,

including how cash receipts are recorded
c. For each period for which results of operations are presented:

1. The average recorded investment in the impaired loans
2. The related amount of interest income recognized during the time

within that period that the loans were impaired
3. The amount of interest income recognized using a cash-basis method of

accounting during the time within that period that the loans were
impaired, if practicable.
d. The entity’s policy for determining which loans the entity assesses for
impairment under Section 310-10-35
e. The factors considered in determining that the loan is impaired.
Reporting entities should disclose the activity in the total allowance for credit
losses related to loans for each period presented, including the balance in the
allowance at the beginning and end of each period, additions charged to
operations, direct write-downs charged against the allowance, and recoveries of
amounts previously charged off.
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Other assets
Finally, when a change in present value attributable to the passage of time is

recorded as interest income, footnote disclosure of the amount of the change is
required.
New guidance
Upon adoption ASU 2016-13, ASC 310-10-50-15 will be superseded.
Troubled debt restructurings by a creditor
ASC 310-40 requires creditors to disclose the amount of commitments, if any, the
reporting entities have made to lend additional funds to debtors whose receivables
to the creditor have been modified in a troubled debt restructuring.
However, the disclosures required by ASC 310-10-50-15(a) and 15(c) are not
required for impaired loans that have been restructured in a troubled debt
restructuring involving a modification of terms in years after the restructuring if
both of the following conditions exist:
□ The interest rate in the restructuring agreement is greater than or equal to the
rate the creditor was willing to accept for a new loan with comparable risk at
the time of the restructuring
□ The loan is not impaired based on the terms of the restructuring agreement
This disclosure exception should be applied consistently for all restructured loans
in a troubled debt restructuring.
ASC 310-10-50-31 through 50-34 also provide disclosure requirements for a

creditor’s troubled debt restructuring of financing receivables, including a
creditor’s modification of a lease receivable that meets the definition of a troubled
debt restructuring. This guidance is not applicable to certain receivables listed in
ASC 310-10-50-32 (i.e., certain trade accounts receivable, receivables measured at
fair value with changes in fair value reported in earnings, receivables measured at
lower of amortized cost basis or fair value, and participant loans in defined
contribution pension plans).
For all income statement periods presented, reporting entities must disclose the
following for any troubled debt restructurings of financing receivables occurring
during the period:
□ Qualitative and quantitative information, by class, including how the

receivable was modified and the modification’s financial effects
□ Qualitative information, by portfolio segment, discussing how such

modifications factor into the determination of the allowance for credit losses
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Other assets
If there was a payment default on any financing receivables that were modified
within the last twelve months, the reporting entities should also disclose the
following for each income statement presented:
□ Qualitative and quantitative information, by class, indicating the types and

amount of financing receivables that defaulted
□ Qualitative information, by portfolio segment, discussing how such defaults

factor into the determination of the allowance for credit losses
Loans acquired with deteriorated credit quality
Some reporting entities purchase loans that have deteriorated credit quality.
ASC 310-30 provides specific disclosure requirements for these types of
receivables.
Reporting entities must describe in their footnotes how prepayments are

considered when determining contractual cash flows and cash flows expected to
be collected. In addition, ASC 310-30-50-2 requires additional disclosures.
ASC 310-30-50-2
In addition to disclosures required by other generally accepted accounting
principles (GAAP), for each balance sheet presented, an investor shall disclose the
following information about loans within the scope of this Subtopic:
a. Separately for both those loans that are accounted for as debt securities and
those loans that are not accounted for as debt securities, all of the following.
1. The outstanding balance (see paragraph 310-30-50-3) and related
carrying amount at the beginning and end of the period
2. The amount of accretable yield at the beginning and end of the period,
reconciled for additions, accretion, disposals of loans, and reclassifications to
or from nonaccretable difference during the period
3. For loans acquired during the period, the contractually required payments
receivable, cash flows expected to be collected, and fair value at the
acquisition date
4. For those loans within the scope of this Subtopic for which the income
recognition model in this Subtopic is not applied in accordance with
paragraph 310-30-35-3, the carrying amount at the acquisition date for loans
acquired during the period and the carrying amount of all loans at the end of
the period.
b. Further, for those loans that are not accounted for as debt securities, both of
the following:
1. The amount of both of the following:
i. Any expense recognized pursuant to paragraph 310-30-35-10(a)
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ii. Any reductions of the allowance recognized pursuant to

paragraph 310-30-35-10(b)(1) for each period for which an income
statement is presented.
2. The amount of the allowance for uncollectible accounts at the beginning
and end of the period.
New guidance
Upon adoption ASU 2016-13, ASC 310-30-50-2 will be superseded.
8.3.2 Shareholder and other receivables
Generally, reporting entities should separately state on the balance sheet all
amounts receivable from officers and directors resulting from sales of stock or
from other transactions (other than expense advances or sales on normal trade
terms). This is true regardless of whether such amounts are shown as assets or
deductions from shareholders’ equity. Refer to FSP 5 for further discussion on
determining the appropriate presentation of these receivables.
In accordance with S-X 5-02(17), other receivables that are in excess of 5% of total
assets should be presented separately on the face of the balance sheet or in a
footnote.
8.3.3 Discounts or premiums on note receivables
Often, the face amount of a note receivable does not represent the present value of
the consideration given or received in the exchange. In this situation, a discount or
premium is recorded.
ASC 835-30 includes the presentation and disclosures required for discounts or
premiums on note receivables.
ASC 835-30-45-1A through 45-3

45-1A. The discount or premium resulting from the determination of present
value in cash or noncash transactions is not an asset or liability separable
from the note that gives rise to it. Therefore, the discount or premium
shall be reported in the balance sheet as a direct deduction from or
addition to the face amount of the note. Similarly, debt issuance costs
related to note shall be reported in the balance sheet as a direct deduction
from the face amount of that note. The discount, premium, or debt
issuance costs shall not be classified as a deferred charge or deferred
credit.
45-2. The description of the note shall include the effective interest rate. The
face amount shall also be disclosed in the financial statements or in the
notes to the statements.
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45-3. Amortization of discount or premium shall be reported as interest

expense in the case of liabilities or as interest income in the case of assets.
Amortization of debt issuance costs also shall be reported as interest
expense.
See FSP 12 for further discussion of discount and premium presentation and
disclosure considerations from the debtor’s perspective.
8.3.4 Loan origination and other fees
The unamortized balance of loan origination, commitment, or other fees or costs,

and purchase premiums and discounts that are being recognized as an adjustment
of yield, should be reported on the balance sheet as part of the loan balance to
which it relates. Any commitment fee that meets the criteria of ASC 310-20-35-3
should be classified as deferred income in the financial statements.
Per ASC 310-20-45-3, loan origination, commitment, and other fees and costs
recognized as an adjustment of yield should be reported as part of interest income.
Amortization of other fees, such as commitment fees that are being amortized on a
straight-line basis over the commitment period or included in income when the
commitment expires, should be reported as service fee income.
8.3.4.1 Net fees and costs
Reporting entities may acquire a loan by initially lending money or by purchasing

the loan from another party. Typically, nonrefundable fees and costs are
associated with these lending activities and loan purchases.
As part of the disclosure of the method for recognizing interest income on loans,
reporting entities should also include their accounting policy for related fees and
costs and their method of amortizing net deferred fees or costs.
ASC 310-20-50 includes other required disclosures related to net fees and costs.
ASC 310-20-50-2
Entities that anticipate prepayments in applying the interest method shall disclose
that policy and the significant assumptions underlying the prepayment estimates.
ASC 310-20-50-3
The unamortized net fees and costs shall be reported as a part of each loan
category. Additional disclosures such as unamortized net fees and costs may be
included in the notes to the financial statements if the lender believes that such
information is useful to the users of financial statements.
ASC 310-20-50-4 requires reporting entities to disclose the net amount of credit
card fees received and costs for both purchased and originated credit cards
capitalized at the balance sheet date and the related accounting policy and
amortization periods.
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8.3.5 Hypothecation or other pledging of receivables
S-X 4-08(b) requires disclosure of the amount of receivables mortgaged, pledged,

or otherwise subject to lien. Any obligations collateralized should also be
identified.
8.4 Inventory
The presentation requirements for inventory are generally dictated by SEC
guidance, while the disclosure requirements are found in both SEC and US GAAP
guidance. The extent of disclosure requirements varies depending on the method
of accounting for inventory.
8.4.1 General presentation requirements
S-X 5-02(6)(a) requires an SEC registrant to state separately on the balance sheet
or in a footnote the amounts of major classes of inventory, such as finished goods,
inventoried costs relating to long-term contracts or programs, work in process,
raw materials, and supplies.
Inventory markdowns attributed to an exit plan or other restructuring activity

(not accounted for as discontinued activity) should be classified on the income
statement as a component of cost of goods sold.
8.4.2 General disclosure requirements
The primary basis of accounting for inventories is cost, provided cost is not higher
than the net amount realizable from the subsequent sale of the inventories.
Reporting entities are required to disclose the basis of accounting for inventories
(e.g., lower of cost or market1). When a significant change in basis occurs,
disclosures regarding the nature of the change and its effect on income are
required.
S-X 5-02(6)(b)
The basis of determining the amounts shall be stated.
If “cost” is used to determine any portion of the inventory amounts, the
description of this method shall include the nature of the cost elements included
in inventory. Elements of “cost” include, among other items, retained costs
representing the excess of manufacturing or production costs over the amounts
charged to cost of sales or delivered or in-process units, initial tooling or other

deferred startup costs, or general and administrative costs.
The method by which amounts are removed from inventory (e.g., “average cost,”
“first-in, first-out,” “last-in, first-out,” “estimated average cost per unit”) shall be
described. If the estimated average cost per unit is used as a basis to determine
amounts removed from inventory under a total program or similar basis of
1 Lower of cost or net realizable value, effective upon adoption of ASU 2015-11.
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accounting, the principal assumptions (including, where meaningful, the

aggregate number of units expected to be delivered under the program, the
number of units delivered to date and the number of units on order) shall be
disclosed.
If any general and administrative costs are charged to inventory, state in a note to
the financial statements the aggregate amount of the general and administrative
costs incurred in each period and the actual or estimated amount remaining in
inventory at the date of each balance sheet.
ASC 330-10-50-1 also requires disclosure of the measurement basis and the
nature of any change therein as well as, if material, the effect on income. In the
relatively rare instances that inventory is stated above cost or at sales price, this
fact should be disclosed. If inventory is presented at standard cost, it should be
titled appropriately.
ASC 330-10-30-12
Standard costs are acceptable if adjusted at reasonable intervals to reflect current
conditions so that at the balance-sheet date standard costs reasonably
approximate costs computed under one of the recognized bases. In such cases
descriptive language shall be used which will express this relationship, as, for
instance, “approximate costs determined on the first-in first-out basis,” or, if it is
desired to mention standard costs, “at standard costs, approximating average
costs.”
ASC 330-10-50-1 also requires disclosure of the method by which costs are
removed from inventory (e.g., average cost, first-in, first-out (FIFO), last-in,
first-out (LIFO), estimated average cost per unit). If LIFO or estimated average
cost per unit is used, additional disclosures are required. LIFO disclosures are
detailed in FSP 8.4.3. If the estimated cost per unit method is used, reporting
entities should disclose the principal assumptions, including, where meaningful,
the aggregate number of units expected to be delivered under the program, the
number of units delivered to date, and the number of units on order.
For any inventory mortgaged, pledged, or otherwise subject to lien, the

approximate amounts thereof and the related obligations collateralized by those
assets should be disclosed. In addition, when substantial and unusual losses result
from the application of the lower of cost or market rule to inventories or firm
purchase commitments, disclosure of the amount of the loss generally should be
identified separately from cost of goods sold on the income statement.2
Some reporting entities maintain a stock of spare parts that is used in connection
with maintenance agreements with customers for customer-owned equipment.
Often, when the reporting entities replace a particular part, the removed part is
repaired and maintained for future use. The refurbished parts should be classified
2 After adoption of ASU 2015-11, reporting entities will be required to disclose in the footnotes any
substantial and unusual losses that result from the subsequent measurement of inventory.
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as inventories, and a loss in the utility of such parts should be recorded in the
period in which it occurs, in accordance with ASC 330-10-35-2.
8.4.3 Last-in, first-out (LIFO) inventories
Reporting entities that use LIFO for tax reporting purposes are required to also
use LIFO for accounting reporting purposes under the LIFO conformity
requirement (Internal Revenue Code 472-2(e)). Supplemental disclosure of
non-LIFO information is allowed, as long as it accompanies the primary LIFO
statement, and is clearly labeled as being supplemental.
When the LIFO inventory method is used, S-X 5-02(6)(c) requires reporting
entities to disclose the excess of replacement or current cost over stated LIFO
value. This disclosure can be made parenthetically on the face of the balance sheet
or in a footnote. In addition, if the method of calculating LIFO inventory does not
allow for the practical determination of amounts assigned to major classes of
inventory, S-X 5-02(6)(a) requires the amounts of those classes to be stated under
cost flow assumptions other than LIFO. However, the excess of such total
amounts over the aggregate LIFO amount should be shown as a deduction to
arrive at the amount of LIFO inventory.
SAB Topic 11.F, LIFO Liquidations, requires sufficient disclosure in the footnotes
of the impact of LIFO liquidations on net income and earnings per share.
Furthermore, these effects should not receive any special treatment on the income
statement (e.g., they should be included in the same line item where inventory
costs are expensed).
8.4.3.1 LIFO used for a portion of inventories
If LIFO is not used for all inventories, then disclosure is recommended regarding
the extent to which LIFO is used, which generally means the nature and dollar
amount of inventories priced at LIFO and under other methods.
8.4.4 Change in inventory costing method
A change in inventory costing method is a change in accounting principle. As such,

reporting entities that change their method of inventory costing are required to
justify and disclose the change and explain why the newly adopted principle is
preferable.
The effect of the change on the income statement must be disclosed in subsequent
years whenever the change has created an inconsistency among the years being
presented. Refer to FSP 30 for further considerations related to accounting
changes.
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8.5 Prepaid assets and other current and

noncurrent assets
Presentation and disclosure requirements for prepaid assets and other current
and noncurrent assets vary depending on the nature of the asset and the
underlying guidance.
8.5.1 Prepaid and other current assets
S-X 5-02(8) requires any amounts in excess of 5 percent of total current assets to
be separately disclosed on the balance sheet or in a footnote.
8.5.2 Foreclosed or repossessed assets
ASC 310 requires foreclosed or repossessed assets to be identified either on the

face of the balance sheet or in the footnotes unless such assets will be utilized by
the reporting entities in operations (e.g., returned inventory that will be resold).
In addition, reporting entities should disclose the carrying amount of foreclosed
residential real estate properties held at the reporting date.
8.5.3 Other assets – noncurrent
S-X 5-02(17) requires any noncurrent asset that is in excess of 5 percent of total
assets to be disclosed separately on the balance sheet or in a footnote. In addition,
any significant increase or decrease in that asset should be explained in the
footnotes. With respect to any significant deferred charges, the policy for deferral
and amortization should also be provided in the footnotes.
8.5.4 Deferred costs – capitalized advertising costs
ASC 340-20-50 requires reporting entities to disclose information related to

advertising costs.
ASC 340-20-50-1
The notes to the financial statements shall disclose all of the following:
a. The accounting policy selected from the two alternatives in
paragraph 720-35-25-1 for reporting advertising, indicating whether such
costs are expensed as incurred or the first time the advertising takes place
b. A description of the direct-response advertising reported as assets (if any), the

accounting policy for it, and the amortization period
c. The total amount charged to advertising expense for each income statement
presented, with separate disclosure of amounts, if any, representing
a write-down to net realizable value
d. The total amount of advertising reported as assets in each balance sheet

presented.
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New guidance
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), will
supersede ASC 340-20-50-1. The new guidance has not been reflected in this
publication, but is summarized in RR 12.
8.6 Property, plant, and equipment

The balances of major classes of depreciable assets, accumulated depreciation
(either by major classes of depreciable assets or in total), depreciation expense for
all income statement periods presented, and a general description of methods
used to compute depreciation should be disclosed in the financial statements or in
the footnotes. In disclosing the major classes of depreciable assets, reporting
entities are required to disclose depreciable assets by nature (e.g., machinery and
equipment, buildings) or by function (e.g., manufacturing, marketing,
transportation). In addition, the SEC expects registrants to disclose the useful
lives of major classes of assets.
The total amount of depreciation accumulated during a period, together with

significant amounts charged to noncurrent asset accounts, should be disclosed. In
addition, disclosures should be provided to enable financial statement users to
reconcile depreciation expense reported for the period to the amount shown on
S-x 4-08(b) requires disclosure of any assets mortgaged, pledged, or otherwise

subject to lien, and the obligations collateralized should be identified briefly.
It is common for manufacturing companies to maintain “stores” items, which are

spare maintenance materials and parts kept on hand as backup components of
major production lines. These items are considered essential to the operations of
the facility. It is appropriate to capitalize stores items because they have a service
potential (when a part on a machine breaks down) and will provide future
economic benefit to the reporting entities. These items are generally classified as
current or noncurrent assets depending on a reporting entities’ specific facts and
the nature of the reporting entities’ business.
8.6.1 Long-lived assets classified as held and used
ASC 36o requires certain disclosures for long-lived assets classified as held and
used, which are discussed in the following subsections.
8.6.1.1 Impairment
ASC 360-10-45-4 requires an impairment loss recognized for a long-lived asset

(asset group) to be held and used to be included in income from continuing
operations before income taxes. If a subtotal such as “income from operations” is
presented, that subtotal should include the impairment loss.
Related disclosures are detailed in ASC 360-10-50.
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ASC 360-10-50-2
All of the following information shall be disclosed in the notes to the financial
statements that include the period in which an impairment loss is recognized.
a. A description of the impaired long-lived asset (asset group) and the facts and
circumstances leading to the impairment
b. If not separately presented on the face of the statement, the amount of the
impairment loss and the caption in the income statement or the statement of
activities that includes that loss
c. The method or methods for determining fair value (whether based on a

quoted market price, prices for similar assets, or another valuation technique)
d. If applicable, the segment in which the impaired long-lived asset (asset group)
is reported under Topic 280.
8.6.1.2 Disposal gain or losses
A gain or loss recognized on the sale of a long-lived asset (disposal group) that
does not qualify as a discontinued operation should be presented as a separate
item within operating income (expense). It is not appropriate to present such
gains or losses as non-operating. In accordance with ASC 360-10-S99-1, such
amounts should also not be included as an adjustment to depreciation expense.
8.6.2 Long-lived assets to be disposed of other than by sale
A long-lived asset to be disposed of other than by sale (for example, by

abandonment, in an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to owners in a spinoff)
should continue to be classified as held and used until it is disposed. It will be
subject to the presentation and disclosure requirements discussed in FSP 8.6.1.
8.6.3 Leases
Refer to FSP 14 for presentation and disclosure considerations related to leased

property, plant, and equipment.
8.7 Held for sale

ASC 360 provides guidance for when to classify long-lived assets as held for sale,
how to present the assets, and the required disclosures.

A long-lived asset (disposal group) to be sold shall be classified as held for sale in
the period in which all of the following criteria are met:
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a. Management, having the authority to approve the action, commits to a plan to

sell the asset (disposal group).
b. The asset (disposal group) is available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such
assets (disposal groups).
c. An active program to locate a buyer and other actions required to complete

the plan to sell the asset (disposal group) have been initiated.
d. The sale of the asset (disposal group) is probable, and transfer of the asset
(disposal group) is expected to qualify for recognition as a completed sale,
within one year, except as permitted by paragraph 360-10-45-11.
e. The asset (disposal group) is being actively marketed for sale at a price that is
reasonable in relation to its current fair value. The price at which a long-lived
asset (disposal group) is being marketed is indicative of whether the entity
currently has the intent and ability to sell the asset (disposal group). A market
price that is reasonable in relation to fair value indicates that the asset
(disposal group) is available for immediate sale, whereas a market price in
excess of fair value indicates that the asset (disposal group) is not available for
immediate sale.
f. Actions required to complete the plan indicate that it is unlikely that

significant changes to the plan will be made or that the plan will be
withdrawn.
Refer to BCG 10 for further details on how to apply the above requirements. Once
a long-lived asset (disposal) group meets these requirements, it is subject to the
presentation and disclosure requirements discussed in the following subsections.
8.7.1 Assets (disposal group) sold or classified as held for sale
Assets and liabilities of a disposal group classified as held for sale should be
separately disclosed on the face of the balance sheet. Assets and liabilities are
usually further disaggregated and presented with separate line items for current
and noncurrent assets, and current and noncurrent liabilities, as applicable.
However, reporting entities may classify all assets and liabilities held for sale as
current when 1) the disposal is expected to be consummated within one year of the
balance sheet date, 2) the reporting entity expects to receive cash or other current
assets upon disposal and the sale proceeds will not be used to reduce long-term
borrowings, and 3) the components (current and noncurrent) of the major classes
of assets and liabilities held for sale are disclosed in the notes to the financial
statements.
Reporting entities are not required, to reclassify the disposal group as held for sale
in periods prior to the period in which the disposal group becomes held for sale
unless the disposal group qualifies as a discontinued operation. Refer to FSP 27
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for the presentation and disclosure requirements associated with disposal groups
classified as held for sale that qualify as discontinued operations.
Gains or losses from the sale of long-lived assets must be included as a component
of operating income. See FSP 3.8.4 for information about the reporting of gains or
losses from the sales of businesses.
ASC 205, Presentation of Financial Statements, requires disclosures related to

assets sold or held for sale.

a. A description of both of the following:
1. the facts and circumstances leading to the disposal or expected disposal
2. the expected manner and timing of that disposal
b. If not separately presented on the face of the statement where net income is
reported (or statement of activities for a not-for-profit entity) as part of
discontinued operations (see paragraph 205-20-45-3B), the gain or loss
recognized in accordance with paragraphs 205-20-45-3C.
c. Subparagraph superseded by Accounting Standards Update No. 2014-08.
d. If applicable, the segment(s) in which the discontinued operation is reported

under Topic 280 [Segment Reporting].
The above disclosures are required in financial statements that cover the period in
which a long-lived asset (disposal group) has either been sold or is classified as
held for sale.
See FSP 27 for a discussion of the disclosure requirements related to individually

significant disposals that do not qualify for discontinued operations.
8.7.2 Change to a plan of sale
Reporting entities may change a plan to sell a long-lived asset (disposal group). In
the period that decision is made, the reporting entities should describe the facts
and circumstances leading to the decision to change the plan and its effect on the
income statement for the period and any prior periods presented.
If the reporting entity decides not to sell a long-lived asset (disposal group)
previously classified as held for sale, then such asset (disposal group) should be
reclassified as held and used in the period when the decision is made. Any
required adjustment to the carrying amount due to the reclassification should be
included in income from continuing operations in the period of the subsequent
decision not to sell. This adjustment should be reported in the same income
statement caption used to report a loss, if any, recognized in accordance with
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ASC 360-10-45-5. The results of operations of a component previously reported in

discontinued operations in accordance with ASC 205-20-45-3 should be
reclassified and included in income from continuing operations for all periods
presented.
8.7.3 Newly acquired asset classified as held for sale
ASC 360-10-45-12 provides specific criteria which, if met, require the acquirer to
present newly-acquired assets as assets held for sale. The criteria requires a plan
to dispose of the assets within a year, and that it be probable that the acquirer will
meet the other held for sale criteria (discussed in FSP 8.7) within a short period of
time after the acquisition date (usually within three months).
8.8 Intangible assets subject to amortization

The presentation and disclosure requirements discussed in this section are
applicable to the post-acquisition periods for intangible assets subject to
amortization. Presentation and disclosure requirements in the period of
acquisition are discussed in FSP 17.
8.8.1 Post-acquisition disclosures
ASC 350-30-45-1 requires intangible assets to be presented separately on the

balance sheet at an individual, class, or aggregate level.
S-X 5-02(15) requires separate presentation for each class of intangible assets that
is in excess of 5 percent of total assets, along with the basis of determining the
respective amounts. Any significant addition or deletion should be explained in a
footnote. S-X 5-02(16) requires that the amount of accumulated depreciation and
amortization related to intangible assets be stated separately on the balance sheet
or in a footnote.
Information related to intangible assets should be disclosed in the financial
statements or the footnotes for each period for which a balance sheet is presented.
Excerpt from ASC 350-30-50-2(a)

For intangible assets subject to amortization, [disclose] all of the following:
1. The gross carrying amount and accumulated amortization, in total and by
major intangible asset class
2. The aggregate amortization expense for the period
3. The estimated aggregate amortization expense for each of the five succeeding
fiscal years.
ASC 350-30-45-2 also requires amortization expense and impairment losses for
intangible assets to be presented in income statement line items within continuing
operations. Refer to FSP 3 for income statement presentation and disclosure
requirements.
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8.8.1.1 Research and development assets
ASC 350 requires disclosures for research and development assets.

c. The amount of research and development assets acquired in a transaction
other than a business combination or an acquisition by a not-for-profit entity
and written off in the period and the line item in the income statement in
which the amounts written off are aggregated.
8.8.1.2 Estimate of useful life
ASC 275, Risks and Uncertainties, requires reporting entities to disclose the
estimated useful life of an intangible asset when it is reasonably possible the
estimate will change and have a material impact on the financial statements.
The materiality criterion may be met if a change in useful lives or a change in
expected likelihood of renewal is material individually or in aggregate by major
intangible asset class.
8.8.2 Impairment losses
ASC 350-30-50 requires disclosure for each impairment loss recognized related to
an intangible asset.

a. A description of the impaired intangible asset and the facts and circumstances
leading to the impairment
b. The amount of the impairment loss and the method for determining fair value
c. The caption in the income statement or the statement of activities in which
the impairment loss is aggregated
d. If applicable, the segment in which the impaired intangible asset is reported
under Topic 280.
The above disclosures should continue to be included in the footnotes whenever

the financial statements include the income statement for the year in which the
impairment loss was recognized.
8.9 Intangible assets not subject to

amortization and goodwill
Goodwill and intangible assets that are not subject to amortization have different
presentation and disclosure requirements. The following subsections discuss the
requirements for post-acquisition (“Day 2”) accounting. Presentation and
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disclosure requirements for goodwill and intangible assets associated with an

acquisition are discussed in FSP 17.
8.9.1 Intangible assets not subject to amortization
For each period for which a balance sheet is presented, all of the following
information should be disclosed in the financial statements or footnotes.

b. For intangible assets not subject to amortization, the total carrying amount
and the carrying amount for each major intangible asset class
c. The entity’s accounting policy on the treatment of costs incurred to renew or

extend the term of a recognized intangible asset
d. For intangible assets that have been renewed or extended in the period for
which a statement of financial position is presented, both of the following:
1. For entities that capitalize renewal or extension costs, the total amount of
costs incurred in the period to renew or extend the term of a recognized
intangible asset, by major intangible asset class
2. The weighted-average period before the next renewal or extension (both

explicit and implicit), by major intangible asset class.
In addition, SEC registrants are required to separately state each class of

intangible asset that is in excess of 5 percent of total assets, along with the basis of
determining the respective amounts. The amount of significant additions or
deletions related to these assets should be stated separately on the balance sheet
or in a footnote.
8.9.1.1 Impairment of intangible assets not subject to amortization
Disclosures for impairment losses for intangible assets not subject to amortization
are similar to intangible assets subject to amortization. Refer to FSP 8.8.2.
8.9.1.2 Renewal or extension of an intangible asset’s legal or contractual life
ASC 350-30-50-4 requires reporting entities to disclose information that enables

financial statement users to assess the extent to which the expected future cash
flows associated with the intangible asset are affected by the reporting entities’
intent or ability (or both intent and ability) to renew or extend the arrangement.
8.9.2 Goodwill
Reporting entities are required to present the aggregate amount of goodwill as a

separate line item in the balance sheet.
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8.9.2.1 Goodwill reconciliation
A reconciliation of the carrying amount of goodwill at the beginning and end of

the reporting period is required and should include the following:

The changes in the carrying amount of goodwill during the period shall be
disclosed, showing separately:
a. The gross amount and accumulated impairment losses at the beginning of the
period
b. Additional goodwill recognized during the period, except goodwill included in
a disposal group that, on acquisition, meets the criteria to be classified as held
for sale in accordance with paragraph 360-10-45-9
c. Adjustments resulting from the subsequent recognition of deferred tax assets
during the period in accordance with paragraphs 805-740-25-2 through 25-4
and 805-740-45-2
d. Goodwill included in a disposal group classified as held for sale in accordance
paragraph 360-10-45-9 and goodwill derecognized during the period without
having previously been reported in a disposal group classified as held for sale
e. Impairment losses recognized during the period in accordance with this
Subtopic
f. Net exchange differences arising during the period in accordance with
Topic 830
g. Any other changes in the carrying amounts during the period
h. The gross amount and accumulated impairment losses at the end of the
period.
ASC 350-20-50-1 also requires reporting entities that report segments under
ASC 280, Segment Reporting, to disclose this information in total, and for each
reportable segment. Significant changes in the allocation of goodwill should also
be disclosed by segment. If any portion of goodwill has not yet been allocated to a
reporting unit at the date the financial statements are issued, that unallocated
amount and the reasons for not allocating that amount should be disclosed.
Reporting entities may change their internal organization structure such that the
composition of reportable segments may change under ASC 280. This would
result in the reporting entities restating all periods shown to reflect the new
segments (see FSP 25.7.8 for further discussion). If the change in reporting
structure does not change the composition of the entities’ reporting units, the
disclosures required for goodwill under ASC 350-20-50-1 could be revised without
a reallocation of goodwill to reporting units.
If the composition of one or more of the reporting entities’ reporting units is

changed, the guidance in ASC 350-20-35-39 through 35-40 should be used to
reassign assets and liabilities to the reporting units affected. Goodwill should be
PwC 8-25
Other assets
reassigned to the reporting units affected at the time the change to the structure is
made and reported (in accordance with ASC 350-20-50-1(g)). This should be done
using a relative fair value allocation approach similar to that used when a portion
of a reporting unit is to be disposed of using the relative fair value approach
discussed in ASC 350-20-35-51 through 35-57. Refer to BCG 11 for further details
on this topic.
8.9.2.2 Goodwill impairment
The aggregate amount of goodwill impairment losses should be presented as a

separate line item on the income statement within continuing operations unless a
goodwill impairment is associated with a discontinued operation. For each
goodwill impairment loss recognized, the following information should be
disclosed in the footnotes that include the period in which the impairment loss is
recognized:

a. A description of the facts and circumstances leading to the impairment
b. The amount of the impairment loss and the method of determining the fair
value of the associated reporting unit (whether based on quoted market
prices, prices of comparable businesses or nonprofit activities, a present value
or other valuation technique, or a combination thereof)
c. If a recognized impairment loss is an estimate that has not yet been finalized
(see paragraphs 350-20-35-18 through 35-19), that fact and the reasons
therefore and, in subsequent periods, the nature and amount of any
significant adjustments made to the initial estimate of the impairment loss.
Subparagraph c will be superseded by ASU 2017-04 (see FSP 8.9.2.3).
This information should continue to be disclosed in the footnotes whenever the

financial statements include the income statement for the period in which the
impairment loss was recognized.
ASC 820-10-50-2(bbb) requires quantitative disclosures about significant

unobservable inputs used in fair value measurements categorized within Level 3 of
the fair value hierarchy. These disclosures are not required for fair value
measurements related to the financial accounting and reporting for goodwill after
its initial recognition in a business combination.
8.9.2.3 New guidance
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and
Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. It
eliminates Step 2 of the current goodwill impairment test, which requires a
hypothetical purchase price allocation to measure goodwill impairment.
ASU 2017-04 includes a new requirement to disclose the amount of goodwill
8-26 PwC
Other assets
allocated to reporting units with zero or negative carrying amounts and the
segment in which the reporting unit is included.
ASU 2017-04 is effective for public business entities that are SEC filers for annual
and interim goodwill impairment tests in fiscal years beginning after December
15, 2019. Other public business entities will have an additional year. All other
entities that have not elected the PCC alternative for goodwill will be required to
apply the guidance in fiscal years beginning after December 15, 2021. Early
adoption is permitted for any impairment test performed on testing dates after
January 1, 2017.
8.10 Long-term contracts

Reporting entities in certain industries enter into long-term revenue contracts.
This may include construction contractors, but also manufacturers of large scale
items (such as ships and airplanes) and professional service providers (such as
consultants or architects). Although ASC 605-35, Revenue—Construction-Type
and Production-Type Contracts, provides recognition and measurement guidance
for such contracts, guidance on presentation and disclosure is limited. Therefore,
many reporting entities look to ASC 910, Contractors—Construction, and
ASC 912, Contractors—Federal Government, for guidance on what constitutes
prudent presentation and disclosure for their long-term contracts.
Some of the ASC 910 and ASC 912 requirements are relevant primarily (or only) to
the construction industry, and therefore are not covered in this chapter since this
guide does not cover industry-specific guidance. However, because many different
types of industries rely (either directly or by analogy) on certain aspects of
ASC 910 or ASC 912 for presentation and disclosure guidance, select topics are
discussed in this section. Due to the significant role that estimates play in
accounting for long-term contracts, reporting entities should consider the
disclosure requirements in ASC 275, Risks and Uncertainties. See FSP 24 for
discussion of these requirements.
New guidance
Topic 606 will supersede ASC 605-35 and certain revenue-related requirements
in ASC 910 and 912. The new guidance has not been reflected in this publication,
but is summarized in RR 12.
8.10.1 Contract receivables
Contract receivables are typically shown separate from other receivables on the
balance sheet or otherwise disclosed in the footnotes. Receivables may include
billed and unbilled amounts. Unbilled costs and fees are presented as receivables
rather than advances or inventory. They should generally be shown separate from
billed accounts receivable, net of unliquidated progress payments. Contract
receivables from government agencies should be shown separately from other
receivables either on the balance sheet or in the footnotes. This disaggregation
PwC 8-27
Other assets
provides a financial statement user with enhanced transparency since the risk
profile of government receivables tends to differ from commercial enterprises.
In addition, the following disclosure requirements apply to contract receivables

that are generated by unapproved change orders, claims, or similar items:
ASC 910-310-50-1
For billed or unbilled amounts under contracts representing unapproved change
orders, claims, or similar items subject to uncertainty concerning their
determination or ultimate realization, the balance sheet, or a note to the financial
statements, shall disclose all of the following:
a. The amount
b. A description of the nature and status of the principal items comprising the
amount
c. The portion, if any, expected to be collected after one year.
New guidance
Topic 606 will supersede ASC 910-310-50-1. The new guidance has not been
reflected in this publication, but is summarized in RR 12.
For amounts representing the recognized sales value of performance under

contracts that have not been billed and were not billable at the date of the balance
sheet, ASC 910-310-50-2 requires disclosures of the amounts and a general
description of the prerequisites for billings. Reporting entities must also disclose
the portion, if any, expected to be collected after one year.
For receivable amounts maturing after one year, reporting entities should disclose
both:
□ The amount maturing after one year and, if practicable, the amounts maturing
in each year
□ The interest rates on major receivables, or on classes of receivables, maturing

after one year. Alternatively, the average interest rate or the range of rates on
all receivables could be disclosed
Retainage provisions are common in long-term contracts. For retainage amounts

billed but not paid by customers, the following items should be disclosed:
□ The amount of retainage
□ The portion expected to be collected after one year (if applicable)
□ The years in which the amounts are expected to be collected (if practicable)
8-28 PwC
Other assets
The portion of retainage not collectible within one year should be classified as
noncurrent on the balance sheet.
S-X 5-02(3)(c) also requires separate disclosure requirements for receivables

under long-term contracts. This guidance requires the following disclosures,
either on the balance sheet or in a footnote:
Excerpt from S-X 5-02(3)(c)

1. Balances billed but not paid by customers under retainage provisions in
contracts
2. Amounts representing the recognized sales value of performance and such

amounts that had not been billed and were not billable to customers at the
date of the balance sheet. Include a general description of the prerequisites for
billing.
3. Billed or unbilled amounts representing claims or other similar items subject

to uncertainty concerning their determination or ultimate realization. Include
a description of the nature and status of the principal items comprising such
amount.
4. With respect to (1) through (3) above, also state the amounts included in each
item which are expected to be collected after one year. Also state, by year, if
practicable, when the amounts of retainage (see (1) above) are expected to be
collected.
8.10.2 Contract costs
Reporting entities’ accounting practices with respect to costs included in inventory

should be disclosed in a footnote. For costs deferred either in anticipation of
future sales (precontract costs that are not within the scope of ASC 720-15), or as a
result of an unapproved change order (where approval is anticipated),
ASC 910-340-50-1 requires that the amount of deferred costs and the deferral
policy also be disclosed in the footnotes.
In addition, the following disclosures should be made with regard to the nature of
amounts included in contract costs:

a. The aggregate amount included in contract costs representing unapproved
change orders, claims, or similar items subject to uncertainty concerning their
determination or ultimate realization, plus a description of the nature and
status of the principal items comprising such aggregate amounts and the basis
on which such items are recorded (for example, cost or realizable value)
b. The amount of progress payments netted against contract costs at the date of
the balance sheet.
PwC 8-29
Other assets
In addition to the items discussed, S-X 5-02(6)(d) requires the following

incremental disclosures relating to contract costs:
□ The aggregate amount of manufacturing or production costs and any related

deferred costs (e.g., initial tooling costs) that exceeds the total estimated cost
of all units (whether in-process or delivered). This should be based on the
estimated average cost of all units expected to be produced under long-term
contracts and programs (even if not yet complete), as well as amounts that
would not be absorbed in cost of sales based on existing firm orders at the
latest balance sheet date. If practicable, also disclose the amount of deferred
costs by type of cost (e.g., initial tooling, deferred production, etc.).
□ The aggregate amount of contract claims or other similar items subject to

uncertainty, including a description of the nature and status of the primary
items comprising the amount.
□ The amount of progress payments netted against inventory at the balance

sheet date.
8.10.3 Other disclosures related to long-term contracts
Reporting entities are required to disclose the method of recognizing revenue

(i.e., percentage of completion or completed contract method). If the percentage
of completion is used, the method of measuring the extent of progress
(e.g., cost-to-cost, direct labor) should be disclosed. If the completed contract
method is used, the reason for selecting this method should also be disclosed.
Reporting entities that are engaged in long-term contracts may often be acting in a
primary contractor role and have long-term contracts with its subcontractors
related to the reporting entities’ overall contract with its customer. In these
instances, the reporting entities may have both a retainage asset from its
customer, and a retainage payable to its subcontractors. Such amounts should not
be netted on the balance sheet. Reporting entities are required to disclose
information relating to retentions payable, including the amounts of retentions to
be paid after one year and, if practicable, the year in which the amounts are
expected to be paid.

Certain presentation and disclosure requirements discussed in this chapter are
only required for SEC registrants. In some instances, the difference in
requirements is due to differences in US GAAP. These differences are discussed in
FSP 8.11.1 and 8.11.2.
The remaining differences are due to incremental presentation and disclosure
requirements mandated by the SEC. These are summarized in Figure 8-1 at the
end of this section.
8-30 PwC
Other assets
8.11.1 Indefinite-lived intangible assets
When disclosing an indefinite-lived intangible asset after its initial recognition, a

private company is not required to disclose the quantitative information about
significant unobservable inputs used in fair value measurements categorized
within Level 3 of the fair value hierarchy required by
paragraph 820-10-50-2(bbb).
8.11.2 Goodwill
ASC 350 allows eligible private companies to amortize goodwill and apply
a one-step impairment model. If elected, ASC 350 requires certain disclosures,
which differ from those discussed in FSP 8.9.2.
The private company alternative in ASC 350 requires the aggregate amount of
goodwill net of accumulated amortization and impairment to be presented as a
separate line item on the balance sheet. The amortization and aggregate amount
of impairment of goodwill is required to be presented on the income statement
line items within continuing operations (or similar caption) unless the
amortization or a goodwill impairment loss is associated with a discontinued
operation. In that case, the amortization and impairment should be included
(on a net-of-tax basis) within the results of discontinued operations.
For each period for which a balance sheet is presented, private companies are
required to disclose in the footnotes (1) the amount assigned to goodwill in total
and by major business combination or by reorganization event resulting in
fresh-start reporting, and (2) the weighted-average amortization period in total
and the amortization period by major business combination or by reorganization
event resulting in fresh-start reporting.
The following information should also be disclosed in the footnotes:
ASC 350-20-50-5
a. The gross carrying amounts of goodwill, accumulated amortization, and
accumulated impairment loss
b. The aggregate amortization expense for the period
c. Goodwill included in a disposal group classified as held for sale in accordance

with paragraph 360-10-45-9 and goodwill derecognized during the period
without having previously been reported in a disposal group classified as held
for sale.
The above disclosures are required in each period for which a balance sheet is
presented.
ASC 820-10-50-2(bbb) requires quantitative disclosures about significant

unobservable inputs used in fair value measurements categorized within Level 3 of
the fair value hierarchy. These disclosures are not required for fair value
PwC 8-31
Other assets
measurements related to the financial accounting and reporting for goodwill after
its initial recognition in a business combination.
8.11.2.1 Impairment loss
For each goodwill impairment loss recognized, the following information should
be disclosed in the footnotes that include the period in which the impairment loss
is recognized:

a. A description of the facts and circumstances leading to the impairment
b. The amount of the impairment loss and the method of determining the fair
value of the entity or the reporting unit (whether based on prices of
comparable businesses, a present value or other valuation technique, or a
combination of those methods)
c. The caption in the income statement in which the impairment loss is included
d. The method of allocating the impairment loss to the individual amortizable

units of goodwill.
This information should continue to be disclosed in the footnotes whenever the

financial statements include the income statement for the year the impairment
loss was recognized.
8.11.2.2 Intangible assets subsumed into goodwill
ASC 805-20, provides private companies the option not to recognize separate
from goodwill: (a) customer-related intangible assets (unless they are capable of
being sold or licensed independent from other assets) and (b) noncompetition
agreements. Instead, the value of these intangibles would be included as a part of
goodwill. A private company that elects the guidance on intangibles must also
adopt the goodwill accounting alternative (see FSP 8.11.2).
ASC 805-20 does not require any incremental disclosure requirements. However,
it is important to note that any intangibles subsumed into goodwill by applying
this guidance require qualitative disclosure in accordance with the following
guidance:

Paragraph 805-10-50-1 identifies one of the objectives of disclosures about a
business combination. To meet that objective, the acquirer shall disclose all of the
following information for each business combination that occurs during the
reporting period:
a. A qualitative description of the factors that make up the goodwill recognized,
such as expected synergies from combining operations of the acquiree and the
8-32 PwC
Other assets
acquirer, intangible assets that do not qualify for separate recognition, or

other factors.
Therefore, private companies must describe the nature of the intangible assets
that are included in goodwill.
8.11.3 SEC requirements not applicable to private companies
The following presentation and disclosure requirements are only required for SEC
registrants.
Figure 8-1
Separate disclosure of S-X 5-02 3(b),6-04 6(b) 8.3.1

receivables that exceed 10
percent of aggregate
receivables
Disclosure of receivables S-X 4-08 (b) 8.3.5

mortgaged, pledged, or
otherwise subject to lien
Separate disclosure of major S-X 5-02 6(a) 8.4.1

classes of inventory
Disclosure of the excess of S-X 5-02 6(c) 8.4.3

replacement or current cost
over stated LIFO value
Separate disclosure of prepaid S-X 5-02(8) 8.5.1

and other current assets that
exceed 5 percent of total
current assets
Separate disclosure of other S-X 5-02(17) 8.5.3

noncurrent assets that exceed
5 percent of total assets
Separate presentation for each S-X 5-02 (15),(16) 8.8.1

class of intangible assets that
exceed 5 percent of total assets
PwC 8-33
Chapter 9:
Investments—debt and
equity securities
PwC 9-1
Investments—debt and equity securities

Investments held in debt or equity securities of other entities (other than
subsidiaries) are usually accounted for by one of three methods: the cost method,
the equity method, or the fair value method. This chapter outlines the
presentation and disclosure of investments in debt and equity securities and
includes examples of the required disclosures.
This chapter does not address the following: investments in consolidated entities
(FSP 18), investments accounted for under the equity method (FSP 10), hedging
of investments (DH), and subsidiary investments in parent company common
stock in the subsidiary’s standalone financial statements (FSP 5.8.3).
9.2 Scope
ASC 320, Investments—Debt and Equity Securities, establishes requirements for
the presentation and disclosure of investments in debt and equity securities and
investments in certain limited partnerships and limited liability companies that
do not qualify for the equity method or the cost method. For simplicity,
thoughout this chapter, the terms “investments” or “investment securities” are
used to pertain to all investments within the scope of ASC 320. As described in
ASC 320-10-15-2 through 15-3, the guidance applies to all reporting entities,
other than reporting entities in specialized industries that account for
substantially all investments in debt and equity securities at fair value, with
changes in fair value recognized through net income. These include broker-
dealers, investment companies, and defined benefit pension and other
postretirement plans.
ASC 325, Investments—Other, provides guidance for the presentation and

disclosure of investments not within the scope of other authoritative guidance,
including cost method investments. Certain investments in limited partnerships
and limited liability companies also may be measured at cost, and therefore the
applicable presentation and disclosure guidance would also apply to them.
Other relevant guidance for SEC registrants in this chapter includes S-X 5-02.
Regulation S-X also includes industry-specific guidance, which is not addressed
in this chapter.
New guidance

Liabilities, updates certain aspects of recognition, measurement, presentation,
and disclosure of financial instruments. It will be effective for public business
entities in fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years.
All other entities, including certain not-for-profit entities and employee benefit
plans, will have an additional year, or may early adopt coincident with the public
business entity effective date.
9-2 PwC
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement

of Credit Losses on Financial Instruments, introduces a new model for
recognizing credit losses on financial instruments based on an estimate of current
expected credit losses. The ASU also provides updated guidance regarding the
impairment of available-for-sale debt securities and includes additional
disclosures.
For public business entities that are SEC filers, ASU 2016-13 is effective for fiscal
years beginning after December 15, 2019, including interim periods within those
fiscal years. For all other public business entities, ASU 2016-13 is effective for
fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years.
For all other entities, including not-for-profit entities and employee benefit plans,
ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and
interim periods within fiscal years beginning after December 15, 2021.
All entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years.
New presentation and disclosure guidance in these two standards has not been
reflected in this chapter, but is included in LI 12.
9.3 Overview of classification guidance

The classification of investment securities per ASC 320-10-25 as trading,
available-for-sale (AFS), or held-to-maturity (HTM) determines the balance sheet
recognition as either a fair value or non-fair value measure.
ASC 325 provides guidance for investments in equity securities accounted for at
cost because they do not have readily determinable fair values. The cost method
should be applied if the equity investment does not qualify for consolidation, for
the equity method of accounting, or as an ASC 320 security, and the reporting
entity has not elected the fair value option under ASC 825, Financial
Instruments.
Figure 9-1 summarizes the presentation of investments within the scope of ASC
320 or ASC 325.
PwC 9-3
Figure 9-1
Balance sheet and income statement presentation of investments
Classification
of debt or Treatment of
equity unrealized Other income
security Valuation gain/loss statement effects
Trading Fair value Recognized in Interest and dividends

net income as earned
Gains and losses from
sale
Held-to- Amortized Not recognized Interest as earned

maturity cost
Credit component of
(debt securities
other-than-temporary
only)
impairment losses
through income and
remainder in OCI
sale
Available-for- Fair value Recognized in Interest and dividends

sale AOCI as a as earned
separate
Other-than-temporary
component of
impairment losses
stockholders’
through income (equity
equity
securities)
Credit component of
other-than-temporary
impairment losses
through income and
remainder in OCI (debt
securities)
sale
Cost method Cost Not recognized Dividends as earned

Other-than-temporary
impairment losses
through income
sale
9-4 PwC
9.4 Balance sheet presentation

ASC 320-10-45-1 and S-X 5-02 require a reporting entity to present AFS
securities and trading securities that are measured at fair value separately from
similar assets that are carried at amortized cost on the face of the balance sheet.
To accomplish this, a reporting entity should present either of the following.
□ The aggregate of the fair value and non-fair value amounts in the same line
item in the balance sheet and a parenthetical disclosure of the fair value
amount included in the aggregate amount
□ The fair value and non-fair value carrying amounts in two separate line items
S-X 5-02 states that reporting entities should have a separate caption for
“marketable securities.” The disclosure requirements for current marketable
equity securities are specified by ASC 320. For marketable securities other than
equity securities, S-X 5-02 requires reporting entities to state, parenthetically on
the balance sheet or in the footnotes, the basis for determining the aggregate
amount presented in the balance sheet, and the alternative measure (i.e.,
amortized cost if the securities are presented at fair value and fair value if the
securities are presented at amortized cost).
We believe that complying with ASC 320 satisfies the requirements of S-X 5-02 in
that investments in debt and equity securities will be presented separately from
other assets, even if not termed “marketable securities” on the face of the balance
sheet. Example 9-1 illustrates how a reporting entity may use this terminology in
its balance sheet presentation for debt and equity securities, rather than using
ASC 320 terminology.
EXAMPLE 9-1
Presentation of marketable securities
FSP Corp has marketable securities at December 31, 20X6, consisting of $150 of
debt securities classified as HTM (with a fair value of $160) and AFS equity
securities with a fair value of $100 (with an amortized cost basis of $90).
How should FSP Corp present these marketable securities on the balance sheet as
of December 31, 20X6?
Analysis
FSP Corp should present these marketable securities on the balance sheet as
follows:
Marketable securities at fair value (amortized cost is $90) $100
Marketable securities at amortized cost (fair value is $160) $150
PwC 9-5
Reporting entities subject to industry-specific guidance under S-X, such as bank

holding companies and insurers, have different reporting requirements with
regard to balance sheet captions. For example, insurers present fixed-maturity
securities separately from equity securities on the face of the balance sheet. This
chapter does not address industry-specific balance sheet presentation guidance.
9.4.1 Current and noncurrent classification
A reporting entity that presents a classified balance sheet (refer to FSP 2.3.4)
should report individual marketable equity securities and individual debt
securities classified as trading or AFS as either current or noncurrent under the
provisions of ASC 210. This is achieved by applying one of the following two
approaches consistently.
The first approach is to classify securities based on their maturities (for debt
securities) and the reporting entity’s reasonable expectation with regard to those
securities (i.e., expectations of sales and redemptions). If the reporting entity
expects to convert securities to cash within one year (or normal operating cycle),
the securities should be classified as current assets. If this criterion is not met, the
securities should be classified as noncurrent.
The second approach is to classify securities based on whether they represent the
investment of funds available for current operations, as defined in ASC 210-10-
45-1 and ASC 210-10-45-2. Under this approach, the reporting entity does not
need to have a stated expectation to sell such securities within one year or normal
operating cycle for such securities to be classified as current; however, the
securities need to be available for use, if needed, for current operations.
HTM debt securities are, by definition, those for which management has the
intent and ability to hold to maturity. Therefore, classification of the individual
securities as current or noncurrent is based on the maturity date or call date if
exercise of the call within the next operating period or fiscal year is probable. For
example, HTM securities that mature within one year are classified as current.
Investments in securities (whether marketable or not) or advances made for the

purposes of control, affiliation, or other continuing business advantage are
excluded from the definition of current assets in ASC 210-10-45-4. Therefore,
securities held for such purposes should be classified as noncurrent.
9.4.2 Deferred tax balances
ASC 320-10-45-3 through 45-6 provides guidance on the presentation of deferred

tax assets arising from losses on AFS securities and the related valuation
allowance, if applicable. For accounting considerations related to taxes on
unrealized gains and losses on AFS securities, see TX guide. For accounting
considerations related to valuation allowances on AFS securities, see TX 5. For
presentation and disclosure of deferred tax balances, see FSP 16.
9-6 PwC
9.5 Income statement presentation

ASC 320 does not provide specific guidance regarding presentation in the income
statement other than guidance relating to other-than-temporary impairment
(OTTI). Instead, ASC 320 broadly describes when amounts should be recognized
in net income, as described in Figure 9-1. Recognition of OTTI is addressed in
PwC’s ARM 5010.
If the fair value of an equity or debt security is less than its amortized cost basis,
the investment is impaired. For equity securities, if the impairment is deemed an
OTTI, the loss is recognized in net income. For debt securities, if the impairment
is deemed an OTTI, a portion of the loss is recognized in net income and a
portion is recognized in OCI.
9.5.1 Other-than-temporary impairments—income statement
ASC 320-10-45-8A requires reporting entities to present the total OTTI in the
income statement “with an offset” for the amount of the total OTTI that is
recognized in OCI. Example 2A in ASC 320-10-55-21A illustrates the application
of this guidance using three line items in the income statement.
However, there is diversity in practice as to whether the “offset” language in 320-

10-45-8A is meant to allow presentation of the net impairment loss on the face of
the income statement, rather than as three separate line items. We believe there
are acceptable alternatives to presenting the net impairment loss as three
separate line items. We believe presenting only the net impairment loss
recognized in net income within the income statement would also be acceptable if
that presentation is accompanied by either:
□ total OTTI and OTTI recognized in OCI presented parenthetically within the
OTTI caption on the income statement
□ total OTTI and OTTI recognized in OCI presented separately at the bottom of
We do not consider it acceptable to only present the total OTTI and OTTI
recognized in OCI in the footnotes.
9.5.2 Other-than-temporary impairments—within OCI
Reporting entities should present amounts recognized in AOCI related to HTM

and AFS debt securities for which a portion of an OTTI was recognized in net
income separately from other components of AOCI in the financial statement that
presents AOCI.
When a reporting entity recognizes an initial OTTI for an AFS security with a
portion of that OTTI recorded in OCI and a portion in net income, the security
has a new amortized cost basis. After the reporting entity recognizes the OTTI, it
adjusts the amortized cost basis of the security for the portion of the OTTI
recognized in net income. The reporting entity then adjusts the security’s post-
PwC 9-7
OTTI carrying value to its fair value at the measurement date, which includes the
effect of the impairment charge recorded in OCI.
The difference between the new amortized cost basis and carrying value that
arises from the recognition of an initial OTTI results in the need for additional
analysis to determine the total OTTI to be presented in the income statement in
subsequent periods. Essentially, an additional OTTI does not exist unless the fair
value of the security has declined further since the most recent OTTI (i.e., below
the new amortized cost basis). However, even if the fair value of the security has
not decreased subsequent to the recognition of an OTTI, if a credit loss is
realized, the reporting entity may recognize an additional OTTI in the income
statement.
The following examples illustrate presentation and disclosure considerations

associated with recording amounts in AOCI and net income for debt securities
with OTTI impairments.
EXAMPLE 9-2
Financial statement presentation of debt security with OTTI
On January 1, 20X3, FSP Corp acquires a debt security for $1,000 (at par) with a
fixed interest rate of 4.5% per year and a maturity at December 31, 20X7. The
security is classified as AFS.
On December 31, 20X6, the fair value of the debt security is $700. FSP Corp
assesses whether the impairment is other-than-temporary. It determines that it
does not intend to sell the security and it is not more likely than not that it will be
required to sell the security. However, based on an evaluation of all available
information, including a discounted cash flow analysis, FSP Corp does not expect
to recover the entire amortized cost basis of the security.
FSP Corp determines a credit loss exists and, therefore, an OTTI has occurred.
FSP Corp separates the total impairment of $300 (the cost basis of $1,000 less
the fair value of $700 as of December 31, 20X6) into (1) the amount representing
the decrease in cash flows expected to be collected (i.e., the credit loss) of $120
and (2) the amount related to all other factors of $180 (i.e., the non-credit
component).
How should the reporting entity present this OTTI in its financial statements?
Analysis
In accordance with ASC 320-10-35, FSP Corp should recognize an OTTI in net
income of $120 for the credit loss and recognize the remaining impairment loss
of $180 separately in OCI.
After the recognition of the OTTI, the debt security’s adjusted cost basis is $880
(i.e., the previous cost basis less the credit loss recognized in net income) and its
carrying value is $700 (i.e., fair value). FSP Corp presents the gross $300
9-8 PwC
impairment on the face of the income statement, with the $180 non-credit
impairment deducted from that amount in a separate line.
Total other-than-temporary impairment $ 300
Portion of impairment loss recognized in OCI (180)
Net other-than-temporary impairment loss recognized

in net income $ 120
Other presentation alternatives, as discussed in FSP 9.5.1, may be appropriate.
EXAMPLE 9-3
Presentation and disclosure of OCI for AFS securities with OTTI
At December 31, 20X6, FSP Corp has an AFS debt security with a $100 amortized
cost basis and a fair value of $60. This impairment is considered other-than-
temporary and comprises a $10 credit-related impairment and a $30 non-credit-
related component.
At March 31, 20X7, the fair value of this AFS debt security increases to $64, with
no additional credit-related impairments.
How should this AFS security be presented in OCI and disclosed in the footnotes
at the end of each reporting period?
Analysis
At December 31, 20X6, FSP Corp should record a $30 debit (charge) in the OTTI-
related component of OCI. FSP Corp should also disclose this as a component of
AOCI, as required by ASC 220-10-45-14 through 45-14A (see FSP 4.5). The
credit-related OTTI charge of $10 should be classified as a realized loss in net
income, and the new amortized cost basis of the security is $90.
At March 31, 20X7, there are no additional impairments to the security, as the
fair value increased period over period. A $4 credit should be included in the
OTTI-related component of OCI. The disclosure of AOCI components should
show a $26 debit balance in the OTTI-related component of AOCI.
Further, FSP Corp should disclose the total OTTI recognized in AOCI
cumulatively of $30 at December 31, 20X6 and March 31, 20X7, in accordance
with ASC 320-10-50-2(aaa), which requires that the total OTTI recognized in
AOCI be separately disclosed. The purpose of this disclosure is to accumulate the
gross OTTI recognized since acquisition of the security, regardless of subsequent
movements in the security’s fair value. Therefore, subsequent increases in the fair
value of the previously impaired securities should not be reflected in this
disclosure.
PwC 9-9
Question 9-1
How should a subsequent increase in the fair value of a previously other-than-
temporarily impaired AFS debt security, accompanied by an increase in expected
credit losses for that debt security, be presented in equity and OCI in the current
period?
PwC response
A reporting entity should recognize a realized loss for a subsequent increase in
expected credit losses for a previously other-than-temporarily impaired AFS debt
security. The realized loss is offset by a corresponding reduction in the previous
non-credit OTTI recognized in OCI, even though the fair value of the debt
security increased. That is, even though on a comprehensive income basis there is
no additional impairment, the nature of the impairment has changed between the
credit loss portion and the non-credit loss portion of the total OTTI amount.
The following example illustrates this point by building on the fact pattern of
Example 9-3.
EXAMPLE 9-4
Subsequent increase in the fair value of a previously other-than-temporarily
impaired AFS debt security with an increase in expected credit losses
Assume the same facts as Example 9-3 except as of March 31, 20X7, the AFS debt
security has a fair value of $64 and an additional $5 of credit-related impairment.
What is the impact on OCI and the income statement presentation of this AFS
security for the quarter ended March 31, 20X7?
Analysis
In accordance with ASC 320-10-45-8A, the income statement presentation for

the quarter ended March 31, 20X7 should be as follows.
Total other-than-temporary impairment $0
Portion of impairment loss recognized in OCI (5)
Net other-than-temporary impairment loss

recognized in net income $(5)
Because FSP Corp recognized the additional $5 of OTTI through net income (for
the credit-related impairment), the new amortized cost basis of the security is
$85.
The activity in comprehensive income for the quarter ended March 31, 20X7
consists of a $5 reclassification to net income and a $4 increase in fair value of
the debt security.
9-10 PwC
Change in OTTI-related component of unrealized gain/loss $9 credit
AOCI balances would consist of the following component at March 31, 20X7.
OTTI-related component of unrealized gain/loss $21 debit
This amount is calculated as 20X4 $30 non-credit component of OTTI less $5

reclassification from OCI to net income in 20X5, and $4 unrealized gain
recognized in 20X7.
Further, FSP Corp should also disclose the total OTTI recognized in AOCI
cumulatively of $30 at December 31, 20X6, and $25 at March 31, 20X7 in
accordance with ASC 320-10-50-2(aaa).
9.6 Disclosure–investments at fair value

ASC 320-10-50 provides disclosure guidance on investments in debt and equity
securities. Generally, the disclosures are segregated by security classification
(e.g., trading, AFS, or HTM), and they highlight key information to investors,
including the types and terms of securities held, the analysis of unrealized loss
positions, and the qualitative assumptions used in determining if a security is
OTTI.
The disclosures are required for all interim and annual periods.
9.6.1 Major security types
Many investments disclosures are required by major security types. ASC 320-10-
50-1B provides guidance on evaluating the level of detail of the disclosures. It
requires reporting entities to evaluate whether discussion of certain security
types should be further disaggregated if there are common characteristics
underlying the securities (e.g., geographic concentration, credit quality, economic
characteristics, etc.).
For example, reporting entities that separate fixed-maturity AFS securities into
government bonds and mortgage-backed securities may consider whether further
detail would be more beneficial to the reader. If so, the reporting entity may
consider separating government bonds into US government bonds and foreign
government bonds, or separating mortgage-backed securities into commercial
mortgage-backed securities and residential mortgage-backed securities. Financial
institutions, as defined by ASC 942-320-50-1, are required to disaggregate with
the level of detail specified in ASC 942-320-50-2.
For purposes of presenting example disclosures in the remainder of this chapter,

the figures include three examples of major security types within fixed maturities;
however, the level of disaggregation will vary by reporting entity and the nature
of its portfolio.
PwC 9-11
9.6.2 Disclosures for securities classified as AFS
When disclosing securities classified as AFS in accordance with ASC 320-10-50-

2, and as illustrated in Figure 9-2, a reporting entity should disclose the following
information by major security type as of each balance sheet date presented.
□ Amortized cost basis

□ Aggregate fair value
□ Total OTTI recognized in AOCI
□ Total gains for securities with net gains in AOCI
□ Total losses for securities with net losses in AOCI
Figure 9-2 illustrates an example of this disclosure for AFS securities. It includes
example classes of instruments.
Figure 9-2
Sample AFS disclosure of amortized cost, fair value, and total OTTI information
Note X: Investments
The following table summarizes the unrealized positions for available-for-sale
equity and fixed-maturity securities, disaggregated by class of instrument.
Single year depicted for simplicity.
ASC 320-10-50-2
reference a b c aa aaa
Gross Gross Total

Amortized unrealized unrealized Fair OTTI in
cost gains losses value AOCI1
US Treasury
securities 500 50 3 547 0
Foreign government
bonds 780 10 30 760 5
Asset-backed
securities 20 17 7 30 6
Total fixed
maturities 1,300 77 40 1,337 11
Total equities 234 38 28 244 N/A
1
Represents the amount of OTTI in AOCI, which was not included in net income. Amount excludes
unrealized gains on impaired AFS securities relating to changes in their value subsequent to the
impairment measurement date.
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In this example, had the equities been a larger portion of the portfolio, the
reporting entity might have considered providing further detail by security type.
Example types are common stock, preferred stock, and mutual funds. Further
breakdown could be by industry type, entity size, or investment objective.
9.6.3 Disclosures for securities classified as HTM
When disclosing securities classified as HTM in accordance with ASC 320-10-50-

5, a reporting entity should disclose the following information by major security
type, as of each balance sheet date presented.
□ Amortized cost basis

□ Aggregate fair value
□ Gross unrecognized holding gains
□ Gross unrecognized holding losses
□ Net carrying amount
□ Total OTTI recognized in AOCI
□ Gross gains and losses in AOCI for any derivatives that hedged the forecasted
acquisition of the HTM securities
Figure 9-3 illustrates an example of this disclosure for HTM securities.
Figure 9-3
Sample disclosure—HTM amortized cost and fair value information
Assume the reporting entity does not have amounts previously recognized in
AOCI associated with these HTM securities (ASC 320-10-50-5(dd)) and the net
carrying amount (ASC 320-10-50-5(d)) is presented on the face of the balance
sheet.
Note X—Investments (continued)

The following table summarizes the unrealized positions for held-to-maturity
securities, disaggregated by class of instrument.
ASC 320-10-50-5 reference a b c aa
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
US Treasury securities 410 67 13 464
Foreign government bonds 280 28 30 278
Asset-backed securities 90 11 14 87
Total 780 106 57 829
PwC 9-13
9.6.4 Disclosures for AFS and HTM securities classified by maturity date
In addition to the disclosures in FSP 9.6.2 and 9.6.3, ASC 320-10-50-3 and 50-5
require presentation of investments in AFS and HTM securities, respectively, by
maturity date. This disclosure should include the fair value and net carrying
amount (if different than the fair value). The disaggregation by contractual
maturity illustrated in Figure 9-4 (i.e., due within one year, due after one year
through five years, etc.) is the minimum level of disaggregation required by ASC
942-320 for financial institutions.
For debt securities that do not have a single maturity date, such as mortgage-
backed securities, reporting entities should disclose the fair value and net
carrying value of these securities separately from those included in the aging
groupings. If a reporting entity chooses to allocate the securities across the aging
categories, it should disclose the basis for allocation. Figure 9-4 illustrates an
example of a single disclosure for AFS and HTM securities.
Figure 9-4
Sample disclosure—AFS and HTM securities grouping by contractual maturity
The following table summarizes the fair value and amortized cost of the available-
for-sale and held-to-maturity securities by contractual maturity.
Available-for-sale Held-to-maturity
Amortized cost Fair value Amortized cost Fair value
Due within
one year 434 429 117 121
Due after one

year through
five years 235 241 78 92
Due after five

years through
ten years 213 211 289 306
Due after ten

years 398 426 206 223
Asset-backed
securities 20 30 90 87
Total 1,300 1,337 780 829
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Actual maturities may differ from contractual maturities because certain

borrowers have the right to call or prepay certain obligations.
9.6.5 Disclosure of impairments of securities
ASC 320-10-50-6 through 50-8B outlines the disclosure requirements for

reporting entities with impaired securities, including those with OTTI.
9.6.5.1 Investments in an unrealized loss position – quantitative disclosures
For all investments in an unrealized loss position for which an OTTI has not been
recognized in net income, including investments for which a portion of an OTTI
has been recognized in OCI, a reporting entity should disclose both of the
following, aggregated by major security type as of each balance sheet date (in a
tabular format).
□ Aggregate related fair value of investments with unrealized losses
□ Aggregate amount of unrealized losses (the amount by which amortized cost

basis exceeds fair value)
Reporting entities should segregate these amounts by those investments in a

continuous unrealized loss position for (1) less than 12 months and (2) 12 months
or longer.
Figure 9-5
Sample disclosure—length of time individual securities have been in a continuous
unrealized loss position, aggregated by major security type
The following table summarizes the fair value and gross unrealized losses
aggregated by category and the length of time that individual securities have been
in a continuous unrealized loss position.
Less than twelve Greater than twelve

months months Total
Gross Gross Gross

Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss
US
Treasury
securities 687 16 324 0 1,011 16
Foreign
govern-
ment
bonds 608 29 430 31 1,038 60
PwC 9-15
Less than twelve Greater than twelve

months months Total
Gross Gross Gross

Fair unrealized Fair unrealized Fair unrealized
value loss value loss value loss
Asset-
backed
securities 30 14 87 7 117 21
Total debt
securities 1,325 59 841 38 2,1661 972
Equity
securities 223 26 21 2 244 28
1
Represents the sum of the total fair value of the HTM and AFS debt portfolio.
2
Represents the sum of the (1) gross unrealized losses on HTM securities of $57 (per Figure 9-3)
and (2) the gross unrealized losses on AFS securities of $40 (per Figure 9-2).
When a portion of an OTTI is not recognized in net income (i.e., it is recognized

in OCI), the duration of that unrealized loss is measured using the balance sheet
date of the reporting period in which the OTTI was first recognized in OCI as the
starting reference point. Continuous unrealized loss positions stop when either of
the following happens.
□ The reporting entity recognizes an OTTI in net income for the total amount
by which amortized cost exceeds fair value.
□ The fair value of the security equals or exceeds the amortized cost basis of the
investment.
9.6.5.2 Investments in an unrealized loss position—qualitative disclosures
As of the latest balance sheet date, a reporting entity should include a narrative
disclosure that allows a user to understand the information (both positive and
negative) the reporting entity considered in reaching its conclusion as to why an
impairment was not deemed other-than-temporary. The reporting entity may
aggregate the disclosure by investment category, unless there are individually
significant unrealized losses. ASC 320 outlines examples of the information
reporting entities should consider including in this qualitative disclosure.
This disclosure could include all of the following:
1. The nature of the investment(s)
2. The cause(s) of the impairment(s)
3. The number of investment positions that are in an unrealized loss position
9-16 PwC
4. The severity and duration of the impairment(s)
5. Other evidence considered by the investor in reaching its conclusion that

the investment is not other-than-temporarily impaired, including, for
example, any of the following:
i. Performance indicators of the underlying assets in the security,

including any of the following:
01. Default rates
02. Delinquency rates
03. Percentage of nonperforming assets.
ii. Loan-to-collateral-value ratios
iii. Third-party guarantees
iv. Current levels of subordination
v. Vintage
vi. Geographic concentration
vii. Industry analyst reports
viii. Sector credit ratings
ix. Volatility of the security’s fair value
x. Any other information that the investor considers relevant.
ASC 320-10-55-23 provides a detailed narrative disclosure that illustrates these

points. In that example, because an unrealized loss is not recognized in net
income, the reporting entity discloses that it did not intend to sell the securities
nor did it believe it is more likely than not that it would be required to sell these
securities before recovery of their amortized cost basis. Reporting entities should
then consider what additional information is necessary to achieve the objective of
the disclosure. For example, a reporting entity with asset-backed securities with
more significant declines might elaborate on and describe their assessment
process, considering the performance indicators noted in paragraph 5.i. of ASC
310-10-50-6.
9.6.5.3 Credit losses recognized in net income
For both interim and annual reporting periods in which an OTTI of a debt
security is recognized and only the credit loss is recognized in net income, a
reporting entity should disclose by major security type the methodology and
significant inputs used to measure the amount related to the credit loss.
PwC 9-17
Examples of significant inputs are included in ASC 320-10-50-8A and are similar
to those described in ASC 320-10-50-6.
A reporting entity should disclose a tabular rollforward of the amount related to

credit losses recognized in net income. This rollforward is meant to provide
investors with additional information regarding management’s expectations of
credit losses, how those expectations develop over time, and how actual
experience compares to prior expectations.
The cumulative balance being rolled forward is not an actual financial statement
account balance. Rather, it represents a memo account relating to the cumulative
credit loss activity recorded in income on impaired debt securities for which a
portion of the impairment was recorded in OCI. One of the focus areas for
stakeholders is the disclosure of additional credit losses recognized on securities
for which a credit loss had previously been recognized (item e in ASC 320-10-50-
8B) because this provides some indication of management’s ability to accurately
estimate credit losses on a timely basis.
Subsequent increases in expected cash flows on a previously OTTI debt security

(item f in ASC 320-10-50-8B) are recognized as a yield adjustment on a
prospective basis. We understand the intent of the FASB was to require
disclosure in the rollforward of the amount recognized in net income in the
current period that relates to the expected increase in cash flows. However, the
components of the rollforward are identified as “minimum” disclosure,
suggesting that supplemental disclosure of the entire increase in expected cash
flows is not precluded. Similarly, supplemental disclosure of the accretion of
discounted expected cash flows recognized in the period is not precluded.
Figure 9-6 illustrates the rollforward of credit losses recognized in net income for
which a portion was recognized in OCI.
Figure 9-6
Sample disclosure—the rollforward of credit losses recognized in net income on
fixed-maturity securities
The following table summarizes the credit loss recognized in earnings on fixed-
maturity securities for which a portion of the OTTI was recognized in OCI.
9-18 PwC
Fair value ASC 320-10-50-8B reference
Balance, beginning of
year 129 a
Credit losses for which

OTTI was not previously
recognized 31 b
Credit-impaired securities
disposed of for which
there was no prior intent
or requirement to sell (48) c
Credit-impaired securities
not disposed of for which
there was no prior intent
or requirement to sell 12 d
Credit impairments on
previously impaired
securities 19 e
Accretion recognized due

to changes in cash flows
expected to be collected
over the remaining
expected term (12) f
Increases due to the

passage of time 3 f
Balance, end of year 134 g
9.6.6 Reclassifications out of AOCI for AFS securities
For each income statement presented, ASC 320-10-50-9 requires a reporting

entity to disclose the change in net unrealized holding gain or loss on AFS
securities reported in AOCI during the period, and the amount of gains and losses
reclassified out of OCI into net income upon sale of the securities. The amount is
calculated as the difference between the balances in the separate component of
equity at (1) period-end and (2) the beginning of the period, reflecting the
additions and reclassifications to net income as the additions and deductions,
respectively, from the beginning amounts. The AOCI reclassification disclosure
also includes the location in the income statement of the reclassified amount. For
AFS securities, the unrealized gain or loss is reclassified out of AOCI and into a
“Realized gain/loss” line on the income statement upon the sale of the security.
FSP 4.5.3.1 includes a sample disclosure.
PwC 9-19
Reporting entities that provide a statement of changes in stockholders’ equity

with the activity reported in OCI detailed separately from other equity captions
should present the change in net unrealized holding gain or loss in the statement
of changes in stockholders’ equity.
If the reporting entity does not provide a statement of changes in stockholders’

equity or the activity in the separate component of equity is not detailed on the
statement, it should disclose the change in net unrealized holding gain or loss on
AFS securities in the footnotes. Refer to FSP 4.5 for further discussion of this
disclosure.
9.6.7 Sales, transfers, and related matters
Additional disclosures are required when investments in debt and equity

securities are sold during a period or transferred between classifications (e.g.,
from AFS to trading), as outlined in ASC 320-10-50-9 through 50-13.
For each period for which an income statement is presented, ASC 320-10-50-9
requires the following disclosures for AFS securities.
□ Proceeds from sales and maturities
□ Gross realized gains and losses
□ The basis on which the cost of a security sold or the amount reclassified out
of AOCI into income was determined (e.g., specific identification, average
cost, or other method)
□ The amount of the net unrealized holding gain or loss for the period that has
been included in AOCI
□ The amount of gains and losses reclassified out of AOCI into income for the
period
ASC 320-10-50-9 also requires disclosure of trading gains and losses on trading
securities still held at the balance sheet date.
Figure 9-7 illustrates the disclosure requirements of the first two bullets above.
FSP 4.5 discusses the disclosure requirements associated with the amounts in,
and reclassified out of, AOCI.
In the rare circumstance, as defined by ASC 320-10-35-12, that a security is

transferred from AFS to trading, the reporting entity should disclose the gross
gains and gross losses included in income from the transfer.
9-20 PwC
Figure 9-7
Sample disclosure—gross realized gains and losses from sales and maturities of
AFS securities
The following table summarizes the gross realized gains and losses from sales or
maturities of AFS securities.
Single year depicted for simplicity. These amounts are not intended to reconcile
to the other example disclosures.
Gross Gross Gross Gross

realized realized proceeds proceeds from
gains losses from sales maturities
Fixed-maturity
AFS securities 314 149 2,100 300
Equity securities 35 24 3,200 N/A
Total 349 173 5,300 300
The gross proceeds from sales and maturities may alternatively be presented on
the face of the statement of cash flows.
For any sales of, or transfers from, securities classified as HTM, a reporting entity
should disclose all of the following in the footnotes for each period for which an
income statement is presented.

a. The net carrying amount of the sold or transferred security
b. The net gain or loss in accumulated other comprehensive income for any
derivative that hedged the forecasted acquisition of the held-to-maturity
security
c. The related realized or unrealized gain or loss
d. The circumstances leading to the decision to sell or transfer the security.

(Such sales or transfers should be rare, except for sales and transfers due to
the changes in circumstances identified in paragraph 320-10-25-6(a) through
(f).)
According to ASC 320-10-35-16, the fair value amount at the date of the transfer,
adjusted for subsequent amortization, becomes the amortized cost basis of the
security transferred to HTM for the disclosures required by ASC 320.
PwC 9-21
9.6.8 Options that do not qualify for derivative accounting
When a reporting entity enters into forward contracts and options that (1) are not
derivatives subject to ASC 815 and (2) involve the acquisition of securities that
will be accounted for under ASC 320, it should report those options consistent
with the accounting, presentation, and disclosure of ASC 320 securities (i.e.,
trading, held to maturity, or available-for-sale).
In addition, the reporting entity should disclose its accounting policy for the
premium paid to acquire such an option that is classified as held to maturity or
available-for-sale in accordance with ASC 815-10-50-9.
9.6.9 Beneficial interests in securitized financial assets
A reporting entity may own debt securities representing beneficial interests in

securitized financial assets that have been accounted for as sales. If so, in
addition to meeting the disclosure requirements of ASC 320, the reporting entity
should consider the disclosure requirements in ASC 860-20-50-4 that may apply
to those beneficial interests as of the balance sheet date presented. Refer to FSP
22 for additional information on transfers.
9.7 Disclosure–cost method investments

ASC 325-20-50-1 provides the sole disclosure guidance specific to investments in
cost method securities.

For cost-method investments, an investor shall disclose all of the following
additional information, if applicable, as of each date for which a statement of
financial position is presented in its interim and annual financial statements:
a. The aggregate carrying amount of all cost-method investments

b. The aggregate carrying amount of cost-method investments that the
investor did not evaluate for impairment (see Section 325-20-35)
c. The fact that the fair value of a cost-method investment is not estimated if
there are no identified events or changes in circumstances that may have a
significant adverse effect on the fair value of the investment, and any one
of the following:
1. That the investor determined, in accordance with paragraphs 825-10-
50-16 through 50-19, that it is not practicable to estimate the fair value
of the investment
2. That the investor is exempt from estimating annual fair values under
Subtopic 825-10
3. The investor is exempt from estimating interim fair values because it
does not meet the definition of a publicly traded company.
9-22 PwC

The presentation and disclosure requirements for investments are generally
applicable to both public and private reporting entities.
Although S-X 5-02 requires use of the term “marketable securities” to describe
investments in debt and equity securities, we believe complying with the ASC 320
guidance satisfies this S-X requirement as well. As such, we see no difference in
the reporting requirements for public and private companies.
At the July 19, 2016 PCC meeting, FASB board members and staff stated that
they expect to do a technical correction to ASC 320 to remove the disclosures in
ASC 320-10-50-5 on held-to-maturity debt securities for entities that are not
public business entities. Removal of these disclosures would be consistent with
the elimination of the disclosure requirements for other financial instruments in
ASU 2016-01.
PwC 9-23
Chapter 10:
Equity method
investments
PwC 10-1
Equity method investments

This chapter discusses the presentation and disclosure requirements for equity
method investments. ASC 323, Investments—Equity Method and Joint Ventures,
is the primary guidance for accounting for equity method investments, but the
SEC also has certain presentation and disclosure requirements for SEC
registrants. Generally, ASC 323 requires an equity method investment to be
shown on the balance sheet of the investor as a single amount. Likewise, the
investor’s share of earnings or losses from an equity method investment should
generally be shown on the income statement as a single amount. Alternatives to
the single line presentation on the balance sheet and income statement may be
used in limited situations, as discussed later in the chapter.
ASC 323 also outlines various disclosures for equity method investments. The
extent of the disclosure requirements is predicated on the significance of an
investment to the investor’s balance sheet and income statement.
See CG 4 for guidance on the recognition and measurement of equity method

investments.
10.2 Scope
The guidance in ASC 323 applies to all reporting entities. Investments within the
scope of the equity method of accounting include investments in (1) common
stock and/or (2) in-substance common stock that individually, or in combination
with other financial and nonfinancial interests, do not result in a controlling
financial interest, but do result in the ability to exercise significant influence.
Investments in general partnerships and other unincorporated joint ventures are
also generally accounted for using the equity method of accounting, as described
in CG 4.2.3.1. Investments in limited partnerships and similar entities (e.g., a
limited liability company that maintains a specific ownership account for each
investor) also should be accounted for under the equity method of accounting,
unless the investment is so minor that the limited partner may have virtually no
influence over the partnership’s operating and financial policies, as described in
CG 4.2.3.2. In such situations, the investment should be accounted for under ASC
320 or ASC 325, depending on which guidance is appropriate based on the facts
and circumstances. See FSP 9 for presentation and disclosure requirements for
ASC 320 and ASC 325.
The following types of investments are not within the scope of ASC 323:
□ An investment accounted for under the derivatives and hedging guidance of

ASC 815, Derivatives and Hedging
□ An investment in common stock held by a nonbusiness entity, such as an

estate, trust, or individual
□ An investment in common stock of an entity that is consolidated in

accordance with ASC 810, Consolidation
10-2 PwC
□ An investment in common stock accounted for using the fair value guidance
of ASC 946, Financial Services—Investment Companies
□ An investment in limited liability entities that are required to be accounted

for as debt securities
Investments held in common stock and/or in-substance common stock

(collectively, referred to as “common stock”) of entities other than consolidated
subsidiaries are usually accounted for by one of three methods—the cost method,
the equity method, or the fair value method. The equity method should be
applied when an investor has the ability to exercise significant influence over the
operating and financial policies of the investee, unless the investor elects the fair
value option available under ASC 825, Financial Instruments. If the investor
elects the fair value option, the investor is still required to provide certain of the
equity method disclosures as described in ASC 323. See FSP 10.6 for further
information on the required disclosures when an investor elects the fair value
option.
See CG 4.2 for further guidance on investments within the scope of the equity
method.

ASC 323-10-45-1 requires an investment in common stock accounted for under
the equity method to be shown as a single amount on the investor’s balance sheet,
if material. Multiple equity method investments can be aggregated for purposes
of presentation on the balance sheet.
The investment in common stock may be combined with advances or investments

in senior or other securities of the investee in a single amount for purposes of
balance sheet presentation; however, disclosure of the types of investments will
generally be required.
Typically, an investor is not permitted to record its share of each asset and
liability of the investee individually (the so-called “expanded equity” or
“proportionate consolidation” approach). This approach is used only in
accounting for unincorporated undivided interests where the investor legally
owns a proportionate share of each asset and is obligated for its proportionate
share of each liability as discussed in ASC 810-10-45-14. This guidance permits
this approach in the extractive and construction industries. However, this
method is not appropriate for an investment in a corporate entity because the
investor in such circumstances owns an interest in the net assets of the corporate
entity as a whole, and does not have a proportionate legal interest in each asset
and liability.
When labeling balance sheet captions, the term “investments at equity” should be
used only in circumstances where the carrying amount of the investment equals
the investor’s underlying equity in investee net assets. Generally, the basis of
accounting should be described in a footnote rather than in the balance sheet
caption. When the investments caption includes investments accounted for under
PwC 10-3
the cost and equity methods, the amount of investment and advances accounted
for under each method should be set forth either on the balance sheet or in a
footnote.
An investor’s share of losses of an investee may exceed the carrying amount of the
investment accounted for under the equity method. In certain circumstances, an
investor may continue to recognize its share of investee losses in excess of the
investor’s carrying amount of the investment, resulting in a balance sheet credit.
In such circumstances, the carrying amount should be classified as a liability. The
balance sheet caption should be appropriately descriptive to reflect the nature of
this liability (e.g., “accumulated losses of unconsolidated companies in excess of
investment,” “estimated losses on investment,” or “estimated liability–guarantee
of obligation of unconsolidated affiliate”). See CG 4.5.3 for further information.

ASC 323-10-45-1 requires the investor’s share of earnings or losses from its
investment in common stock accounted for under the equity method to be shown
on the income statement as a single amount, except for the investor’s share of
accounting changes reported in the financial statements of the investee, which
should be classified separately in the income statement. If basis differences exist
(see FSP 10.4.1.4, CG 4.4.5, and CG 4.5.5.1 for further information) that are
assigned to depreciable or amortizable assets, the investor’s share of the
investee’s earnings should be adjusted to reflect amortization or accretion of the
basis difference. In addition, an investor may need to make other adjustments to
its proportionate share of the earnings or losses of an investee, as described in CG
4.5.5. Equity method investments can be aggregated for purposes of presenting
the investor’s share of earnings or losses in the income statement.
When practicable, the investee’s financial information should be as of the same

dates and for the same periods as presented in the reporting entity’s financial
statements. However, if the investee’s financial information is reported on a lag,
the reporting entity would ordinarily record its share of the earnings or losses of
an investee using the most recently available financial statements, provided this
approach is applied consistently. See CG 4.5.7 for further information on lag
reporting.
10.4.1 Presentation alternatives
The investor’s share of the investee’s earnings or losses is generally presented as a

single amount in the income statement. Limited exceptions to this presentation
are permissible, as discussed in this section.
Regulation S-X generally requires equity method earnings to be presented below

the income tax line. However, the SEC staff has indicated that, in certain limited
circumstances, it may be appropriate to include income from equity investments
in operations because some reporting entities operate their business largely
through equity investees, or the equity investee may be integral to the investor’s
operations. Even under these circumstances, classification within revenue is not
allowed.
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Unless permitted by the ASC 810 guidance discussed in FSP 10.3, the SEC will
not accept the proportionate consolidation method because the investee’s sales,
cost of sales, and other items of income and expense are not those of the SEC
registrant.
Example 10-1 illustrates the presentation of equity in net earnings of an investee

as a single amount in the income statement.
EXAMPLE 10-1
Presentation of equity in net earnings of investee as a single amount
FSP Corp owns 40% of the common stock of Company A and has the ability to
exercise significant influence over the operating and financial policies of this
investee. FSP Corp accounts for Company A as an equity method investee. There
are no intercompany transactions, consolidation-type adjustments required for
investee capital changes, or differences between investor cost and underlying
equity in investee net assets. FSP Corp is taxed at 40%.
Additionally, note that any tax provision required by ASC 740, Income Taxes,
relating to the temporary difference arising from the use of the equity method for
book purposes and the cost method for tax purposes has been omitted to simplify
the illustration.
During the year, FSP Corp has income before taxes of $160,000 and income taxes
of $64,000. FSP Corp’s portion of Company A’s net earnings is $39,000.
How should FSP Corp present the equity in net earnings of Company A as a
single amount in the financial statements?
Analysis
FSP Corp should present the equity in net earnings of Company A as a single
amount as follows:
Income before income taxes and equity in net earnings of

affiliate $160,000
Income taxes 64,000
Income before equity in net earnings of affiliate 96,000
Equity in net earnings of affiliate 39,000
Net income $135,000
The above presentation is consistent with ASC 323-10-45-1 and is the most
common presentation. S-X 5-03 requires this presentation unless a different
presentation is justified by the circumstances. We believe such circumstances
may include (1) an investment in a partnership or other unincorporated entity,
where the equity earnings or losses caption could be presented before the
PwC 10-5
investor’s income tax provision, or (2) in other limited cases where proportionate
consolidation is permissible, as discussed in FSP 10.3.
The income statement caption for the equity method earnings should be
appropriately titled depending on its nature (e.g., “Equity in net earnings of
Company A,” or “Share of net earnings of equity method investee”). Additionally,
the subtotal for FSP Corp’s income prior to its equity in net earnings in Company
A (required for SEC registrants) should be appropriately titled, as illustrated
above.
If the equity method earnings are of such a nature that it is acceptable for them to
be presented within operations, the amount must be net of taxes as recorded by
the investee in determining its net income. To do otherwise would be tantamount
to proportionate consolidation.
When the investee is a partnership, the investor/partner’s share of the income of
the partnership is taxable at the investor level, not at the partnership level. In
such cases, a question may arise as to whether the equity earnings should be
reported before or after the investor’s income tax provision on its income
statement. We would encourage the investor to report equity earnings after the
income tax provision line on its income statement because any taxes due on its
equity method investment in the partnership would be reported in its income tax
provision.
Figure 10-1 illustrates common methods an investor may use for income
statement presentation of equity method earnings, which depend on the nature of
the equity method investee and whether the investee is a taxable or non-taxable
entity.
In practice, the presentation of equity in earnings in the income statement varies.
Careful consideration should be given to how investor and investee activity
related to an equity method investment is presented. Depending on the facts and
circumstances, an alternative presentation may be acceptable when accompanied
by appropriate disclosures in order to allow users of the financial statements to
understand the activity presented.
Figure 10-1
Common methods of presenting earnings of equity method investees in the
income statement
Earnings of non-taxable Earnings of taxable investees (“net of
investees (A) tax” presentation)
In operating profit (B) In operating profit (B)
Before tax provision line item Below tax provision line item (C)
Below tax provision line item (C)
(A) For a non-taxable investee, there is no difference between gross or net of tax presentation, as the
investee is not taxed.
(B) The SEC staff has indicated that presenting equity method earnings from an investee within the
operating income section of the investor’s income statement is acceptable in very limited
circumstances.
(C) The investor’s income tax provision line would include income tax levied against the investor for
its share of the investee’s results.
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10.4.1.1 Royalties, technical fees, interest, and dividends on advances and

senior securities
In certain situations, investments are made principally to secure channels of

distribution or to finance licensees. In such cases, the return on the investment in
common stock may be nominal and incidental to earning royalties, technical fees,
and similar types of income. In other cases, in addition to an investment in
common stock, the investor may have a substantial investment in the investee in
the form of advances or senior securities.
In such circumstances, because of the interplay between royalties, technical fees,

interest, or other items, and the return on investment in the investee entity, it
may be more meaningful to combine these amounts in presenting equity in
income of the investee. When such presentation is used, the following should be
considered:
□ The investment account in the balance sheet should include the investment
in common stock, advances, and senior securities consistent with how it is
presented in the income statement.
□ The separate amounts and the fact that they were combined in the financial
statements must be disclosed. Appropriately descriptive captions must be
used (e.g., “equity in income of and technical fees and interest earned from
investees”).
10.4.1.2 Full or partial sale of equity method investment
The gain or loss from the sale of an equity method investment may be presented
in either of the following ways in the income statement:
□ Gross of tax, before the income tax provision, in non-operating income
□ In the same line item in which the investor reports the equity in earnings of
the investee
These methods are also appropriate to record the gain or loss when the investor’s
ownership interest is diluted as a result of the investee issuing additional shares,
and the investor does not maintain its proportionate ownership interest (i.e., an
indirect sale). See CG 4.7.6 for further information on indirect sales. Appropriate
disclosures about the sale should be made in the investor’s financial statements
as necessary.
10.4.1.3 Other-than-temporary impairment
When an investor records an other-than-temporary impairment charge for an

equity method investment, the impairment charge should generally be included
as a component of the investor’s share of the earnings or losses of the investee.
PwC 10-7
10.4.1.4 Difference between investor cost and underlying equity in net assets
of investee
When an investor purchases an investment that will be accounted for by the

equity method, the amount paid for the investment may not equal the investor’s
proportionate share of the investee’s net book value. This is commonly referred to
as a basis difference.
The guidance in ASC 323 requires that a difference between the cost of an
investment and the amount of underlying equity in net assets of an investee be
accounted for as if the investee were a consolidated subsidiary. The investor must
identify which individual assets or liabilities have fair values different from the
corresponding amounts recorded in the investee’s financial statements. If the
basis difference is assigned to depreciable or amortizable assets, such as PP&E or
intangibles assets, the difference should be depreciated, amortized, or accreted
over the useful lives of the related assets and included as a component of the
investor’s share of the earnings or losses of the investee.
10.4.1.5 Intercompany profits on transactions between investor and investee
The presentation of the effects of intercompany profits on transactions between

an investor and an investee in an investor’s income statement and balance sheet
will depend on what is most meaningful in the circumstances. See CG 4.5.2.2 for
further information on the elimination of intercompany profits.
10.4.1.6 Private company accounting alternatives adopted by investee
A public company investor may have an interest in a private company investee

that has elected an accounting alternative approved by the PCC and endorsed by
the FASB (“PCC alternative”). A public company investor should eliminate the
effects of its private company investee’s application of such PCC alternatives by
adjusting its proportionate share of the earnings or losses of the investee. This is
because PCC alternatives are not available to public companies.
10.4.1.7 Discontinued operations reported by an investee
If an investee reports discontinued operations, an investor should only report its

share of the investee’s discontinued operations as discontinued operations if it
represents a strategic shift that has (or will have) a major effect on the investor’s
operations and financial results. If an investor does not report its share of an
investee’s discontinued operations as discontinued operations, it should be
included in the income statement line used for its share of the investee’s earnings
or losses. See FSP 27 for further information on the presentation of discontinued
operations.
10.4.1.8 Low income housing tax credit partnerships
Many companies, particularly financial institutions, invest in limited

partnerships or similar limited liability companies that operate qualified
affordable housing projects or invest in one or more other entities that operate
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qualified affordable housing projects. These investors earn federal tax credits as
the principal return for providing capital to facilitate the development,
construction, and rehabilitation of low income rental property. Subject to
meeting a number of criteria, investors in these entities may be eligible to elect to
recognize the return they receive as a component of income taxes in the income
statement. See CG 4.8 for further information.
10.4.1.9 Proportionate consolidation
The proportionate consolidation method reflects an investor’s proportionate

share of each item of income and expense of the investee, as adjusted for any
consolidation entries. As discussed in FSP 10.3, this presentation method is only
permitted in limited circumstances in certain industries.
While intercompany sales between the investor and investee must be eliminated,
the amount eliminated under the proportionate consolidation method should not
exceed the investor’s share of investee sales. As long as intercompany sales are
equal to or less than the investor’s share of the investee sales, the intercompany
sales should be fully eliminated.
10.4.2 Investee accounting changes
An investor’s equity share of an investee’s accounting change should be reported

in the investor’s financial statements as if the investor had made the change.
This treatment is a logical extension of the consolidation guidance.
ASC 250-10-45-3 clarifies that the adoption of accounting changes should

follow the transition requirements specified in the Accounting Standards
Update. In the unusual instance when there are no transition requirements, the
update should be adopted by adjusting assets, liabilities, and opening retained
earnings in the first comparative period presented.
When an investee records the cumulative effect of adoption of an accounting

change through opening retained earnings, the investor would reflect the
investee’s adoption through a corresponding adjustment to its opening retained
earnings. Conversely, adoption of an accounting change by an investee through
net income also would be recorded by the investor through its net income.
Example 10-2 illustrates this concept.
EXAMPLE 10-2
Presentation of investor’s share of an investee’s accounting change
FSP Corp owns 40% of the common stock of Company C and has the ability to
exercise significant influence over the operating and financial policies of this
investee. FSP Corp accounts for Company C as an equity method investee.
Company C recorded a cumulative effect charge through net income as a result
of an accounting change. FSP Corp’s portion of Company C’s net income before
the cumulative effect charge is $104,000 and its portion of the cumulative effect
charge is $20,000. FSP Corp’s net income for the year, prior to its equity
earnings in Company C, is $134,000.
How should FSP Corp present the effect of Company C’s accounting change?
PwC 10-9
Analysis
FSP Corp’s income statement should be presented as follows:
Income before equity in net earnings of investee and

cumulative effect of change in accounting by investee $134,000
Equity in net earnings of investee before cumulative effect of

change in accounting by investee 104,000
Income before equity in cumulative effect of change in

accounting by investee 238,000
Equity in cumulative effect of change in accounting by investee

(see Note X) (20,000)
Net income $218,000
This presentation should also be applied to earnings per share disclosures. Refer
to FSP 7 for information on EPS disclosures.
10.4.3 Investment becomes qualified for the equity method—current

guidance
A reporting entity with an investment that was previously accounted for on a

basis other than the equity method (e.g., cost method investment, available-for-
sale security) may increase its level of ownership such that the investor has the
ability to exercise significant influence. If this occurs prior to the adoption of ASU
2016-07 (see FSP 10.4.3.1) and the investor does not elect the fair value option,
the change should be reflected retrospectively as if the equity method had been
applied during all previous periods in which the investment was held.
For example, assume a reporting entity owns 15% of an investee that is accounted
for using the cost method. It subsequently increases its ownership interest to
40%, which results in the investor applying the equity method. The investor
would retrospectively reflect its previous 15% ownership interest using the equity
method in all prior periods. Refer to FSP 30 for discussion of changes in
accounting principles.
10.4.3.1 Investment becomes qualified for the equity method—new guidance
In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the
Equity Method of Accounting (ASU 2016-07), which eliminates the requirement
that a reporting entity retroactively adopt the equity method of accounting for a
previously held investment that now qualifies for use of the equity method.
Instead, the equity method of accounting should be applied prospectively from
the date significant influence is obtained.
On the date when an entity has an available-for-sale equity security that first
qualifies for use of the equity method of accounting, ASU 2016-07 requires the
10-10 PwC
entity to recognize the unrealized holding gain or loss in accumulated other

comprehensive income through earnings.
ASU 2016-07 should be applied prospectively to increases in the ownership level

or degree of influence that result in the adoption of the equity method. No
incremental disclosures are required in the period of change. ASU 2016-07 is
effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. Early adoption is permitted.
10.4.4 Investment no longer qualifies for the equity method
When an investment in common stock of an investee entity no longer qualifies for

accounting under the equity method (i.e., the ability to exercise significant
influence over operating and financial policies of an investee no longer exists),
the investor should discontinue accruing its share of earnings or losses of the
investee. This is a change of circumstances, not a change in accounting principle,
and therefore is not reflected retrospectively. Additionally, the investor’s share of
the investee’s other comprehensive income should be reclassified to the carrying
value of the investment at the time of discontinuance of the equity method of
accounting. In executing the reclassification, the reporting entity should first
reduce the carrying value of the investment to zero and then record the
remaining balance in income.
10.4.5 Change from a controlling interest to a noncontrolling investment

accounted for under the equity method
US GAAP considers a change in reporting entity to include “changing specific

subsidiaries that make up the group of entities for which consolidated financial
statements are presented.” Circumstances may arise in which a parent’s
controlling financial interest (e.g., generally an ownership interest in excess of
50% of the outstanding voting stock) is reduced to a noncontrolling investment
that still enables it to exercise significant influence over the operating and
financial policies of the investee. A change that results from changed facts and
circumstances (such as a partial sale of a subsidiary), where there was only one
acceptable method of accounting prior to the change in circumstances
(consolidation) and only one acceptable method of accounting after the change
(equity method accounting), is not a change in reporting entity and should not be
accounted for retrospectively. Accordingly, a change from a controlling interest to
a noncontrolling investment accounted for under the equity method should be
accounted for prospectively from the date of change in control.
10.5 Statement of other comprehensive income

A reporting entity is required to record its proportionate share of its equity
method investees’ comprehensive income. This requirement is consistent with
the guidance in ASC 323, which indicates that an investee’s transactions that are
of a capital nature and affect the investor’s share of the investee’s stockholders’
equity should be accounted for as if the investee were a consolidated subsidiary.
PwC 10-11
The format used by an investee to report comprehensive income, including other

comprehensive income (OCI), should not impact how the investor displays its
proportionate share of OCI of its investee. Accordingly, an investor is permitted
to combine its proportionate share of OCI from an equity method investment
with its own OCI items and report those aggregated amounts (by each category).
When a reporting entity elects to present in this manner, the statement of
comprehensive income would not include additional line items that would
indicate an equity method investment exists because it is embedded in the
reporting entity’s components of OCI. Alternatively, the investor would be
permitted to separately report the OCI items related to the equity method
investee, which are depicted in Figure 10-2.
Figure 10-2
Presentation in the statement of comprehensive income and footnote disclosure
for separately reporting the OCI items related to the equity method investee
FSP Corp
Statement of Comprehensive Income
For the year ended December 31, 20X4
Net income $4,150
Other comprehensive income, net of deferred income taxes:
Changes in foreign currency translation adjustments 10
Changes in defined benefit plans:
Actuarial losses and prior service cost/credit before

reclassification to net earnings (50)
Amounts reclassified to net earnings 14
(36)
Ownership share of equity method investment:
Other comprehensive income, before reclassifications to net

earnings 21
Amounts reclassified to net earnings (2)
19
Other comprehensive income, net of deferred income taxes (7)
Comprehensive income 4,143
Comprehensive income attributable to noncontrolling interests (3)
Comprehensive income attributable to FSP Corp $4,140
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Note X—Changes in accumulated other comprehensive income by

component
The following table presents a rollforward of accumulated other comprehensive

income, net of tax:
Accumulated
Currency Equity other
translation Benefit method comprehensive
adjustments plans investment loss
Beginning
balance,
January 1, 20X4 $ 20 $ (206) $ 33 $ (153)
Period change 10 (36) 19 (7)
Ending balance,
December 31,
20X4 $ 30 $ (242) $ 52 $ (160)
10.5.1 Equity method—foreign operations
Reporting entities should also apply the guidance applicable to OCI and
cumulative translation adjustments accounted for in accordance with ASC 830
for equity method investments that are (or are part of) a foreign entity, and for
domestic equity method investments that have foreign operations. When the
equity method is used, the reporting entity’s financial statements should include
a proportionate share of any investee’s translation adjustments (e.g., when the
investee has a subsidiary that is a foreign entity) in OCI, as well as its
proportionate share of the direct effects of translating an equity method investee
that reports in a foreign currency (e.g., the investee is a foreign entity).
10.6 Disclosures
ASC 323-10-50-1 through 50-2 sets forth guidelines regarding disclosures that
should be made in the financial statements of an investor when it accounts for
investments under the equity method. The guidance states:

…references in this Subtopic to common stock refer to both common stock and
in-substance common stock that give the investor the ability to exercise
significant influence over the operating and financial polices of an investee even
though the investor holds 50% or less of the common stock or in-substance
common stock (or both common and in-substance common stock).
PwC 10-13
ASC 323-10-50-2
The significance of an investment to the investor’s financial position and results
of operations shall be considered in evaluating the extent of disclosures of the
financial position and results of operations of an investee. If the investor has
more than one investment in common stock, disclosures wholly or partly on a
combined basis may be appropriate.
The guidance also indicates that investments may be appropriately combined or

grouped, either wholly or in part, for disclosure purposes.
If the investee is a variable interest entity (VIE), the investor is required to make
the equity method investment disclosures in accordance with ASC 323-10-50, in
addition to the required disclosures for VIEs in ASC 810-10-50. Refer to FSP 18
for additional information on the required disclosures for VIEs.
ASC 323-10-50-3 requires the following disclosures with regard to equity method
investments, keeping in mind that the nature and extent of disclosure may vary in
each case based on the significance of the investment to the investor:
□ Name of each investee and percentage of ownership of common stock by the

investor
Normally, the names of investees and the percentage owned would be

included only for individually significant investees, for large holdings in
publicly held investees, or where otherwise clearly informative to the users of
financial statements. The percentage of ownership generally should be
disclosed as a range where numerous individually immaterial investments in
corporate joint ventures or other investees are accounted for under the equity
method.
□ Accounting policies of the reporting entity with respect to investments in

common stock
The name of any significant investee in which the investor holds 20% or more
of the outstanding voting stock, for which the investment is not accounted for
under the equity method, should be disclosed. The reasons why the equity
method is not considered appropriate should also be disclosed. Additionally,
the name of any significant investee in which the investor holds less than
20% of the voting stock in circumstances where such investment is accounted
for under the equity method should be disclosed, along with the reasons why
such treatment is considered appropriate.
□ Difference, if any, between the amount at which an investment is carried

and the amount of underlying equity in net assets, and the accounting
treatment for the basis difference
Intra-entity (intercompany) income eliminations, as well as other basis

differences such as goodwill, should be disclosed. Basis differences are
discussed further in FSP 10.4.1.4 and CG 4.4.5.
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□ Market value of investments in common stock for which a quoted market

value is available
If specific circumstances lead the reporting entity to decide not to disclose

this information—e.g., when the market for a stock is thin and quoted market
value may not be representative of the investor’s holding—the reporting
entity should disclose the reasons for reaching that determination.
□ Summarized information as to assets, liabilities, and results of operations of

investees, either individually or grouped
The disclosure of summarized financial information is also required under

SEC rules. While the disclosure requirement for summarized financial
information in ASC 323-10-50-3(c) is more general in nature, the SEC
disclosure requirement provides specific guidance as to the financial captions
that should be disclosed. S-X 4-08(g) sets forth disclosure requirements for
annual periods, and S-X 10-01(b)(1) stipulates interim disclosure
requirements. Refer to FSP 10.6.1 and 10.6.2 for further discussion of SEC
disclosure requirements on an annual and interim basis, respectively. If an
investment accounted for by the equity method exceeds 20% based on the
investment test or income test as defined in S-X 1-02(w), separate financial
statements—not just summarized financial information—are required in the
Form 10-K.
□ Material effects of possible conversions, exercises, or contingent issuances of

investee securities that would significantly affect the investor’s share of
reported earnings or losses of the investee
Investee common stock equivalents and dilutive securities are taken into
account in computing the investor’s earnings per share (see ASC 323-10-50-
3(d)). Disclosure of the potential effects should normally be made only if the
conversion, exercise, or issuance would significantly change the investor’s
share of investee net assets or reported income. Normally, disclosures should
be limited to the nature of the contingency and the effect on income for the
most recent period and financial position at the end of the period. Refer to
FSP 7 for further discussion on EPS considerations.
Equity method investments may also generate temporary differences for tax
purposes that must be disclosed under ASC 740. Refer to FSP 16 for required
disclosures related to deferred taxes. In addition to those disclosures, SAB Topic
6.I.2, Taxes of Investee Company, indicates that if an equity method investee’s
effective tax rate differs by more than 5% from the statutory Federal income tax
rate, the investor is required to disclose the tax components of the reconciliation
if such information is available and material to the investor’s balance sheet or
income statement.
If a reporting entity would have accounted for an investment using the equity
method, but instead elected to use the fair value option, the reporting entity must
include the disclosures required by ASC 825-10-50-28. In addition, the reporting
PwC 10-15
entity must also include the equity method disclosures above, even though it is
not using the equity method for accounting purposes, except for:
□ Difference, if any, between the amount at which an investment is carried and

the amount of underlying equity in net assets, and the accounting treatment
for the basis difference
□ Market value of investments in common stock for which a quoted market

value is available
□ Material effects of possible conversions, exercises, or contingent issuances of

investee securities that would significantly affect the investor’s share of
reported earnings or losses of the investee
10.6.1 Summarized financial information of equity method investees—

annual SEC disclosure requirements
SEC rules provide significance thresholds for determining whether an SEC

registrant is required to provide summarized financial information or full
separate financial statements relating to an unconsolidated subsidiary or equity
method investee. The rules are regarded by the SEC as an interpretation of ASC
323-10-50-3, which states that summarized financial information or separate
statements may be required for equity investees if the investments are material in
relation to the investor’s financial position or results of operations. S-X 4-08(g)
requires reporting entities to disclose summarized financial information of
unconsolidated subsidiaries and equity method investees for all periods
presented if any one of the three significant subsidiary tests (outlined in S-X 1-
02(w)) exceeds 10% on an individual basis or on an aggregated basis by any
combination of unconsolidated subsidiaries or equity method investees for any of
the periods presented.
If separate financial statements of significant investees are included in an annual

report to shareholders or a Form 10-K (as required by S-X 3-09), the summarized
data required by S-X 4-08(g) is not required for those entities. In some cases, the
financial statements required by S-X 3-09 are not filed concurrent with the Form
10-K, but rather are filed by amendment at a later date. In such cases, the SEC
registrant may not omit the summarized financial information for the significant
investees from the financial statements in its initial Form 10-K filing.
If required, the summarized financial information disclosures must include, at a

minimum, the following financial statement captions:
□ Current assets
□ Noncurrent assets
□ Current liabilities
□ Noncurrent liabilities
□ Redeemable preferred stock
□ Noncontrolling interest
10-16 PwC
□ Net sales or gross revenue

□ Gross profit (or alternatively, costs and expenses applicable to net sales or
gross revenues)
□ Income or loss from continuing operations before cumulative effect of a
change in accounting principle
□ Net income or loss
□ Net income or loss attributable to the entity
If the balance sheet is not classified, information should be provided that

indicates the nature and amount of major components of assets and liabilities. In
addition, for specialized industries, other information may be substituted for
sales and related costs if they are more meaningful.
Once the significance test is triggered, summarized financial information for all
equity investees must be disclosed in the aggregate or individually (not just those
that are significant individually). In other words, there is not a materiality
threshold for individual entities that would exempt an investee from being
included in the disclosures. And although aggregation is generally permitted, the
SEC staff has, in certain circumstances, issued comments that it believes
aggregation is misleading or suppresses important information. In those cases,
the SEC staff has requested that certain investees be presented separately.
Separate information may be requested for individual investees that are
significant quantitatively or qualitatively.
10.6.2 Summarized financial information of equity method investees—

interim SEC disclosure requirements
S-X 10-01(b)(1) requires reporting entities to include in their interim financial

statements separate summarized income statement information for each equity
method investee for which (1) separate financial statements of the investee would
be required for annual periods, and (2) the investee would be required to file
quarterly financial information in Form 10-Q if the investee were a registrant
(e.g., the investee is not a foreign registrant).
Reporting entities would use the investment and income tests in S-X 1-02(w) to
determine whether any investees exceed 20%. The investment tests would be
based on the two balance sheets included in the 10-Q and the income tests would
be based on the year-to-date income statements included in the 10-Q.
The minimum disclosures below must be included for each significant investee
and may be aggregated with similar minimum disclosures for other significant
investees. The information must be presented for both the current and prior
comparative year-to-date periods included in the interim financial statements:
□ Net sales or gross revenues

□ Gross profit (or, alternatively, costs and expenses applicable to net sales or
gross revenues)
PwC 10-17
□ Income or loss from continuing operations before cumulative effect of a

change in accounting principle
□ Net income or loss
□ Net income or loss attributable to the entity
At interim, S-X 10-01(b)(1) requires income statement information, whereas the

annual requirements under S-X 4-08(g) require summarized financial
information for both the balance sheet and income statement. Additionally,
interim disclosures must be provided for the investees that meet the significance
tests, whereas on an annual basis summarized financial information for all equity
investees must be disclosed once the significance test is triggered.

The guidance on presentation and disclosure of equity method investments is
similar for private and public companies. However, the SEC has particular views
regarding income statement presentation and additional rules surrounding the
disclosure requirements for equity method investees.
As discussed in FSP 10.6, SEC registrants are required to disclose the tax
components of the investee’s effective tax rate if the investee’s effective tax rate
differs by more than 5% from the statutory Federal income tax rate. This
disclosure is not required for private companies.
In addition, the SEC rules are more prescriptive with respect to disclosures
required for summarized financial information of equity method investees.
Summarized financial information of equity method investees is required to be
disclosed under ASC 323 if the investments are material to the investor.
However, judgment must be used to determine whether an investment is material
to the balance sheet and income statement of the investor. In contrast, SEC rules
establish significance tests which determine whether an investor is required to
disclose the equity method investee summarized financial information.
S-X 4-08(g) also establishes the specific financial statement captions that must
be included in the disclosure. In contrast, ASC 323 does not specify the captions
that must be included in the summarized financial information.
Lastly, S-X 10-01(b)(1) specifies interim disclosure requirements for summarized

financial information of equity method investees, while such information is not
explicitly required under the ASC 270 minimum disclosure requirements.
10.7.1 Private company accounting alternatives
See FSP 10.4.1.6 for information on the implications of a private company

investee’s election of private company accounting alternatives on a public
company investor’s equity method accounting.
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Chapter 11:
Other liabilities
PwC 11-1
Other liabilities

This chapter provides considerations for reporting entities related to liabilities
that are not covered by other chapters within this guide. It focuses on US GAAP
and SEC requirements that a reporting entity should consider with regard to
liabilities when preparing the financial statements and related disclosures.
This chapter identifies common liabilities and discusses related presentation and
disclosure considerations. Topics discussed include:
□ Accounts and notes payable
□ Accruals (including warranty, environmental, employee compensation,

restructuring, etc.)
□ Asset retirement obligations
□ Deferred revenue
□ Liabilities held for sale
11.2 Scope
In considering the scope of this chapter, it is helpful to understand the conceptual
framework related to liabilities, which is included in FASB Concepts Statement
No. 6, Elements of Financial Statements.
Excerpt from FASB Concepts Statement No. 6

Liabilities are probable future sacrifices of economic benefits arising from
present obligations of a particular entity to transfer assets or provide services to
other entities in the future as a result of past transactions or events.
Expanding on CON 6, in order to be classified as a liability, the following

characteristics must be present:
□ There is a present duty or responsibility to one or more entities that entails

settlement by probable future transfer, or the use of assets at a specified or
determinable date, on occurrence of a specified event, or on demand
□ There is little or no discretion in avoiding a future transfer of assets or

providing services
□ An obligating event has already happened
As discussed in FSP 2, a reporting entity should consider the ASC Master

Glossary definition of current liabilities in preparing a classified balance sheet.
11-2 PwC
Other liabilities

Current liabilities: Current liabilities is used principally to designate obligations
whose liquidation is reasonably expected to require the use of existing resources
properly classifiable as current assets, or the creation of other current liabilities.
The presentation and disclosure considerations in this chapter do not address

current versus noncurrent classification. Each reporting entity should consider
their facts and circumstances in light of the ASC definition when determining
how to classify liabilities in their financial statements.
11.3 Accounts and notes payable

S-X 5-02 requires a reporting entity to separately disclose amounts payable to the
following in the balance sheet:
□ Trade creditors
□ Banks for borrowings
□ Holders of commercial paper
□ Factors or other financial institutions for borrowings
□ Related parties
□ Underwriters, promoters, and employees
□ Others
The SEC regulations allow for amounts applicable to banks for borrowings,
holders of commercial paper, and factors or other financial institutions for
borrowings to be either separately stated in the balance sheet, or in the footnotes.
11.3.1 Trade creditors
This caption typically represents amounts owed to suppliers of goods and services
that a reporting entity consumes through operations. There are numerous
considerations that a reporting entity should evaluate related to these payables,
the most common of which are discussed in the following subtopics.
11.3.1.1 Overdrafts (bank & book)
Book overdrafts—representing outstanding checks in excess of funds on

deposit—should be classified as liabilities at the balance sheet date. Bank
overdrafts—representing the total of checks honored by the bank that exceed the
amount of cash available in the reporting entity’s account—result in the creation
of a short-term loan.
PwC 11-3
Other liabilities
Refer to FSP 6 for presentation and disclosure considerations related to book and
bank overdrafts.
11.3.1.2 Classification of outstanding checks
It is not acceptable for a reporting entity to reclassify all outstanding checks as a

liability if the outstanding checks may be covered by funds on deposit. The
generally accepted approach, including the view of the Accounting Standards
Executive Committee, is to reduce the cash balance for checks issued but not yet
paid by the bank.
EXAMPLE 11-1
Offset of cash deposits with outstanding checks
FSP Corp has three separate bank accounts with the same bank: a deposit
account, a main account, and a disbursement account. The deposit account is
used by the reporting entity to accumulate deposits from customers. At the end of
each business day, any amounts in the deposit account are automatically swept
into the main account. FSP Corp uses the disbursement account to write checks.
Each day, the bank accumulates the amount of checks presented for payment
and, pursuant to its account agreement with FSP Corp, sweeps an equal amount
out of the main account into the disbursement account to cover the balance.
According to the account agreement, the bank has a right to draw any amount
from an account with a positive balance to cover an account with a negative
balance. As of year-end, FSP Corp has a negative cash book balance in the
disbursement account of $9 million (representing outstanding checks), a positive
cash book balance of $4 million in the main account, and zero in the deposit
account.
How should FSP Corp present its cash accounts on its balance sheet?
Analysis
Because the bank has the ability to draw any amount from an account with a
positive balance to cover an account with a negative balance, FSP Corp should
offset the $4 million positive balance in the checking account against the $9
million in outstanding checks. The net amount of $5 million should be reported
as a current liability on FSP Corp’s balance sheet.
11.3.1.3 Checks written but not released
Checks that have not been mailed by the end of the accounting period should not
be deducted from the cash balance. They should be included with accounts
payable or other appropriate liability accounts.
11.3.1.4 Drafts payable
A draft is an order to pay a certain sum of money. It is signed by the drawer

(e.g., an insurance company for a claim payment) and payable to order or bearer
11-4 PwC
Other liabilities
(e.g., the insurance policyholder). When the draft is presented to the drawee
(i.e., the bank), it is paid only upon the approval of the drawer.
Drafts and checks have different legal characteristics. A check is payable on

demand, whereas a draft must be approved for payment by the drawer before it is
honored by the bank.
Drafts payable should be netted against the cash balance, similar to the treatment
for outstanding checks. It is acceptable, however, for a reporting entity to present
drafts payable gross as a liability if the total amount is disclosed either on the
balance sheet or in a footnote. This approach recognizes that there is a legal
distinction between a check and a draft. The policy election must be consistently
applied.
11.3.1.5 Structured payables
Structured payable programs are arrangements involving a reporting entity, its

vendors, and a bank or other financial institution. These arrangements may
involve an administrative paying agent service contract, a financing agreement,
or a factoring arrangement, with or without the reporting entity being a direct
party to the contracts.
A traditional factoring arrangement in its simplest form is one in which a

reporting entity has no involvement in the transaction between a vendor and a
financial institution and the entity pays in the ordinary course its obligations on
the original invoice. The other end of the involvement spectrum is the reporting
entity financing its payment of the obligation under the invoice, in some
instances taking advantage of early pay discounts or extending the terms from
the original invoice.
Depending on the reporting entity’s level of involvement and whether or not the
structured payable program represents a financing of the original obligation, the
terms of the structured payable program could cause the substance of the liability
to change from trade payables to debt. This change in classification could affect a
reporting entity’s leverage ratios, and possibly, its covenants.
Balance sheet classification of the liability also impacts the statement of cash
flows. Refer to FSP 6.7.2.5 for discussion of the statement of cash flows
classification.
The accounting for structured payable programs is not addressed directly in

authoritative literature. When entering into structured payable programs, a
reporting entity should weigh the evidence to determine whether the obligation is
more akin to a trade payable or debt. Program terms differ, and even similar
programs in different markets or jurisdictions may be accounted for differently
because of variations in industry norms and laws by jurisdiction.
When evaluating whether an obligation is more akin to a trade payable or debt, a

company should consider whether:
PwC 11-5
Other liabilities
(1) The terms of the payable are typical for the specific company and industry.
Said differently, would a supplier offer those terms to the company absent
any other considerations?
(2) As a result of the structured payable program, was the payable modified so
significantly such that it should be considered a new arrangement?
A number of factors to help make this assessment are detailed in Figure 11-1 and
the subsequent commentary.
Figure 11-1
Structured payables — classification considerations
Program terms Considerations
What are each party’s roles Significant involvement of the reporting entity in
and responsibilities in the the negotiations of terms between the reporting
negotiations of the entity’s vendors and the financial institution
structured payable would make it hard to assert that the payable’s
program? terms have not changed from the reporting
entity’s perspective. If the reporting entity simply
introduces the vendor and the bank, this level of
involvement would generally not be inconsistent
with a typical vendor/customer arrangement.
However, if the reporting entity is a party to the
arrangement, the nature of the obligation may
have changed.
Are credits still negotiated If the reporting entity does not retain its right to
between the reporting negotiate with the vendor and the ability to
entity and the vendor? realize negotiated credit memos, the economic
substance and legal form of the obligation may
have changed.
Is the program offered to a We do not believe that the arrangement needs to

wide range of companies be offered to all buyers or by all suppliers.
or by a wide range of However, when there are a limited group of
vendors?/ Is vendor buyers/suppliers or a mandatory program, the
participation in the arrangement may not reflect a customary trade
program voluntary? payable.
Has the financial If the arrangement results in the financial

institution obtained any institution receiving new rights that the vendor
new rights, such as did not have before the structured payable
deciding which vendor program, it could call into question the character
invoices get paid? of the obligation from the reporting entity’s
perspective.
11-6 PwC
Other liabilities
Program terms Considerations
How are fees calculated Fee arrangements may indicate more than a
when the reporting entity typical paying arrangement. Mere servicing does
uses a paying agent’s not change the nature of the transactions being
accounts payable serviced. However, variable fees based on vendor
platform? participation may indicate that the transaction is
a financing.
Are the terms of the Extending payment terms beyond industry norms
payables consistent with may suggest a change to the economic substance
peers? of the obligation.
Is the purpose of the Terms that are designed to allow the company to
transaction in substance finance the payment may make the transaction an
an effort by the reporting in-substance financing. However, if the program
entity to finance trade is not limited to a single vendor and does not
payables by extending the significantly change the payment terms such that
terms beyond industry they go beyond industry norms, the extension of
norms? the due date may not be determinative that the
trade payable is more akin to debt.
Is the reporting entity’s Parent guarantees are not typical of trade

parent jointly and severally payables. However, if the obligation was already
liable for the obligation? implicitly guaranteed, making it explicit via the
structured payable program, may not, in and of
itself, make the obligation debt if the guarantee is
the only “debt-like” characteristic. Determination
of whether an obligation was already implicitly
guaranteed requires judgment.
Has the legal character of Changes to the obligations such that they are no
the obligations changed? longer consistent with UCC-compliant trade
payables could be an indicator that the obligation
is debt.
Notwithstanding these considerations, the presence of certain terms may suggest

that the obligation is, in substance, debt. These include:
□ An incremental increase in the price of the goods to compensate vendors who

provide extended payment terms
□ The original liability being extinguished
□ Interest accruing on the balance prior to the due date (although penalties for
non-payment may be imposed after that)
□ The financial institution having the right to draw on the reporting entity’s
other accounts without its permission if the designated payment account has
PwC 11-7
Other liabilities
insufficient funds, if not part of the reporting entity’s normal banking

arrangement
□ Altering the trade payable’s seniority in the reporting entity’s capital

structure
□ Requiring the reporting entity to post collateral on the trade payable
□ Default on invoice payment under the arrangement triggering a cross-default

(other than a general debt obligation cross-default)
EXAMPLE 11-2
Structured payables — accounts payable versus debt classification
FSP Corp and its financial institution ask certain of FSP Corp’s vendors to enter
into a new payment program. Under the payment program, the financial
institution pays the vendors directly and participates in an early pay discount that
the vendors offer for invoices paid within 15 days. FSP Corp is then obligated to
pay the financial institution the agreed-upon amount at the invoice due date. The
amount FSP Corp pays the financial institution at the due date is less than the full
amount of the invoice because the financial institution has offered FSP Corp a
portion of the early pay discount it receives from the vendor.
Should FSP Corp classify the payable to the financial institution as accounts
payable?
Analysis
No. FSP Corp should derecognize its trade account payable and record a new
liability classified on its balance sheet as a borrowing from the lender. The
arrangement between the financial institution and FSP Corp results in FSP Corp
securing financing at a lower cost of funds than in the vendor’s original invoice.
FSP Corp received an early-pay discount for which it was not otherwise eligible.
This transaction differs from traditional receivable factorings in that it has terms
that change the amount of the payables.
Further, FSP Corp’s statement of cash flows should reflect an operating cash
outflow and financing cash inflow related to the affected trade payable balances,
and a financing cash outflow upon payment to the financial institution and
settlement of the obligation. See FSP 6.7.2.5 for discussion of the statement of
cash flows classification of structured payables.
11.3.1.6 Liabilities settled through paying agents
In some circumstances, a reporting entity may engage a financial institution to

operate solely as a paying agent by entering into arrangements that allow for the
financial institution to make payments on behalf of the reporting entity, and in
some instances, allow the reporting entity to participate in rebates or “rewards”
11-8 PwC
Other liabilities
programs based on transaction volume. Generally, reporting entities settle the

outstanding obligations to the paying agent within the same time period that the
reporting entity would have settled the vendor payable, absent a paying agent.
Transaction types vary, and include:
□ P-cards
Employees of the reporting entity make small-dollar purchases, and the

reporting entity owes the financial institution issuing the credit card directly.
Generally, payment terms are 30–60 days from closure of the billing period,
though in some cases, a higher volume of purchases may drive a shorter
payment period.
□ e-payables
Reporting entities charge their trade payables to credit cards, thus settling
the obligations to the vendors and creating new obligations to financial
institutions. Generally, they allow for larger dollar purchases than p-cards,
and are also generally payable 30 days after billing period closure, similar to
standard credit card arrangements.
□ Clearing accounts
Vendors (often of health care companies) have access to a bank account in

the reporting entity’s name and can post charges directly to that account.
The use of these payment mechanisms may, in some circumstances, result in a

change in the legal form of a reporting entity’s liability because the reporting
entity pays a paying agent who had paid off and extinguished the reporting
entity’s obligation to a third party vendor.
Although the reporting entity may now be legally obligated to make payment to
the financial institution, since the payable arose from normal operating
purchases and no financing costs are involved, this arrangement may still be
classified as a trade payable. Trade payable designation may still be acceptable if
(1) payment is made quickly (within the month) and (2) the arrangement is more
for convenience than financing. This may be true even if rebates are received
from the card issuer based on the volume of use.
Refer to FSP 6.7.2.6 for discussion of the statement of cash flows classification
when paying agents are used.
11.3.2 Borrowings from financial institutions or holders of commercial

paper
As described in FSP 11.3, SEC regulations require reporting entities to state

separately either on the balance sheet or within a footnote amounts payable to
banks for borrowings, other borrowings from financial institutions, and amounts
PwC 11-9
Other liabilities
payable to holders of commercial paper. Refer to FSP 12 for debt-related

presentation and disclosure considerations.
11.3.3 Related parties
Refer to FSP 26 for considerations related to the presentation and disclosure

requirements for related party transactions.
11.3.4 Underwriters, promoters, and employees
Regulation S-X 5-02 requires reporting entities to separately disclose in the

financial statements amounts payable to the following classes of individuals:
□ Underwriters — Section 2(a)(11) of the 1933 Securities Act broadly defines

the term “underwriter” as:
Excerpt from Section 2(a)(11) of 1933 Securities Act

The term ‘‘underwriter’’ means any person who has purchased from an issuer
with a view to, or offers or sells for an issuer in connection with, the distribution
of any security, or participates or has a direct or indirect participation in any such
undertaking, or participates or has a participation in the direct or indirect
underwriting of any such undertaking; but such term shall not include a person
whose interest is limited to a commission from an underwriter or dealer not in
excess of the usual and customary distributors’ or sellers’ commission.
□ Promoters — Rule 405 of the 1933 Securities Act defines a “promoter” as:
Excerpt from Securities Act of 1933, Rule 405

(i) Any person who, acting alone or in conjunction with one or more other
persons, directly or indirectly takes initiative in founding and organizing the
business or enterprise of an issuer; or
(ii) Any person who, in connection with the founding and organizing of the
business or enterprise of an issuer, directly or indirectly receives in
consideration of services or property, or both services and property,
10 percent or more of any class of securities of the issuer or 10 percent or
more of the proceeds from the sale of any class of such securities. However, a
person who receives such securities or proceeds either solely as underwriting
commissions or solely in consideration of property shall not be deemed a
promoter within the meaning of this paragraph if such person does not
otherwise take part in founding and organizing the enterprise.
□ Employees — The ASC Master Glossary defines an employee as an individual

over whom a reporting entity can either exercise, or has the right to exercise,
sufficient control to establish an employer-employee relationship
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Other liabilities
11.3.5 Accounts or notes payable to other parties
A reporting entity should report accounts or notes payable to other parties not
included in FSP 11.3.1 through FSP 11.3.4. Others can include, but are not limited
to, repurchase agreements. Refer to FSP 22 for presentation and disclosure
considerations related to repurchase agreements.
11.4 Accruals and other liabilities

The SEC requires entities to separately state in the balance sheet or in the
footnotes any item in excess of 5% of total current liabilities, or 5% of total
liabilities not otherwise addressed by the specific categories of S-X 5-02. Given
the broad definition of accruals and other liabilities, this section captures the
more common disclosure considerations related to accruals and other liabilities,
and provides an interpretation of certain specific disclosure requirements within
the accounting guidance.
11.4.1 Dividends payable
For presentation and disclosure considerations related to dividends payable and

stock dividends refer to FSP 5.
11.4.2 Income taxes
Refer to FSP 16 for considerations related to income tax presentation and

disclosure.
11.4.3 Employee benefits
Employee benefits are a broad topic and include a number of subtopics, some of
which are discussed below, and others that are discussed in other chapters of this
guide. Topics covered within this guide include:
□ Compensated absences (FSP 11.4.3.1)
□ Rabbi trusts (FSP 11.4.3.2)
□ Pension and other postemployment benefits (FSP 13)
□ Stock-based compensation (FSP 15)
11.4.3.1 Compensated absences
ASC 710, Compensation, requires an employer to accrue a liability, considering

anticipated forfeitures, related to employees’ compensation for future absences if
all of the following criteria are met:
□ The employer’s obligation relating to employees’ rights to receive

compensation for future absences is attributable to services already rendered
by the employee
PwC 11-11
Other liabilities
□ The obligation relates to rights that accumulate or vest

□ Payment is probable
□ The amount of payment is reasonably estimable
In certain instances, a reporting entity may have to disclose a liability even if it

has not yet recorded one. ASC 710-50 requires a reporting entity to disclose
compensated absences if the employer meets the first three criteria listed above,
but fails to meet the final criteria (i.e., the amount is reasonably estimable).
11.4.3.2 Rabbi trusts
ASC 710 addresses the accounting for deferred compensation when a portion of
an employee’s compensation (e.g., bonuses) is invested in the stock of the
employer and placed in a “rabbi trust.” These invested assets are in the name of
the employer and not the employee. Accordingly, the accounts of the rabbi trust
should be consolidated with the accounts of the employer in the employer’s
financial statements. Depending on the provisions of the plan, an employee
might be allowed to immediately diversify into nonemployer securities or to
diversify after a holding period; other plans do not allow for diversification. The
deferred compensation obligation of some plans may be settled in (1) cash, by
having the trust sell the employer stock (or the diversified assets) in the open
market, (2) shares of the employer’s stock, or (3) diversified assets. In other
plans, the deferred compensation obligation may be settled only by delivery of
the shares of the employer stock.
Employer stock held by a rabbi trust should be classified and accounted for in
equity in the consolidated financial statements of the employer in a manner
similar to treasury stock (i.e., changes in fair value are not recognized). This
presentation is required regardless of whether the deferred compensation
obligation may be settled in cash, shares of the employer’s stock, or diversified
assets.
When diversification is not permitted and the deferred compensation obligation

is required to be settled by delivery of a fixed number of shares of employer stock,
the deferred compensation obligation should be classified in equity. Changes in
the fair value of the amount owed to the employee should not be recognized in
the rabbi trust liability.
Diversified assets held by a rabbi trust should be accounted for in accordance

with US GAAP for the particular asset (i.e., if the diversified asset is a marketable
equity security, that security would be accounted for in accordance with ASC 320,
Investments—Debt and Equity Securities).1 At acquisition, securities held by the
rabbi trust should be classified as trading, available for sale, or held to maturity,
depending on the nature and risks of the security.
For plans that permit diversification or cash settlement at the option of the
employee, the deferred compensation obligation should be classified as a liability
1As a result of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities, the relevant guidance will be included within ASC 321, Investments—Equity Securities.
11-12 PwC
Other liabilities
and adjusted to reflect changes in the fair value of the amount owed to the
employee. Changes in the fair value of the deferred compensation obligation
should be recorded in the income statement, even if changes in the fair value of
the assets held by the rabbi trust are recorded in other comprehensive income
pursuant to ASC 320.
For the EPS implications for rabbi trusts, refer to FSP 7.
11.4.4 Restructuring
ASC 420, Exit or Disposal Cost Obligations, addresses significant issues related
to the recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities.
11.4.4.1 Presentation and disclosure related to exit or disposal cost

obligations
The FASB has specified certain classification requirements related to costs and
reversal of liabilities that are often relevant for exit and disposal costs.
ASC 420-10 requires extensive disclosures in the footnotes in the period in which
an exit or disposal activity is initiated and until that activity is completed.
Disclosures related to one-time termination benefits are principally focused on
the amount to be paid. ASC 420-10 does not require that reporting entities
disclose specific information about the number of employees or the employee
groups that are to be terminated. However, reporting entities are not precluded
from voluntarily providing such information.
ASC 420-10-50-1 requires all of the following information to be disclosed in the

footnotes. The disclosures required pertain to all periods, including interim
periods, until the exit plan is completed.

a. A description of the exit or disposal activity, including the facts and
circumstances leading to the expected activity and the expected completion
date
b. For each major type of cost associated with the activity (for example,
one-time employee termination benefits, contract termination costs, and
other associated costs), both of the following shall be disclosed:
1. The total amount expected to be incurred in connection with the activity,

the amount incurred in the period, and the cumulative amount incurred
to date
2. A reconciliation of the beginning and ending liability balances showing

separately the changes during the period attributable to costs incurred
and charged to expense, costs paid or otherwise settled, and any
adjustments to the liability with an explanation of the reason(s) why.
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Other liabilities
c. The line item(s) in the income statement or the statement of activities in

which the costs in (b) are aggregated
d. For each reportable segment, as defined in Subtopic 280-10, the total amount
of costs expected to be incurred in connection with the activity, the amount
incurred in the period, and the cumulative amount incurred to date, net of
any adjustments to the liability with an explanation of the reason(s) why
e. If a liability for a cost associated with the activity is not recognized because
fair value cannot be reasonably estimated, that fact and the reasons why.
ASC 420-10-50-1-b(2) prescribes a reconciliation footnote. The reconciliation is

intended to address potential concerns regarding the comparability of
information, as well as to provide information that will aid users of the financial
statements in assessing the effects of these activities over time. In addition,
ASC 420-10-50-1(d) requires disclosure of the amount of costs incurred and
expected to be incurred in connection with exit and disposal activities by
reportable segment, for both the current period and cumulative amounts to date.
In the event a reporting entity recognizes liabilities for exit costs and involuntary
employee termination benefits relating to multiple exit plans, the presentation of
separate information for each material individual exit plan is appropriate.
If a liability for costs associated with an exit or disposal activity is not recognized
when management commits to a restructuring plan, ASC 420 requires that a
reporting entity disclose information regarding the costs the entity expects to
incur in connection with those activities. This provides users of the financial
statements with the necessary information to assess the effects of the activity,
both initially and over time.
Each provision for asset writedowns and similar allowances should be disclosed
separately and distinguished from provisions for restructuring charges. For
example, amounts should be disclosed separately for writedowns of PP&E,
intangible assets, inventory, leasehold termination costs, litigation costs, and
environmental clean-up costs. Reporting entities should be careful when
grouping together exit and involuntary termination costs, as the SEC staff has
often requested greater disaggregation and more precise labeling in the income
statement line items and footnotes when reporting entities group these costs
together.
Provisions and writedowns unrelated to a formal restructuring plan should be

disclosed separately from those charges arising as a result of a discretionary exit
decision.
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Other liabilities
Question 11-1
How should the markdown of inventory be classified when it is due to activities
taken in connection with a restructuring decision?
PwC response
As discussed in SAB Topic 5.P, the SEC staff recognized that there may be
circumstances in which a reporting entity might assert that inventory markdowns
are costs directly attributable to a decision to exit or restructure an activity.
However, given the difficulty in distinguishing inventory markdowns attributable
to a decision to exit or restructure from those markdowns that are attributable to
external market factors, the SEC staff has indicated that inventory markdowns
should be classified in the income statement as a component of costs of goods
sold.
The SEC staff has also indicated that reporting entities should evaluate
restructuring liabilities at each balance sheet date (annual and interim) to ensure
that unnecessary amounts are reversed on a timely manner. Disclosure should be
provided when material reversals are made. A reversal of a liability should be
recorded in the same income statement line item that was used when a liability
was initially recorded. Amounts determined to be in excess of those required for
the stated restructuring activity may not be used for other payments. The SEC
staff has emphasized that costs incurred in connection with an exit plan should
be charged to the exit accrual only to the extent that those costs were specifically
included in the original estimation of the accrual. Costs incurred in connection
with an exit plan not specifically contemplated in the original estimate of the
liability should be charged to expense in the period in which they are incurred.
11.4.4.2 Income statement presentation considerations related to exit or

disposal cost obligations
Reporting entities are not prohibited from separately presenting costs associated
with exit or disposal activities covered by ASC 420 in the income statement,
excluding those activities that involve a discontinued operation. However,
ASC 420 specifically requires that those costs be included in income from
continuing operations before income taxes in the income statement.
The SEC provides additional guidance about the appropriate presentation of exit
or disposal costs for SEC registrants.
PwC 11-15
Other liabilities
Excerpt from SAB Topic 5.P.3

The staff believes that restructuring charges should be presented as a component
of income from continuing operations, separately disclosed if material.
Furthermore, the staff believes that a separately presented restructuring charge
should not be preceded by a sub-total representing “income from continuing
operations before restructuring charge” (whether or not it is so captioned). Such
a presentation would be inconsistent with the intent of FASB ASC
Subtopic 225-20.
To be consistent with the guidance in ASC 420, we believe the earnings per share
effect of exit and disposal costs should not be disclosed on the face of the income
statement. Additionally, revenue, related costs, and expenses that will not be
continued should not be netted and reported as a separate component of income
unless they qualify as discontinued operations. Refer to FSP 27 for discussion of
presentation and disclosure requirements associated with discontinued
operations.
11.4.5 Warranty
Although product warranties and extended warranties are excluded from the
recognition and measurement requirements of ASC 460, Guarantees, they are
still subject to certain of its disclosure requirements. Specifically,
ASC 460-10-50-8(b) and ASC 460-10-50-8(c) require the reporting entity
providing the guarantee (i.e., the guarantor) to disclose its accounting policy and
methodology used in determining its liability for these warranties. The guarantor
reporting entity should provide a tabular reconciliation of the changes in its
aggregate warranty liability for each year an income statement is presented in the
The FASB staff has confirmed that the accounting policy and methodology
disclosure and the tabular reconciliation should include information about both
general product warranties and deferred revenue related to extended warranties.
Reporting entities may present their general product warranty and extended
product warranty information in two separate reconciliations or on a combined
basis in one table. Under either presentation, both the costs incurred during the
year for extended warranties and the settlement of those costs should be included
in the reconciliation. Because such costs are generally not accrued in the balance
sheet, but are recognized directly in the income statement as an expense when
incurred, this will appear in the reconciliation as an equal increase and decrease
to the reserve in the same period.
The following is an example of the reconciliation of product warranty that should

be presented for all income statement periods presented.
11-16 PwC
Other liabilities
Figure 11-2
Sample disclosure — reconciliation of product warranty liability
For the year ended December

31, 20X6
Balance at the beginning of the period $5,000
Accruals for warranties issued 1,225
Accruals related to pre-existing warranties (including 375*

changes in estimates)
Settlements made (in cash or in kind) (2,750)
Impact of foreign exchange rate changes 80*
Balance at the end of the period $3,930
* Could be a debit or a credit amount.
In addition to this tabular reconciliation, reporting entities should consider

including narrative disclosure to explain any significant changes or unusual items
presented in the table.
Reporting entities that have extended warranty programs should consider
disclosing the reconciliation of beginning and ending deferred revenue, including
amortization, costs incurred, and costs settled. As noted, this may be combined
with the rollforward of the general warranty, or presented separately. A separate
reconciliation of extended warranty information might include the following:
Figure 11-3
Sample disclosure — reconciliation of deferred revenue liability
For the year ended

December 31, 20X6
Deferred revenue at the beginning of the period $3,000
Additions for extended warranties issued 600
Amortization of deferred revenue (1,250)
Costs incurred related to extended warranties* 0
Settlement of costs related to extended warranties** 0
Impact of foreign exchange rate changes 65***
Deferred revenue at the end of the period $2,415
* These costs are generally expensed as incurred.

** If costs were not settled in the period incurred, an additional line item would be necessary to
reflect the status of that cost as a payable of the reporting entity to ensure that the balance of
deferred revenue at the end of the period per the tabular reconciliation equals the balance
reported in the financial statements.
*** Could be a debit or a credit amount.
PwC 11-17
Other liabilities
11.4.6 Unconditional promises to give
ASC 720, Other Expenses, provides guidance on the recognition and

measurement of accounting for contributions, including an unconditional
promise to give. Unconditional promises (e.g., pledges to a not for profit
organization) are any promises that depend only on the passage of time or
demand by the promissee for performance. Disclosures for the makers of these
promises and indications of the intention to give are included within ASC 450,
Contingencies (FSP 23), and ASC 470, Debt (FSP 12).
11.5 Environmental accruals

ASC 410-30, Environmental Obligations, provides accounting considerations
related to the recognition, measurement, presentation, and disclosure of
environmental remediation liabilities. For SEC registrants, important
interpretative guidance is included in SAB Topic 5.Y, Accounting and Disclosures
Relating to Loss Contingencies, and SAB Topic 10.F, Presentation of Liabilities
for Environmental Costs. The following section provides a discussion of the
presentation and disclosure considerations for environmental obligations.
ASC 410-30-55 provides illustrations and examples of the disclosure
requirements related to environmental remediation liabilities, environmental
remediation costs, loss contingencies, and liabilities with numerous potential
outcomes. Additionally, refer to FSP 24 for presentation and disclosure
considerations related to risks and uncertainties.
ASC 410-30 allows for the capitalization of costs if certain criteria are achieved.
For example, if a reporting entity is involved in an oil spill and decides to
reinforce the hulls of oil tankers to improve the safety of the ships and prevent
future oil spills, those costs may be capitalized. In addition, if a reporting entity
acquires fixed assets to clean up an oil spill, it may capitalize the costs unless the
assets do not have a future use. Similar to other assets, a reporting entity should
evaluate the recoverability of these assets. They should be classified on the
balance sheet as current or noncurrent based on the ASC Master Glossary
definitions. Presentation of the remediation liabilities and these related assets is
discussed in the following section.
11.5.1 Presentation considerations
ASC 410-30-45-1 through 45-6 details other presentation matters related to

accrued liabilities and assets related to environmental remediation obligations.
The guidance details the following points:
□ Right of setoff — If all conditions within ASC 210, Balance Sheet, are met, the
asset and liability may be reported net. However, the FASB observed that it
would be rare, if ever, that all of the conditions would be met for
environmental remediation liabilities, the related insurance, and potential
third-party recoveries.
□ Operating expense classification — Remediation costs are required to be

charged against operations since the events underlying the incurrence of the
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Other liabilities
obligation relate to the reporting entity’s operations. Any recoveries should

be reflected in the same income statement line as the original expense. To the
extent a reporting entity has earmarked assets for funding its environmental
liabilities, the earnings on those assets are to be reported as investment
income.
□ Discontinued operations — A reporting entity should classify environmental

remediation expenses and recoveries as discontinued operations if they meet
the requirements in ASC 205-20, Discontinued Operations.
11.5.2 Required disclosures
ASC 410-30-50-4 through 50-7 outlines the specific disclosure requirements with
respect to environmental remediation obligations. They include:
□ The undiscounted amount and the discount rate used in the present-value
determinations (if a reporting entity utilizes a present value measurement
technique).
□ The disclosures required by ASC 275-10, Risks and Uncertainties, related to

environmental remediation liabilities. (Refer to FSP 24 for disclosures
related to risks and uncertainties.)
□ The disclosures required by ASC 450-20, Contingencies, related to

environmental remediation loss contingencies. (Refer to FSP 23 for
information about disclosure requirements for contingencies.)
ASC 410-30-50-13 through 50-17 provides additional guidance related to the

disclosure of contingencies. It specifically reminds reporting entities that if there
are existing laws and regulations to report the release of hazardous substances
and begin a remediation study, those requirements would represent a loss
contingency subject to the disclosure considerations within ASC 450-20.
11.5.3 Additional disclosure considerations — encouraged but not required
ASC 410-30-50-8 through 50-12 outlines the following disclosures that a

reporting entity should consider, but that are not required.
□ The event, situation, or circumstances that might trigger recognition of a loss

contingency related to a reporting entity’s remediation-related obligations
(e.g., upon completion of a feasibility study)
□ Policy concerning the timing of recognition of recoveries
□ Additional specific disclosures related to the environmental remediation loss

contingencies that would be useful to further a user’s understanding of the
reporting entity’s financial statements
□ Period over which disbursements for recorded amounts will occur
PwC 11-19
Other liabilities
□ Expected period for realization of recognized probable recoveries
□ Estimated time frame for resolution of the uncertainty
□ Reason why an estimate of a probable or reasonably possible loss or range of

loss cannot be made, if applicable
□ Specific considerations related to a specific site, including the total amount

accrued for the site, the nature of any reasonably possible loss contingency,
whether any other parties are involved and share in the obligation, status of
regulatory proceedings, or estimated time frame for resolution of the
remediation loss contingency
□ Details related to the amount of environmental remediation costs recognized

in the income statements (e.g., amount recognized in each period, recoveries
credited to environmental remediation costs in each period, where costs are
captured in financial statements, etc.)
11.5.4 SEC reporting considerations
The SEC staff has indicated that certain additional disclosures should be
furnished with respect to product and environmental remediation liabilities.
SAB Topic 5.Y indicates that product and environmental remediation liabilities
are typically of such significance that specific disclosures regarding the
judgments and assumptions underlying the recognition and measurement of the
liabilities are necessary to prevent the financial statements from being
misleading. The SEC staff has indicated that, in addition to the disclosures
required by ASC 450 and ASC 410-30, it may be necessary to disclose the
following information:
Excerpt from SAB Topic 5.Y

 Circumstances affecting the reliability and precision of loss estimates.
 The extent to which unasserted claims are reflected in any accrual or may
affect the magnitude of the contingency.
 Uncertainties with respect to joint and several liability that may affect the
magnitude of the contingency, including disclosure of the aggregate expected
cost to remediate particular sites that are individually material if the
likelihood of contribution by the other significant parties has not been
established.
 Disclosure of the nature and terms of cost-sharing arrangements with other

potentially responsible parties.
 The extent to which disclosed but unrecognized losses are expected to be

recoverable through insurance or other sources, with disclosure of any
material limitation of that recovery.
11-20 PwC
Other liabilities
 Uncertainties regarding the legal sufficiency of insurance claims or solvency

of insurance carriers.
 The time frame over which the accrued or presently unrecognized amounts
may be paid out.
 Material components of the accruals and significant assumptions underlying

estimates.
SAB Topic 5.Y further states that reporting entities should disclose in the
footnotes material liabilities that may occur upon the sale, disposal, or
abandonment of a property related to site restoration, monitoring commitments,
or other exit costs as a result of unanticipated contamination of assets. These
disclosures would generally include the nature of the costs, total anticipated
costs, total costs accrued to date, balance sheet classification of the accrued
amounts (i.e., current versus noncurrent), and the amount of reasonably possible
additional losses.
The SAB topic also states that if an asset held for sale will require remediation
prior to the sale, or as a condition of sale, a footnote should describe how these
future expenditures are considered in the assessment of the asset’s value.
Additionally, reporting entities should disclose if the reporting entity may be
liable (unless the likelihood of a material unfavorable outcome is remote) for
remediation of environmental damage relating to assets or businesses previously
disposed. The SEC registrant’s accounting policy with respect to such costs
should be disclosed.
The SAB topic is not intended to impose an affirmative obligation to determine

potential closure costs for an operating manufacturing plant that the reporting
entity has no plans to sell or abandon and for which no ASC 450 obligation exists.
In addition to the specific topics discussed by the SEC staff within the SAB topic,
reporting entities should be aware of the following with respect to environmental
reporting.
□ Compliance costs
The SEC has historically viewed the cost of compliance with all specific
federal, state, local, and foreign laws relating to the environment as part of
the total environmental expenditures. The SEC staff has suggested that the
future estimated cost of compliance be disclosed in accordance with the
guidance in SAB Topic 5.Y.
□ Accrued costs
There is no requirement to disclose amounts accrued for specific

contingencies unless failure to disclose such amounts would omit
information material to an investor. In past comment letters, and as implied
in SAB Topic 5.Y, the SEC staff has requested information on the total
PwC 11-21
Other liabilities
amounts accrued for environmental remediation liabilities, such as

breakdowns by type of accrual or by type of site. In some instances, the SEC
staff may request this information supplementally.
□ Uncertainties
The SEC staff has issued a significant number of comments related to

disclosures regarding uncertainties, as discussed in FSP 24. Reporting
entities should ensure that disclosures related to environmental accruals
include discussion of any uncertainties. Disclosures related to environmental
liabilities should include details about the uncertainties related to the
estimate and the range of reasonably possible losses in excess of the amount
recorded as a liability, or state that such an estimate cannot be made.
The SEC staff has indicated that the absence of disclosure about unrecorded, but
reasonably possible loss contingencies pursuant to ASC 450, represents the
assertion that no reasonably possible material loss contingency, in fact, exists. If a
material amount is subsequently recorded, the SEC registrant can expect
questions from the SEC staff. Depending on the facts and circumstances,
amendments to prior disclosures to correct errors in the application of ASC 450
could be required. The SEC staff has indicated that it generally expects SEC
registrants to record an estimated liability for environmental exposures.
11.5.5 Environmental policy note
Many reporting entities with significant environmental expenditures include an

environmental accounting policy footnote, outlining both the reporting entity’s
policies with regard to classification of expenditures between capital and
operating expense, and its process for determining the amount of environmental
remediation obligations to accrue. ASC 235-10-50-3 requires disclosure when
environmental matters are material.
EXAMPLE 11-3
Sample disclosure — environmental remediation costs
FSP Corp accrues for losses associated with environmental remediation

obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable.
Consolidated provisions made in 20X6 for environmental liabilities were
$10 million ($11 million in 20X5), and the balance sheet reflects accumulated
liabilities of $70 million and $75 million as of December 31, 20X6, and 20X5,
respectively.
11-22 PwC
Other liabilities
11.6 Asset retirement obligations

ASC 410-20 describes standards for the recognition and measurement of an asset
retirement obligation (ARO). ASC 410-20 also provides accounting guidance for
legal obligations associated with the retirement of tangible long-lived assets. The
retirement obligations included within the scope of the guidance are unavoidable
obligations incurred as a result of the acquisition, construction, or development
and/or normal operation of a long-lived asset. ASC 410-20 requires asset
retirement obligations to be recognized at fair value as the liability is incurred
with a corresponding increase in the carrying amount of the related long-lived
asset, referred to as an asset retirement cost (ARC). The guidance specifically
requires that accretion expense be classified as an operating expense in the
income statement.
11.6.1 Disclosure requirements
ASC 410-20 requires multiple disclosures for entities that have AROs associated
with their assets. A general description of any ARO and the associated assets is
required. If a reporting entity has legally segregated any assets to settle the ARO,
ASC 410-20 requires disclosure of the fair value of those assets. This requirement
only applies to assets that have been legally restricted for settlement of the ARO,
such as in a sinking fund, trust, or other arrangement, and not to any general
internal funding policy that a reporting entity may adopt.
If a reporting entity has any asset retirement obligation for which no amount has
been recognized, ASC 410-20 requires disclosure of the existence of the ARO and
the reasons why it has not been recognized. For example, if an entity has an ARO
associated with an asset with an indeterminate life, no reasonable estimation of
the liability is possible, so no ARO liability is recorded. However, management
should consider disclosure of the potential cash flows (based on current
estimated costs) related to this unrecognized ARO.
Reporting entities are also required to reconcile the ARO liability at the beginning
of the period to the ARO liability at the end of the period. This reconciliation is
required for each income statement period presented, but is only required in
periods when there have been significant changes in liabilities incurred or settled,
accretion expense, or revision in estimated cash flows. Best practices would be to
include the reconciliation (or information sufficient to allow the user to construct
the reconciliation) if any of the amounts in the reconciliation are significant,
without regard to whether they have changed. In other words, a reporting entity
should not look only to significant changes in the components of the
reconciliation, but also look to significant changes in the liability year over year.
For instance, if ARO liabilities incurred during the period are significant each
year but constant, we believe that the reconciliation should be provided.
11.7 Deferred revenue

Cash may be received from customers in advance of when related revenues are
allowed to be recognized. Reporting entities should distinguish between current
PwC 11-23
Other liabilities
and noncurrent portions of deferred revenue and present them accordingly. If

deferred revenue is recorded prior to cash receipt (e.g., an invoice is issued in
advance of providing services), consideration should be given to offsetting such
amount against the related accounts receivable. This avoids potential distortions
in performance measures, such as days sales outstanding. The SEC staff has
indicated that it is generally not appropriate for an SEC registrant to record
deferred revenue in advance of cash receipt when the conditions for revenue
recognition have not been met, because neither party has fulfilled its obligations
under the contract.
11.7.1 New guidance — Breakage for certain prepaid stored-value products
In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for
Certain Prepaid Stored-Value Products (Subtopic 405-20), which requires
issuers that record financial liabilities related to prepaid stored-value products to
follow the same breakage model required by ASC 606, Revenue from Contracts
with Customers, for non-financial liabilities. The guidance is effective concurrent
with ASC 606, which is effective for public business entities in fiscal years
beginning after December 15, 2017, including interim periods within those years.
For all other entities, the guidance is effective for fiscal years beginning after
December 15, 2018, and interim periods within fiscal years beginning after
December 15, 2019. Early adoption is permitted for all entities as of the beginning
of an interim or annual reporting period. The guidance may be applied on a full
retrospective basis or modified retrospective basis.
Reporting entities that recognize breakage in accordance with the new guidance
should disclose the methodology used to estimate breakage and the significant
judgments used in applying the methodology.
11.8 Liabilities held for sale

ASC 205-20-45 requires segregation of the liabilities related to disposal groups
classified as held for sale in the balance sheet. Assets and liabilities should not be
offset and presented as a single amount. The major classes of liabilities classified
as held-for-sale should be separately disclosed on the balance sheet or in the
footnotes.
ASC 205-20-45 does not provide guidance on whether liabilities held for sale
should be classified as current or noncurrent in the balance sheet. Generally, at
the held-for-sale date, it would be acceptable to classify liabilities held for sale as
current when 1) the disposal is expected to be consummated within one year of
the balance sheet date, and 2) the entity expects to receive cash or other current
assets upon disposal and the sale proceeds will not be used to reduce long-term
borrowings. If such conditions are not met at the reporting period date, we would
expect to see two line items related to the liabilities of a disposal group held for
sale — current and noncurrent. Classification should be assessed each reporting
period date through the sale date. Refer to FSP 8.7 for further discussion of
held-for-sale disclosure requirements.
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Other liabilities
We have seen instances in practice where liabilities of discontinued components

have been reclassified in the balance sheets of periods ended prior to the period
in which the component becomes held for sale or is disposed of, presumably
under the theory that this is an extension of the reclassification requirement for
operations of discontinued components. While not required under ASC 205-20,
the Codification of Statements on Auditing Standards Section 708, Consistency of
Financial Statements, implies that such reclassifications are permissible and
requires that material reclassifications be indicated and explained in the
footnotes. Accordingly, provided appropriate disclosure is made, reporting
entities may retroactively segregate liabilities of discontinued components in
balance sheets of periods ended prior to the measurement date. For additional
information related to discontinued operations, refer to FSP 27.
We also believe that, in a spin-off transaction rather than a sale, it is acceptable to

reclassify the prior period balance sheet into segregated assets and liabilities
(similar to if the entity had been held for sale). However, because assets disposed
of through a spin-off transaction are required to remain classified as held and
used until the spin-off has occurred, reclassification of the prior year balance
sheet would not be appropriate until completion of the spin-off.

The requirements of ASC guidance discussed above apply equally to public and
private companies. However, certain disclosure items are only required by SEC
registrants. Figure 11-2 summarizes the SEC requirements discussed in this
chapter.
Figure 11-4
Disclose separately, in the balance sheet or S-X 5-02 11.4

within a footnote, any item in excess of 5%
of total current liabilities or total liabilities
Disclose separately amounts payable to S-X 5-02 11.3

certain parties
Disclosures related to environmental SAB Topic 5.Y 11.5.4

obligations SAB Topic 10.F
SAB Topic 5.P.3 details the SEC staff’s requirements for the presentation of
restructuring charges. Although not technically applicable to private companies,
based on limited authoritative guidance, we believe private companies should
consider applying this guidance as well. For additional information related to
SAB Topic 5.P.3, refer to FSP 11.4.4.2.
PwC 11-25
Chapter 12:
Debt
PwC 12-1
Debt

This chapter discusses a reporting entity’s balance sheet presentation of debt and
the related disclosures. It provides insight into how to assess certain facts and
circumstances to determine the appropriate current or noncurrent balance sheet
classification. Additionally, it discusses the classification of costs incurred in
issuing, modifying, and extinguishing debt in the balance sheet and the income
statement, as well as the presentation of debt extinguishment gains or losses in
the income statement. Finally, it discusses the balance sheet presentation of debt
discounts and premiums.
For recognition and measurement considerations relevant to debt, see PwC’s

guide for Financing transactions: debt, equity and the instruments in between.
12.2 Scope
ASC 470, Debt, is the primary accounting and reporting guidance for debt for all
reporting entities. However, its guidance for separate classification of current
assets and current liabilities is only applicable when a reporting entity prepares a
classified balance sheet, which is addressed in FSP 2.
For SEC registrants, S-X 4-08(k) provides incremental guidance on related party
transactions (including those involving debt), and S-X 5-02 and S-X 4-06 provide
disclosure requirements for long-term borrowings. SAB Topic 6.H.2,
Classification of Short-term Obligations—Debt Related to Long-Term Projects,
also provides classification guidance for SEC registrants.
Finally, SEC registrants that issue registered securities that are guaranteed, or
that guarantee a registered security, are subject to S-X 3-10.
an active project on debt classification that may affect the presentation and
publication are therefore encouraged to monitor the status of the project and, if
presentation and disclosure.
12.3 Balance sheet classification — term debt

Accurate debt classification is important for reasons beyond simply complying
with US GAAP. First, it can impact a reporting entity’s ability to raise funds. Debt
classification is typically a key component in calculating ratios that prospective
investors and lenders (creditors) use to gauge a reporting entity’s liquidity and
credit risk. Second, it can impact contractual covenant compliance. Covenants
may require a reporting entity to calculate certain financial ratios that are directly
affected by debt classification. One such example is working capital, which is
calculated as the difference between current assets and current liabilities.
12-2 PwC
Debt
There are many classification nuances to consider, and often, a debt agreement
can include terms that may yield unanticipated classification answers. These
terms include:
□ Call and put options
□ Subjective acceleration clauses
□ Debt covenants
As a general rule, if the legal term of the debt is long-term (either by its original
terms or through a waiver or modification), then the debt is ordinarily presented
as noncurrent. Conversely, if the legal term of the debt is short-term (either by its
original terms or because of a non-waived covenant violation), the debt is
generally presented as current.
12.3.1 Callable debt
Debt agreements may contain call options that provide the borrower (debtor) the
option to prepay the debt prior to its maturity date. Call options can vary widely
among various loan agreements. Some agreements allow for prepayment of debt
at any time while others allow prepayment only upon specific contingent events.
Typically, the existence of a call option in a debt agreement should not impact
classification because call options are at the borrower’s discretion. The call
options do not create a requirement to pay off the debt at a certain date, but
rather they give the borrower a choice to pay off the debt prior to maturity.
Exercising a call right or announcing the intent to exercise a call right prior to the
financial statements being issued generally does not affect classification.
However, if the reporting entity’s announcement of the plan to exercise a call
right prior to the balance sheet date creates a legally-binding obligation or an
irrevocable commitment to redeem the debt at the balance sheet date, then the
debt should be classified as current.
Likewise, the announcement and execution of a call option after the balance sheet
date but before the financial statements are issued has no effect on debt
classification. Although there is no effect on the debt’s balance sheet
classification, the reporting entity should disclose the exercise of the call option
subsequent to the balance sheet date as a nonrecognized subsequent event. See
FSP 28.6.3.2 for discussion of this subsequent event.
PwC 12-3
Debt
12.3.2 Puttable debt1
Debt agreements may contain put options that allow the lender to demand
repayment prior to maturity. Some put options can be exercised at any time,
while others are contingently exercisable upon the occurrence of specific events.
Debt classification for these types of instruments requires consideration of the
terms in the debt agreement.
12.3.2.1 Due-on-demand loan agreements
Debt that is puttable by the lender based on conditions that existed at the balance
sheet date is considered a due-on-demand loan. Due-on-demand loan
agreements provide the lender with a right to demand repayment at any time at
its discretion. The due-on-demand language can vary by agreement. Some typical
examples include the following:
□ The term note matures in monthly installments or on demand, whichever is

earlier
□ Principal and interest are due on demand (“redeemable”) or annually
Obligations that, by their terms, are due on demand or will be due on-demand
within one year (or the operating cycle, if longer) from the balance sheet
date—even if liquidation is not expected within that period—are required to be
classified as current liabilities.
12.3.2.2 Subjective acceleration clauses
Long-term financing agreements may contain subjective acceleration clauses

(SAC), in which the lender refuses to continue to lend if the borrower experiences
an adverse change. These clauses are typically referred to as Material Adverse
Change (MAC) or Material Adverse Effect (MAE) clauses.
Unlike a demand provision, a SAC typically requires a covenant violation or

default event to occur before it can be invoked. The ASC Master Glossary defines
a subjective acceleration clause as follows:

Subjective Acceleration Clause: A subjective acceleration clause is a provision in a
debt agreement that states that the creditor may accelerate the scheduled
maturities of the obligation under conditions that are not objectively
determinable (for example, if the debtor fails to maintain satisfactory operations
or if a material adverse change occurs).
1ASC 470-10-45-11 refers to debt that is callable by the lender. This is common nomenclature in the
banking sector. However, we have referred to these instruments as puttable because debt that is
callable by the lender is equivalent to debt that is puttable to the borrower/issuer. Regardless of
terminology, this feature provides the lender with the right to deliver its loan back to the
borrower/issuer at a fixed price that meets the more general description of a put option.
12-4 PwC
Debt
The likelihood of the due date being accelerated determines the classification of
debt with a SAC.
□ If acceleration of the due date is probable (for example, the reporting entity
has recurring losses or liquidity problems), it should classify the long-term
debt subject to a SAC as a current liability. For purposes of this
determination, reporting entities should use the definition of “probable” in
ASC 450, Contingencies.
□ If acceleration of the due date is judged reasonably possible, disclosure of the

existence of a SAC clause is generally sufficient. The debt may be classified as
noncurrent.
□ If the acceleration of the due date is deemed remote, neither reclassification

nor disclosure is required.
Example 12-1 illustrates the different treatment for debt due on demand and debt
with a subjective acceleration clause.
EXAMPLE 12-1
Demand provision versus subjective acceleration clause
As of December 31, 20X6, FSP Corp, a reporting entity whose financial condition
is strong, has two outstanding loans, Loan D and Loan S. Both loans have a stated
maturity date beyond December 31, 20X7 (one year from the balance sheet date).
Loan D contains a demand provision that allows the lender to put the debt to FSP
Corp at any time.
Loan S contains a SAC that would allow the lender to put the debt to FSP Corp if
a material adverse change in FSP Corp’s financial condition occurs.
The lender historically has not accelerated due dates of loans containing similar
clauses.
How should FSP Corp classify Loan D and Loan S on its balance sheet as of
December 31, 20X6?
Analysis
Loan D should be classified as current. A demand provision requires current

liability classification even if liquidation is not expected within the period.
Loan S should be classified as noncurrent (as long as there are no covenant

violations). A SAC does not require classification of the debt as current if the
likelihood of acceleration of the due date (the lender’s exercise of the SAC) is not
probable. Because the likelihood of acceleration of the due date is remote, no
disclosure is required either.
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12.3.2.3 Contingently puttable debt
Debt agreements may contain clauses that make the debt puttable upon certain
contingent events. At each reporting period, the reporting entity should assess
contingent events. If a contingent event has occurred that makes the debt
obligation puttable, then current classification is required.
12.3.3 Classification of debt with a covenant violation
Many debt agreements include covenants on the borrower for the life of the
agreement. Breach of a covenant triggers an event of default, which may lead to
an increase in the interest rate or a potential demand for repayment (i.e., the debt
becomes due).
Figure 12-1 summarizes the various covenant violation scenarios and their related
impact on classification. It also references the section in this chapter where each
scenario is discussed in detail.
Figure 12-1
Debt classification resulting from covenant violations at the balance sheet date
Covenant violation scenario Classification Section
(1) Violation; no waiver; no grace period Current 12.3.3.1
(2) Violation; no waiver; grace period 12.3.3.2
— It is probable the violation will be Noncurrent

cured
— It is not probable the violation will be Current

cured
(3) Violation; waiver or modification 12.3.3.3
— Covenant not required to be met Current (waiver

going forward less than one
year)
Noncurrent
(waiver for
more than one
year)
— It is reasonably possible the covenant Noncurrent

will be met at subsequent testing
dates
— It is probable the covenant will not be Current

met at subsequent testing dates
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Covenant violation scenario Classification Section
(4) Violation avoided through modification 12.3.3.4
— It is reasonably possible the covenant Noncurrent

will be met at subsequent testing
dates
— It is probable the covenant will not be Current

met at subsequent testing dates
(5) Violation occurring or anticipated after the Noncurrent 12.3.3.5

balance sheet date
See FSP 12.9 for a discussion of the balance sheet classification of unamortized
debt issuance costs and FSP 12.8.1 for discussion of the balance sheet
classification of debt discount/premium associated with debt that is reclassified
to current due to a covenant violation.
12.3.3.1 Covenant violation at the balance sheet date with no waiver

obtained
If a borrower violates a debt covenant that does not include a specified grace
period, the obligation becomes puttable by the lender (i.e., due-on-demand debt).
As discussed in FSP 12.3.2.1, long-term obligations that are, or will be, puttable
by the lender are required to be classified as current liabilities.
12.3.3.2 Covenant violation at the balance sheet date with no waiver

obtained and a grace period
If a covenant violation has occurred at the balance sheet date and there is a grace
period in effect, these puttable obligations should be classified as current.
However, if it is probable the violation will be cured within that period,
ASC 470-10-45-11(b) indicates that the obligation can be classified as noncurrent.
12.3.3.3 Covenant violation and waiver or modification at the balance sheet

date
Classification of debt that has a covenant violation waived or modified at the

balance sheet date depends on the manner in which the waiver or modification
was provided.
Same or more restrictive covenant is not required to be met going

forward
If a covenant violation has occurred at the balance sheet date, the lender may not
require the borrower to meet the same covenant, or a more restrictive covenant,
in the next 12 months (although this circumstance is unusual). ASC 470-10-45-
11(a) indicates that the associated obligations should be classified as current
unless one of the following conditions exists:
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□ The lender has waived the right to demand repayment for more than a year
(or an operating cycle, if longer) from the balance sheet date
If the obligation is puttable because of violations of certain provisions of the

debt agreement, the lender needs to waive its right with regard to only those
specific violations.
□ The lender has subsequently lost the right to demand repayment for more
than a year (or an operating cycle, if longer) from the balance sheet date
For example, if the borrower has cured the violation after the balance sheet
date and the obligation is not puttable at the time the financial statements
are issued, the lender has lost the right to demand repayment.
Same or more restrictive covenant is required to be met going

forward
Frequently, a covenant violation occurs at the balance sheet date and the lender
requires the borrower to meet the same covenant, or a more restrictive covenant,
in the next 12 months. ASC 470-10-55-2 through 55-6 indicates that the
obligation should be classified as a noncurrent liability at the balance sheet date if
a waiver is obtained, unless the borrower concludes that the chance of meeting
the same or more restrictive covenants at subsequent compliance measurement
dates within the next year is remote (i.e., it is probable the borrower will violate
the future covenant). As long as the borrower can conclude that it is at least
reasonably possible that the subsequent covenant will be met, the debt should
remain classified as noncurrent.
A situation may arise in which a covenant was violated at the balance sheet date
and subsequently the lender granted a waiver giving up its right (arising from the
covenant violated) to demand repayment for more than one year from the
balance sheet date. However, it is probable that violation of the same (or a more
restrictive) covenant will occur at subsequent compliance measurement dates
within the next year that will make the debt callable. In these circumstances,
ASC 470-10-55-4(e) requires current classification of the obligation, unless the
conditions in ASC 470-10-45-13 through 45-20 for refinancing short-term debt
(discussed in FSP 12.3.4) are met. If these conditions are met, the debt may be
classified as noncurrent.
EXAMPLE 12-2
Classification of debt with waiver of a covenant violation at the balance sheet
date, but the same covenant needs to be met going forward
FSP Corp, the borrower, is not in compliance with its working capital covenant at
December 31, 20X6.
The lender waives its right to put the debt based on the December 20X6 violation
until January 1, 20X8.
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FSP Corp is required to meet the same working capital covenant on March 31,
20X7, and it is probable that it will not do so.
How should FSP Corp classify the debt in the December 31, 20X6 balance sheet?
Analysis
FSP Corp should classify the debt as a current liability in its December 31, 20X6
balance sheet because it is in violation of the covenant at the balance sheet date.
Although it obtained a waiver at the balance sheet date, it is probable it will not
meet that covenant in the next period, triggering current classification.
12.3.3.4 Covenant violation avoided at the balance sheet date through a loan
modification
A borrower may determine in advance of the balance sheet date that it will not be
able to meet certain covenants. To avoid a covenant violation at the balance sheet
date, the borrower may seek to modify the debt agreement in advance so it will be
compliant at the balance sheet date. In this fact pattern, the modification is in
substance a waiver, except that it is obtained prior to the actual violation (instead
of after, as a waiver would be).
ASC 470-10-55-4(d) provides guidance for when a covenant would have been
violated at the balance sheet date absent a modification of the debt agreement
before the balance sheet date, and for which violation is probable at the
subsequent compliance date after the balance sheet date. It requires current
classification of the debt, unless the provisions of ASC 470-10-45-13 through
45-20 for refinancing short-term debt (discussed in FSP 12.3.4) are met, in which
case the debt may be classified as noncurrent.
EXAMPLE 12-3
Classification of debt with a covenant violation avoided at the balance sheet date
through a loan modification
FSP Corp, the borrower, does not expect to be in compliance with its working
capital covenant at December 31, 20X6.
On December 15, 20X6, FSP Corp negotiates a modification to the debt

agreement to eliminate this covenant until June 29, 20X7.
FSP Corp is required to meet the same working capital covenant on June 30,
20X7, and it is probable that it will not do so.
Analysis
FSP Corp should classify the debt as a current liability at the balance sheet date
because it would have violated the covenant at December 31, 20X6 had it not
entered into the loan modification, and because it is probable it will not meet that
covenant within the next year.
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12.3.3.5 Covenant violation occurring or anticipated after the balance sheet

date
ASC 470-10-55-4(a) through (c) address classification when a covenant violation

is probable after the balance sheet date, but no violation existed at the balance
sheet date. In those instances, the guidance indicates that noncurrent
classification would be appropriate. This is true regardless of whether the
violation occurs after the balance sheet date but before the financial statements
are issued, or if the violation is anticipated to occur in the next year.
The key factor in understanding this conclusion is that compliance with debt
covenants is determined at the balance sheet date. The guidance in
ASC 470-10-55-2 through 55-6 is similar to subsequent events
guidance—indicating that “unless the facts and circumstances would indicate
otherwise,” the borrower should classify the obligation as noncurrent, unless a
covenant violation has occurred at the balance sheet date or would have occurred
absent a waiver or loan modification.
We believe the wording “unless the facts and circumstances would indicate
otherwise” was added to the guidance to permit current classification in the
limited circumstances when the reporting entity concluded this was a more
appropriate presentation.
EXAMPLE 12-4
Classification of debt with a covenant violation after the balance sheet date
FSP Corp, the borrower, receives an audit opinion in February 20x7 on its
December 31, 20X6 financial statements with an emphasis of a matter paragraph
related to its ability to continue as a going concern. FSP’s debt agreement states
that receiving an audit opinion with a going concern issue is an event of default.
Therefore, this covenant was violated in the following year.
Analysis
It depends.
We believe if the debt agreement contains a SAC, it should be classified as current

at December 31, 20X6, assuming the subjective acceleration clause is violated as
of December 31, 20X6.
If there is no SAC, FSP Corp should apply judgment. Technically, the covenant
violation occurred after the balance sheet date, so a literal read of the guidance
would indicate noncurrent classification. However, based on the facts and
circumstances of this example (the going concern issue), FSP Corp might deem it
more appropriate to classify the debt as current.
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12.3.4 Refinancing short-term debt
Borrowers may refinance short-term debt to obtain noncurrent classification at

the balance sheet date.
ASC 470-10-45-14 (a) indicates that short-term obligations should be reclassified

as noncurrent at the balance sheet date if the borrower has both the intent and
ability to refinance the short-term obligation on a long-term basis. The borrower
can demonstrate this intent and ability by actually refinancing the short term
obligation before the financial statements are issued in one of the following ways:
□ Issuing a long-term obligation
□ Issuing an equity security
Additionally, in lieu of actually issuing a new long-term obligation,

ASC 470-10-45-14 (b) indicates that a borrower can evidence its ability to
refinance on a long-term basis by entering into a financing agreement before the
financial statements are issued. The financing agreement would need to satisfy all
of the following conditions:
□ It does not expire within one year from the balance sheet date.
□ It is only cancelable by the lender based on objective measures.
□ No violation of any provision in the agreement exists at the balance sheet

date or balance sheet issuance date, or if a violation does exist, the reporting
entity has obtained a waiver
□ The lender is expected to be financially capable of honoring the financing

agreement.
12.3.4.1 Using financing agreements that contain subjective acceleration

clauses to evidence an ability to refinance short-term debt on a
long-term basis
There is a particularly high threshold to achieve noncurrent classification for debt

that is otherwise current through the issuance of a financing agreement.
Long-term financing agreements that contain SAC, MAC, or MAE clauses are
specifically prohibited from being used to support reclassification of short-term
obligations from current to noncurrent. This is because the parties to the
financing agreement may interpret SAC, MAC, MAE, and other nonobjectively
verifiable clauses differently.
Due to their subjective nature, such clauses may result in the lender refusing to
allow the reporting entity to refinance its short-term obligations. Therefore, this
would undermine the reporting entity’s assertion that it has the “ability” to
refinance the current obligation into long-term, noncurrent debt.
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An agreement that objectively defines an “adverse change” would be acceptable

for purposes of demonstrating ability to refinance (or continuing to finance). The
“adverse change” definition should include specific, quantifiable criteria, such as
minimum working capital requirements, maximum dollar or percentage decrease
in sales or earnings, or other objective measurements. If such criteria are present,
noncurrent classification would be acceptable, provided the other required
conditions are met.
It may be difficult to meet the objectivity standard in some cases. For example,
language may appear to be objective but require the use of subjective
assumptions—for example, forward-looking criteria that require the use of
projections, which are subjective by their nature. Such a provision would not be
considered an objectively-defined “adverse change.” Reporting entities should
ensure that language included in agreements to provide a more precise definition
of “adverse change” is truly objective, and not simply less subjective than the
original language.
The following subsections discuss certain situations that may impact a reporting
entity’s ability to meet the requirements of ASC 470-10-45-14(b) with regard to
subjective clauses.
Upfront representations and warranties
Certain clauses in financing agreements involve the reporting entity representing

to the lender that, between the date of the most recent audited financial
statements and the date of signing the financing agreement, there have been no
MACs or MAEs. If a financing agreement requires a borrower to make such a
representation each time it requests funding under the agreement, this financing
agreement would not evidence an ability to borrow on a long-term basis.
On the other hand, if a date-limited representation is required only at the time of,
and as a condition of, entering into the financing agreement, the borrower and
the lender have the ability to evaluate whether or not a material event or a
material change actually occurred prior to execution of the financing agreement.
If the lender determines that such an event has not occurred, the financing
agreement is executed and, thereafter, the agreement is substantively not
cancelable. Therefore, the borrower is able to demonstrate its intent to refinance
on a long-term basis.
The borrower needs to determine whether the MAE or MAC was a date-limited
representation required only at the time of, and as a condition of, entering into
the financing agreement to achieve noncurrent classification. Specifically, such
representation clauses need to (1) include date range limitations for the period
from the most recent audited financial statements to the date of signing the
financing agreement, (2) be represented and warranted only at the time the
financing agreement was entered into as a condition to execution of the
agreement, and (3) not be subject to re-representation requirements in the
future, such as at the time of a future draw-down request.
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Dual-trigger clause qualifying language
Dual-trigger clauses—which trigger a MAE or MAC only after

a sufficiently-objective clause is not met (i.e., if the objectively verifiable portion
is met, the second portion would never be operable)—are also acceptable for
purposes of asserting ability to refinance long-term.
A dual-trigger clause may take the form of a management representation

required at the time of draw down, such as:
“Since the date of our last representation to you, there have been no lawsuits filed
that have had or are expected to have a material adverse effect on our financial
position or results of operations.”
Whether a lawsuit has been filed is an objective matter. If no lawsuits have been
filed during the representation period, there is no basis for the lender to refuse to
fund the draw-down request. This subjective qualifier becomes operative only
after the objective event occurs. In the absence of the occurrence of the objective
event, there would be no event of default that allows the lender to refuse to honor
a draw-down request.
Cross-default clauses
Notwithstanding the above, there have been instances when a SAC, MAC, or MAE
included in unrelated debt obligations could cause a cross-default of the
long-term financing agreement that the reporting entity would use to support its
“ability” assertion under ASC 470-10-45-14. If there is such a clause, the
conditions of that guidance would not be met and the debt should remain
classified as current.
Example 12-5 demonstrates the classification of debt when the reporting entity
seeks to refinance but the new agreement contains a SAC clause.
EXAMPLE 12-5
Classification of short-term debt based on a financing agreement containing a
SAC clause
At the balance sheet date, FSP Corp has a $10 million borrowing with a
contractual maturity of less than 12 months. FSP Corp also has a $100 million
revolving credit agreement that is unused and that has a remaining term of 5
years. Borrowings under the revolver may be long-term, as the borrower is
permitted to choose any debt term from one to five years. However, future
borrowings under the revolving credit agreement are subject to a SAC.
How should FSP Corp classify the $10 million borrowing at the balance sheet
date?
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Analysis
Even if the borrower has the intent to use the revolver to refinance its short-term
obligation, it may not exclude the $10 million outstanding debt from current
liabilities. This is because the SAC undermines the borrower’s ability to refinance
the short-term debt on a long-term basis.
12.3.4.2 Use of working capital to refinance debt
ASC 470-10-45-15 indicates that a short-term obligation should be included in

current liabilities if it is repaid after the balance sheet date, and is subsequently
replaced or replenished by long-term debt before the balance sheet is issued. The
FASB noted that repayment of a short-term obligation before funds are obtained
through a long-term financing requires the use of current assets and, as such, the
short-term obligation cannot be excluded from current liabilities at the balance
sheet date. Specifically, as illustrated in the example in ASC 470-10-55-33
through 55-36, the repayment of commercial paper using working capital after
the balance sheet date, followed by a borrowing under a long-term revolving debt
arrangement to replenish the working capital prior to the financial statement
issuance date, does not meet the intent requirement for refinancing a short-term
borrowing on a long-term basis.
12.3.4.3 Inability to refinance short-term debt with a commitment from a

parent company
Occasionally a borrower may obtain a long-term commitment from its parent

(i.e., a parent support letter) as evidence of its intent and ability to refinance a
short-term obligation on a long-term basis. Such agreements need to be reviewed
carefully. This is because the parent controls the subsidiary and is a related party.
If the agreement can be cancelled at any time or there is no deterrent to prevent
the parent from cancelling the agreement, the agreement would not meet the
provisions of ASC 470-10-45-14(b)(1) and the debt therefore could not be
presented as noncurrent.
12.3.4.4 Refinancing with successive short-term borrowings
A short-term obligation that will be refinanced with successive short-term

obligations may be classified as noncurrent as long as the cumulative period
covered by the financing agreement is uninterrupted and extends beyond one
year. This would include short-term borrowings under revolving credit
agreements that permit either continuous replacement with successive
short-term borrowings for more than a year or conversion to term loans
extending beyond a year at the reporting entity’s option. These borrowings could
be classified as noncurrent if the borrower intends to utilize those provisions and
meets the criteria for refinancing the short-term debt on a long-term basis.
The rollover provisions should be included in the terms of the debt obligation;
classification as noncurrent cannot be based solely on management’s intent. For
example, short-term debt in the form of commercial paper should be supported
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by a contractually long-term financing arrangement, such as a revolving credit

agreement with sufficient unused borrowing capacity to support the ability to
refinance the commercial paper. Any SACs, MACs, or MAEs in the refinancing
agreements would cause the reporting entity to fail to meet the requirements to
assert its ability to refinance its short-term debt on a long-term basis.
12.4 Balance sheet classification — revolving

debt agreements
A line of credit or revolving debt arrangement is an agreement that provides the
borrower with the ability to do all of the following:
□ Borrow money at different points in time, up to a specified maximum amount
□ Repay portions of previous borrowings
□ Re-borrow under the same contract
Line of credit and revolving debt arrangements may include both amounts drawn
by the borrower (a debt instrument) and a commitment by the lender to make
additional amounts available to the borrower under predefined terms (a loan
commitment).
12.4.1 Revolving debt requiring execution of a note for each borrowing
Revolving debt arrangements with a contractual term beyond one year may
require the execution of a note for each borrowing under the arrangement. While
the credit arrangement may permit long-term borrowings, the underlying notes
may be for a shorter term, possibly less than one year. When the revolver
includes individual notes, the reporting entity should classify the debt based on
the term of each individual note, not based on the expiration date of the revolver,
unless the conditions for noncurrent classification based on a refinancing are met
(see FSP 12.3.4 for a discussion of short-term debt refinanced on a long-term
basis).
Revolving debt arrangements may have a feature that gives the borrower the
option to select between two different types of borrowings, each with potentially
different terms. For example, a borrower may be able to choose between the
following:
□ A long-term loan with a certain interest rate having a maturity date

consistent with the expiration date of the revolving debt arrangement
□ A short-term loan with a maximum maturity of 90 days that carries a

different interest rate from the first option
In such cases, the second option would require current classification unless
(1) the conditions for refinancing the short-term debt on a long-term basis are
met, or (2) the second option automatically converts at its maturity date, without
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any further actions, into the first option with a long-term maturity date. If the
debt instrument does automatically convert, it is in-substance long-term debt
and, therefore, we believe noncurrent classification is appropriate.
12.4.2 Revolving debt that specifies a borrowing base
Borrowings under a contractually short-term revolver may be renewed or

extended through a long-term financing agreement. Sometimes these borrowings
specify objective criteria, such as the attainment of specified operating results,
levels of financial position, or other measures (e.g., inventory levels) that the
reporting entity must maintain or achieve to continue borrowing. This is
commonly referred to as a borrowing base.
In such cases, the reporting entity may classify the outstanding short-term
borrowings as noncurrent if it is reasonable to expect that the specified criteria
will be met, such that long-term borrowings (or successive short-term borrowings
for an uninterrupted period) will be available to refinance the short-term debt on
a long-term basis. The reporting entity must also demonstrate the intent and
ability to refinance, as discussed in 12.3.4. Achieving noncurrent classification in
this scenario requires a high degree of assurance.
Borrowings under contractually long-term revolving debt agreements may also

reference a borrowing base. We believe there are two methods for determining
how the borrowing base impacts the classification of debt as current or
noncurrent.
□ Treat the borrowing base as a debt covenant and assess it with all other debt
covenants under the model discussed in FSP 12.3.3.
□ Classify the outstanding borrowings as noncurrent only if it is reasonable to

expect that the specified criteria will be met over the 12 months following the
balance sheet date. This method is based on the ASC Master Glossary
definition of a current liability.
EXAMPLE 12-6
Classification of a revolver subject to a working capital requirement
FSP Corp, the borrower, has $10 million outstanding on its short-term revolving
credit facility at December 31, 20X6. As long as FSP Corp complies with the
provisions of the credit facility, the amounts borrowed are permitted to be
continuously renewed at its option for successive 120-day periods through
December 31, 20X9. The revolver’s borrowing base is calculated using a multiple
of working capital. The borrowing base is calculated quarterly. Any outstanding
amount that exceeds the calculated borrowing base is not permitted to be
renewed, but rather is due and payable at the end of its 120-day term.
FSP Corp’s outstanding borrowings did not exceed the borrowing base calculated
on December 31, 20X6. It expects that the lowest borrowing base amount for the
upcoming 12 months following the balance sheet date will be $6 million.
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There are no events of default or covenants breached as of December 31, 20X6

and all other terms within the agreement are usual and customary.
How should FSP Corp classify the outstanding short-term borrowings in the
December 31, 20X6 financial statements? What if the borrowings under the
revolver were contractually long-term?
Analysis
Since FSP Corp’s outstanding borrowings did not exceed the borrowing base at
December 31, 20X6 and it expects that the lowest borrowing base will be
$6 million through January 1, 20X8, $6 million should be classified as
noncurrent, assuming all of the other requirements for refinancing short-term
debt on a long-term basis are met. As management expects the borrowing base to
be as low as $6 million in the coming year, the excess of borrowings of $4 million
($10 million outstanding less the $6 million recorded as noncurrent) should be
classified as current.
In contrast, if the borrowings under the credit facility were contractually long-
term, we believe FSP Corp could apply either of the two models for determining
the current and noncurrent amounts. Under the first method, all of the debt
would be noncurrent because FSP Corp is not in violation of the “covenant”
(i.e., it has a sufficient borrowing base at the balance sheet date). Under the
second method, $6 million of the debt would be classified as noncurrent and
$4 million would be classified as current based on FSP Corp’s estimate of the
borrowing base for the following year.
12.4.3 Revolving debt subject to lockbox arrangements and subjective

acceleration clauses
Borrowings that are legally long-term under a revolving credit agreement should
be classified as current if they include a requirement to maintain a lockbox
arrangement (or a sweep feature or other lender arrangement), whereby
remittances from the borrower’s customers are used to reduce the revolving debt
outstanding. A revolving credit arrangement with a required lockbox is inherently
short-term based on the definition of a current liability because a lockbox
requires that the debt be serviced with working capital.
The only way this type of arrangement could be considered noncurrent is if the
revolving credit agreement permits either (1) continuous replacement with
successive short-term borrowings for more than a year or (2) conversion to term
loans extending beyond a year at the reporting entity’s option and the borrower
intends to utilize those provisions and meets the criteria for refinancing the
short-term debt on a long-term basis (as discussed in FSP 12.3.4). However, if
there is a SAC in the agreement, the agreement will not meet the requirements to
refinance the short-term obligation on a long-term basis and the arrangement
should be classified as current.
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In contrast, borrowings outstanding under a long-term revolving credit

agreement that includes a requirement to maintain a “springing” lockbox
(an agreement whereby remittances from the borrower’s customers are not
forwarded to the lender to reduce the debt outstanding until and unless an event
of default occurs) are long-term obligations as long as no event of default
occurred prior to the balance sheet date. A SAC in such agreement would be
evaluated using the guidance in FSP 12.3.2.2.
12.4.4 Revolving debt related to long-term projects
SAB Topic 6.H.2 provides guidance for public companies that have a revolving
cover loan associated with a long-term construction project.
Excerpt from SAB Topic 6.H.2

Facts: Companies engaging in significant long-term construction programs
frequently arrange for revolving cover loans which extend until the completion of
long-term construction projects. Such revolving cover loans are typically
arranged with substantial financial institutions and typically have the following
characteristics:
1. A firm long-term mortgage commitment is obtained for each project.
2. Interest rates and terms are in line with the reporting entity’s normal
borrowing arrangements.
3. Amounts are equal to the expected full mortgage amount of all projects.
4. The company may draw down funds at its option up to the maximum amount
of the agreement.
5. The company uses short-term interim construction financing (commercial

paper, bank loans, etc.) against the revolving cover loan. Such indebtedness
is rolled over or drawn down on the revolving cover loan at the company’s
option. The company typically has regular bank lines of credit, but these
generally are not legally enforceable.
When these conditions exist—representing a firm commitment throughout the

construction program for permanent mortgage financing, and there are no
contingencies other than completing construction—the borrowing may be
classified as noncurrent with appropriate disclosure.
12.4.5 Increasing rate debt
Revolving debt agreements may have a maturity date that can be extended at the
option of the borrower at each maturity date until final maturity. In such cases,
the interest rate on the note may increase a specified amount each time the note
is renewed. These types of instruments are called increasing rate debt
instruments. ASC 470-10-45-7 indicates that classification of the debt as current
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or noncurrent should reflect the borrower’s anticipated source of repayment

(e.g., current assets, new short-term debt, or long-term refinancing agreement).
Guidance in ASC 470-10-35 requires the borrower to estimate the life of the debt
to calculate one blended effective interest rate, but the classification need not be
consistent with the time frame used to determine the blended effective interest
rate.
12.5 Balance sheet classification — paid-in-kind

notes
The terms of debt instruments may permit or require the borrower to satisfy
accrued interest on the debt with additional paid-in-kind (PIK) notes having
identical terms (maturity date, interest rate, etc.) as the original debt. In such
cases, the original debt is referred to as a PIK note. Typically, the interest may be
paid either in cash or additional PIK notes, at the borrower’s discretion. If the
borrower intends to pay the interest with additional notes, the balance sheet
classification of the accrued interest payable should be assessed under the
guidance in ASC 470-10-45-14 for refinancing short-term debt (FSP 12.3.4).
EXAMPLE 12-7
Classification of accrued interest settleable in PIK notes
In October 20X6, FSP Corp issues floating-rate senior PIK notes that are due on
September 30, 20X1.
The notes have semiannual interest payments payable in the form of cash or
additional PIK notes at FSP Corp’s option.
FSP Corp intends to pay the interest in the form of additional PIK notes. The
maturity date of the PIK notes delivered to settle the interest payments is the
same as the original note.
How should FSP Corp classify the accrued interest on the notes as of December
31, 20X6?
Analysis
FSP Corp should classify the accrued interest as a noncurrent liability since it has
both the intent and ability to refinance the short-term liability (accrued interest)
on a long-term basis.
The issuance of the original PIK notes demonstrates FSP Corp’s ability to
consummate a refinancing of the interest on a long-term basis, with terms that
are readily determinable and meet all of the following conditions that are based
on the requirements for ASC 470-10-45-14, as follows:
□ The obligation does not expire within one year from FSP Corp’s balance
sheet.
PwC 12-19
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□ The agreement (i.e., the right to satisfy interest with long-term PIK notes) is
not cancellable by the lender.
□ The PIK notes issued under the agreement are not puttable, except for
violations for which compliance is objectively measurable.
□ There is no violation of any financing agreement provisions at the balance

sheet date.
□ There is no available information that indicates a violation has occurred after

the balance sheet date and prior to the issuance of the financial statements,
which would prevent the issuer from having the right to satisfy the interest
with long-term PIK notes; for example, there is no covenant violation of the
original PIK notes that would do either of the following:
o Accelerate their due date and the due date of any additional PIK notes
that might be used to satisfy the interest
o Prevent the issuer from electing to pay the interest in PIK notes while
there is a covenant violation of the original PIK notes
□ The lender entered into the financing agreement permitting interest to be

refinanced with PIK notes.
□ FSP Corp is expected to be financially capable of honoring the agreement.
Given these facts, we believe FSP Corp should classify the accrued interest as
noncurrent.
12.6 Balance sheet classification — liquidity

facility arrangements for variable rate
demand loans
A Variable Rate Demand Obligation (VRDO) is a debt instrument, typically a
bond, that the lender can put to (or demand repayment from) the borrower. This
feature gives the lender the ability to redeem the investment on short notice
(usually seven days) by putting the debt to the borrower’s remarketing agent.
Upon a lender’s exercise of a put, the remarketing agent will resell the debt to
another lender to obtain the funds to honor the put (i.e., to repay the original
lender). If the remarketing agent fails to sell the debt (referred to as a “failed
remarketing”), the funds to pay the lender who exercised the put will often be
obtained through a liquidity facility issued by a financial institution. Liquidity
facilities typically take the form of a standby or direct-pay letter of credit, line of
credit, or standby bond purchase agreement.
ASC 470-10-55-7 through 55-9 addresses these instruments. The guidance

indicates that the presence of a “best-efforts” remarketing agreement
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(typical for VRDO issuances) should not be considered when evaluating whether
the VRDO should be classified as current or noncurrent.
A reporting entity should assume that a put will occur, and unless the VRDO
borrower has the ability and intent to refinance the debt on a long-term basis,
VRDOs should be classified as a current liability.
If a liquidity facility provides the borrower with the ability to refinance,

borrowers should evaluate the terms of their liquidity agreements in light of the
requirements for refinancing a short-term borrowing on a long-term basis
(as addressed in FSP 12.3.4) for attributes that could impact balance sheet
classification of the debt, including the following:
□ Expiration date of the commitment
To achieve noncurrent classification, a liquidity facility for the VRDOs cannot

expire within one year of the balance sheet date. VRDOs supported by
liquidity agreements that expire within one year of the balance sheet should
be classified as current.
□ Covenant violations
Violations of covenants in liquidity agreements could cause termination of

the agreement or demand for immediate repayment of any draws. Therefore,
a violation of any provision in the financing agreement at the balance sheet
date, or available information that indicates a violation occurred after the
balance sheet date but prior to the issuance of the financial statements,
would trigger current classification. A covenant violation occurring prior to
or after the balance sheet date requires a waiver to be obtained to achieve
noncurrent classification. The form and content of the waiver needs to be in
force for at least 12 months and it should not be subject to termination
beyond those conditions in the original agreement.
□ SAC, MAC, or similar clauses
The existence of subjective clauses that provide the lender with the ability to
demand repayment based on subjective (rather than objective) criteria will
typically preclude classification of the VRDOs as noncurrent.
□ Repayment terms
The repayment terms of the liquidity facility will impact the determination of
amounts due within one year of the balance sheet date (and thus the amount
of the VRDOs that must be classified as a current liability). Some liquidity
facilities have repayment terms that are installment-based and others require
a balloon payment at the facility’s expiration date.
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□ Ability to cancel
The lender should not have the ability to cancel the credit facility within one
year from the balance sheet date except for violations of the terms of the
agreement that can be objectively measured. This may include failure to meet
a condition, or a breach or violation of a provision, such as a restrictive
covenant, representation, or warranty.
12.7 Balance sheet classification — debt with a

cash conversion feature
Upon conversion of traditional convertible debt, the lender receives common
stock of the borrower, not cash. If the lender exercises its conversion option, it
receives the full number of shares underlying the debt. In contrast, a convertible
bond with a cash conversion feature allows the borrower to settle its obligation
upon conversion, in whole or in part, in a combination of cash or stock either
mandatorily or at the borrower’s option. Convertible debt with cash conversion
features are accounted for under the cash conversion subsections of ASC 470-20.
Excerpt from ASC 470-20-15-4 through 15-5

The guidance in the Cash Conversion Subsections applies only to convertible debt
instruments that, by their stated terms, may be settled in cash (or other assets)
upon conversion, including partial cash settlement, unless the embedded
conversion option is required to be separately accounted for as a derivative
instrument under Subtopic 815-15.
The Cash Conversion Subsections do not apply to any of the following

instruments:
a. A convertible preferred share that is classified in equity or temporary equity.
b. A convertible debt instrument that requires or permits settlement in cash

(or other assets) upon conversion only in specific circumstances in which the
holders of the underlying shares also would receive the same form of
consideration in exchange for their shares.
c. A convertible debt instrument that requires an issuer’s obligation to provide

consideration for a fractional share upon conversion to be settled in cash but
that does not otherwise require or permit settlement in cash (or other assets)
upon conversion.
ASC 470-20-45-3 indicates that the guidance in the cash conversion subsections
of ASC 470-20 does not affect classification of the debt as current or noncurrent.
Instead, reporting entities should consider all terms of the convertible debt
instrument (including the equity component) when determining the proper
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Debt
classification. Therefore, regardless of the life used for amortization purposes, a

borrower’s determination of the classification of the liability component of the
debt instrument should be based on the terms of the debt as a whole.
Some of the features in debt with a cash conversion feature may permit the
lender to exercise the conversion feature at any time. They may also contain
non-contingent terms that, upon conversion, require the debt principal to be
settled in cash and the remaining amount to be settled in shares or cash at the
borrower’s option. Typically, the debt principal settlement equals the accreted
value, and the remainder represents the conversion spread—i.e., the value of the
stock underlying the conversion option in excess of the accreted value. When
these features exist, the debt is essentially demand debt, because the lender can
unilaterally choose to convert the debt at any time, and the reporting entity would
be compelled to pay cash.
Therefore, the convertible debt equal to the debt principal (or accreted value)
should be classified as current because of the holder’s legal ability to demand
payment in cash, consistent with the guidance in ASC 470-10-45-10. The fact that
the conversion feature may be out-of-the-money at the balance sheet date does
not change the fact that the holder may convert at any time, and the reporting
entity cannot predict future stock prices that could affect the amount of cash to be
paid upon conversion at some point in the next 12 months (or current operating
cycle). Therefore, we believe that the entire recorded amount of the debt should
be classified as current, unless the reporting entity satisfies the requirements in
ASC 470-10-45-14 regarding the ability and intent to refinance the debt on a
long-term basis.
With respect to contingently convertible debt securities with a cash settlement

feature, if the contingency has been met as of the balance sheet date, the
instruments would require current classification. If the contingency has not been
met at the balance sheet date but is met prior to financial statement issuance, the
debt principal should continue to be classified as noncurrent debt at the balance
sheet date.
EXAMPLE 12-8
Classification of debt with a contingent cash conversion option
FSP Corp, a calendar year entity, issues convertible debt that is within the scope
of the cash conversion subsections of ASC 470-20. The instrument has a stated
life of 10 years, but allows the holder to put it back to the borrower at the end of
5 years. In addition, the instrument also allows the lender to convert the
instrument for 90 days after a specific market price trigger is exceeded. If not
converted within the 90-day period, it will cease to be convertible, unless the
market price contingency is met at the end of the 90 days, after which a new three
month conversion period will apply.
FSP Corp determines the expected life of the debt component is 5 years.
Accordingly, FSP Corp will amortize the debt issuance costs allocated to the debt
component over 5 years using the interest method.
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At March 31 of the second year, the market price trigger is met, which allows
(but does not require) the lender to convert the debt until June 30. The lender
decides not to convert the debt by June 30, and on June 30 the market price
trigger is not met. Therefore, the debt ceases to be convertible by the lender on
June 30.
What are the classification considerations for FSP Corp on March 31 and June 30
of the second year?
Analysis
Even though the debt is no longer convertible at the lender’s option, the debt is
effectively demand debt during the reporting period ended March 31 and would
require current classification at March 31. At June 30, FSP Corp should reclassify
the debt to noncurrent, as the lender no longer has the right to convert the debt.
12.8 Balance sheet classification — debt

discounts and premiums
Debt discounts or premiums are fees paid by the borrower to the lender or
received by the borrower from the lender as part of the issuance of debt. Costs
incurred by the lender or on behalf of the lender, which are paid by the borrower,
are also classified as a debt discount. Additionally, a debt discount can arise from
an original issue discount or allocation of proceeds received due to a detachable
warrant issued with debt, a beneficial conversion feature, or bifurcated options
separated from the debt.
A debt discount or premium is presented in the balance sheet as a direct

adjustment to the carrying value of the debt.
Reporting entities often classify the entire debt discount or premium as

noncurrent. In preparing a classified balance sheet, many reporting entities
simply reclassify only the gross amount of principal payments due in the next 12
months (or operating cycle, whichever is longer) as current. This results in the
entire discount/premium being attributed to the noncurrent portion of the debt,
until the last year of the instrument when the remaining discount/premium is
classified as current along with the remaining principal balance.
As an alternative, since the overall liability is measured on a present-value basis,

it would also be acceptable to classify the portion of the discount/premium
associated with the principal payments due in the next 12 months (or operating
cycle, whichever is longer) as current. The amount reflected as current would be
determined by applying the effective interest rate to the principal payments that
are due in the next 12 months.
A reporting entity should elect one of these methods and apply it consistently.
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Question 12-1
Under the alternative, is the portion of the discount/premium associated with the
principal payments due in the next 12 months the same as amortization expense
charged in the next 12 months?
PwC response
No. The amortization expense recorded in the next 12 months relates to the entire
principal balance and not just the portion related to the principal payments that
are due in the next 12 months.
12.8.1 Impact of covenant violations at the balance sheet date on

classification of debt discount or premium
When a covenant violation makes long-term debt puttable (i.e., demand debt), a
reporting entity is required to classify the debt discount or premium as current
along with the debt (see FSP 12.3.3.1).
12.9 Balance sheet classification — debt

issuance costs
Debt issuance costs include various incremental fees and commissions paid to
third parties (not to the lender) in connection with the issuance of debt, including
investment banks, law firms, auditors, and regulators.
Debt issuance costs are required to be presented in the balance sheet as a direct
deduction from the carrying value of the associated debt liability, consistent with
the presentation of a debt discount.
The presentation of debt issuance costs as current or noncurrent follows the same
principles as the guidance on presentation of debt discounts and premiums,
which is addressed in FSP 12.8.
12.9.1 Commitment fees associated with revolving lines of credit
A revolving line of credit can be accessed or “drawn down” at any time at the
borrower’s discretion. In a typical arrangement, a borrower pays the lender a fee
in exchange for the lender’s commitment to stand ready to lend a specified
maximum amount over a specified period of time. This means that a reporting
entity may have paid the fee to provide access to the revolving line of credit, but
may not have a liability on its books—either because it has not drawn down on
the revolving line of credit, or it has repaid amounts previously drawn down.
Deferred initial up-front commitment fees paid by a reporting entity to a lender

represent the benefit of being able to access capital over the contractual term, and
therefore, meet the definition of an asset. Reporting entities should subsequently
amortize the asset ratably over the term of the line-of-credit arrangement,
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regardless of whether there are any outstanding borrowings on the line-of-credit

arrangement.
Reporting entities should classify the entire asset as noncurrent (unless the
original commitment was for less than one year).
In the limited circumstances when a reporting entity draws down on a line of

credit and does not intend to repay the borrowing until the contractual maturity
of the arrangement (i.e., the borrowing is treated like a term loan), we believe the
portion of the costs related to each respective draw-down could be presented as a
direct deduction from the carrying value of the debt when drawn. Under this
approach, the reporting entity should amortize commitment fees for the portion
associated with the draw-down using the effective interest method (as is done for
a term loan).
12.10 Balance sheet classification — other

Certain other situations may affect the balance sheet classification of debt. These
are discussed in the following subsections.
12.10.1 Subsidiary’s debt when fiscal year differs from parent
SEC registrants may need specific disclosures when a subsidiary with debt
outstanding has a fiscal year that differs from its parent. For example, a
subsidiary may have a material loan outstanding that is due beyond one year
from its fiscal year-end. However, the maturity date of the loan payable may fall
within the 12 months following the parent’s fiscal year-end. In
ASC 470-10-S99-4, the SEC staff noted that it would expect to see the debt
classified as current in the parent’s consolidated financial statements in this fact
pattern.
12.10.2 Debt restructuring
Debt modifications (including troubled debt restructurings) may change the

terms of the debt—for example, the amount due within one year after the date of
the borrower’s balance sheet may change. These modifications may result in
reclassification of all or a portion of the carrying amount of the debt at the time of
restructuring.
12.10.3 Structured payables
Reporting entities that enter into structured payable programs need to consider
whether the transaction terms could cause the substance of the liability to change
from trade payables to debt. For considerations related to structured payables,
see FSP 11.3.1.5.
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12.11 Income statement classification

This section discusses considerations for certain items that may affect income
statement classification. They include:
□ Debt extinguishment gains and losses
□ Modification or exchanges
□ Participating mortgage loans
□ Cash conversion
□ Related party debt restructurings
12.11.1 Debt extinguishment gains and losses
Gains and losses from extinguishment of debt include the write-off of

unamortized debt issuance costs, debt discount, and/or premium.
ASC 470-50-40-2 requires an extinguishment gain or loss to be identified as a

separate item. However, given that neither the ASC guidance nor Regulation S-X
specifies where in the income statement the gains and losses should be presented,
we believe there is more than one acceptable approach. The selected approach
should be consistently applied to classifying an extinguishment gain or loss.
Some approaches include:
□ Classifying the amount as a separate line item on the income statement
□ Classifying the extinguishment gain or loss in interest expense with

disclosure of the components of the loss in the footnotes
12.11.2 Income statement classification related to modifications or

exchanges on a revolving debt agreement
A charge to income may result from a modification or exchange of a revolving

debt agreement due to unamortized deferred costs being written off when the
borrowing capacity of the new arrangement is less than the borrowing capacity of
the old arrangement. This charge to earnings should be treated in a manner
similar to gains and losses on extinguishments (discussed in FSP 12.11.1).
12.11.3 Participating mortgage loans
Under a participating mortgage loan arrangement, the lender (mortgagee) is

entitled to share in the rental or resale proceeds from a property owned by the
borrower (mortgagor). Any periodic amortization of debt discount relating to a
participating liability is reported in interest expense. Any gain or loss resulting
from the difference between the reacquisition price and the net carrying amount
on extinguishment of the debt before its due date is recognized in income in the
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period of extinguishment and treated as a debt extinguishment gain or loss

(discussed in FSP 12.11.1).
12.11.4 Classification of expenses related to debt with conversion feature
For debt with a conversion feature, the following expenses should be treated in a
manner similar to gains and losses on extinguishments (discussed in
FSP 12.11.1):
□ The unamortized discount remaining at the date of conversion for

instruments with beneficial conversion features (expense recognized under
ASC 470-20-40-1)
□ The inducement charge when a convertible debt instrument is converted to

equity securities of the borrower pursuant to an inducement offer
(expense recognized under ASC 470-20-40-16)
12.11.5 Restructuring debt with related parties
If a borrower restructures its debt with a debt holder that is also an equity holder,
the counterparty may be considered a related party. In that case, it may not be
appropriate to recognize any associated gain or loss in the income statement
under ASC 470-50-40-2. Instead, such a restructuring may be essentially a
capital transaction, and the gain or loss may be required to be classified in equity.
See FG 3 for details on the accounting for this type of transaction.
12.12 Disclosure
The disclosure requirements of ASC 470 vary depending on the nature of the
debt. Regulation S-X also prescribes certain disclosure requirements for the debt
of SEC registrants.
12.12.1 Long-term debt
The guidance in ASC 470-10-50-1 through 50-5 provides the following general
disclosure requirements for all long-term borrowings:
□ The combined aggregate amount of maturities and sinking fund

requirements for each of the five years following the date of the latest balance
sheet
□ The circumstances surrounding any debt obligations that have a covenant

violation at the balance sheet date and are classified as noncurrent
□ Subjective acceleration clauses required to be disclosed under

ASC 470-10-45-2 (discussed in FSP 12.3.2.2)
□ If a short-term obligation is excluded from current liabilities (as discussed in

FSP 12.3.4), a general description of the financing agreement and the terms
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Debt
of any new obligation incurred, or expected to be incurred, or equity

securities issued, or expected to be issued as part of the refinancing
□ Explanation of the pertinent rights and privileges of various securities

outstanding, including:
o Information regarding participation rights
o Call price and dates
o Conversion exercise prices or rates and pertinent dates
o Number of shares issued upon conversion, exercise, or satisfaction of

required conditions during at least the most recent annual period and
any subsequent interim period presented
Example 3 in ASC 470-10-55-10 through 55-12 provides an example disclosure

for a long-term borrowing.
S-X 5-02 and S-X 4-08 provide the following incremental disclosure
requirements for long-term debt for public reporting entities. An SEC registrant
is required to disclose the following separately in the balance sheet or in a
footnote for each issue or type of debt (including capital leases). In addition,
since the nature of these incremental disclosure requirements appears to be
consistent with the disclosure of “pertinent rights and privileges” discussed in
ASC 470, private companies may also want to consider whether to disclose this
information.
□ The general character of each type of debt including the rate of interest
□ The date of maturity or maturities (if maturing serially)
□ If the payment of principal or interest is contingent, an appropriate

indication of such contingency
□ A brief indication of priority
□ The amount and terms (including commitment fees and the conditions under
which commitments may be withdrawn) of unused commitments for
long-term financing
□ Any significant changes in the authorized or issued amounts of debt since the
date of the latest balance sheet filed for the reporting entity
□ The facts and amounts concerning any default in principal, interest, sinking
fund, or redemption provisions with respect to any issue of securities or
credit agreements or any covenant violation of a debt agreement, which
default or violation existed at the date of the most recent balance sheet being
filed, and which has not been subsequently cured. If a default or violation
exists but acceleration of the obligation has been waived for a stated period of
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time beyond the date of the most recent balance sheet being filed, state the
amount of the obligation and the period of the waiver.
12.12.2 Short-term debt
S-X 5-02 also includes disclosure requirements pertaining to short-term

obligations for SEC registrants. They include:
□ The amount and terms (including commitment fees and the conditions under
which lines may be withdrawn) of unused lines of credit for short-term
financing
□ The weighted average interest rate on short term borrowings outstanding as

of the date of each balance sheet presented
□ The amount of the lines of credit that support a commercial paper borrowing
arrangement or similar arrangements
12.12.3 Collateral
Reporting entities are required by ASC 860-30-50-1A to disclose in the balance

sheet or footnotes the fact that assets are pledged as collateral against a liability.
Excerpt from ASC 860-30-50-1A(b)

… As of the date of the latest statement of financial position presented, both of
the following:
1. The carrying amount and classifications of both of the following:
i. Any assets pledged as collateral that are not reclassified and separately
reported in the statement of financial position in accordance with
paragraph 860-30-25-5(a)
ii. Associated liabilities.
2. Qualitative information about the relationship(s) between those assets and

associated liabilities; for example, if assets are restricted solely to satisfy a
specific obligation, a description of the nature of restrictions placed on those
assets.
In our view, whenever the value of the collateral is less than the amount of the
debt, it may be misleading to state in the balance sheet that the receivable or
payable is “secured” because “secured” may imply “fully secured.” Frequently, the
value of the collateral is uncertain. Even if the valuation is determinable, and the
collateral appears to be adequate, there can be no assurance that such value will
persist. Consequently, we do not believe that reporting entities should describe
assets pledged as collateral as “secured,” even if qualified (such as “partly
secured”). The following are illustrative balance sheet line items:
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Debt
□ Notes receivable pledged as collateral against $X of loans
□ Notes payable (property, plant, and equipment with a net book amount of $X
has been pledged as collateral)
□ Notes payable (with collateral consisting of capital stock of certain

subsidiaries representing X% of consolidated net assets)
When a reporting entity pledges stock of a consolidated subsidiary as collateral

for bond or note issuances of an unconsolidated subsidiary, it should disclose this
in the footnotes. It should also indicate the underlying net assets effectively
pledged.
Also refer to S-X 3-16 (SEC 4900) for guidance on financial statements of
affiliates whose securities collateralize any class of securities that are registered
or being registered.
12.12.4 Participating mortgage loans
ASC 470-30-50-1 requires issuers of participating mortgages to disclose all of the

following:
□ The total amount of participating mortgage obligations
□ The total amount of gross participation liabilities and the related debt
discount
□ The lender’s participation terms related to:
o The operations of the mortgaged real estate
o The increase in the fair value of the mortgaged real estate
12.12.5 Own-share lending arrangements (in contemplation of convertible

debt issuance)
A reporting entity that enters into a share-lending arrangement on its own shares
in contemplation of a convertible debt offering or other financing should disclose
a description of any outstanding share-lending arrangements on its own stock.
Information to be disclosed includes:
□ Number of shares, term, circumstances under which cash settlement would

be required, and other significant terms
□ Requirements for the counterparty to provide collateral
□ Reason for entering into the arrangement
□ Fair value of the outstanding loaned shares as of the balance sheet date
□ Treatment for the purposes of calculating earnings per share
PwC 12-31
Debt
□ Unamortized amount and classification of the issuance costs
□ Classification of issuance costs associated with the share-lending

arrangement at the balance sheet date
□ Amount of interest cost recognized relating to the amortization of the

issuance cost associated with the share-lending arrangement for the
reporting period
□ Any amounts of dividends paid related to the loaned shares that will not be
reimbursed
A reporting entity that enters into a share-lending arrangement on its own shares
in contemplation of a convertible debt offering or other financing is also required
to comply with the disclosure requirements of ASC 505, Equity. Refer to FSP 5
for discussion of these requirements.
In the period in which a counterparty defaults, or a reporting entity concludes it

is probable that the counterparty to its share-lending arrangement will default,
the reporting entity should disclose:
□ The amount of expense reported in the income statement in that period

related to the default or any subsequent period
□ Any material changes in the amount of expense recorded due to changes in

fair value of the reporting entity’s shares or probable recoveries
□ If the default is probable but has not yet occurred, the number of shares
related to the share-lending arrangement that will be reflected in basic and
diluted earnings per share when the counterparty defaults
12.12.6 Debt with cash conversion features
As discussed in FSP 12.7, certain convertible debt instruments fall within the
scope of the cash conversion guidance in ASC 470-20-15-4 through 15-5.
ASC 470-20-50-3 through 50-6 requires the following disclosures to be made as

of each balance sheet presented for those instruments:
□ The carrying amount of the equity component
□ The principal amount, the unamortized discount, and the net carrying
amount for the liability component
As of the most recent balance sheet date, the reporting entity should disclose the
following terms.
□ The remaining period over which any discount on the liability component
will be amortized
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□ The conversion price and the number of shares issued upon conversion
□ The amount by which the instrument’s if-converted value exceeds its

principal amount, regardless of whether the instrument is currently
convertible (for public entities only)
If any derivatives are executed in connection with these convertible debt

instruments, the reporting entity should disclose the following related to the
derivatives, regardless of whether the derivatives are accounted for as assets,
liabilities, or equity instruments:
□ The derivative transactions’ terms
□ How those derivative transactions relate to the instruments
□ The number of shares underlying the derivative transactions
□ The reasons for entering into those derivative transactions
For each period for which an income statement is presented, a reporting entity
should disclose both of the following related to the liability component: (1) the
effective interest rate and (2) the amount of interest cost recognized relating to
both the contractual interest coupon and amortization of the discount.
12.12.7 Troubled debt restructurings
ASC 470-60-50 provides specific disclosures for a troubled debt restructuring. It

requires that a troubled borrower disclose the following, either in the financial
statements or the footnotes:
□ A description of the principal changes in terms, major features of settlement,

or both
□ Aggregate gain on restructuring of payables
□ Aggregate net gain or loss on transfers of assets recognized during the period
(see FSP 22 for guidance on transfers)
□ Per-share amount of the aggregate gain on restructuring of payables
Reporting entities may group separate restructurings within a fiscal period for
the same category of payables (for example, accounts payable or subordinated
debentures) for disclosure purposes.
For financial statement periods after the troubled debt restructuring, the
borrower should disclose amounts contingently payable that are included in the
carrying amount of restructured payables and the conditions under which those
amounts would become payable or be forgiven.
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12.12.8 Revolving debt related to long-term projects
When an SEC registrant classifies a borrowing under a long-term project as

noncurrent based on the conditions in FSP 12.4.4, it should make appropriate
disclosures regarding the existence of such conditions.
12.13 Guarantees of a reporting entity’s debt by

others
Guarantees of debt are subject to the same disclosures as other guarantees in
ASC 460, Guarantees. Guarantees are addressed in FSP 23.
Guarantees of a reporting entity’s debt by its principal stockholders or other

related parties require incremental disclosure as related party transactions under
ASC 850-10-50. Presentation and disclosure requirements associated with
related party transactions are addressed in FSP 26. Although not in the scope of
ASC 460, we believe guarantees obtained by a reporting entity (as opposed to
those made by it) should also be disclosed, as such arrangements may indicate
that the reporting entity is not able to obtain financing without the guarantees of
others.
12.13.1 Issuers of guaranteed securities
SEC registrants may issue registered debt that is guaranteed by one or more
subsidiaries, or SEC registrant-parent companies may serve as a guarantor for
securities issued by one or more subsidiaries. Under the US securities laws,
guarantees of securities are also considered securities, and therefore may be
subject to the SEC’s registration and reporting requirements.
S-X 3-10 generally requires every issuer of a registered security that is guaranteed
and every guarantor of a registered security to file the financial statements
required for a registrant. However, S-X 3-10 provides relief that may result in
significantly reduced reporting obligations (i.e., condensed consolidating
financial information or narrative disclosure) if certain criteria are met. The
criteria are discussed in SEC 4530.
12.13.2 Preparing condensed consolidating financial information
S-X 3-10(c) through (f) specifies the columns that should be presented in the
condensed consolidating financial information. S-X 3-10(i) includes instructions
for preparing the condensed consolidating financial information.
12.13.2.1 Form and content of condensed consolidating financial information
Registrants should follow the guidance in S-X 10-01 concerning the form and
content of the condensed consolidating financial statements. We believe the
necessary financial information should consist of condensed balance sheets,
income statements, statements of comprehensive income (presented in either a
single continuous statement or in two separate but continuous statements), and
12-34 PwC
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statements of cash flows, prepared with the same level of detail as required in
interim financial statements. This level of disclosure is appropriate even in the
condensed consolidating financial information included in the footnotes to
annual financial statements.
Footnotes to the condensed consolidating financial information are generally not

required. The condensed consolidating financial information generally should
include a headnote describing the reasons why the condensed consolidating
information is presented, along with any other relevant data. The SEC staff
generally expects disclosure of whether each subsidiary-issuer/guarantor is
“100% owned,” and whether the guarantee is “full and unconditional” and joint
and several.
S-X 3-10 requires condensed consolidating financial information for the periods
specified by S-X 3-01 and 3-02 (i.e., two years of balance sheets, three years of
income statements, statements of comprehensive income, and statements of cash
flows). With respect to interim periods, registrants should file condensed
consolidating financial statements for the same periods that the registrant’s
financial statements are presented (even if those financial statements are not
required by S-X 3-01 and S-X 3-02).
For example, in the June 30, 20X6 Form 10-Q of a registrant with a calendar
year-end, the condensed consolidating financial information would be as follows:
□ Balance sheets as of June 30, 20X4 and December 31, 20X5
□ Income statements for the three- and six-month periods ended June 30,
20X6 and 20X5
□ Statements of comprehensive income for the three- and six-month periods

ended June 30, 20X6 and 20X5 (in a single continuous statement with the
statement of income or in two separate, but consecutive, statements)
□ Statements of cash flows for the six-month periods ended June 30, 20X6 and
20X5
Smaller reporting companies should adhere to the guidance in Note 3 to

S-X 8-01.
The parent company should present its investments in all subsidiaries based
upon the parent’s proportionate share of the subsidiaries’ net assets (similar to
presenting them on the equity method). Similarly, a subsidiary-issuer should
present its subsidiaries (e.g., its investments in any subsidiary-guarantors) based
upon its proportionate share of the subsidiaries’ net assets.
Subsidiary-guarantors should present any non-guarantor subsidiaries based
upon their proportionate share of the subsidiaries’ net assets. Non-guarantor
subsidiaries should present their investment in any subsidiary-guarantors based
upon their proportionate share of the subsidiaries’ net assets.
PwC 12-35
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The stockholders’ equity, net income, and comprehensive income amounts

(attributable to the reporting entity) presented in the parent reporting entity
column generally should equal the corresponding consolidated amounts. In
addition, noncontrolling interest generally would not be included in the parent or
guarantor columns (one exception would be for nonvoting preferred stock).
Separate columns in the condensed consolidating financial information are

required for each subsidiary-issuer/guarantor in any of the following situations:
□ The subsidiary is not “100% owned” by the parent
□ The relevant guarantee is not “full and unconditional”
□ The relevant guarantee is not joint and several with the guarantees of other
subsidiaries, if applicable
If the subsidiary-issuer/guarantor is not 100% owned, or if the relevant

guarantee is not full and unconditional, then providing the separate columns
does not relieve that specific subsidiary-issuer/guarantor of an obligation to file
separate financial statements and to comply with its relevant Exchange Act
reporting obligations (see SEC 4530.22 through 4530.222 for more information).
The fact that a guarantee is not joint and several does not, by itself, trigger a
requirement to provide separate financial statements of the subsidiary.
When preparing the condensed consolidating financial information, the reporting

entity may elect to “push down” the parent’s accounting basis in its subsidiaries
in the subsidiary’s separate financial statements.
The parent’s disclosure should include any significant restrictions on the ability
of the parent reporting entity or any guarantor to obtain funds from its
subsidiaries by dividend or loan. Additionally, the parent should provide the
disclosures prescribed by S-X 4-08(e)(3) for the subsidiary-issuers/guarantors.
Refer to FSP 31.5.2 and 31.5.3 for discussion of how the cumulative effect of a
change in accounting principle and discontinued operations, respectively, should
be reflected in the financial statements of any entity that presents
a subsidiary-issuer/guarantor based on the proportionate share of net assets.
12.14 Registration rights arrangements

Registration rights allow the holder to require that a reporting entity file a
registration statement for the resale of specified instruments. They may be
provided to lenders in the form of a separate agreement, such as a registration
rights agreement, or included as part of an investment agreement, such as an
investment purchase agreement, warrant agreement, debt indenture, or preferred
stock indenture. These arrangements may require the issuer to pay additional
interest if a registration statement is not filed or is no longer effective.
Additional disclosures are required of the issuer of a registration payment

arrangement for each registration payment arrangement or each group of similar
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arrangements. These requirements are based on those for guarantees in

ASC 460-10-50-4 and include the following.
□ The nature and term of the arrangement and financial instruments subject to
the arrangement, and the circumstances that would require transfer of
consideration
□ Any settlement alternatives in the terms of the registration payment

arrangement
□ The undiscounted maximum potential amount of consideration that could be

required to be transferred, or, if there is no limit, disclosure of that fact
□ The current carrying amount of the liability representing the issuer’s

obligations under the registration payment arrangement
□ The income statement classification of any gains and losses resulting from
changes in the liability’s carrying amount.

The requirements of ASC 470 apply to both public and private companies. The
following disclosure and classification requirements discussed in this chapter are
required for SEC registrants only:
□ Disclosure requirements under S-X 5-02
□ Related party disclosures under Rule 4-08(k)
□ S-X 3-10 disclosures for issuer of a registered security that is guaranteed
□ Classification considerations for revolving debt under long-term construction

programs in SAB Topic 6.H.2
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Chapter 13:
Pensions and other
postemployment
benefits
PwC 13-1
Pensions and other postemployment benefits

This chapter addresses the specific annual presentation and disclosure matters
related to retirement benefits under ASC 715, Compensation—Retirement
Benefits, and nonretirement postemployment benefits under ASC 712,
Compensation—Nonretirement Postemployment Benefits. Interim presentation
and disclosure requirements differ and are discussed in FSP 29.
For presentation considerations related to the presentation of retirement and

other postemployment benefits in the statement of other comprehensive income,
refer to FSP 4.
13.2 Scope
Retirement benefits are benefits that employers provide employees at retirement,
including pensions, other postretirement benefits (OPEB), like health and welfare
benefits, and similar benefits through defined contribution plans. Retirement
benefits may take the form of a defined benefit or a defined contribution.
Nonretirement postemployment benefits are benefits that reporting entities

provide employees after employment but before retirement, such as termination
benefits.
The topics discussed in this chapter relate to the presentation and disclosure
requirements for the employer’s financial statements (not the benefit plan itself).
New guidance — updated May 2017
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement

Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. The guidance is effective for fiscal
years beginning after December 15, 2017 for public business entities, and interim
periods within those years. For all other entities, the guidance is effective for
fiscal years beginning after December 15, 2018 and interim periods within fiscal
years beginning after December 15, 2019. Early adoption is permitted as of the
beginning of an annual reporting period for which financial statements have not
been issued or made available for issuance. However, early adoption is only
allowed in the first interim period presented in a fiscal year.
Note about ongoing standard setting — updated May 2017
As of May 2017, the FASB has an active project related to the disclosure
requirements for defined benefit plans. Financial statement preparers and other
users of this publication are therefore encouraged to monitor the status of the
project, and if finalized, evaluate the effective date of the new guidance and its
implications on presentation and disclosure.
13-2 PwC
13.3 Defined benefit plans

This section covers the presentation of defined benefit plans in a reporting
entity’s financial statements and the disclosures in the accompanying notes.
A defined benefit plan is any retirement plan that is not a defined contribution
plan, as described in FSP 13.4. Generally, a defined benefit plan is one that
defines an amount of benefit to be provided, usually as a function of one or more
factors, such as age, years of service, or compensation.
Balance sheet presentation of defined benefit plans involves two factors:

recognition of the plan’s funded status, and classification of the funded status as
current and noncurrent. The funded status is the difference between the fair
value of plan assets and the benefit obligation. The benefit obligation refers to the
projected benefit obligation (PBO) for pension plans and the accumulated
postretirement benefit obligation (APBO) for OPEB plans. The funded status and
its classification as current and noncurrent are required to be determined on a
plan-by-plan basis.
13.3.1.1 Funded status presentation
Reporting entities are required to recognize the funded status of their defined
benefit plans on the balance sheet. An overfunded benefit plan has plan assets
that are greater than the benefit obligation (which would be presented as a net
benefit asset). An underfunded benefit plan has plan assets that are less than the
benefit obligation, and an unfunded benefit plan has no plan assets (both are
presented as a net benefit liability).
A reporting entity is not permitted to offset one plan’s net benefit asset with
another plan’s net benefit liability. Further, all overfunded plans should be
aggregated and recorded as a net benefit asset, and all unfunded or underfunded
plans should be aggregated and recorded as a net benefit liability. Therefore, a
reporting entity that has more than one plan may report both a net benefit asset
and a net benefit liability on its balance sheet.
For assets to be considered plan assets, the assets must be segregated in a trust or
otherwise restricted for the sole use of paying benefits. The reporting entity is
generally not permitted to access the funds for other uses. Only assets that meet
this definition (ASC 715-30-20 and ASC 715-60-20) can offset the liability in the
balance sheet. Assets that do not meet the definition are presented gross in the
balance sheet and accounted for and classified depending on the nature of the
asset.
Plan assets should be measured on the balance sheet date. However, the guidance
provides a practical expedient as a policy election that allows employers with
fiscal year-end dates that do not fall on a calendar month-end (e.g., companies
PwC 13-3
with a 52/53 week fiscal year) to measure plan assets and obligations as of the
calendar month-end closest to the fiscal year-end.
13.3.1.2 Balance sheet classification

Reporting entities that present a classified balance sheet are required to consider
whether a portion of their net benefit liability should be presented as a current
liability, on a plan-by-plan basis. The current liability is the amount of the benefit
obligation that is payable over the next 12 months (or the operating cycle, if
longer) that exceeds the fair value of plan assets. Payments include expected
benefit payments, expected settlements (e.g., lump sum payments), and
payments of other items reflected in the benefit obligation (e.g., administrative or
claims costs). All expected payments for an unfunded plan to be made over the
next 12 months (or operating cycle, if longer) from the balance sheet date are
classified as a current liability.
In determining the current liability, reporting entities should consider expected

payments for the 12-month period from the balance sheet date. For example, in
its 20X6 financial statements, a calendar year-end reporting entity should
consider the expected payments for the period January 1, 20X7 to December 31,
20X7 in determining whether a portion should be classified as a current liability.
For its March 31, 20X7 balance sheet, the reporting entity should consider the
expected payments for the period April 1, 20X7 to March 31, 20X8 (and not April
1, 20X7 to December 31, 20X7). Reporting entities are not required to remeasure
plan assets and obligations in order to estimate expected payments for interim
reporting purposes.
For plans that are overfunded (in a net asset position), the net benefit asset
should be classified as a noncurrent asset. If a reporting entity expects a refund
from the plan within the next 12 months—a rare occurrence in practice—the
amount and timing of the refund should be disclosed, but not recorded as a
current asset.
13.3.2 Income statement presentation — before adoption of ASU 2017-07 —

updated May 2017
Reporting entities are required to combine the various pension and OPEB cost
components and present them in the financial statements on a net basis. It is not
appropriate to recognize these costs separately. Net periodic benefit cost
comprises:
□ Service cost
□ Interest cost
□ Expected return on plan assets
□ Amortization of prior service cost/credit
□ Gains and losses
□ Amortization of transition amount (this would have arisen upon the initial
adoption of the guidance that is now in ASC 715)
13-4 PwC
Net periodic benefit cost is estimated at the beginning of the year, based on
beginning-of-the-year (or end-of-prior-year) plan balances and assumptions.
When the plan is remeasured, typically at the end of the year, if the net benefit
asset or liability changes by more than the net periodic benefit cost recorded, the
difference is referred to as an actuarial gain or loss. How an actuarial gain or loss
is recognized will depend on the reporting entity’s accounting policy for gain and
loss recognition. Some reporting entities first recognize such gains and losses in
OCI and subsequently recognize these amounts in net periodic benefit cost in
future periods. A reporting entity that has adopted an immediate recognition
policy for gains and losses will recognize the gain or loss in net periodic benefit
cost in the period in which it occurs.
13.3.2.1 Capitalizing costs — before adoption of ASU 2017-07
Similar to other employee costs, net periodic benefit costs should be capitalized
in connection with the construction or production of an asset (e.g., inventories,
self-constructed assets, internal use software). The amount capitalized should be
the total net periodic pension and other postretirement benefit cost attributable
to the specific employees, and not an allocation of only certain components. For
example, the interest cost component of net periodic benefit cost cannot be
separately included as an element subject to interest capitalization.

…when it is appropriate to capitalize employee compensation in connection with
the construction or production of an asset, the net periodic pension and other
postretirement cost applicable to the pertinent employees for the period
(including interest cost), not individual components of that amount, is the
relevant amount.
The guidance does not prescribe how to determine the amount of net periodic
benefit cost to allocate to the employees associated with the production or
construction of an asset, or how to allocate the costs across the period the assets
are being produced or constructed. This determination requires considerable
judgment based on the relevant facts and circumstances.
13.3.3 Income statement presentation — after adoption of

ASU 2017-07 — added May 2017
Net periodic benefit cost comprises:
□ Service cost
□ Interest cost
□ Expected return on plan assets
PwC 13-5
□ Gains and losses
□ Amortization of transition amount (this would have arisen upon the initial
adoption of the guidance that is now in ASC 715)
Under the new guidance, entities that sponsor defined benefit plans will present
net benefit cost as follows:
□ Service cost will be included with other employee compensation costs within
operations, if such a subtotal is presented.
□ The other components of net benefit cost will be presented separately (in one
or more line items) outside of income from operations, if such a subtotal is
presented.
If a separate line item is used to present the other components of net benefit cost,
it should have an appropriate description. If a separate line item is not used, the
line items in the income statement where the other components of net benefit
cost are included must be disclosed.
Gains and losses from curtailments and settlements, and the cost of certain
termination benefits accounted for under ASC 715, should be reported in the
same fashion as the other components of net benefit cost.
The guidance is required to be applied on a retrospective basis for the

presentation of the service cost component and the other components of net
benefit cost (including gains and losses on curtailments and settlements, and
termination benefits paid through retirement plans).
The guidance allows a practical expedient for the retrospective application that
permits use of the amounts disclosed for the various components of net benefit
cost in the pension and other postretirement benefit plans footnote as the basis
for the retrospective application. This would be in lieu of determining how much
of the various components of net benefit cost were actually reflected in the
income statement each period as a result of capitalization of certain costs into
assets and their subsequent amortization. If the practical expedient is elected,
this fact must be disclosed.
Net periodic benefit cost is estimated at the beginning of the year, based on
beginning-of-the-year (or end-of-prior-year) plan balances and assumptions.
When the plan is remeasured, typically at the end of the year, if the net benefit
asset or liability changes by more than the net periodic benefit cost recorded, the
difference is referred to as an actuarial gain or loss. How an actuarial gain or loss
is recognized will depend on the reporting entity’s accounting policy for gain and
loss recognition. Some reporting entities first recognize such gains and losses in
OCI and subsequently recognize these amounts in net periodic benefit cost in
future periods. A reporting entity that has adopted an immediate recognition
policy for gains and losses would recognize the gain or loss in net periodic benefit
cost in the period in which it occurs.
13-6 PwC
13.3.3.1 Capitalizing costs — after adoption of ASU 2017-07
Similar to other employee costs, net periodic benefit costs should be capitalized
in connection with the construction or production of an asset (e.g., inventories,
self-constructed assets, internal use software). Under the new guidance, the
amount capitalized will be limited to only the service cost component of the total
net periodic pension and other postretirement benefit cost attributable to specific
employees.
Excerpt from ASC 330-10-55-6A

The service cost component of net periodic pension cost and net periodic
postretirement benefit cost is the only component directly arising from
employees’ services provided in the current period. Therefore, when it is
appropriate to capitalize employee compensation in connection with the
construction or production of an asset, the service cost component applicable to
the pertinent employees for the period is the relevant amount to be considered
for capitalization
The guidance does not prescribe how to determine the amount of net periodic
benefit cost to allocate to the employees associated with the production or
construction of an asset, or how to allocate the costs across the period the assets
are being produced or constructed. This determination requires considerable
judgment based on the relevant facts and circumstances.
This guidance is required to be applied on a prospective basis for the

capitalization of only the service cost component of net benefit cost. Amounts
capitalized into assets prior to the date of adoption should not be adjusted
through a cumulative effect adjustment, but should continue to be recognized in
the normal course as, for example, inventory is sold or fixed assets are
depreciated.
13.3.4 Statement of stockholders’ equity presentation
Reporting entities are permitted to recognize gains and losses in OCI and
subsequently amortize those amounts as a component of net periodic benefit
cost. Prior service cost (credit) generated from plan amendments is generally
required to be treated in a similar manner, i.e., first recognize in OCI and
subsequently recognized in net periodic benefit cost through amortization. As the
amounts are amortized, a reclassification adjustment is recognized in AOCI. As
such, the net impact on total comprehensive income (which comprises net
income and OCI) is zero.
Refer to FSP 4 for further discussion of OCI reclassification adjustments.
PwC 13-7
13.3.4.1 Gains and losses
A gain or loss can result from a change in any of the following:
□ The value of plan assets due to experience, both realized and unrealized,
being different from that assumed (i.e., the expected return on plan assets)
□ The benefit obligation resulting from experience different from that assumed
□ Actuarial assumptions, including changes in discount rates
The amount of the net gain or loss recognized in AOCI, as well as the amount to
amortize in the subsequent period, is recalculated at each measurement date. At a
minimum, an amount should be amortized as a component of net periodic
benefit cost for the year if the beginning-of-the-year net gain or loss in AOCI
exceeds the “corridor” amount, i.e., 10% of the greater of the benefit obligation or
the market-related value of plan assets.
A reporting entity may adopt an accounting policy for recognizing the net gain or
loss that differs from the corridor approach described above, as long as it is a
systematic method that, at a minimum, recognizes the amount that would have
been recognized under the corridor method (in any period), and the reporting
entity discloses its policy.
13.3.4.2 Prior service cost
Prior service cost (credit) arises from plan amendments that increase (decrease)
benefits for services rendered in prior periods. It is measured by the change in
the benefit obligation at the date the amendment is adopted. The amount to be
amortized as a component of net periodic benefit cost each period is established
at the date of the amendment and is not subsequently changed or recalculated,
unless there is a significant event, like a curtailment. Prior service cost arising
from each plan amendment should generally be amortized separately.
13.3.4.3 Foreign pension and OPEB plans
Companies with foreign plans in which the functional currency is different from
the reporting currency need to determine at what foreign currency rate to
translate amounts in AOCI that are subsequently reclassified to net income. We
believe that there are two acceptable approaches to account for the translation
under ASC 830, Foreign Currency Matters, as described in Figure 13-1 below.
Selection of an approach represents an accounting policy decision that should be
applied consistently.
13-8 PwC
Figure 13-1
Acceptable approaches to account for the reclassification of foreign pension and
OPEB items from AOCI to net income
Approach Requirements of presentation
Historical rate The amount of AOCI reclassified to net income each period
would be translated at the historical exchange rate in effect at
the time the prior service costs/credits, net gain/loss, and
transition asset/obligation were initially recognized in OCI.
Current rate The amount of AOCI reclassified to net income each period
would be translated at the current exchange rate in effect for
the period in which the reclassification adjustment is
reflected in net income.
This typically represents the average exchange rate for the
period, since pension and OPEB expense is recognized
ratably over the period.
13.3.5 Disclosure
Information related to the reporting entity’s net periodic benefit cost should be
disclosed for each period that an income statement is presented. Similarly,
information related to amounts presented in a reporting entity’s balance sheet
should be disclosed as of the date of each balance sheet presented. Information
for pension plans should be provided separately from information about OPEB
plans. Public reporting entities should provide the required disclosures from
ASC 715-20-50-1 as further discussed in the remainder of this section.
ASC 715-20-55-16 through 55-17 include an illustrative example of the disclosure
requirements.
A private company should refer to the disclosures required in ASC 715-20-50-5,

and to the considerations for private companies discussed at the end of this
chapter.
13.3.5.1 Description of the plans
Although not specifically required, a reporting entity should consider providing a

general description of the defined benefit plans it sponsors to help financial
statement users understand the current and future impact the benefits have on
the financial statements. The following is information that reporting entities may
consider providing:
□ Nature of the plans
□ Benefits provided
□ Employee groups entitled to benefits
PwC 13-9
□ Description of the regulatory environment (e.g., ERISA) in which the plans

operate
□ Description of the risks to which the plans may expose the reporting entity
□ Other information that would be useful to understand the plans
13.3.5.2 Amounts recognized on the balance sheet and funded status
ASC 715 requires a reporting entity to provide the amounts recognized on the
balance sheet, showing separately the net assets and net liabilities. A reporting
entity that presents a classified balance sheet should present the current and
noncurrent liabilities recognized. A reporting entity should also disclose the
funded status of the plans. These amounts should be consistent with the ending
balances in the reconciliation of the benefit obligation and the fair value of plan
assets, as discussed in FSP 13.3.5.3.
For defined benefit pension plans, a reporting entity should disclose the
accumulated benefit obligation (ABO). The ABO is a benefit obligation measure
that incorporates past and current compensation levels, but unlike the PBO, does
not reflect expected benefit increases from future salary levels. The PBO is the
benefit obligation that is used to calculate the net asset or liability included on the
balance sheet, while the ABO is disclosed.
Reporting entities with two or more plans have additional disclosure
requirements, discussed in FSP 13.3.6.
13.3.5.3 Reconciliation of the benefit obligation and the fair value of plan
assets
A reporting entity should disclose a reconciliation of the beginning and ending
balances of the benefit obligation and the fair value of plan assets, showing
separately the items that impact the balance. Figure 13-2 identifies items that
typically affect the benefit obligation, fair value of plan assets, or both.
Figure 13-2
Items that typically affect the benefit obligation, fair value of plan assets, or both
Benefit obligation Fair value of plan assets Both
□ Service cost □ Actual return on plan □ Contributions by

assets plan participants
□ Interest cost □ Contributions by □ Benefits paid
reporting entity
□ Actuarial gains □ Foreign currency
and loses exchange rate
changes
□ Plan amendments □ Business
combinations
□ Curtailments □ Divestitures
13-10 PwC
Benefit obligation Fair value of plan assets Both

□ Termination □ Settlements
benefits
13.3.5.4 Plan assets
The guidance provides disclosure objectives for plan assets, indicating that the
disclosures are intended to provide users of the financial statements with an
understanding of:
□ The plan’s investment policies, strategies, and allocation decisions
□ The classes of plan assets
□ The inputs and valuation techniques used to measure the fair value of plan
assets
□ The effect of fair value measurements using significant unobservable inputs

on changes in plan assets for the period
□ Significant concentrations of risk within plan assets
The plan asset disclosures are intended to address users’ desires for transparency
about the types of assets and associated risks in a reporting entity’s defined
benefit pension and OPEB plans, and how economic events could have a
significant effect on the value of plan assets.
Disclosure about investment policies and strategies
The guidance requires a reporting entity to disclose information regarding how

investment allocation decisions are made, including factors pertinent to
understanding investment policies and strategies. Disclosures should include:
□ A narrative description of investment policies and strategies
□ Target allocation percentages or a range of percentages considering the

classes of plan assets as of the latest balance sheet presented (on a
weighted-average basis for reporting entities with more than one plan)
□ Other factors pertinent to an understanding of the plan’s policies and

strategies, such as:
o Investment goals
o Risk management practices
o Permitted and prohibited investments, including whether the use

of derivatives is permitted
o Diversification
PwC 13-11
o The relationship between plan assets and benefit obligations
□ A description of the significant investment strategies of investment funds

(e.g., hedge funds, mutual funds, private equity funds), if those investment
funds represent a major class of plan assets.
Disclosure about classes of plan assets
A reporting entity should disclose the fair value of each class of plan assets as of
each annual reporting date for which a balance sheet is presented. Asset classes
should be disclosed based on the nature and risks of the assets. While separate
disclosures are required for pension and OPEB plans, reporting entities may
combine disclosures for multiple pension plans and multiple OPEB plans.
Disclosures about US and non-US pension plans and US and non-US OPEB plans
can be combined, unless the benefit obligations of plans outside of the US are
significant relative to the total benefit obligation and those plans use significantly
different assumptions.
Examples of classes of plan assets include:
□ Cash and cash equivalents
□ Equity securities (segregated by industry type, reporting entity size, or

investment objective)
□ Debt securities issued by national, state, and local governments
□ Corporate debt securities
□ Asset-backed securities
□ Structured debt
□ Derivatives on a gross basis (segregated by type of underlying risk in the

contract, e.g., interest rate risk, foreign exchange risk, credit risk)
□ Investment funds (segregated by type of fund)
□ Real estate
Plan assets may be invested indirectly in many different asset categories (e.g., a
mutual fund may invest in several different types of assets). Reporting entities
are not required to allocate such indirect investments into respective asset
categories. However, reporting entities should consider the objectives of the
disclosure in determining under which asset class such an investment should be
disclosed. Specifically, disclosure of additional asset classes and/or further
disaggregation of major categories would be appropriate if that information is
expected to be useful in understanding the risks associated with each asset class
or the overall expected long-term rate of return on assets.
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Reporting entities that apply the practical expedient related to the measurement
date of defined benefit plan assets and obligations at the calendar month-end
closest to the fiscal year-end date are subject to an additional disclosure
requirement (if applicable), as described in ASC 715-20-50-1(d)(5)(ii).
Excerpt from ASC 715-20-50-1(d)(5)(ii)

If an employer determines the measurement date of plan assets in accordance
with paragraph 715-30-35-63A or 715-60-35-123A and the employer contributes
assets to the plan between the measurement date and its fiscal year-end, the
employer shall not adjust the fair value of each class of plan assets for the effects
of the contribution. Instead, the employer shall disclose the amount of the
contribution to permit reconciliation of the total fair value of all the classes of
plan assets to the ending balance of the fair value of plan assets.
Reporting entities are also required to provide a narrative description of the basis
used to determine the overall expected long-term rate of return on assets. Such
narrative should consider the classes of assets described above and include:
□ The general approach used
□ The extent to which the overall rate of return on assets assumption was based
on historical returns
□ The extent to which adjustments were made to those historical returns in

order to reflect expectations of future returns and how those adjustments
were determined.
Question 13-1
To meet the objective of providing financial statement users with an
understanding of how investment allocation decisions are made considering the
classes of plan assets disclosed, should an investment strategies disclosure be
presented for each class of assets in the fair value hierarchy disclosure?
PwC response
The guidance does not explicitly require disclosure of investment strategies for
each class of assets in the fair value disclosure. Accordingly, the investment
strategies may be disclosed at the level provided to the portfolio managers
provided it is clear how the strategy relates to the classes of plan assets. For
example, if a plan’s strategy is to invest 50% to 60% in equities, the reporting
entity would not be required to break this target allocation into further subclasses
(even where the fair value hierarchy disclosure presents several such subclasses
of equities).
PwC 13-13
Disclosure of fair value measurements of plan assets — updated

May 2017
For users of the reporting entity’s financial statements to assess the inputs and
valuation techniques used to develop the fair value measurements of plan assets,
reporting entities should disclose the following for each class of plan assets as of
each annual reporting date for which a balance sheet is presented:
□ The level within the fair value hierarchy in which the fair value
measurements in their entirety fall, segregating fair value measurements
using Level 1, Level 2 and Level 3 inputs. However, if the fair value is
measured at net asset value (NAV) using the practical expedient, it is not
required to be reflected in this table, but rather can be included as a
reconciling item to the total fair value of plan assets. Investments for which
NAV is fair value, and not a practical expedient, must still be included in the
fair value table in the appropriate Level.
□ For Level 3 fair value measurements of plan assets, a reconciliation of the

beginning and ending balances, separately presenting changes during the
period attributable to:
o Actual return on plan assets, separately identifying the amounts related

to assets still held at the reporting date and assets sold during the period
o Purchases, sales, and settlements, net
o Transfers in or out of Level 3
□ Information about the valuation technique(s) and inputs used to measure fair
value, including a discussion of any changes in valuation techniques and
inputs used during the period.
Where the inputs used to measure fair value fall within different levels of the fair
value hierarchy, the presentation should be based on the lowest level input that is
significant to the fair value measurement in its entirety. Assessing the
significance of a particular input to the fair value measurement in its entirety
requires judgment, considering factors specific to the asset.
The disclosure requirements by level are similar to those required by ASC 820,
Fair Value Measurement (refer to FSP 20). However, the segregation of actual
returns between those related to assets held and sold is in lieu of the ASC 820
requirement to segregate gains and losses recognized in earnings from those
recognized in other comprehensive income. That requirement does not apply to a
reporting entity’s disclosures about its pension and OPEB plan assets because the
delayed recognition provisions for gains and losses makes it too difficult to
determine whether gains or losses on plan assets were included in net income or
OCI for the period.
ASC 715 requires the Level 3 asset reconciliation to include the actual return on
plan assets, separately identifying the amount related to assets still held at the
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reporting date and the amount related to assets sold during the period. Questions
have arisen in practice about how to define and measure realized and unrealized
gains and losses on plan assets, as well as the appropriate format for presenting
this information. The guidance does not specify a particular way to calculate
realized and unrealized gains and losses, or the format of the Level 3
reconciliation disclosure. Based on a reasonable interpretation of the
requirements, a reporting entity can exercise judgment in determining the
manner and format of the disclosure, so long as it satisfies the disclosure
objectives of the standard and is applied consistently each period.
In considering the guidance, we believe, for example, that it would be acceptable

to separately present the actual return (realized and unrealized) on plan assets
still held at the reporting date, and on assets sold during the period within the
reconciliation. Alternatively, the actual return (realized and unrealized) may be
presented as a single line item in the reconciliation, and the amounts associated
with assets still held at the reporting date disclosed in a footnote to the
reconciliation.
Many reporting entities and plans use information provided by third parties in
developing their fair value estimates. While reporting entities may receive
information from the plan custodian or trustee regarding asset valuations and the
classification of investments in the fair value hierarchy (i.e., whether inputs used
to measure fair value are Level 1, 2 or 3), management remains responsible for
the accuracy of such determinations. As such, reporting entities should
understand the valuation methodologies used by their third party information
providers. The AICPA Employee Benefit Plans Audit Quality Center Advisory,
Valuing and Reporting Plan Investments, may help management understand its
responsibility regarding the valuation and reporting of investments.
Question 13-2
How should a reporting entity determine the level of disaggregation (e.g., the
appropriate unit of account) for the fair value hierarchy disclosure?
PwC response
The guidance indicates that for purposes of the fair value disclosures, the asset
classes should be based on the nature, characteristics, and risks of the assets in a
reporting entity’s plan.
Plan investments often involve complex structures with multiple layers. In some
cases, the plan may utilize a portfolio manager to manage a pool of investments
(e.g., stocks and bonds) on its behalf, but the plan legally owns the underlying
investments. In these situations, each individual stock and bond (i.e., CUSIP or
trade lot) would be its own unit of account.
Plans may invest in an insurance contract that will generate returns based on the
performance of underlying or referenced assets (e.g., pooled accounts). In these
situations, a reporting entity may determine that the appropriate unit of account
PwC 13-15
is the insurance contract rather than the underlying investment. Alternatively,

some insurance contracts require that the underlying assets be maintained in a
“separate account” of the insurance reporting entity, and sometimes the plan
sponsor has some involvement in investment decisions relating to the separate
account. These assets are generally not comingled with assets of the insurer or
other plan sponsors, and while the insurer legally owns the assets, they may not
be available to its general creditors in bankruptcy. Accordingly, it may be
appropriate to look through the separate account to determine the appropriate
level of the underlying investment.
Question 13-3
How should insurance contracts, cash, accrued interest, dividends receivable, and
investments measured at NAV using the practical expedient be included in the
reporting entity’s fair value hierarchy disclosure?
PwC response
The guidance requires disclosure of the fair value of each class of plan assets and
the level within the fair value hierarchy based on the inputs used to develop the
fair values. The following provides guidance on specific types of plan assets:
Investments measured at NAV using the practical expedient — For reporting

entities that have adopted ASU 2015-07, there is no requirement to include
investments whose fair values are measured at NAV using the practical expedient
in the fair value hierarchy table. Such investments should be included as a
reconciling item between the fair value hierarchy disclosure and total plan assets.
Demand deposits and other cash — Cash on deposit held by plans is recorded at
the amount on deposit. Since no judgment is required to assess the fair value of
cash, and the disclosure example in ASC 715-20-55-17 explicitly includes cash, it
could be included in the fair value hierarchy disclosure. It is appropriate to
classify the fair value measurement for cash as Level 1 when the amounts are
available on demand. It would also be acceptable to exclude cash from the fair
value hierarchy disclosure and include it as a reconciling item between the fair
value hierarchy disclosure and total plan assets.
Contracts with insurance companies — ASC 715-30-35-60 states that contracts

with insurance companies (other than those that are in substance equivalent to
the purchase of annuities) should be accounted for as investments and measured
at fair value. The guidance further states that for some contracts, contract value
may be the best evidence of fair value. If a contract has a determinable cash
surrender value or conversion value, that amount is presumed to be its fair value.
We believe that these alternative measures are practical expedients to the

required fair value measurement. This practical expedient does not relieve a
reporting entity from the requirement to present such contracts as a component
of the applicable major category of plan assets in the fair value disclosure.
Accordingly, contracts issued by insurance companies, including those for which
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cash surrender value or contract value is used to estimate fair value, should be
included in the fair value hierarchy disclosure.
Generally, contracts that are recorded at cash surrender value or contract value
will be classified as Level 2 or Level 3, depending on the nature of the contract.
For example, in some instances, the contract value or cash surrender value is
based principally on a referenced pool of investment funds that actively redeems
shares and for which prices may be observable, resulting in Level 2 classification.
In other instances, the underlying investments may comprise less liquid funds or
assets, resulting in Level 3 classification.
Dividends and interest receivable — Dividends and interest receivable included in

plan assets are also required to be recorded at fair value. Given the short-term
nature of these assets, reporting entities generally assert that the carrying
amounts of these items approximate their fair values. A reporting entity that
includes these assets in the fair value hierarchy should not classify these assets as
Level 1 as there are no quoted prices in active markets. A reporting entity would
need to assess the observability of inputs to determine whether the assets should
be reported as Level 2 or Level 3. Alternatively, some reporting entities present
these items as adjustments to reconcile the fair value hierarchy to the fair value of
plan assets.
Question 13-4
Should the Level 3 asset reconciliation start with the fair value estimates reported
in the prior year financial statements or the revised amounts based on any final
valuations received after those financial statements were issued (and used to
measure current year benefit cost and disclosed in the plan financial statements
filed with Form 5500)? If the prior year estimates are used as the starting point
in the reconciliation, how should the reconciliation present the "true-up"
adjustments?
PwC response
Many reporting entities apply a roll forward technique to estimate the year-end
fair values of alternative investments (e.g., hedge funds and private equity funds)
because valuations are difficult to obtain in a timely manner for year-end
reporting. In these instances, reporting entities typically develop a best estimate
using asset values at a period earlier than the year-end measurement date and
make adjustments to roll forward the asset values to year-end. The year-end
estimates are subsequently “trued-up” when the plan receives the final valuations
(e.g., in the second quarter).
Assuming the reporting entity has concluded that any subsequent changes to the
prior year fair value estimates were “changes in estimates” rather than
“corrections of errors” (as defined by ASC 250, Accounting Changes and Error
Corrections), the change in estimate should be reflected as current period activity
(e.g., unrealized gain or loss) in the Level 3 asset reconciliation. In that case, the
PwC 13-17
reconciliation should start with the fair value estimates reported in the prior year
Question 13-5
How should the Level 3 asset reconciliation present foreign exchange translation
and transaction gains and losses?
PwC response
The effect of foreign currency translation and transaction gains and losses, to the
extent they affect the change in the fair value of the Level 3 assets, may be
presented as a component of actual return on plan assets for the period, or as a
separate line item. If a reporting entity elects to present the foreign exchange
amounts as a separate line item in the reconciliation, it is not necessary to
disclose the amounts associated with assets sold and assets held at year-end.
Question 13-6
If a pension plan is party to securities lending transactions (i.e., borrower of cash
and lender of securities), should the obligation to buy back the securities on loan
be included in the fair value disclosures, including the fair value hierarchy
disclosure?
PwC response
Yes. The liability recognized in connection with a securities lending transaction

(i.e., to repurchase the securities on loan) is included in the net assets of the plan
at fair value. Accordingly, it is appropriate to include the securities lending
liability in the fair value disclosures, including the fair value hierarchy disclosure.
Disclosure about significant concentrations of risk
Reporting entities are required to disclose significant concentrations of risk in

plan assets. The guidance does not prescribe how a significant concentration
should be determined. Each reporting entity should perform a risk assessment of
its plan assets to determine whether it has any significant concentrations of risk
that require disclosure. Reporting entities should consider concentrations of risk
related to asset type, industry, or market.
Other asset disclosures
The guidance requires the following additional asset disclosures:
□ If plan assets include securities of the reporting entity or a related party, the
amounts and types of securities included in plan assets
13-18 PwC
□ The approximate amount of future annual benefits covered by insurance

contracts, including annuity contracts issued by the reporting entity or a
related party
□ Any significant transactions between the reporting entity or a related party

and the plan during the year
□ If plan assets are expected to be returned to the reporting entity during the
next year (or operating cycle if longer), the amount and timing of any such
plan assets
13.3.5.5 Net periodic benefit cost and other comprehensive income
A reporting entity is required to disclose the net periodic benefit cost, amounts
recognized in OCI, AOCI balances, and amounts expected to be amortized in the
coming year.
Net periodic benefit cost — updated May 2017
A reporting entity should disclose its net periodic benefit cost and disclose the
components of cost for each period for which an income statement is presented,
including the following:
□ Service cost
□ Interest cost
□ Expected return on assets
□ Gain or loss
□ Gain or loss due to settlements or curtailments
□ Amortization of transition asset or obligation
□ Upon adoption of ASU 2017-07, if not presented in a separate line, the line
item(s) in the income statement in which the components other than the
service cost component are presented
Other comprehensive income and accumulated other comprehensive

income
A reporting entity that defers amounts in AOCI (either gains and losses or prior
service cost (credit) generated from a plan amendment) is required to disclose
the following information about OCI and AOCI:
□ For each year that an income statement is presented, amounts recognized in

OCI during the year, including separately disclosing the net gain or loss, net
PwC 13-19
prior service cost (credit), and amounts that are being reclassified or
amortized from AOCI into net periodic benefit cost
□ For each year that a balance sheet is presented, amounts recognized in AOCI,
i.e., year-end balances in AOCI
□ Amounts expected to be amortized from AOCI into net periodic benefit cost
in the coming year
13.3.5.6 Expected cash flows of the reporting entity and the plan
Reporting entities should disclose expected benefit payments to be paid in each

of the next five fiscal years, and the total to be paid in years five through ten.
These amounts should be estimated based on the same assumptions that were
used to measure the reporting entity’s year-end benefit obligation.
Reporting entities should also disclose their best estimate of contributions

expected to be paid to the plans in the coming year, including contributions
required by funding regulations or laws, discretionary contributions, and
noncash contributions. These may be presented in the aggregate.
13.3.5.7 Assumptions
ASC 715 requires reporting entities to disclose the discount rate, the rate of salary
increases (if any), and the expected long-term rate of return on plan assets on a
weighted average basis used to determine (1) the year-end benefit obligation, and
(2) the net periodic benefit cost for the year.
Reporting entities are required to disclose the assumptions used to determine the
benefit obligation for each year that a balance sheet is presented, and the
assumptions used to determine the net periodic benefit cost for each year that an
income statement is presented.
Since net periodic benefit cost is estimated at the beginning of the year, based on
beginning-of-the-year plan balances and assumptions, the assumptions used to
determine the net periodic benefit cost are generally the same assumptions as
those used for measuring the benefit obligation as of the prior year end.
If a reporting entity performed an interim measurement, it should disclose either

the beginning and interim rates, or a weighted average of the rates.
An SEC registrant with material defined benefit plans should disclose how it
determines its assumed discount rate, either in the critical accounting policies
section of MD&A or in the footnotes. That disclosure should include the specific
source data used to support the discount rate and adjustments made to the
source data.
If the reporting entity benchmarks its assumption off of published long-term

bond indices, it should explain how it determined that the timing and amount of
cash outflows related to the bonds included in the indices matches its estimated
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defined benefit payments. If there are differences between the terms of the bonds
and the terms of the defined benefit obligations, or if the bonds are callable, the
reporting entity should explain how it adjusted for the differences.
Question 13-7
Is additional disclosure required if a reporting entity uses a disaggregated
approach (such as the use of spot rates) to measure interest cost and/or service
cost instead of using a single weighted-average discount rate?
PwC response
When a company changes from using a single weighted-average discount rate to a

disaggregated approach that uses spot rates along the yield curve to calculate
interest cost or service cost, the change is accounted for as a change in estimate.
This change should be accompanied by robust disclosures as required by
ASC 250-10-50-4.
In the period of change and in future periods, in addition to the traditional

disclosure of the weighted-average discount rate used to measure the benefit
obligation, entities should also disclose the weighted-average discount rates (or
effective rates) that were used to measure interest cost and service cost, as well as
a narrative description of the disaggregated approach utilized.
13.3.5.8 Certain disclosures for postretirement healthcare plans
ASC 715-20-50 and ASC 715-60-50 provide guidance on the disclosure

requirements for postretirement healthcare plans.
Assumptions and sensitivity
Reporting entities that sponsor postretirement healthcare plans should provide

specific disclosures regarding the assumptions used. These assumptions include
the following:
□ Healthcare cost trend rate (used to project current per capita healthcare
costs)
□ Direction and pattern of the trend rates
□ The ultimate trend rate (the rate at which healthcare cost trends will level off
in some future year)
□ The year when the reporting entity expects to reach the ultimate trend rate
Reporting entities should also provide a sensitivity analysis of the healthcare cost
trend rate. This includes disclosing the effect of a one percentage point increase
and decrease in the assumed health care cost trend rates on the sum of service
PwC 13-21
cost and interest cost components of the net periodic benefit costs, and on the
benefit obligation.
Medicare Prescription Drug, Improvement and Modernization Act of

2003
The Medicare Prescription Drug, Improvement and Modernization Act of 2003

authorized Medicare to provide prescription drug benefits to retirees. The federal
government makes subsidy payments to reporting entities that sponsor
postretirement benefit plans under which Medicare-eligible retirees receive
prescription drug benefits that are “actuarially equivalent” to the prescription
drug benefits provided under Medicare.
ASC 715-60-50 provides guidance on disclosing the effects of the subsidy by a

reporting entity that offers postretirement prescription drug coverage, including
a reporting entity that is unable to determine whether the benefits under its plan
are actuarially equivalent to the Medicare Part D benefit. Those reporting entities
should disclose (1) the existence of the Medicare Prescription Drug,
Improvement, and Modernization Act, and (2) that its measures of the benefit
obligation and net periodic benefit cost do not reflect any amounts associated
with the subsidy, since it cannot conclude on whether the benefit is actuarially
equivalent to Medicare Part D.
In the first period that a reporting entity includes the effects of the subsidy when
measuring its APBO and net periodic benefit cost, it should disclose the following
in both interim and annual financial statements:
□ The decrease in the APBO for the subsidy that relates to benefits attributed to
past service
□ The effect of the subsidy on the measurement of the current period’s net
periodic benefit cost, including the reduction in service cost and interest cost
from the effects of the subsidy and the amortization of the gain for the
reduction in the APBO
When providing the expected benefit payment disclosures, the reporting entity
should provide the gross benefit payments (paid and expected), including
prescription drug benefits, and, separately, the gross amount of the subsidy
receipts (received and expected).
13.3.5.9 Significant events
Reporting entities may take actions that significantly affect their defined benefit
plans. Appropriate disclosure about the nature and impact of these events is
required.
Curtailments and settlements
Two common significant events are curtailments and settlements. A curtailment

is an event that significantly reduces the expected years of service of current
13-22 PwC
employees or eliminates the accrual of benefits for future service for a significant
number of employees. A settlement is an event that relieves the employer of the
primary responsibility for the obligation to some or all participants, eliminates
significant risks related to the obligation and the assets used to settle it, and is
irrevocable. In these situations, the reporting entity should disclose a description
of the nature of the event and the quantitative effect on the periods presented.
Termination benefits
If a reporting entity is providing special or contractual termination benefits, the

reporting entity should disclose a description of the nature of the event giving rise
to the benefit and the cost recognized during the year.
Negative plan amendment that may be reversed as a result of

litigation
The significant increase in the cost of providing healthcare benefits to retirees has
prompted a number of reporting entities to amend the terms of their benefit
plans to reduce or eliminate benefits, which may be considered a “negative plan
amendment.” There are presently no US federal laws prohibiting a reduction in
OPEB benefits. However, reductions in benefits, whether made pursuant to a
written plan or as a matter of historical procedure, have sometimes resulted in
litigation against the reporting entity on behalf of the retirees. Such litigation may
seek to retroactively reinstate the prior level of benefits.
If it is probable that the negative plan amendment will be rescinded due to

litigation, the OPEB obligation should not be reduced by the effects of the
negative plan amendment. If rescission is not probable, the facts and
circumstances may indicate the existence of a contingent liability requiring
disclosure pursuant to ASC 450, Contingencies.
13.3.5.10 Other disclosures
The guidance requires reporting entities to provide additional disclosures under

certain circumstances, including the following:
□ Any alternative methods for amortizing prior service cost or gains and losses
□ A substantive commitment, such as a “past practice or a history of regular

benefit increases, used as the basis for accounting for the benefit obligation”
□ Japanese governmental settlement transactions, and the related required

disclosures discussed in ASC 715-20-50-10
□ Measurement method used for plans discussed in ASC 715-30-35-40 and 41

where the present value of benefits if the employee terminates immediately is
greater than the present value of benefits calculated assuming a normal
separation date (typically seen in foreign plans) (ASC 715-20-S99-2)
PwC 13-23
□ Any significant change in the benefit obligation or fair value of plan assets
not otherwise disclosed
□ If applicable, the accounting policy election to measure plan assets and

benefit obligations using the month-end that is closest to the employer’s
fiscal year-end in accordance with ASC 715-20-50-1(u), and the month-end
measurement date
As a general matter reporting entities should provide a description of all

significant accounting policies. If the market-related value (MRV) is used instead
of fair value for recognizing gains or losses or for calculating the expected return
on plan assets, the reporting entity should disclose the methodology for
determining the MRV of plan assets. If the year-end MRV significantly differs
from fair value, reporting entities should disclose the year-end MRV and the
expected impact on benefit expense for the upcoming year.
13.3.6 Reporting entities with two or more plans
Reporting entities may aggregate the disclosures provided for all pension plans,
and for all OPEB plans, unless disaggregating in groups provides more useful
information or if it is specifically required by the sections below.
13.3.6.1 Aggregate benefit obligation in excess of plan assets
Reporting entities may aggregate disclosures for plans whose plan assets exceed
the benefit obligation, with separate disclosures for those plans whose benefit
obligations exceed plan assets. However, ASC 715-20-50-3 requires that if a
reporting entity choses to aggregate the disclosure for these plans, it needs to
include the following disaggregated disclosure:
□ For plans with benefit obligations in excess of plan assets as of the

measurement date of each balance sheet presented, disclosethe aggregate
benefit obligation and aggregate fair value of plan assets
□ For pension plans with an ABO in excess of plan assets, disclose the
aggregate ABO and the aggregate fair value of plan assets
13.3.6.2 US and international plans
A reporting entity may aggregate its disclosure for US and non-US plans, unless
the benefit obligations for the non-US plans are significant relative to the total
benefit obligation and their assumptions are significantly different.
13.3.7 Subsidiaries participating in parent company plans
When a reporting entity participates in a pension or OPEB plan sponsored by an

affiliated entity (e.g., parent company, sister entity), the accounting in the
standalone financial statements of the reporting entity should generally follow
the “multiemployer” guidance in ASC 715-80 (discussed in FSP 13.5). The
multiemployer guidance differs significantly from the traditional “single
13-24 PwC
employer” accounting guidance. Under multiemployer accounting, a reporting

entity typically recognizes expense based on the required contribution to the plan
for the period. The reporting entity only recognizes a liability if the required
contribution had not been paid at the end of the period.
A subsidiary that participates in its parent’s benefit plan is not required to

provide the multiemployer disclosures described in FSP 13.5.1 and 13.5.2. Rather,
it should disclose the name of the plan and the amount of contributions to the
plan.
13.4 Defined contribution plans

A defined contribution plan is a plan that provides an individual account for each
participant, and specifies how contributions to the individual’s account are to be
determined instead of specifying the amount of benefit the individual is to
receive.
13.4.1 General disclosure
A reporting entity that sponsors a defined contribution plan should disclose the
amount of cost recognized for the plan separately from its defined benefit plans.
The disclosures should include a description of the nature and effect of any
significant changes during the period affecting comparability, such as a change in
the rate of reporting entity contributions, a business combination, or a
divestiture.
13.4.2 Hybrid plans
Some plans contain features of both defined contribution and defined benefit
plans. Some examples include cash balance plans and floor-offset plans. If, in
substance, the plan provides a defined benefit, the accounting and disclosures
should follow the requirements for a defined benefit plan.
13.5 Multiemployer plans

A multiemployer plan is a pension or OPEB plan to which two or more unrelated
reporting entities contribute. The assets of the plan are commingled and can be
used to provide benefits to employees of any of the participating reporting
entities. These plans are usually, but not always, pursuant to a collective
bargaining agreement. A reporting entity accounts for its participation in a
defined benefit multiemployer plan by recognizing expense in the amount of
contributions to the plan when they are required to be made, without any accrual
of future contributions or consideration of the funded status of the plan.
13.5.1 Multiemployer pension plans
The disclosure requirements of ASC 715-80-50 are intended to provide

information about a reporting entity’s financial obligations to a multiemployer
pension plan and help financial statement users better understand the financial
PwC 13-25
health of all of the significant plans in which the reporting entity participates. A
reporting entity should provide a narrative description of the nature of the
multiemployer plans and of its participation in the plans, indicating how the risks
of participating in these plans differ from those of a single-employer plan.
When information about the plan is available in the public domain

(e.g., a Form 5500), reporting entities should disclose the following for each
individually significant plan:
□ Plan’s legal name and Employer Identification Number
□ For each balance sheet presented, the plan’s “Zone status” (a color-coded
designation based on the funded status of the plan), as defined by the
Pension Protection Act of 2006 or, if not available, whether the plan was less
than 65% funded, between 65% and 80% funded, or 80% or more funded
□ For each period that an income statement is presented, the amount of the
employer’s contributions, whether those contributions represent more than
5% of total contributions to the plan per the plan’s most recently available
annual report (Form 5500 for US plans), and the year-end date of the plan to
which the annual report relates
□ Expiration dates of collective bargaining agreements
□ For the most recent annual period presented, whether the plan is subject to a
funding improvement plan, whether the reporting entity paid a surcharge to
the plan, and a description of any minimum contributions required in future
periods
The guidance does not define the term “significant.” When determining whether
a plan is individually significant, a reporting entity should consider not only its
contributions to the plan but other factors, such as the severity of the
underfunded status of the plan and the relative proportion of the employer’s
participation in the plan.
These disclosure requirements are applicable for US and non-US plans, although
obtaining some of this information for non-US plans may be more challenging.
Reporting entities may also face other challenges for US or non-US plans,
including obtaining the information necessary to prepare the disclosures on a
timely basis. Some information may be unavailable at the financial statement
date. In these cases, reporting entities should use the most recent information
available (which may, for example, relate to a prior fiscal year) and disclose the
year-end to which the information relates.
When plan information is not available in the public domain, reporting entities
should disclose, in addition to the information described above, the nature of the
benefits, a qualitative description of the extent to which the reporting entity could
be responsible for the obligations of the plan, and other quantitative information
about the plan, such as the total plan assets, the actuarial present value of
accumulated plan benefits, and the total contributions received by the plan.
13-26 PwC
If information is not available without undue cost or effort, reporting entities

should describe what information was omitted and the reason it was omitted, and
provide alternative information to meet the overall disclosure objectives.
Reporting entities should disclose the total contributions, in the aggregate, made
to all other multiemployer plans that are not individually significant, and the
total contributions, in the aggregate, to all multiemployer plans.
Reporting entities should also provide a description of any significant changes

that affect the comparability of total reporting entity contributions from period to
period, including from a business combination or divestiture, a change in the
reporting entity contribution rate, or a change in the number of employees
covered by the plan during the year.
ASC 715-80-55-6 through 55-8 illustrate these disclosure requirements.
13.5.2 Multiemployer other postretirement plans
Reporting entities that participate in a multiemployer plan that provides OPEB

benefits (such as retiree medical benefits) should disclose the amount of
contributions made to the plan, the nature of the benefits provided, and the types
of employees covered by these benefits.
Reporting entities should also provide a description of any significant changes

that affect the comparability of total reporting entity contributions from period to
period, including from a business combination or divestiture, a change in the
reporting entity contribution rate, or a change in the number of employees
covered by the plan during the year.
13.5.3 Withdrawal or increase in contribution level is probable or

reasonably possible
If withdrawal from the multiemployer plan would give rise to a liability and the
withdrawal is probable, the liability should be accrued. If withdrawal is
reasonably possible, disclosure of the possible withdrawal liability should be
made. Similar consideration should be given if it is either probable or reasonably
possible that a reporting entity’s contribution to the plan will increase in the
future. A liability is generally required only if the increased future contributions
are probable and relate to periods covered by the financial statements or earlier
periods. If the employer is not required to recognize a liability, increases in future
employer contributions that are reasonably possible should be disclosed.
13.6 Nonretirement postemployment benefits

A reporting entity that accounts for its nonretirement postemployment benefit
plans by analogy to ASC 715 should generally provide the disclosures required by
ASC 715, as discussed in FSP 13.3.5, if applicable.
PwC 13-27
13.6.1 Termination benefits
A reporting entity that provides contractual or special termination benefits

should disclose a description of the nature of the event giving rise to the benefit,
and the cost recognized during the year.
SAB Topic 5.P.4, Restructuring Charges, indicates that the SEC staff expect
similar disclosures for employee termination benefits, whether those costs have
been recognized pursuant to ASC 420, Exit or Disposal Cost Obligations,
ASC 712, or ASC 715. See FSP 11 for discussion of disclosure requirements
associated with exit or disposal costs.
13.6.2 Other postemployment benefits
If a reporting entity has a significant obligation for a postemployment benefit cost

that was not accrued only because it cannot reasonably be estimated, then a
reporting entity should disclose that fact.

This section covers special considerations for private companies and highlights
the differences in disclosure requirements from those applicable to public
reporting entities.
A “nonpublic entity” is defined in ASC 715 as follows:

Any entity other than one with any of the following characteristics:
a. Whose debt or equity securities trade in a public market either on a stock

exchange (domestic or foreign) or in the over-the-counter market, including
securities quoted only locally or regionally
b. That is a conduit bond obligor for conduit debt securities that are traded in a
public market (a domestic or foreign stock exchange or an over-the-counter
market, including local or regional markets)
c. That makes a filing with a regulatory agency in preparation for the sale of any
class of debt or equity securities in a public market
d. That is controlled by an entity covered by a., b., or c.
13-28 PwC
The disclosures for private company defined benefit plans are similar to those of
a public reporting entity, except for the following:
Figure 13-3
Differences in disclosure requirements for private companies
Section above
Required Required where SEC
disclosures for SEC disclosures for Private company registrant
registrants but not private reporting requirements
private companies companies reference are discussed
Reconciliation of the End of year ASC 715-20-50-5a&b 13.3.5.3

beginning and ending balances for
balances of the benefit benefit obligation
obligation and the fair and fair value of
value of plan assets plan assets,
employer and
participant
contributions,
and benefits paid
Components of net Amount of net ASC 715-20-50-5q 13.3.5.5

periodic benefit cost periodic benefit
cost
One percentage point Not applicable Not applicable 13.3.5.8

sensitivity analysis for
healthcare cost trend
rates
Significant change in Nature and effect ASC 715-20-50-5m 13.3.5.10

benefit obligation or of significant
fair value of plan assets nonroutine
events
Alternative method Not applicable Not applicable 13.3.5.10

used to amortize prior
service cost or gains
and losses
Substantive Not applicable Not applicable 13.3.5.10

commitment used as a
basis for accounting
for benefit obligation
New guidance
The guidance in ASU 2015-07, Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent), is effective for
fiscal years beginning after December 15, 2016 for all entities other than public
business entities. Early adoption is permitted. This guidance eliminates the
requirement to disclose the level of the fair value hierarchy for pension plan
assets for which the fair value is measured at net asset value (NAV) using the
practical expedient. Investments for which NAV is fair value, and not a practical
expedient, must still be included in the fair value table.
PwC 13-29
Chapter 14:
Leases
PwC 1
Leases

Leasing arrangements take a variety of forms and can include the lease of a single
asset or a group of assets. The lease may also be part of a larger overall
arrangement.
Lessees classify leases as either operating or capital leases; lessors classify leases
as operating, sales-type, direct financing, or leveraged leases. The classification
determines presentation and disclosure.
This chapter discusses lessees’ and lessors’ presentation and disclosure

requirements for various types of leases. It also discusses certain arrangements
that are leasing transactions in form, but not accounted for as leases, such as
sale-leaseback transactions when sale recognition criteria are not met.
14.2 Scope
ASC 840, Leases, provides the authoritative guidance for accounting and
reporting by both lessees and lessors.
New guidance
ASU 2016-02, Leases, includes a new leasing model with implications for all
leases. The new guidance is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years for (a) public business
entities, (b) not-for-profit entities that have issued, or are a conduit bond obligor
for, securities that are traded on an exchange or over-the-counter market, and (c)
employee benefit plans that file with or furnish financial statements to the SEC.
For all other entities, the standard is effective one year later. Early adoption is
permitted.
The new presentation and disclosure guidance in ASC 842 has not been reflected
in this chapter, but is summarized in LG 9.
14.3 Lessees
Lessees classify leases as either operating or capital leases.
Regardless of the type of lease, all lessees should disclose a general description of
their leasing arrangements, including a description of leasing transactions with
related parties. (Related party disclosures are discussed in FSP 26.)
The disclosures should include the significant terms of leasing arrangements,

such as the following, if applicable.
□ Renewal or purchase options

□ Escalation clauses
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Leases
□ Significant penalties and guarantees, such as residual value guarantees
□ Basis for determining contingent rental payments
□ Restrictions imposed by the agreements, such as against paying dividends
14.3.2 Operating leases
In an operating lease, the lessee uses an asset for a period of time but does not
obtain substantially all of the benefits or assume substantially all of the risks of
owning the asset.
In an operating lease, the lessee does not record a lease obligation or an asset for
the right to use the asset on its balance sheet. However, since payments under a
lease can vary over its term, the lessee in an operating lease may be required to
recognize certain lease-related assets or liabilities. Examples of these items
include prepaid or accrued rent, capitalized initial direct costs, and lease
incentives received. In a classified balance sheet, the lessee in an operating lease
should present these assets and liabilities as current or noncurrent with other
prepaid or accrued expenses with similar maturities. Refer to Example 2-1 for an
illustration.
ASC 840-20-45-1 indicates that the lessee in an operating lease should include
rental costs in income from continuing operations (as opposed to combining it
with interest expense). Reporting entities typically include rent expense with
other expenses based on function, such as cost of goods sold or selling, general,
and administrative expenses.
14.3.2.2 Disclosure
Disclosures required for an operating lease focus primarily on the income

statement and the commitments to make future payments under the lease.
Example 1 of ASC 840-10-55-40 includes an illustration of a lessee’s application
of the disclosure requirements for an operating lease.
Scope of disclosures
Inception of an operating lease is the date the terms are agreed to by the parties.
Lease commencement is the date the lessee controls the use of the property.
The specific disclosure requirements of ASC 840 apply upon lease

commencement. Prior to this date, the lessee should disclose its lease
commitment in a manner similar to how it discloses commitments to purchase or
construct properties that it will own. See FSP 23 for discussion of commitments
and contingencies.
PwC 14-3
Leases
Rental expense
A lessee in an operating lease is required to disclose rental expense for each

period for which an income statement is presented, with separate disclosure for
minimum rentals, contingent rentals, and sublease rentals.
This disclosure may exclude rental payments under leases with terms of a month
or less that were not renewed. For example, assume a construction company
rents heavy equipment on a day-to-day basis in an arrangement that may be
cancelled by either party at any time. The lessee may exclude those rents from its
disclosure of rental expense even if those expenses are significant.
Minimum lease payments
For operating leases that have initial or remaining noncancelable lease terms that
are greater than one year, lessees should disclose the minimum rental payments
for each of the next five years, and a sum for all years thereafter, followed by a
total. The lessee may exclude lease payments that the lessee can avoid at its
option. For example, the lessee may exclude rents due in a future extension
period even if it is considered part of the lease term. However, if the lessee elects
to exclude those rents, it should consider disclosing that fact.
When preparing disclosures of future minimum rental payments, a question may

arise as to whether the lessee’s disclosure is based on (1) the future cash it is
obligated to pay, or (2) the expense it will recognize in the income statement on a
straight-line basis. These amounts often differ, since many leases include non-
level rents. While both approaches are acceptable, we believe the requirement
was intended to reflect future cash payments. As a best practice, a lessee should
clarify, for example, that the disclosure is based on contractually-required cash
payments while expense recognition is based upon a straight-line basis.
For foreign currency transactions, lessees should translate the amount of future
minimum rental payments for purposes of the disclosure at the current exchange
rate at the balance sheet date.
A lessee should also disclose the total minimum rentals it is entitled to receive
under noncancelable subleases, if any, as of the date of the latest balance sheet
presented.
Exit obligations
When a lessee stops using a leased asset altogether during the lease term, the
transaction may be subject to the accounting and disclosure requirements of ASC
420, Exit or Disposal Cost Obligations. See FSP 11 for discussion of disclosures
related to restructuring activities.
14-4 PwC
Leases
14.3.3 Capital leases
A lessee in a capital lease has obtained substantially all the benefits or assumed
substantially all the risks of ownership of the asset. A capital lease is similar to
the financed purchase of an asset.
Lessees should separately identify the gross amount of assets recorded under
capital leases for each period a balance sheet is presented. This can be presented
either in the balance sheet or the footnotes.
For capital leases, lessees should also separately identify, in the balance sheet or
footnotes, their obligations under capital leases. In a classified balance sheet, a
lessee should present the current and noncurrent portions of their capital lease
obligations in accordance with its operating cycle.
Since a capital lease is similar to other financed purchases of assets, interest

expense is usually presented with other interest in the income statement. A lessee
should either present the amortization of assets under a capital lease separately
in the income statement, or disclose the amount in the footnotes.
14.3.3.2 Disclosure
Example 1 of ASC 840-10-55-40 includes an illustration of lessee disclosures

under capital leases.
Scope of disclosure
As with operating leases, prior to the commencement date, leases are not subject
to the specific disclosure requirements of ASC 840, but an entity instead discloses
its lease commitment similar to a commitment to purchase or construct
properties that it will own. See FSP 23 for discussion of commitments and
contingencies.
Classes of capital lease assets
Regardless of whether the capital lease information is presented on the balance

sheet or in the footnotes, lessees should present assets recorded under capital
leases by major class according to their nature or function (e.g., manufacturing
facilities, retail facilities, or transportation equipment), along with the associated
accumulated amortization. The lessee may combine this information with other
comparable disclosures for owned assets.
The lessee should disclose the future minimum lease payments for each of the
next five years, and a sum for all years thereafter, followed by a total. The lessee
should subtract amounts representing executory costs included in the rent
payment (e.g., maintenance, property taxes and property insurance) from this
PwC 14-5
Leases
total to disclose the net minimum lease payments. Further, the lessee should
subtract any imputed interest to disclose the present value of net minimum lease
payments.
For capital leases, a lessee should also disclose the total minimum rentals it is
entitled to receive under noncancelable subleases, if any, as of the date of the
latest balance sheet presented.
Contingent rentals
For capital leases, the lessee should disclose contingent rental expense for each
period for which an income statement is presented, and disclose where the
contingent rent was presented in the income statement.
Interest expense
A lessee in a capital lease often presents interest expense with other interest in
Amortization
A lessee in a capital lease should either present the amortization of assets under
capital lease separately or disclose the amount in the footnotes.
14.3.4 Sale-leaseback transactions
Sale-leaseback transactions involve the sale of property the seller will continue to
use after it has transferred legal ownership of the asset to the buyer. A sale-
leaseback transaction is one in which the seller recognizes both a sale and a
separate leaseback of the asset sold.
Lessees classify the leaseback of the asset as either an operating or a capital lease.
As such, lessees in sale-leaseback transactions apply the presentation and
disclosure guidance applicable to the classification of the leaseback, either for an
operating or capital lease, addressed in FSP 14.3.2 and 14.3.3, respectively.
A sale-leaseback transaction typically results in the seller-lessee deferring gains

(or losses eligible for deferral). The presentation of the deferred gain (or loss) on
the balance sheet depends on whether the lessee classifies the leaseback as a
capital lease or as an operating lease.
When the leaseback is classified as a capital lease, the lessee would normally
offset the deferred gain (or loss) against (or add it to) the asset.
When the leaseback is classified as an operating lease, the lessee may present the
current and noncurrent portions of the deferred gain (or loss) within current or
noncurrent liabilities (or assets), as appropriate.
14-6 PwC
Leases
14.3.4.2 Presentation of “failed” sale-leasebacks
Because of the strict accounting guidance applicable to the sale and leaseback of
real estate (including integral equipment), these transactions frequently do not
qualify for sales recognition. In these “failed” sale-leaseback transactions, the
seller-lessee continues to reflect the asset it “sold” on its balance sheet as if it still
legally owns the asset. The lessee would typically reflect the sale proceeds
received from the buyer-lessor as a financing on its balance sheet, even though
the lease might otherwise have been classified as an operating lease had the
transaction qualified for sale treatment.
14.3.4.3 Disclosure of “failed” sale-leasebacks
In a failed sale-leaseback transaction, the seller-lessee should provide disclosures

similar to any other financing obligation (see FSP 11 for discussion of disclosures
related to various liabilities). Additionally, the seller-lessee should describe the
terms of the transaction, including future commitments and obligations that arise
from the transaction and the circumstances that result in the seller-lessee’s
continuing involvement with the “sold” asset. For example, if a seller-lessee did
not account for a sale leaseback transaction as a sale because they have an option
to repurchase the asset at its fair value at a future date, the lessee should disclose
that provision as a form of continuing involvement with the asset.
In addition to the disclosures applicable for financing obligations discussed in

FSP 12.13, the seller-lessee in a failed sale-leaseback should continue to disclose
the five-year data described in FSP 14.3.2.2 for operating leases. That is, the
lessee should disclose the lease payments and any lease receipts on non-
cancelable subleases associated with the failed sale-leaseback for each of the next
five years and all periods thereafter, with a total.
The amounts in the financing and leasing disclosures will differ from how the
lessee accounts for these cash payments. In a failed sale-leaseback transaction
accounted for as a financing, for example, the lessee will recognize its cash
payments as interest and principal payments, whereas the leasing disclosures
focus on the gross cash flows.
14.3.5 Subleases
Often, when a lessee subleases a leased property to a third party, the original
lessee is not relieved of its primary obligation under the lease. In such
transactions, the assets and liabilities related to the original lease should not be
offset against assets and liabilities related to the sublease (unless the transactions
qualify for right of offset under ASC 210-20). See 14.3.2.2 and 14.3.3.2 for
disclosure requirements for subleases of operating leases and capital leases,
respectively.
PwC 14-7
Leases
14.4 Lessors
Lessors may classify leases as operating, sales-type, direct financing leases, or
leveraged leases.
Regardless of the type of lease, all lessors should disclose a general description of
their leasing arrangements, including a description of leasing transactions with
related parties. (FSP 26 addresses disclosures of related party transactions.)
Lessors should also disclose their accounting policy for recognizing contingent
rental income. Generally, lessors would not recognize contingent income until the
contingency has been resolved. In those atypical situations when a lessor accrues
contingent rental income before the lessee achieves a specified target, however,
the lessor should disclose the effect on rental income compared to the amount
that would have been recognized had contingent rental income been deferred
until the specified target is met.
14.4.2 Operating leases
In an operating lease, a lessor transfers the use of an asset to a lessee for a period
of time but does not transfer substantially all of the benefits or risks of owning
the asset.
Unlike lessees, lessors reflect assets subject to operating leases on the balance
sheet. They report the leased asset either (1) together with their other property,
plant and equipment (e.g., within “buildings”), or (2) as a separate line item on
the balance sheet (e.g., “assets subject to operating leases”). Property subject to
leases may be presented net of accumulated depreciation on the balance sheet,
but the accumulated depreciation must either be shown on the face of the balance
sheet or disclosed in the footnotes.
For operating leases with scheduled rent increases, the requirement to recognize
rental income on a straight-line basis may generate rents receivable or deferred
rent revenue on the lessor’s balance sheet. Lessors should present such rent
receivable or deferred rent with items of similar maturities on a classified balance
sheet, for example, with other prepaids associated with long term contracts.
Lessors should present the rental income and depreciation gross in the income
statement as revenue and expense, respectively.
14.4.2.2 Disclosure
The disclosure requirements for lessors’ operating leases are more extensive than
they are for lessees. If leasing is a significant part of a lessor’s business activities
(as measured by revenue, net income, or assets), a lessor should disclose the
following information with respect to their operating leases.
14-8 PwC
Leases
□ A general description of the leasing arrangements
□ The cost and carrying amount, if different, by major classes of property

according to nature or function
□ Total accumulated depreciation for leased assets as of the latest balance sheet
date
□ Minimum future rentals on noncancelable leases as of the latest balance

sheet date, in the aggregate and for each of the next five years
□ Total contingent rentals included in income for each period for which an
income statement is presented
As a best practice, a lessor should clarify whether the disclosure of minimum

future rentals is based on actual payments or income recognition, similar to the
discussion in FSP 14.3.2.2.
For foreign currency transactions, the amount of future minimum rental

payments should be translated at the current exchange rate at the balance sheet
date.
Example 1 of ASC 840-10-55-47 includes illustration of the disclosure

requirements for lessors under operating leases.
14.4.3 Sales-type leases and direct financing leases
A lessor in a sales-type lease or direct finance lease transfers substantially all of

the benefits or substantially all of the risks of ownership of the asset to a lessee.
These leases are similar to a financed sale of the asset.
In sales-type and direct financing leases, the lessor derecognizes the leased
property, plant, and equipment and recognizes a financing receivable on its
balance sheet. The lessor presents this receivable as a separate line item or
combined within the same line item as long term financing receivables or similar
assets in a classified balance sheet.
The financing receivable is referred to as a “net investment in leased property.”

This receivable represents the present value of both the minimum lease payments
receivable (net of executory costs that may be embedded in the lease payments)
and the unguaranteed residual value of the property at the end of the lease (plus
any capitalized initial direct costs to originate a direct financing lease). The
difference between the gross cash flows and the discounted cash flows is referred
to as “unearned income.” These amounts are reported on the balance sheet as a
single line item.
A lessor should report the amortization of initial direct costs as a component of

finance or lease income in accordance with ASC 310, Receivables. In other words,
PwC 14-9
Leases
the amortization of the initial direct cost is reported in the income statement net,
as a reduction of interest income rather than as an expense.
14.4.3.2 Disclosure
If leasing is a significant part of the lessor’s business activities (as measured by

revenue, net income, or assets), the lessor should disclose the components that
make up its net investment in sales-type or direct financing leases. Disclosure
includes the following components:
□ Future minimum lease payments receivable, with separate deductions for

both executory costs (including any profit thereon), and the accumulated
allowance for uncollectible minimum lease payments receivable
□ The unguaranteed residual values accruing to the benefit of the lessor
□ Initial direct costs (for direct financing leases only)
□ Unearned income
A lessor of a direct-financing or sales-type lease should disclose future minimum

lease payments receivable for each of the next five fiscal years. There is no
specific guidance that requires a sales-type or direct financing lessor to disclose
(or that prohibits a lessor from disclosing) total minimum lease payments
receivable (i.e., including amounts due beyond five years).
Contingent rentals
The sales-type or direct financing lessor should disclose total contingent rentals
included in income for each period for which an income statement is presented.
They should also describe the terms of their contingent rent arrangements and
how and when contingent rents are recognized in income.
Example 1 of ASC 840-10-55-47 includes illustration disclosures of sales-type and

direct financing leases.
14.4.4 Leveraged leases
A leveraged lease is a type of a direct finance lease that meets specific criteria. For
example, in a leveraged lease, the lessor must obtain substantial nonrecourse
financing from a third party. Also, the cash flows to the lessor in a leveraged lease
result in a net investment in the lease that declines in the early years of the lease
but then increases.
Leveraged leases are unique in that a lessor presents the investment in the lease
on the balance sheet, net of principal and interest owed on the related non-
14-10 PwC
Leases
recourse debt. It is one of the few times when accounting guidance requires a
reporting entity to net its receivables from one party with its obligations to a
different party. Leveraged leases also have a unique revenue recognition pattern
that differs from the accounting for other financial assets.
Figure 14-1 illustrates the components of a lessor’s investment in a leveraged

lease.
Figure 14-1
Components of the investment
Classified balance sheet
Presentation of leveraged leases in a classified balance sheet can be challenging

because the investment in leveraged leases contains a combination of different
cash inflows (e.g., rents receivable) and outflows (e.g., debt service). One of the
defining features of a leveraged lease is that its investment balance declines and
then rises at least once (and maybe more than once) over the lease term. This
could appear to present a “negative” current portion of the investment in
leveraged leases in a classified balance sheet. Therefore, an investment in a
leveraged lease is typically classified entirely as a noncurrent asset because of the
impracticality of separating the investment into current and noncurrent portions.
Deferred taxes
Notwithstanding that a lessor’s “investment in leveraged leases” includes ITC,

lessors should present deferred taxes related to leveraged leases separately from
the investment in leveraged leases on its balance sheet. The lessor may present
PwC 14-11
Leases
them separately on the face of the balance sheet or combine them with other
deferred taxes. In either case, the lessor should disclose deferred taxes related to
leveraged leases separately in the footnotes.
Presentation of the investment tax credit by a leveraged lessor in the

income statement
Some lessors report the amortization of ITC on leveraged leases as operating

income because they view the ITC amortization as an integral part of their rate of
return on the lease financing. Other lessors report it as a component of the
income tax provision. The examples included in ASC 840-30-55-29 through 55-
38 include ITC amortization in income tax expense. It is also acceptable to reflect
ITC amortization as part of pretax income. The elected method should be
disclosed and consistently applied.
14.4.4.2 Disclosure
Given the unique accounting characteristics for leveraged leases, they require
significant disclosure.
A lessor is required to provide a general description of its leveraged leasing

activity. Also, if leveraged leasing is a significant part of the lessor’s business
activities (in terms of revenue, net income, or assets), the lessor’s footnotes
should disclose each of the components of the “net investment in leveraged
leases,” including the deferred taxes related to the leveraged lease (which is not
netted against “investment in leveraged leases” on the balance sheet). This
disclosure, which is typically presented in a tabular format, usually includes a
subtotal of all components of the investment in leveraged leases other than the
deferred taxes (which should tie to the “investment in leveraged leases” line item
on the balance sheet). Deferred taxes arising from leveraged leases is then
subtracted to arrive at a lessor’s “net investment in leveraged leases.”
A leveraged lease is not subject to the specific disclosure requirements for sales-
type or direct financing leases. For example, a lessor of a leveraged lease does not
need to disclose a five-year table for minimum rental payments receivable.
ASC 840-30-55-34 includes an example footnote disclosure for investments in

leveraged leases.
Deferred taxes
The lessor in a leveraged lease should either present deferred taxes related to
leveraged leases separately on the face of the balance sheet or disclose the
amount in the footnotes.
Effect of a change in tax law or rates on leveraged leases
The basic model for accounting for taxable temporary differences arising from
leveraged leases is governed by ASC 840, rather than by ASC 740. Accordingly,
the accounting for a change in tax rates or tax laws may affect leveraged leases in
14-12 PwC
Leases
a manner that distorts the usual relationship between income taxes and pretax
income. When tax rates or laws change, and the accounting for the change on
leveraged leases results in this unusual relationship, ASC 840-30-50-6 requires
lessors to disclose the reason for such variation if it is not otherwise clear.
For SEC registrants, ASC 840-30-S99-2 addresses issues relating to the

calculation and reporting of adjustments to net investments in leveraged leases
required by a change in tax law or rates. In ASC 840-30-S99-2, the SEC noted
that it expects leveraged lessors that are SEC registrants to disclose the
cumulative effect that the changes in tax laws or rates have on pretax income and
income tax expense.

Private companies may elect not to apply VIE guidance for assessing whether
they should consolidate a lessor entity when (a) the lessor entity and the private
company are under common control, (b) the private company has a leasing
arrangement with the lessor entity, and (c) substantially all of the activity
between the two entities is related to the leasing activity of the lessor entity. See
FSP 18 for discussion of the implications in consolidation, and FSP 26 for
discussion of related party transactions.
ASC 840-30-S99-2, related to lessor disclosure of the effect of changes in tax laws
or rates on pretax income and income tax expense, applies only to SEC
registrants.
PwC 14-13
Chapter 15:
Stock-based
compensation
PwC 15-1
Stock-based compensation

This chapter addresses presentation and disclosure considerations related to
stock-based compensation awards. It also addresses nonemployee awards,
implications for the separate financial statements of a subsidiary, employee stock
ownership plans (ESOPs), and considerations for private companies.
For recognition and measurement topics related to stock-based compensation,

refer to PwC’s accounting and financial reporting guide for Stock-based
compensation guide (2013).
15.2 Scope
Stock-based compensation refers to all forms of employee compensation that fall
within the scope of ASC 718, Compensation—Stock Compensation, including
shares, options, and other equity instruments. Liability-classified awards are also
within the scope of ASC 718 if they are based, in part, on the price of the
reporting entity’s stock, or settled through the issuance of equity.
SEC guidance related to stock-based compensation is included in SAB Topic 14,

Share-Based Payment.
New guidance
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee

Share-Based Payment Accounting, which amends ASC 718 and includes
provisions intended to simplify various provisions related to how share-based
payments are accounted for and presented in the financial statements.
beginning after December 15, 2016, and interim periods within that reporting
period. For all other entities, it is effective for annual periods beginning after
December 15, 2018. Early adoption is permitted in any interim or annual period,
with any adjustments reflected as of the beginning of the fiscal year of adoption.
If a reporting entity adopts the guidance early, all provisions of the guidance
must be adopted at the same time.
15.3 Presentation
This section discusses presentation requirements and considerations for the
balance sheet, income statement, and statement of stockholders’ equity.
Presentation considerations for the statement of cash flows are discussed in
FSP 6.
15.3.1 Balance sheet
Stock-based compensation awards are classified as either equity or liabilities. The

criteria (outlined in ASC 718-10-25-6 through 19) for determining whether an
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award should be classified as equity or liability are complex. Reporting entities

should carefully consider the terms of awards when determining whether an
award should be equity or liability-classified. ASC 718 describes five types of
awards that should be classified as liabilities. All other awards would typically be
classified as equity, even if the guidance requires ongoing remeasurement of the
award for expense purposes (e.g., nonemployee awards).
The following types of awards should be classified as liabilities:
□ An award with conditions or other features that are indexed to something

other than a market, performance, or service condition
□ An award that meets certain criteria of ASC 480, Distinguishing Liabilities

from Equity
□ A share award with a repurchase feature that permits an employee to avoid

the risks and rewards normally associated with stock ownership by allowing
the employee to put shares to the reporting entity within six months after the
employee vests in the shares; or a share award where it is probable that the
employer would prevent the employee from bearing the risks and rewards
that are normally associated with stock ownership within six months after
share issuance
□ An option or similar instrument that could require the employer to pay an

employee cash or other assets, unless cash settlement is based on a
contingent event that is (a) not probable, and (b) outside the control of the
employee
□ An option or similar instrument where the underlying stock is classified as a

liability
For more on each of these types of awards, refer to SC 1.12.
15.3.1.1 Short-term versus long-term classification
A reporting entity should determine whether a liability-classified award is a

current or noncurrent liability. A liability-classified award is generally classified
as current if a vested award is payable upon demand, or if vesting is expected to
occur within one year. All other liability awards are classified as noncurrent.
15.3.2 Income statement
Stock-based compensation expense should be included in the same income

statement line or lines as the cash compensation paid to the employees receiving
the stock-based awards (for example, cost of sales, R&D, or G&A).
As indicated in SEC’s Division of Corporation Finance Current Accounting and

Disclosure Issues (Section I(B)(2)), separate line item presentation of stock-
based compensation expense in the income statement (for example, a line item
titled “noncash compensation”), one or more separate line items for share-based
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compensation, or a table totaling the amount of share-based compensation

included in various line items is not appropriate. However, the SEC staff noted in
SAB Topic 14F that a parenthetical note to the respective income statement line
items indicating the amount of stock-based compensation expense included in
the line item would be acceptable, as shown in Figure 15-1.
Figure 15-1
Sample stock-based compensation parenthetical presentation
Revenues $xx
Cost of sales (including noncash compensation of $XX) xx
Gross margin xx
Selling expense (including noncash compensation expense of $XX) xx
General and administrative expense (including noncash

compensation expense of $XX) xx
Research and development expense (including noncash

compensation expense of $XX) xx
Total operating expenses xx
Income from operations $xx
The SEC staff has not objected to a footnote presentation on the face of the
income statement (as opposed to parenthetical disclosure) indicating the amount
of stock-based compensation expense included in each of the respective expense
line items. However, a presentation that includes a total of the stock-based
compensation expense would not be acceptable.
Other commonly accepted methods of disclosing stock-based compensation

expense include footnote disclosure or presenting the total as a line item in the
15.3.2.1 Capitalized compensation cost
The guidance uses the term compensation cost rather than compensation
expense to emphasize that an entity could be required to capitalize stock-based
compensation under the applicable US GAAP, similar to the treatment of cash
compensation. For example, employee costs could require capitalization as:
□ Inventory
□ Deferred loan origination costs
□ Contract accounting assets
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□ Self-constructed fixed assets
□ Capitalized software (internal-use and to be sold, leased, or marketed)
A reporting entity should disclose the total compensation cost that is capitalized
as part of the cost of an asset.
15.3.3 Temporary (mezzanine) equity
Financial statements filed with the SEC must follow the guidance in ASR 268,
which requires certain awards to be classified as temporary equity. This guidance
applies if redemption of the award (or underlying shares) is outside of the control
of the issuer. This could include awards such as:
□ Shares that are redeemable at the employee’s discretion after a six-month

holding period, or based on contingent events
□ Options with underlying shares that are redeemable at the employee’s

discretion after a six-month holding period, or based on contingent events
□ Options with cash settlement features based on contingent events
For information on accounting for awards classified as temporary equity, refer to

SC 1.12.14. FSP 5.6.3.1 discusses presentation and disclosure requirements
associated with temporary equity.
15.4 Disclosure
ASC 718-10-50-1 establishes four disclosure objectives for stock-based
compensation. A reporting entity that has granted stock-based compensation
awards to its employees should provide information that enables users of the
financial statements to understand the following:
□ The nature and general terms of stock-based compensation arrangements

outstanding during the period
□ The income statement effects of stock-based compensation
□ The method of estimating the fair value of stock-based compensation awards
□ The cash flow effects of stock-based compensation
ASC 718-10-50-2 specifies the minimum information that a reporting entity

should provide in its annual financial statements in order to achieve these
objectives. The specific requirements are discussed in the subsections below. In
addition, ASC 718-10-55-134 through 137 includes an illustrative example of the
disclosure requirements.
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Question 15-1
Is a reporting entity required to provide the disclosures outlined in ASC 718 in its
interim financial statements?
PwC response
No. The disclosure requirements outlined in ASC 718 are only required in a
reporting entity’s annual financial statements. However, reporting entities should
consider the guidance in ASC 270, Interim Reporting, which requires disclosure
of significant changes since the last reporting period in interim financial
statements (refer to FSP 29). Many reporting entities provide disclosures about
stock-based compensation on an interim basis to provide transparency into the
activity occurring during the interim period.
15.4.1 Description of awards and methods
A reporting entity should include a description of its stock-based compensation

arrangements, including the general terms of the awards, as well as any
accounting policy elections. Such disclosure should include the following:
□ The requisite service periods and any other substantial conditions, such as
vesting conditions
□ The maximum contractual term
□ The number of shares authorized for awards of options or other equity

instruments
□ The method (for example, fair value, calculated value, or intrinsic value) used
to measure compensation cost
□ Post-adoption of ASU 2016-09, the policy for estimating expected forfeitures

or recognizing forfeitures as they occur, if not separately disclosed elsewhere.
We believe reporting entities should also disclose its policy election for the
attribution of awards with a graded vesting schedule and only service conditions.
15.4.2 Option and similar awards
A reporting entity that awards stock options or similar awards (such as stock
appreciation rights) to its employees should provide a rollforward of activity for
the most recent year an income statement is presented. The rollforward should
include the number and weighted-average exercise price (or conversion ratios) of
the following groups of awards:
□ Outstanding at the beginning of the year
□ Granted during the year
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□ Exercised or converted during the year
□ Forfeited during the year
□ Expired during the year
□ Outstanding at the end of the year
□ Exercisable or convertible at the end of the year
For fully vested awards and awards expected to vest, a reporting entity must
separately disclose the following for awards outstanding and awards currently
exercisable (or convertible), at the date of the latest balance sheet. It should be
noted that upon adoption of ASU 2016-09, if a reporting entity elects to account
for forfeitures when they occur, the following disclosures will also apply to
unvested shares, for which the requisite service period has not been rendered but
for which the vesting is expected based on achievement of a performance
condition.
□ The number
□ The weighted-average exercise price (or conversion ratio)
□ Aggregate intrinsic value
□ Weighted-average remaining contractual term
A reporting entity should provide a description of its policy, if any, for issuing
shares upon award exercise (or stock unit conversion), including the source of
those shares (that is, new shares or treasury stock). If a reporting entity expects
to repurchase shares in the following annual period, the reporting entity should
disclose an estimate of the number (or range) of shares it will repurchase during
that period.
Question 15-2
Is a reporting entity required to include awards that are granted for which no
compensation expense has been recognized (e.g., because the awards vest upon a
performance condition that is not currently probable of occurring) in the
rollforward?
PwC response
Yes. ASC 718 requires disclosure of awards granted during the year regardless of
whether compensation expense has been recognized. However, if the grant date
criteria in ASC 718 was not met (e.g., the key terms and conditions have not been
communicated), then those awards should not be included as granted in the
rollforward. This guidance is also applicable for other types of awards. See
FSP 15.4.3.
PwC 15-7
15.4.3 Other awards
A reporting entity that grants its employees awards other than options (for
example, restricted stock) should provide a rollforward of activity for the most
recent year an income statement is presented. The rollforward should include the
number and weighted-average grant-date fair value (or calculated value or
intrinsic value, if used) for the following groups of awards:
□ Nonvested at the beginning of the year
□ Granted during the year
□ Vested during the year
□ Forfeited during the year
□ Nonvested at the end of the year
15.4.4 Fair value disclosure
For each year an income statement is presented, a reporting entity should

disclose:
□ The weighted-average grant-date fair value (or calculated value or intrinsic

value, if used) of equity awards granted during the year
□ The total intrinsic value of options exercised (or stock units converted),
stock-based liabilities paid, and the total fair value of shares vested during
the year
For each year an income statement is presented, a reporting entity should

provide a description of the method and significant assumptions used during the
year to estimate the fair value (or calculated value, if used) of stock-based
compensation awards, including (if applicable):
□ Expected term
□ Expected volatility
□ Expected dividend rate
□ Risk-free rate
□ Discount for post-vesting restrictions and the method used to estimate it
A reporting entity that uses a valuation method that employs a range of

assumptions over the contractual term of an award (e.g., a lattice model) should
disclose the range of expected volatilities, dividend rates, and risk-free rates used,
and the weighted-average expected volatility and dividend rate.
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The guidance does not specify how to disclose the significant assumptions used
when a reporting entity grants similar awards at different times throughout the
year. Some reporting entities disclose a range of the significant assumptions
used, while others disclose a weighted-average amount for each significant
assumption.
15.4.4.1 Expected term assumption
A reporting entity’s disclosure of expected term should include a discussion of the

method used to incorporate the contractual term of the awards and employees’
expected exercise and expected post-vesting termination behavior.
A reporting entity that elects to use the simplified method discussed in SAB
Topic 14 (Section D.2, question 6) to estimate expected term for its “plain-
vanilla” options should disclose its use of the method and why it was selected.
Disclosure should also be made of which options were valued using this method if
not all options were valued using the same methodology, and the periods in
which it was used.
For more discussion of the simplified method, refer to SC 7.2.1.
15.4.4.2 Expected volatility assumption
Reporting entities should disclose how they determined the expected volatility
assumption. This could include whether the reporting entity used only implied
volatility, historical volatility, or a combination of both, for which time periods,
and the respective weighting.
A private company may use the calculated-value method to estimate fair value
when sufficient information is not available to estimate expected volatility. This
would entail substituting expected volatility with an industry sector index. In this
case, a reporting entity should disclose the following:
□ The reasons why it is not practicable to estimate expected volatility
□ The industry sector index selected and the reasons for selecting it
□ How it calculated historical volatility using that index
15.4.4.3 Change in valuation technique
Reporting entities may decide to change option-pricing models (for example,

from Black-Scholes to a lattice model). A change in option-pricing model is not a
change in accounting principle and therefore does not require a preferability
letter. However, reporting entities should disclose any changes to the
option-pricing model used and the reasons for the change.
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15.4.5 Multiple awards
A reporting entity that grants awards under multiple employee stock-based

compensation arrangements should provide separate disclosures for different
types of awards to the extent they have different characteristics. For example, it
may be important for a reporting entity to:
□ Provide separate disclosure of weighted-average exercise prices

(or conversion ratios) at the end of the year for stock options (or stock units)
with a fixed exercise price (or conversion ratio) and those with an indexed
exercise price (or conversion ratio)
□ Segregate the number of stock options (or stock units) not yet exercisable
into those that will become exercisable (or convertible) based either (a) solely
on fulfilling a service condition, or (b) fulfilling a performance condition
□ Provide separate disclosures for awards that are classified as equity and those
classified as liabilities
15.4.6 Impact on financial statements
A reporting entity should disclosure the impact of stock-based compensation on

the financial statements. The disclosures should be made for each year an income
statement is presented and should include:
□ Total compensation cost for stock-based compensation awards recognized in

income, as well as the total related income tax benefit
□ Total compensation cost capitalized as part of the cost of an asset
□ A description of significant modifications, including the terms, the number of

employees affected, and the total incremental compensation cost resulting
from the modifications
As of the latest balance sheet date presented, the reporting entity should also
disclose the total compensation cost related to nonvested awards not yet
recognized, and the weighted-average period over which it is expected to be
recognized.
Question 15-3
Should a reporting entity reflect expected forfeitures in the disclosure of the total
compensation cost related to nonvested awards not yet recognized?
PwC response
Yes. Pre-adoption of ASU 2016-09, we would expect a reporting entity to disclose

the amount of compensation expense it expects to record in future periods, which
would reflect an estimate of awards not expected to vest (i.e., estimated
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forfeitures). Post-adoption of ASU 2016-09, expected forfeitures would only be

included in this disclosure if the reporting entity’s policy is to estimate
forfeitures.
If not separately disclosed elsewhere (e.g., in the statement of cash flows), the
reporting entity should also disclose the following for the most recent income
statement year presented:
□ Cash received from the exercise of stock options and similar awards
□ Pre-adoption of ASU 2016-09, tax benefits realized from exercised stock

options and similar awards. Post-adoption of ASU 2016-09, all tax benefits
from exercised stock options and similar awards.
□ Cash used to settle equity instruments granted under stock-based

compensation awards
15.5 Separate financial statements of a

subsidiary
In some situations, employees of a reporting entity receive stock-based awards
from the reporting entity’s parent, or an entity under common control. The
reporting entity typically recognizes compensation cost in its financial statements
if the awards were issued for services to the reporting entity. For example, if
employees of Subsidiary A receive shares of the parent entity for services
provided to Subsidiary A, Subsidiary A should recognize compensation cost with
an offsetting entry to equity, representing a capital contribution from the parent.
For more information on the accounting implications, refer to SC 1.6.4.
A reporting entity that recognizes stock-based compensation in its separate

financial statements for stock-based awards of the parent, or an entity under
common control granted to its employees, should disclose the information
required by ASC 718, as summarized in FSP 15.4 above. These disclosures should
include only information about awards granted to the reporting entity’s
employees.
15.6 Non-employee awards

Stock-based compensation awards granted to non-employees are subject to the
measurement and presentation guidance in ASC 505-50, Equity-Based Payments
to Non-Employees. A reporting entity that grants awards to non-employees
should provide similar disclosure as those required by ASC 718 if that
information is important to understanding the effects of the transaction on the
ASC 505-50-S99-1 addresses the balance sheet presentation of arrangements

where a reporting entity issues unvested, forfeitable equity instruments to a
non-employee as consideration for future services. In this scenario, the fair value
PwC 15-11
of such equity instruments should not create equity until the future services are
received (i.e., the instruments are not considered “issued” for accounting
purposes until they vest). Consequently, there should be no accounting
recognition for these instruments at the grant date, even if a measurement date
has occurred (e.g., due to the existence of a performance commitment). The
reporting entity should instead record costs and equity over the period the
services are received.
Refer to SC 1.6 for guidance on whether an individual is an employee or

non-employee.
The FASB has an active project related to improving the accounting model for
nonemployee share-based payments. Financial statement preparers and other
users of this publication are therefore encouraged to monitor the status of the
project, and if finalized, evaluate the effective date of the new guidance and the
implications on presentation and disclosure.
15.7 Employee stock ownership plans (ESOPs)

An ESOP is a stock bonus plan that is designed to facilitate employee investment
in the reporting entity’s stock. ESOP plans can be non-leveraged or leveraged.
A reporting entity (sponsor) with a non-leveraged ESOP contributes cash to the

ESOP to purchase the sponsor’s stock, or contributes its stock directly to the
ESOP. A leveraged ESOP borrows funds from a lender to purchase the sponsor’s
shares. The sponsor generally guarantees the loan or otherwise commits, directly
or indirectly, to make contributions and/or pay dividends to the ESOP. As an
alternative to borrowing funds from a lender, the sponsor may directly loan funds
to the ESOP. Sponsor contributions and, in most instances, dividends on the
stock held by the ESOP, are used by the ESOP to service the debt.
15.7.1 Presentation
For non-leveraged ESOPs, when contributions are made and shares are
purchased in the ESOP, common stock or additional paid-in capital are credited
to the sponsor’s equity accounts.
For leveraged ESOPs, sponsors should report the issuance of new shares or the
sale of treasury shares to the ESOP, or external purchase of shares by the ESOP,
when the issuance, sale, or purchase occurs, and should report a corresponding
charge to “unearned ESOP shares,” a contra-equity account. Sponsors should
credit “unearned ESOP shares” as the shares are committed to be released, based
on the cost of the shares to the ESOP.
Sponsors should report loans from outside lenders to their leveraged ESOPs as
liabilities on their balance sheets and should report the related interest cost on
the debt in their income statements. Sponsors with internally leveraged ESOPs
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(employer loans) should not report the loan receivable from the ESOP as an asset
and should not report the ESOP’s debt as a liability, or recognize interest income
or cost on the sponsor loan.
Question 15-4
Under what circumstances should all or a portion of stock with a put option or a
mandatory cash redemption feature held by an ESOP be classified outside of
permanent equity in the sponsor’s balance sheet?
PwC response
If there are conditions (regardless of their probability of occurrence) when

holders of equity securities (that is, ESOP participants) may demand cash in
exchange for their securities, SEC registrants and private company financial
statements filed with the SEC must reflect the maximum possible cash obligation
related to those securities outside of permanent equity, in accordance with
ASR 268. This is true regardless of whether the underlying shares have been
allocated to participants.
Where the cash obligation relates only to a market value guarantee feature
(that is, a cash feature equivalent to the amount by which the “floor” exceeds the
common stock market price as of the reporting date), reporting entities are
permitted to classify only that portion of the obligation outside of permanent
equity.
Alternatively, a reporting entity could classify the entire guaranteed value amount
outside of permanent equity (for example, in situations where there is
uncertainty as to the ultimate cash obligation due to a possible market value
decline in the underlying security).
15.7.2 Disclosure
Reporting entities that sponsor ESOPs should provide the disclosures described
in ASC 718-40, Employer Stock Ownership Plans, as applicable. These include:

a. A description of the plan, the basis for determining contributions, including
the employee groups covered, and the nature and effect of significant matters
affecting comparability of information for all periods presented. For
leveraged employee stock ownership plans and pension reversion employee
stock ownership plans, the description shall include the basis for releasing
shares and how dividends on allocated and unallocated shares are used.
b. A description of the accounting policies followed for employee stock

ownership plan transactions, including the method of measuring
compensation, the classification of dividends on employee stock ownership
plan shares, and the treatment of employee stock ownership plan shares for
PwC 15-13
earnings per share (EPS) computations. If the employer has both old
employee stock ownership plan shares for which it does not adopt the
guidance in this Subtopic and new employee stock ownership plan shares for
which the guidance in this Subtopic is required, the accounting policies for
both blocks of shares shall be described.
c. The amount of compensation cost recognized during the period.
d. The number of allocated shares, committed-to-be-released shares, and

suspense shares held by the employee stock ownership plan at the
balance-sheet date. This disclosure shall be made separately for shares
accounted for under this Subtopic and for grandfathered employee stock
ownership plan shares.
e. The fair value of unearned employee stock ownership plan shares at the
balance-sheet date for shares accounted for under this Subtopic. (Future tax
deductions will be allowed only for the employee stock ownership plan's cost
of unearned employee stock ownership plan shares.) This disclosure need not
be made for old employee stock ownership plan shares for which the
employer does not apply the guidance in this Subtopic.
f. The existence and nature of any repurchase obligation, including disclosure

of the fair value (see paragraph 718-40-30-4) of the shares allocated as of the
balance sheet date, which are subject to a repurchase obligation.
g. The amount and treatment in the EPS computation of the tax benefit related
to dividends paid to any employee stock ownership plan, if material.
ASC 718-40-55-9 and 55-20 provide illustrative examples of ASC 718-40-50-1’s

disclosure requirements.

This section addresses presentation and disclosure considerations for private
companies. ASC 718 defines a “public entity” as an entity that (1) has equity
securities that trade on a public market (domestic or foreign), (2) files an initial
prospectus in preparation to sell equity securities, or (3) is controlled by an entity
that meets either of the first two criteria. Therefore, an entity with only publicly
traded debt securities is a “non-public entity” under ASC 718, but a subsidiary of
an entity with publicly traded equity is considered a public entity itself.
The presentation and disclosure guidance in this chapter is generally applicable

to both public and non-public companies. A non-public entity under the ASC 718
definition that measures awards based on calculated value or intrinsic value
should provide the disclosures in FSP 15.4 based on that measure. Additionally,
non-public entities under the ASC 718 definition are not required to disclose the
aggregate intrinsic value for fully vested awards and awards expected to vest, or
for fully vested awards currently exercisable, as discussed in FSP 15.4.2.
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Although only entities that file their financial statements with the SEC are
required to classify certain ASC 718 awards as temporary equity, as described in
FSP 15.3.3 and 15.7.1, it is also preferable for other non-public reporting entities
to present these awards in temporary equity.
Additionally, as noted above, there are two simplification provisions included in

ASU 2016-09 that are only available to entities that are considered non-public
per the ASC 718 definition. A non-public entity is permitted to make a one-time
election to change its measurement basis for all liability classified awards to
intrinsic value upon adoption of the new guidance, without requiring the entity to
evaluate whether the change is preferable. Non-public entities that elect this
practical expedient must disclose, in their first interim and annual period of
adoption, the nature of and reason for the change in accounting principle, as well
as the cumulative effect of the change on retained earnings (or other appropriate
components of equity or net assets). The new guidance also provides non-public
entities with a practical expedient for estimating the expected term of the award.
If elected, non-public entities must disclose, in their first interim and annual
period of adoption, the nature of and reason for the change in accounting
principle.
While the ASC 718 definition of public entity is used for purposes of determining
which entities can adopt the two non-public company practical expedients,
ASU 2016-09 uses the ASC Master Glossary definition of public business entities
for transition purposes.
Definition of public business entity from ASC Master Glossary

A public business entity is a business entity meeting any one of the criteria below.
Neither a not-for-profit entity nor an employee benefit plan is a business entity.
a. It is required by the U.S. Securities and Exchange Commission (SEC) to file

or furnish financial statements, or does file or furnish financial statements
(including voluntary filers), with the SEC (including other entities whose
financial statements or financial information are required to be or are
included in a filing).
b. It is required by the Securities Exchange Act of 1934 (the Act), as amended,

or rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
c. It is required to file or furnish financial statements with a foreign or domestic

regulatory agency in preparation for the sale of or for purposes of issuing
securities that are not subject to contractual restrictions on transfer.
d. It has issued, or is a conduit bond obligor for, securities that are traded,
listed, or quoted on an exchange or an over-the-counter market.
PwC 15-15
e. It has one or more securities that are not subject to contractual restrictions
on transfer, and it is required by law, contract, or regulation to prepare U.S.
GAAP financial statements (including footnotes) and make them publicly
available on a periodic basis (for example, interim or annual periods). An
entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its
financial statements or financial information is included in another entity’s filing
with the SEC. In that case, the entity is only a public business entity for purposes
of financial statements that are filed or furnished with the SEC.
ASU 2016-09 is effective for entities other than public business entities (under
the Master Glossary definition) for annual periods beginning after December 15,
2017, and interim periods within annual periods beginning after December 15,
2018. Therefore, if an entity is not a public business entity, it would not be
required to adopt the new guidance until the nonpublic entity effective date.
15.8.1 Disclosures in periods prior to an initial public offering
The AICPA accounting and valuation guide Valuation of

Privately-Held-Company Equity Securities Issued as Compensation (AICPA
guide) provides both valuation and disclosure best practices related to
privately-held-company equity securities issued as compensation, including
awards that are within the scope of ASC 718. The AICPA guide recommends that
private companies include information about stock-based compensation awards
granted within 12 months of an initial public offering (in addition to the
disclosures required by ASC 718).
Excerpt from AICPA guide, Chapter 14, Accounting and Disclosures

a. For each grant date, the number of equity instruments granted, the exercise
price and other key terms of the award, the fair value of the common stock at
the date of grant, and the intrinsic value, if any, for the equity instruments
granted (the equity instruments granted may be aggregated by month or
quarter and the information presented as weighted average per share
amounts)
b. Whether the valuation used to determine the fair value of the equity
instruments was contemporaneous or retrospective
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Chapter 16:
Income taxes
PwC
16-1
Income taxes

This chapter discusses the presentation and disclosure requirements of ASC 740,
Income Taxes, and the applicable SEC requirements (primarily S-X 4-08(h)). The
presentation and disclosure requirements associated with income taxes are
extensive, and certain aspects can be complicated. This chapter is organized in
the following manner:
□ Balance sheet presentation and disclosures for deferred tax accounts
□ Income statement presentation and related disclosures
□ Disclosures for uncertain tax positions
□ Disclosures related to other specific topics affecting income taxes
16.2 Scope
ASC 740 applies to all domestic and foreign reporting entities that pay taxes
based on income. The ASC Master Glossary defines income taxes as “domestic
and foreign federal (national), state, and local (including franchise) taxes based
on income.” However, beyond that definition, US GAAP does not provide further
guidance on the term “taxes based on income,” nor does it specify what
characteristics differentiate taxes based on income from taxes that are based on
something other than income.
Some taxes are structured such that they meet the definition of an income tax
from a legal perspective. However, the legal definition of a tax structure (as an
income tax or some other type of tax) is not determinative when evaluating
whether the income tax guidance is applicable. We believe that a tax based on
income is predicated on a concept of income less allowable expenses incurred to
generate and earn that income. That said, a tax structure need not include all
income statement accounts in order to be considered an income tax. For example,
a tax on a subset of the income statement, such as a tax on net investment income
(i.e., investment income less investment-related expenses), would also appear to
be a tax on income since it employs a net income concept. In general, practice has
been that “taxes based on income” could apply to tax structures even if revenues
or receipts are reduced by only one category of expense.
New guidance
The FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes,
in November 2015. To simplify the presentation of deferred income taxes, this
ASU requires deferred tax assets and liabilities to be classified as noncurrent in a
classified balance sheet. These amendments apply to all entities that present a
classified balance sheet. This guidance is effective for public business entities for
annual periods beginning after December 15, 2016 and interim periods within
those annual periods. For all other entities, the guidance is effective for annual
periods beginning after December 15, 2017 and interim periods within annual
16-2 PwC
Income taxes
periods beginning after December 15, 2018. Earlier application is permitted for
all entities as of the beginning of an interim or annual reporting period, and
adoption may be either prospective or retrospective.
The FASB issued ASU 2015-09, Improvements to Employee Share-Based

Payment Accounting, in March 2016. The guidance simplifies several aspects of
the accounting for share-based payment transactions, including the accounting
for the related income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows. Specifically as it
relates to income taxes, the new model requires that all of the tax related to
share-based payments be recorded in earnings at settlement (or expiration).
This guidance is effective for public business entities for annual periods
beginning after December 15, 2016, and interim periods within those annual
periods. For all other entities, the guidance is effective for annual periods
beginning after December 15, 2017, and interim periods within annual periods
beginning after December 15, 2018. Earlier application is permitted for all
entities as long as all amendments are adopted at the same time. The transition
provisions vary for each amendment.
As of the date of publication, the FASB has an active project related to income tax
publication are therefore encouraged to monitor the status of the project, and if
disclosure.
16.3 Balance sheet presentation of deferred tax

accounts
Deferred tax assets and liabilities are a function of temporary differences between
the reporting entity’s accounting and tax carrying value, and the enacted current
and anticipated income tax rate. A deferred tax asset on a reporting entity’s
balance sheet reflects the fact that the reporting entity will pay less income tax in
the future because of a transaction that took place in the current period. Deferred
tax assets can arise due to expenses being recorded for book accounting purposes
prior to the point at which they are allowed to be deducted for tax purposes, or
because income is recognized for tax purposes prior to the recognition for book
accounting. They can also arise due to tax attributes such as net operating losses
and tax credit carryovers.
A deferred tax liability reflects the fact that the reporting entity will pay more
income tax in the future because of a transaction that took place during the
current period. Deferred tax liabilities can arise when income is recorded for
book accounting purposes prior to the point at which it is recorded for tax
purposes. Alternatively, they can arise when expenses are deducted for tax
purposes prior to their recognition for book accounting.
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Income taxes
Deferred tax balances often result from temporary differences that relate to a
particular asset or liability. A temporary difference is related to an asset or
liability if reduction of the asset or liability causes the temporary difference to
reverse. A “reduction” includes amortization, sale, or other realization of an asset
and amortization, payment, or other satisfaction of a liability.
Reporting entities must determine the appropriate classification of deferred tax

accounts on the balance sheet. Specific guidance includes ASC 740-10-45-4
through ASC 740-10-45-10.
16.3.1 Principles of balance sheet classification — before adoption of

ASU 2015-17
Reporting entities should show deferred tax assets and liabilities separately from
income taxes payable or receivable on the balance sheet. Deferred tax assets and
liabilities must be classified as current or noncurrent if presenting a classified
balance sheet. They should receive the same classification as the financial
statement asset or liability that gave rise to the deferred tax asset or liability.
For classification purposes, deferred tax assets and liabilities related to

temporary differences of financial statement assets and liabilities do not consider
when a temporary difference is expected to reverse. For example, temporary
differences related to inventory and vacation accruals should be classified as
current because these balances are current in the financial statements. Likewise,
the entire temporary difference related to property, plant, and equipment should
be classified as noncurrent. This presentation mirrors the classification of the
underlying asset on the financial statements and ignores the fact that a portion of
the temporary difference may reverse in the current year as a result of
depreciation.
Deferred tax balances can also arise from temporary differences that are not
related to financial statement assets and liabilities. Common examples include:
□ Operating loss or tax credit carryforwards
□ Organizational costs expensed for financial reporting, but deferred for tax
return purposes
□ Long-term contracts accounted for using the percentage-of-completion

method for financial reporting purposes, but using the completed contract
method for tax purposes
□ Unremitted earnings of a foreign subsidiary that are not considered

indefinitely reinvested
These types of deferred tax assets and liabilities should be classified in the
balance sheet based on their expected reversal date (i.e., the year in which the
temporary difference reversal or carryforward is expected to affect the amount of
taxes payable or refundable). If a deduction or carryforward is expected to expire
unused, it should be classified as noncurrent. In certain instances, there could be
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both a current and noncurrent portion related to a temporary difference that

arises from something other than a financial statement asset or liability (e.g., a
tax credit or net operating loss where a portion will be used in one year and the
balance over a longer period).
16.3.2 Principles of balance sheet classification — after adoption of

ASU 2015-17
Reporting entities should present deferred tax assets and liabilities separate from
income taxes payable or receivable on the balance sheet. Deferred tax assets and
liabilities, along with any related valuation allowance, must be classified as
noncurrent if presenting a classified balance sheet.
A reporting entity can only offset within a jurisdiction–that is, reporting entities
are prohibited from offsetting deferred tax liabilities from one jurisdiction
against deferred tax assets of another jurisdiction. As a result, each jurisdiction
will have one net noncurrent deferred tax asset or liability.
16.3.3 Balance sheet classification of valuation allowances — before

Reporting entities are required to record a valuation allowance to reduce the

measurement of deferred tax assets when it is more likely than not that such
assets will not be realized. When reporting entities have recorded valuation
allowances against net deferred tax assets and carryforwards, they must
determine the appropriate classification of the valuation allowance.
ASC 740-10-45-5
The valuation allowance for a particular tax jurisdiction shall be allocated
between current and noncurrent deferred tax assets for that tax jurisdiction on a
pro rata basis.
The pro rata allocation is performed on a gross basis (i.e., before the netting of
deferred tax assets and deferred tax liabilities). This often differs from an
allocation based on specific identification of the deferred tax assets and
carryforwards, and can produce unusual or unexpected results. For example, a
reporting entity may require a valuation allowance for particular deductible
differences or carryforwards for which the deferred tax assets are classified as
noncurrent. Despite this, the valuation allowance is not allocated to the
specifically identified noncurrent deferred tax assets. Instead, a portion of the
valuation allowance is allocated on a pro rata basis to any current deferred tax
assets.
An unusual outcome could also result if a reporting entity records a valuation

allowance to reserve its entire net deferred tax asset. The following example
illustrates the pro rata allocation of the valuation allowance.
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Income taxes
EXAMPLE 16-1
Pro rata allocation of a valuation allowance
FSP Corp has current deferred tax assets of $100, noncurrent deferred tax assets
of $200, current deferred tax liabilities of $200, and noncurrent deferred tax
liabilities of $40. All of FSP Corp’s tax assets and liabilities are within one tax
jurisdiction. This results in a net deferred tax asset of $60 prior to consideration
of the need for a valuation allowance. FSP Corp’s taxable temporary differences
are expected to reverse in a similar manner as its deductible temporary
differences and, therefore, assure the realization of its deferred tax assets to the
extent of the deferred tax liabilities. With respect to its net deferred tax asset, in
light of significant negative evidence, including a three-year cumulative loss, FSP
Corp has recorded a valuation allowance of $60 to reduce its net deferred tax
asset to zero.
How should FSP Corp classify its valuation allowance?
Analysis
FSP Corp should allocate its valuation allowance to its current and noncurrent
deferred tax assets on a pro rata basis. As one-third of its gross deferred tax
assets are current and two-thirds are noncurrent, this will result in one-third of
the valuation allowance, or $20, being allocated to current deferred tax assets
and two-thirds of the valuation allowance, or $40, being allocated to noncurrent
deferred tax assets. As a result, FSP Corp should present on its balance sheet a
net current deferred tax liability of $120 and a net noncurrent deferred tax asset
of $120.
The following table summarizes the supporting computations and amounts

presented on the balance sheet:
Total Allocated
valuation valuation
Amount Percentage allowance allowance
Current
deferred tax
asset $100 33% $60 $20
Noncurrent
deferred tax
asset 200 67% 60 40
Total
deferred tax
asset $300 $60
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Current Noncurrent
Deferred tax asset $100 $200
Valuation allowance (20) (40)
Net deferred tax asset $80 $160
Deferred tax liability 200 40
Amounts presented on the balance sheet
Net current deferred tax liability $120
Net noncurrent deferred tax asset $120
Note: If FSP Corp operated in multiple jurisdictions, a separate allocation would

be required for each jurisdiction.
16.3.4 Balance sheet classification of valuation allowances — after

Reporting entities are required to record a valuation allowance to reduce the

measurement of deferred tax assets when it is more likely than not that such
assets will not be realized. The valuation allowance should be reflected as a
reduction of the noncurrent deferred tax asset.
16.3.5 Offsetting and multiple jurisdictions — before adoption of

ASU 2015-17
Reporting entities are required to offset all current deferred tax assets and
liabilities within a single tax jurisdiction and present them as a single amount.
Similarly, they should also offset all noncurrent deferred tax assets and liabilities
within a single tax jurisdiction and present them as a single amount. Current and
noncurrent deferred tax assets and liabilities of different tax-paying entities or
different jurisdictions cannot be netted. A classification exercise must be
completed for each applicable tax-paying entity in each tax jurisdiction.
Accordingly, in a single balance sheet, deferred taxes may appear under four
different classifications: current asset, current liability, noncurrent asset, and
noncurrent liability.
The following example illustrates the classification of deferred tax balances

between current and noncurrent.
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EXAMPLE 16-2
Balance sheet classification of deferred tax accounts for each tax-paying

component within each tax jurisdiction
FSP Corp carries out its operations through two separate tax-paying components
(Subsidiary A and Subsidiary B) within two tax jurisdictions (Germany and
Japan). There are no intercompany transactions between the two subsidiaries
and no ability to file consolidated tax returns. Subsidiary A and Subsidiary B have
the following deferred tax assets and liabilities at year-end:
Germany Japan
Sub A Sub B Sub A Sub B
Current deferred tax assets $50 $130 $75 $90
Noncurrent deferred tax assets — 95 45 80
Total deferred tax assets 50 225 120 170
Current deferred tax liabilities $(90) $(30) $(55) $(130)
Noncurrent deferred tax (60) (110) (20) (60)

liabilities
Total deferred tax liabilities (150) (140) (75) (190)
How should FSP Corp classify its deferred tax assets and liabilities?
Analysis
For purposes of presenting FSP Corp’s consolidated balance sheet, Subsidiary A’s
current deferred tax assets and liabilities for Germany should be offset and
presented as a single net liability ($40). Similarly, Subsidiary A’s noncurrent
deferred tax assets and liabilities for Germany should be offset and presented as a
single net liability ($60). Separate analyses should be performed for Subsidiary
A’s deferred tax assets and liabilities in Japan, Subsidiary B’s deferred tax assets
and liabilities in Germany, and Subsidiary B’s deferred tax assets and liabilities in
Japan. As a result, FSP Corp should present its deferred tax assets and liabilities
under four different classifications in its year-end consolidated balance sheet:
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Germany Japan
Sub A Sub B Sub A Sub B Consolidated
Net current
deferred tax
assets $— $100 $20 $— $120
Net
noncurrent
deferred tax
assets — — 25 20 45
Net current
deferred tax
liabilities (40) — — (40) (80)
Net
noncurrent
deferred tax
liabilities (60) (15) — — (75)
Question 16-1
A consolidated reporting entity operates in a jurisdiction that does not allow tax
consolidation. However, the jurisdiction does have annual elective group relief
provisions for affiliated members, where a member with a loss for tax purposes
may shift its loss to an affiliate that can use the loss to offset taxable income. Is
netting of the deferred tax balances permitted for balance sheet presentation in
the consolidated financial statements?
PwC response
A reporting entity must first determine whether the affiliated members are
considered a single tax-paying component. We believe that the determining
factors for this classification are (1) whether the taxing authorities can pursue one
subsidiary for the other’s income tax liabilities, and (2) whether the election
allows for offset in all cases (e.g., whether it allows carryback or carryforward of
losses among affiliated members). If the taxing authority can pursue one
subsidiary for the other’s income tax liabilities and if offset is unconditionally
available, the affiliated members would be considered, in substance, a single
tax-paying component, which would make offsetting appropriate. However, if
both of these conditions are not met, the affiliated members should be considered
separate tax-paying components. As such, the deferred tax balances should not
be offset, irrespective of whether the reporting entity plans to avail itself of the
group relief provisions.
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16.3.6 Offsetting and multiple jurisdictions — after adoption of ASU 2015-17
Reporting entities are required to offset all deferred tax assets and liabilities
within a single tax jurisdiction and present them as a single amount. Deferred tax
assets and liabilities of different tax-paying entities or different jurisdictions
cannot be netted. An asset vs. liability classification exercise must be completed
for each applicable tax-paying entity in each tax jurisdiction. Accordingly, in a
single balance sheet, deferred taxes may appear under two different
classifications: noncurrent asset and noncurrent liability.
16.4 Disclosures related to balance sheet tax

accounts
ASC 740-10-50-2 through 50-8 and ASC 740-30-50-2 require disclosures related
to balance sheet deferred tax accounts, which are discussed in the following
subsections.
16.4.1 Gross deferred tax assets and gross deferred tax liabilities
Reporting entities are required to disclose total deferred tax assets and total
deferred tax liabilities for each period a balance sheet is presented. Balances
disclosed should exclude deferred tax charges related to intercompany
transactions, and deferred tax credits arising from leveraged leases. Taxes paid
on an intercompany transaction accounted for as an exception to the general
principles under ASC 740-10-25-3(e) are different from deferred tax assets
recognized. The prepaid tax from an intercompany transfer represents an asset
resulting from a past event for which the tax effect is simply deferred. Refer to
TX 2 for more information on taxes related to intercompany transfers.
16.4.2 Valuation allowance and the net change in the valuation allowance
Reporting entities must disclose the total valuation allowance and the net change
in the valuation allowance for each period a balance sheet is presented.
Judgment about future taxable income often enters into the determination of the
valuation allowance. In such cases, management should consider disclosing the
extent to which realization of the tax assets depends on such future taxable
income. In some cases, SEC comment letters have indicated that certain
incremental disclosures with respect to deferred tax assets are required. The SEC
staff has emphasized the need to provide disclosures regarding the relevant
positive and negative factors considered when assessing the realization of
deferred tax assets, such as sustained pretax profitability. The SEC staff also
expects ample forewarning regarding any future valuation allowance release.
Refer to FSP 24 for discussion of disclosure requirements associated with
significant estimates.
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Question 16-2
Deferred tax assets and related valuation allowances are generally required to be
presented gross in the footnotes. Is it appropriate to write off deferred assets
when realization is remote?
PwC response
In certain limited situations, it may be appropriate to write off a deferred tax

asset against the related valuation allowance. The effect is to reduce the amounts
of disclosed gross deferred tax assets and valuation allowance. A write off might
be appropriate, for example, if a reporting entity has a loss carryforward that has
not yet expired in a tax jurisdiction where it no longer conducts business. There
are certain carryforwards (e.g., Alternative Minimum Tax (AMT) and foreign
tax-credit carryforwards) where the likelihood of utilization is extremely remote
because of a reporting entity’s particular facts and circumstances. In those
instances, we believe it is acceptable to write off the deferred tax asset against the
valuation allowance, thereby eliminating the need to disclose the gross amounts.
If limitations caused by a change in ownership (e.g., IRC Section 382) preclude

the use of a portion of a carryforward or a deductible difference, writing off the
deferred tax asset against the valuation allowance is considered appropriate. If
carryforwards and built-in losses are subject to the same aggregate limitation, the
estimate of the “permanent” loss of tax benefits should be reflected as an
unallocated reduction of gross deferred tax assets.
As with many other areas of ASC 740, determining when a direct write off of the
deferred tax asset is appropriate (rather than recording a valuation allowance)
requires judgment and careful consideration of the relevant facts and
circumstances.
The tax effect of each type of temporary difference and carryforward that gives
rise to deferred tax assets and liabilities
Disclosure requirements regarding temporary differences and carryforward

information differ between public entities (as defined by ASC 740) and private
companies. Public entities must disclose the approximate tax effect of each type
of significant temporary difference and tax carryforward that comprises deferred
tax assets and liabilities (before allocation of valuation allowances). ASC 740 does
not impose a “bright line” for determining which types of temporary differences
are significant and, therefore, this assessment requires judgment. As a practical
benchmark, we believe that a particular type of temporary difference should be
considered significant if its deferred tax effects equal 5% or more of either total
deferred tax assets (before valuation allowance) or total deferred tax liabilities,
whichever is greater.
A private company is not required to provide numeric information regarding the

types of temporary differences and carryforwards that give rise to significant
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Income taxes
deferred tax assets and liabilities. However, a private company must disclose the
nature of significant items.
16.4.3 The amounts and expiration dates of loss and tax credit
carryforwards
Reporting entities should disclose the nature and potential effects of any tax law
provision that might limit the availability or utilization of loss or tax credit
carryforward amounts (e.g., limitations caused by changes in ownership).
In the United States, for both regular tax and AMT, there is an annual limitation
under IRC Section 382 on the use of loss and other carryforwards, and of certain
built-in losses. The annual limitation exists if there has been a cumulative change
in ownership of more than 50 percent within a three-year period.
Triggering the annual limitation could result in a permanent loss of potential tax
benefits (e.g., when an entire carryforward cannot be utilized prior to its
expiration because of the annual limitation). In this situation, the reporting entity
should reduce the recorded deferred tax asset and the amount of carryforward
disclosed. It may also be appropriate for reporting entities to disclose the fact that
an annual limitation exists so that financial statement users understand the
timeframe over which carryforwards can be used and the effect the limitation has
on cash taxes each year.
The rules for computing a change in ownership are complex. It is possible for the
limitation to apply to an entity that is not an acquired entity in a business
combination. The limitation could be triggered, for example, by exercises of stock
options, conversions of convertible debt or preferred stock, new common stock
offerings, or treasury share purchases.
Unless the prospect of such a change in ownership is remote, we recommend

disclosing the potential limitation in all circumstances by means of a brief
statement such as: “If certain substantial changes in the entity’s ownership occur,
there would be an annual limitation on the amount of the carryforward(s) that
can be utilized.”
If there are circumstances that make the change in ownership reasonably

possible in the foreseeable future, a general description of those circumstances
may be warranted. More specific disclosures concerning the limitation should be
made if the triggering event is probable. Some examples of circumstances that
might warrant such disclosure include a planned public offering or outstanding
convertible debt with an exercise price that is below market.
Regulated investment companies may need to consider additional disclosures

prescribed by ASC 946-740-55-2.
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16.4.4 Temporary differences for which a deferred tax liability has not been
recognized
In certain situations, reporting entities might not record a deferred tax liability
for specific temporary differences. This can occur, for example, when the
reporting entity asserts it will indefinitely reinvest the earnings of foreign
subsidiaries/corporate joint ventures back into those foreign entities and will not
repatriate the earnings back to the parent. In these situations, the following
disclosures are required:
□ A description of the types of temporary differences and the types of events

that would cause those differences to become taxable
□ The cumulative amount of each type of temporary difference
□ Temporary differences related to investments in foreign subsidiaries and

foreign corporate joint ventures. This disclosure should include, but is not
limited to, unremitted earnings and cumulative translation adjustments, and
the amount of unrecognized deferred tax liability if it is determined that
disclosure of an amount is practicable, or a statement that a determination is
not practicable. SEC staff comment letters have focused on required
disclosures in this area. In certain instances, they have asked reporting
entities to explain and disclose specifically why an estimate is not practicable
if not provided.
□ The amount of any unrecognized deferred tax liability for each type of
temporary difference (e.g., unremitted domestic corporate joint venture
earnings prior to the 1993 effective date of ASC 740), excluding temporary
differences related to investments in foreign subsidiaries and foreign
corporate joint ventures.
No disclosure is required for unremitted earnings of domestic subsidiaries if such

earnings are expected to be recovered in a tax-free manner. In addition, earnings
that arose prior to the mandatory effective date of ASC 740, which would have
been a temporary difference exception “grandfathered” by the standard, do not
require disclosure.
For foreign subsidiaries and corporate joint ventures, the disclosures apply to
unremitted earnings and, if applicable, to the entire excess book-over-tax outside
basis. For more information on unremitted earnings and outside basis
differences, see TX 11.
If it is at least reasonably possible that within one year there will be a change in
either a reporting entity’s indefinite reversal assertion or in the expected method
of recovery of the investment in a domestic subsidiary, disclosure under the risks
and uncertainties guidance of ASC 275-10-50-9 may be required. See FSP 24.
PwC 16-13
Income taxes
In comment letters, the SEC staff has asked reporting entities to describe the
types of events that would trigger a tax on foreign earnings. Typical events that
could trigger a tax might include:
□ US acquisitions or other investments, stock buybacks, and shareholder

dividends to be funded by cash distributions or loans from foreign
subsidiaries
□ Certain foreign corporate restructurings or reorganizations
□ A decision to exit a particular business or jurisdiction leading to a sale of

stock to a third party
□ Anticipated tax law changes that are considered unfavorable and would result
in higher taxes on repatriations that occur after the change in tax law goes
into effect
The SEC staff also considers the consistency between a reporting entity’s MD&A
disclosures of liquidity and capital resources and its indefinite reinvestment
assertions related to foreign earnings. For example, a reporting entity’s MD&A
might describe a business situation that necessitates significant cash, but the
entity does not appear to have sufficient domestic cash available. The reporting
entity’s foreign subsidiaries may have sufficient cash to fund the parent, but the
parent has asserted indefinite reinvestment of those funds. Such a situation may
raise a question of whether it is still reasonable to assert that the parent will not
repatriate some of the earnings generated by the foreign subsidiaries. The staff’s
comments emphasize the need to provide accurate, transparent, and
plain-English disclosures of significant assertions and estimates, including those
associated with undistributed foreign earnings.
16.4.5 Other required disclosures
There are additional required balance sheet disclosures for deferred tax accounts,
which include:
□ The nature and effect of any significant matters affecting comparability of

information for all periods presented (unless otherwise evident from other
disclosures)
□ Any portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be credited directly to contributed
capital
□ The amount of income tax expense or benefit allocated to each component of

other comprehensive income, including reclassification adjustments, either
on the face of the statements in which those components are displayed or in
footnotes, as required by ASC 220-10-45-12. See FSP 4.4.1 for further
discussion of these presentation options.
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Total income tax expense or benefit for the year generally equals the sum of total
income tax currently payable or refundable (i.e., the amount calculated in the
income tax return) and the total deferred tax expense or benefit. This section
discusses the appropriate presentation of income tax expense or benefit items in
16.5.1 Deferred tax expense or benefit
The total deferred tax expense or benefit for the year generally equals the change
between the beginning-of-year and end-of-year balances of deferred tax accounts
on the balance sheet (i.e., assets, liabilities, and valuation allowance). In certain
circumstances, however, the change in deferred tax balances is reflected in other
accounts. For example, some adjustments to deferred tax balances are recorded
through other comprehensive income, such as balances related to pensions or
available-for-sale investments. Other circumstances are described below.
When a business combination has occurred during the year, deferred tax
liabilities and assets, net of the valuation allowance, are recorded at the date of
acquisition as part of the purchase price allocation. When a single asset is
purchased, the tax effect is generally recorded as an adjustment to the book
carrying amount of the related asset.
Adjustments to uncertain tax positions made subsequent to the acquisition date

of a business combination are recognized in earnings, unless they qualify as
measurement period adjustments. See TX 10.5.5 for a discussion of evaluating
whether an adjustment within the measurement period relates to circumstances
that were included in the acquirer’s assessment at the date of the acquisition.
Other changes in the deferred tax balances, including those resulting from
foreign currency exchange rate changes, may not be classified as a tax expense or
benefit. When the US dollar is the functional currency, revaluations of foreign
deferred tax balances are reported as transaction gains and losses or, if
considered more useful, as deferred tax benefit or expense, as described in
ASC 830-740-45-1. When the foreign currency is the functional currency,
revaluations of foreign deferred tax balances are included in cumulative
translation adjustments. The revaluations of the deferred tax balances are not
identified separately from revaluations of other assets and liabilities.
16.5.2 Interest and penalties
In accordance with ASC 740-10-45-25, the decision as to whether to classify

interest as a component of income tax expense or interest expense is an
accounting policy election. Penalties are also allowed to be classified as a
component of income tax expense or another expense classification (e.g., selling,
general & administrative expense) depending on the reporting entity’s accounting
policy.
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Reporting entities are required to disclose their policy and the amount of interest
and penalties charged to expense in each period, as well as the amounts accrued
on the balance sheet for interest and penalties. Any change in the classification of
interest or penalties is a change in accounting principle subject to the
requirements of ASC 250, Accounting Changes and Error Corrections, and
therefore must be a change to a preferable accounting method.
Although ASC 740 does not provide guidance on the balance sheet classification
of accrued interest and penalties, we believe that it should be consistent with the
income statement classification. If the reporting entity’s accounting policy
election is to classify interest and penalties as “above the line” income statement
items (i.e., included in pretax income or loss), the accrued balance sheet amounts
should not be included with the balance sheet tax accounts. Instead, they should
be included with accrued interest and/or other accrued expense.
ASC 740 is also silent on the classification of interest income received as it relates
to income taxes. We believe that the classification of interest income should be
consistent with the reporting entity’s treatment of interest expense (i.e., either as
a component of tax expense or as a pretax income line item).
Questions may arise as to whether the disclosure of total tax-related interest

should be net of any interest income and of any potential tax benefit associated
with an interest deduction. We believe that interest expense should be disclosed
on a gross basis. However, if a reporting entity also wishes to disclose the amount
of interest income it recorded in connection with tax overpayments, and any tax
benefits generated from interest deductions, it would not be precluded from
doing so.
16.5.3 Professional fees
Reporting entities often incur professional fees working with attorneys or

accountants in their efforts to minimize income tax payable (e.g., implementing
tax strategies, resolving tax contingencies, or defending tax strategies). These fees
do not represent payments to taxing authorities and therefore should not be
classified in the income statement as income tax expense or benefit.
16.5.4 Change in tax laws, rates, or status
Reporting entities should include adjustments to deferred tax balances related to

enacted changes in tax laws, tax rates, or tax status in income from continuing
operations, regardless of whether the deferred tax balances originated from
charges or credits to another category of income (e.g., discontinued operations or
other comprehensive income).
Occasionally, rate changes are enacted with retroactive effects. ASC 740-10-30-26
specifies that the current and deferred tax effects of items not included in income
from continuing operations that arise during the current year, but before the date
of enactment, should be adjusted to reflect the rate change as of the enactment
date. The adjustment should be reflected in income from continuing operations.
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Example 16-3 illustrates the application of a change in tax law and how this
presentation is affected by intraperiod allocation.
EXAMPLE 16-3
Presentation of the effects of a tax law change when prior year results are restated
for discontinued operations
In the prior year, a provincial tax law was enacted in Germany, which resulted in
a charge to FSP Corp’s consolidated financial statements. This effect was
appropriately recorded in tax expense from continuing operations in the financial
statements for that fiscal year. In the current year, FSP Corp agrees to sell all of
its operations in Germany and recasts the German operations as a discontinued
operation. The results from continuing operations no longer include any
operations from Germany.
Should the effects of the tax law change that were originally recorded in
continuing operations also be reclassified to discontinued operations?
Analysis
No. The effect of the change in tax law should be included in income from
continuing operations for the period that includes the enactment date. Therefore,
the amount of taxes associated with the discontinued operation should be the
difference between the taxes previously reported in continuing operations and
the amount of taxes allocated to continuing operations after the decision to
dispose of the German operations occurred, which would still include the impact
of the tax law change.
Subsequent to disposal, FSP Corp will have no operations in Germany. There are
no provisions in ASC 740 that allow FSP Corp to “backwards trace” the effects of
the tax law change and reclassify them as discontinued operations. Therefore, the
effect of the tax law change on deferred tax assets and liabilities should remain in
continuing operations.
Refer to TX 12 for more information on intraperiod tax allocations.
Question 16-3
If an election to change a reporting entity’s tax status is approved by the tax
authority (or filed if approval is not necessary) after the reporting date but before
the issuance of the financial statements, should the effect of the change in tax
status be recognized in the financial statements?
PwC response
No, the effect of the change in tax status should not be recognized in the financial
statements because this is considered a nonrecognized subsequent event.
However, ASC 740 does require a reporting entity to disclose (1) the change in
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the entity’s tax status for the following year, and (2) the effects of the change, if
material.
16.5.5 Income taxes and net income attributable to noncontrolling interests
The financial statement amounts reported for income tax expense and net
income attributable to noncontrolling interest differ based on whether the
subsidiary is a C-corporation or a partnership. The tax status of each type of
entity causes differences in the amounts a parent would report in its consolidated
income tax provision and net income attributable to noncontrolling interests.
A C-corporation is generally a taxable entity and is responsible for the tax

consequences of transactions by the corporation. Therefore, a parent that
consolidates a C-corporation includes the income taxes of the C-corporation,
including the income taxes attributable to the noncontrolling interest, in its
consolidated income tax provision. Net income attributable to the noncontrolling
interest should equal the noncontrolling interest’s share of the C-corporation’s
net income, which would include a provision for income taxes.
The legal liability for income taxes of a partnership generally does not accrue to
the partnership itself. Instead, the investors are responsible for income taxes on
their share of the partnership’s income. Therefore, a parent that consolidates a
partnership only reports income taxes on its share of the partnership’s income in
its consolidated income tax provision. This results in a reconciling item in the
parent’s income tax rate reconciliation that should be disclosed, if material. Net
income attributable to the noncontrolling interest should equal the
noncontrolling interest’s share of the partnership’s income, which would not
include a provision for income taxes.
The guidance relating to partnerships is applicable to other pass-through entities,

such as limited liability companies (if they elect to be taxed as a partnership) and
subchapter S-corporations. Note that limited liability companies should follow
the guidance for C-corporations if they elect to be taxed as such.
Example 16-4 illustrates the presentation of income tax and net income
attributable to noncontrolling interests when the subsidiary is a C-Corporation or
partnership.
EXAMPLE 16-4
Presentation of income tax and net income attributable to noncontrolling interest
FSP Corp has a 70% ownership interest in Subsidiary B. The other 30% is owned
by an unrelated party. FSP Corp consolidates the financial statements of
Subsidiary B. FSP Corp has pretax income from continuing operations of $400
for the year ended December 31, 20X4. This amount includes $100 of pretax
income from continuing operations from Subsidiary B. FSP Corp’s tax rate for the
period is 40%. For purposes of this example, the tax effects of any outside basis
differences have been ignored, and Subsidiary B is assumed to have no
subsidiaries of its own.
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How should income tax expense and net income be determined and presented in
the consolidated financial statements?
Analysis
Assuming Subsidiary B is a C-corporation with a 40% tax rate, income tax

expense and net income would be calculated and presented as follows:
Income from continuing operations, before tax $400
Income tax expense 1601
Net income 240
Less: Net income attributable to noncontrolling interest 182
Net income attributable to FSP Corp $222
1 Calculated as $400 x 40%

2 Calculated as ($100 – (100 x 40%)) x 30%
Assuming Subsidiary B is a partnership, income tax expense and net income

would be calculated and presented as follows:
Income from continuing operations, before tax $400
Income tax expense 1483
Net income 252
Less: Net income attributable to noncontrolling interest 304
Net income attributable to FSP Corp $222
3 Calculated as ($400 – (100 x 30%)) x 40%

4 Calculated as $100 x 30%
If the subsidiary is a partnership, income attributable to noncontrolling interest

should be disclosed as a reconciling item in FSP Corp’s tax rate reconciliation, if
material.
16.6 Disclosures related to income statement

amounts
ASC 740-10-50-9 through 50-14 requires certain disclosures about income
statement amounts related to income taxes. For SEC registrants, S-X 4-08(h)
requires certain incremental disclosures.
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16.6.1 Amount of income tax expense or benefit
Reporting entities are required to disclose the amount of income tax expense or
benefit allocated to continuing operations. In practice, this is frequently
presented on the face of the income statement. In addition, reporting entities
must also disclose amounts separately allocated to other categories of income in
accordance with the intraperiod tax allocation provisions, such as discontinued
operations and a cumulative effect of a change in accounting principle.
16.6.2 Effective tax rate reconciliation
Reporting entities are required to provide a tax rate reconciliation that reconciles
income tax expense attributable to continuing operations to the statutory Federal
income tax rate applied to pretax income from continuing operations. Foreign
reporting entities should use the income tax rate in the entity’s country of
domicile. When a rate other than the US Federal corporate income tax rate is
used, the rate and basis for using that rate should be disclosed.
Reporting entities can present the reconciliation using either dollar amounts or
percentages. The reconciliation should include the estimated amount and the
nature of each significant reconciling item.
Common rate reconciling items include:
□ Change in the valuation allowance for deductible temporary differences or
carryforwards (adjusted for expirations of carryforwards or their use in the
current year)
□ Use of the current year’s permanent differences or tax credits in the

calculation of taxes payable or deferred taxes
□ The effect on beginning deferred tax balances of rate changes enacted in the
current year and the effect on temporary differences originating in the
current year if expected to reverse in a year for which a different rate has
been enacted
□ Unremitted foreign earnings that are reinvested indefinitely
□ Foreign tax rate differential related to tax holidays or preferential rates
□ When graduated rates are a significant factor, changes to the prior year’s
assessment of the expected future level of annual taxable income and the
difference between the average rate at which deferred taxes are provided, and
the incremental effect implicit in the reconciliation
□ Change in unrecognized tax benefits from uncertain tax positions 1
□ Dividends-received deduction
□ Stock-based compensation shortfalls2
1 We believe uncertain tax positions should be separately identified, if significant.

2 Upon adoption of ASU 2016-09, this will no longer be a reconciling item.
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□ Goodwill impairments or tax amortization
□ Foreign currency translation and transactions
Although ASC 740 does not define what “significant” means with regard to the
rate reconciliation, S-X 4-08(h) does provide guidance. It requires disclosure of
individual reconciling items that are more than 5% of the amount computed by
multiplying pretax income by the statutory tax rate (e.g., for a U.S.-based entity
subject to the 35% statutory tax rate, any item that increases or decreases the tax
rate by 1.75% or more). Reporting entities should ensure that items are not
disaggregated to avoid this requirement, that reconciling items below this
threshold are displayed in appropriate categories, and that groupings are
consistent from year to year.
In addition, the SEC staff has requested transparent disclosure in situations
where an SEC registrant generates a significant amount of profit from
jurisdictions with very low tax rates. They have also requested disclosures
highlighting any expected changes in the future mix of profit by jurisdiction or
expected changes in a jurisdiction’s tax rate.
16.6.3 Significant components of income tax expense

Reporting entities are required to disclose significant components of income tax
expense attributable to continuing operations.
ASC 740-10-50-9
The significant components of income tax expense attributable to continuing
operations for each year presented shall be disclosed in the financial statements
or notes thereto. Those components would include, for example:
a. Current tax expense (or benefit)
b. Deferred tax expense (or benefit) (exclusive of the effects of other

components listed below)
c. Investment tax credits
d. Government grants (to the extent recognized as a reduction of income tax

expense)
e. The benefits of operating loss carryforwards
f. Tax expense that results from allocating certain tax benefits directly to
contributed capital
g. Adjustments of a deferred tax liability or asset for enacted changes in tax laws
or rates or a change in the tax status of the entity
h. Adjustments of the beginning-of-the-year balance of a valuation allowance

because of a change in circumstances that causes a change in judgment about
the realizability of the related deferred tax asset in future years. For example,
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any acquisition-date income tax benefits or expenses recognized from

changes in the acquirer’s valuation allowance for its previously existing
deferred tax assets as a result of a business combination (see paragraph
805-740-30-3).
The sum of the amounts disclosed for the components of tax expense should
equal the amount of tax expense that is reported in income from continuing
operations. Insignificant components can be grouped in an “other” category.
These items are typically discussed in a narrative disclosure.
ASC 740-10-55-212 through 55-216 provides three examples that illustrate this
disclosure requirement.
16.6.3.1 Investment tax credits
ASC 740-10-50-20 requires disclosures detailing the method of accounting

(either the deferral method or the flow-through method) used to account for
investment tax credits and the amounts involved, if material. Without reference
to materiality, the US tax law also requires that the method of accounting for the
investment credit be disclosed in any filing with a federal agency in which the
credit is used, including the SEC.
Generally accepted accounting principles in certain countries outside of the

United States may allow specific tax credits (e.g., research and experimentation
credits) to be reflected outside of income tax expense and presented on a net
basis against the expense to which they relate. However, we generally do not
believe that this presentation complies with US GAAP. Rather, reporting entities
should present income tax credits as a component of income tax expense.
16.6.3.2 Adjustments of a deferred tax liability or asset for enacted changes

in tax laws or rates, or a change in the tax status of the entity
As discussed in FSP 16.5.4, the effects of changes in tax laws or rates are
recognized in income from continuing operations in the period that includes the
enactment date. The tax effect of the enacted tax rates on current and deferred
tax assets and liabilities should be determined at the date of enactment using
temporary differences and currently taxable income existing as of the date of
enactment.
Changes in tax rates may be retroactive to the beginning of the current year. In
these instances, we believe it would generally be sufficient to disclose (1) the
effect of the rate change on beginning-of-year deferred tax balances, and (2) the
effect of the rate change on current and deferred taxes provided prior to the
enactment date. Both of these items should be considered in the rate
reconciliation. Other disclosures might also be sufficient. In any case, the
amount(s) disclosed should be clearly described.
If a reporting entity experiences a change in tax status (e.g., change from a

nontaxable partnership to a taxable corporation), the deferred tax effects of that
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change should be disclosed as a component of income tax expense attributable to

continuing operations. See TX 8.1 for discussion of changes in tax status.
16.6.4 Additional disclosures for SEC registrants
S-X 4-08(h) requires certain additional disclosures that are not specifically
required by ASC 740. They include:
□ Identifying the source of income (loss) before tax expense (benefit) as either
foreign or domestic
□ Separately stating for each major component of income tax expense

(i.e., current and deferred) the amounts applicable to US federal income
taxes, foreign income taxes, and other income taxes
In addition, SAB Topic 11.C, Tax Holidays, requires disclosure of tax holidays
from income taxes that the reporting entity has been granted for a specified
period, if the entity conducts business in a foreign jurisdiction. The disclosure
should include the aggregate dollar and per-share effects of the tax holiday, and
briefly describe the facts and circumstances, including the date on which the
special tax status will terminate.
These disclosure requirements apply not only to continuing operations, but also
to total pretax income and total tax expense. However, question 7 of SAB
Topic 6.I., Accounting Series Release 149—Improved Disclosure Of Income Tax
Expense, indicates that “overall” disclosures of the components of total income
tax expense (i.e., current versus deferred, and US federal versus foreign versus
other) are acceptable. In other words, it is not necessary to make such disclosures
separately with respect to each of the different categories (continuing operations,
discontinued operations, other comprehensive income, etc.) in which income tax
expense is reported.
Example 16-5 provides an example of the disclosure required if a tax holiday has
been granted.
EXAMPLE 16-5
Disclosure of tax holidays
Germany grants FSP Corp a ten-year tax holiday beginning in 20X4. During the
holiday, FSP Corp will be 100% exempt from taxation for the first five years,
followed by five years at a reduced tax rate of 12.5%. The current statutory rate in
Germany is 25%.
What should FSP Corp disclose in its 20X4 financial statements?
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Income taxes
Analysis
FSP Corp should provide disclosure that is similar to the following to comply with
the SEC disclosure requirements:
“In 20X4, we were granted an income tax holiday for our manufacturing facility
in Germany. The tax holiday allows for tax-free operations through December 31,
20X9, followed by operations at a reduced income tax rate of 12.5% on the profits
generated through December 31, 20Y4, with a return to the full statutory rate of
25% for periods thereafter. As a result of the tax holiday in Germany, our net
income was higher by $2.0 million ($0.02 per share) for the year ended
December 31, 20X4.”
This type of disclosure should cover all income statement periods presented.
However, for purposes of this illustration, the example footnote only covers one
year.
16.7 Presentation and disclosure for uncertain

tax positions
Uncertain tax positions represent tax positions taken that are subject to
significant and varied interpretations of applicable tax law. ASC 740 is applicable
to all income tax positions that were included on previously filed tax returns, as
well as those that are expected to be included on returns that have not yet been
filed (e.g., amended returns or refund claims that have not yet been filed). The
timing of the filing of a tax return is irrelevant, as long as a tax position taken or
expected to be taken is filed or will be filed on an original or amended return.
16.7.1 Presentation of unrecognized tax benefits
ASC 740-10-45-11 indicates that the balance sheet classification of a liability for
an unrecognized tax benefit as current versus noncurrent is determined based on
the expected timing of cash payments, if any. That is, to the extent that cash
payments are anticipated within one year or the operating cycle, if longer, a
liability for an unrecognized tax benefit is classified as a current liability.
Otherwise, such amounts should be reflected as noncurrent liabilities.
Balance sheet classification should be based on management’s expectation of

future cash payments. For example, if $40 of a $100 liability for an unrecognized
tax benefit is expected to be paid within 12 months, only $40 should be classified
as a current liability; the remaining $60 should be classified as a noncurrent
liability. Similarly, if management expects that its liability for an unrecognized
tax benefit will reverse without cash consequences within 12 months
(e.g., because the statute of limitation will expire), the associated liability should
be classified as noncurrent because no cash payments are anticipated to settle the
liability.
The liability that an entity records for uncertain positions is not a component of
deferred taxes. Therefore, it is inappropriate to use a valuation allowance to
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recognize a liability for an unrecognized tax benefit. Rather, the liability must be
classified separate from other tax balances based on the expected timing of cash
payments to taxing authorities.
16.7.1.1 Presentation of unrecognized tax benefits when a carryforward

exists
ASC 740-10-45-10A and 45-10B clarify the financial statement presentation of an

unrecognized tax benefit when a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward exists. Unrecognized tax benefits should be
presented in the financial statements as a reduction to the deferred tax asset
related to an NOL carryforward, a similar tax loss, or a tax credit carryforward.
This presentation is not appropriate if:
□ the NOL, similar tax loss, or tax credit carryforward is not available at the
reporting date under the tax law of the applicable jurisdiction to settle any
additional income generated by disallowance of a tax position, or
□ the tax law does not require the entity to use, or the entity does not intend to
use, the NOL, similar tax loss, or tax credit carryforward to offset additional
income generated by disallowance of a tax position.
If either of these exceptions exist, the unrecognized tax benefit should be

presented as a liability and not netted against the deferred tax asset for an NOL,
similar tax loss, or tax credit carryforward.
The example below illustrates how the unrecognized tax benefit should be
considered when measuring the valuation allowance necessary to reduce deferred
tax assets to their realizable value.
EXAMPLE 16-6
Netting unrecognized tax benefits with NOL/tax credit carryforwards
As of December 31, 20X7, Company A has $800 in NOL carryforwards. The

related DTAs are offset by a full valuation allowance as a result of significant
negative evidence.
In 20X8, Company A expects to report taxable income of $30 on its tax return.
This taxable income includes a $10 deduction that does not meet the
ASC 740-10-25 recognition threshold and therefore constitutes an unrecognized
tax benefit. Assume that the tax rate is 40% and that the assessment of the need
for a full valuation allowance has not changed as of December 31, 20X8.
Should Company A reduce the DTA for the NOLs carried forward from 20X7 on
its balance sheet for the unrecognized tax benefit recorded in 20X8?
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Analysis
Yes. The Company should present the NOL carryforwards net of the liability for
unrecognized tax benefit of $4 ($10 deduction x 40%). The $4 liability would be a
source of income for the purposes of assessing whether a valuation allowance is
necessary and would therefore reduce the valuation allowance required.
Journal entries are summarized as follows:
Journal Entry #1
Dr Deferred income tax expense $12

Cr DTA-NOL carryforward $12
Dr Valuation allowance on DTA $12

Cr Deferred income tax expense $12
To record the realization of the NOL carryforward and the release of the
valuation allowance due to 20X8 taxable income on tax return of $30
($30 × 40% = $12).
Journal Entry #2
Dr Income tax expense $4

Cr Liability for unrecognized tax benefit $4
To record the liability on the 20X8 unrecognized tax benefit of $10

($10 × 40% = $4).
Journal Entry #3
Dr Valuation allowance on DTA $4

Cr Deferred income tax benefit $4
To reverse the valuation allowance due to the existence of a liability for the
unrecognized tax benefit of $4, which can be considered as a source of taxable
income in the valuation allowance assessment.
Balance sheet reporting as of December 31, 20X8, is as follows:
DTA-NOL carryforward $(3041)
Valuation allowance $(304)
Net DTA 0
1 NOL at 12/31/X7 of $800 – 20X8 taxable income of $30 = $770; $770 × 40% = $308 – $4 (liability
for unrecognized tax benefit) = $304
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16.7.2 Disclosure requirements for uncertain tax positions
Uncertain tax position assessments often require judgment. Management can, at

times, be concerned with including information in the financial statements that
could be helpful to the taxing authority examining its tax positions. ASC 740
addresses this tension in part by requiring a qualitative discussion of only those
positions where a change is reasonably possible within the next 12 months.
Further, for public entities as defined in ASC 740, the quantitative rollforward of
unrecognized tax benefits is prepared on a worldwide aggregated basis. The
specific disclosure requirements are discussed in the following sections.
Refer also to ASC 740-10-55-217 for an illustrative disclosure about uncertainty

in income taxes.
Question 16-4
For what periods should unrecognized tax benefit disclosures be provided for
purposes of the annual financial statements?
PwC response
Reporting entities should provide disclosures as of the end of each annual

reporting period presented in the financial statements.
To meet this requirement, we believe disclosures related to historical information

reflected in the financial statements (e.g., the tabular reconciliation of
unrecognized tax benefits discussed in FSP 16.7.4) should cover the years for
which income statements are presented.
For disclosures that are primarily forward-looking in nature (e.g., the total
amount of unrecognized tax benefit that, if recognized, would affect the effective
tax rate discussed in FSP 16.7.5), we believe it is appropriate to present this
information as of the most recent balance sheet date only. However, in practice,
some reporting entities have taken an alternative point of view that the
requirements related to unrecognized tax benefits should be presented for all
periods presented. We believe either approach is acceptable for disclosures that
are primarily forward-looking in nature.
16.7.3 Disclosure of positions where a change is reasonably possible in the

next 12 months
Reporting entities must disclose the nature of uncertain tax positions and related
events if it is reasonably possible that the positions and events could change the
associated recognized tax benefits within the next 12 months. This includes
previously unrecognized tax benefits that are expected to be recognized upon the
expiration of a statute of limitations within the next year.
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ASC 740-10-50-15 requires the following disclosures:
□ Nature of the uncertainty
□ Nature of the event that could occur within the next 12 months to cause the
change
□ Estimate of the range of the reasonably possible change, or statement that an

estimate of the range cannot be made
In preparing this disclosure, all facts and circumstances, including the likelihood
that a taxing authority will (or will not) identify an uncertain tax position, should
be considered. In certain instances, an uncertain tax position may not meet the
recognition threshold, but management expects the statute of limitations to
expire within the next 12 months and does not expect the taxing authority to
identify the exposure. When this occurs, the total amount of the unrecognized tax
benefit should be disclosed as being expected to change within the next 12
months.
Most uncertain tax positions have a range of possible outcomes (from being fully
sustained to being fully disallowed). Accordingly, we believe that, in most cases,
reporting entities should be able to provide a quantitative range of the possible
changes in unrecognized tax benefits.
Management will need to exercise judgment in determining the level of

aggregation that is appropriate for this disclosure. While some level of
aggregation is expected, we believe that the information should be appropriately
detailed to provide a reader of the financial statements with some context as to
which circumstances may cause the unrecognized tax benefits to significantly
change.
The disclosure requirements related to unrecognized tax benefits apply annually

as noted in ASC 740-10-50-15(d). However, the early warning disclosure
requirements of ASC 275, Risks and Uncertainties, are also still applicable.
Accordingly, reporting entities should disclose reasonably possible significant
changes in unrecognized tax benefits on a rolling 12-month basis. As a result, at
each interim period, reporting entities should have processes and controls in
place that allow them to identify unrecognized tax benefits capable of changing
significantly within the next 12 months.
16.7.4 Tabular reconciliation of unrecognized tax benefits
ASC 740-10-50-15 requires reporting entities to disclose a reconciliation of the

beginning and ending balances of the unrecognized tax benefits from uncertain
positions. This rollforward must include all unrecognized benefits—whether they
are reflected in a liability, as a decrease in a deferred tax asset (irrespective of
whether a valuation allowance would be required), or as an off-balance-sheet
exposure (e.g., a questionable stock option windfall benefit that has not been
recorded because of the prohibition on recognizing windfall benefits prior to an
actual reduction in taxes payable).
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Public entities must include a tabular reconciliation rollforward of the total

amounts of unrecognized tax benefits at the beginning and end of the reporting
period. The rollforward should cover all income statement periods presented, and
include the following.
Excerpt from ASC 740-10-50-15A(a)

1. The gross amounts of increases and decreases in unrecognized tax benefits as
a result of tax positions taken during a prior period
2. The gross amounts of increases and decreases in unrecognized tax benefits as

a result of tax positions taken during the current period
3. The amounts of decreases in the unrecognized tax benefits relating to

settlements with taxing authorities
4. Reductions to unrecognized tax benefits as a result of a lapse of the

applicable statute of limitations.
Reporting entities may consider including additional line items such as

reclassifications of a liability to or from a deferred tax liability to reflect exposures
that only affect timing. Reporting entities may also consider disaggregating the
above line items to provide further details. For instance, they may disaggregate
details about changes that affected the effective tax rate, or changes that were
recorded outside the income statement (e.g., recorded as a component of other
comprehensive income, against goodwill for uncertainties arising from business
combinations, or decreases due to the disposal of a business unit).
An investor in a pass-through entity (e.g., partnerships, S-corporations, or LLCs)

should include in its tabular reconciliation its respective interest in the pass-
through entity’s underlying unrecognized tax benefits, regardless of whether the
pass-through entity is consolidated or accounted for under the equity method.
Conversely, an investor in a non-pass-through entity (e.g., an investment in a
C-corporation) that is accounted for under the equity method would not be
expected to include the uncertain tax positions of the non-pass-through investee
in its tabular reconciliation. However, disclosures of significant tax uncertainties
of a non-pass-through investee that could affect the investor may be appropriate.
16.7.4.1 The gross amounts of increases and decreases in unrecognized tax

benefits as a result of tax positions taken during a prior period
Amounts reported on this line represent an uncertain tax position taken in a prior
year for which measurement has changed for one of two reasons: (1) the
reporting entity met one of the subsequent recognition thresholds in
ASC 740-10-25-8, or (2) new information supported a change in measurement.
When a reporting entity decides to not take a position it was previously expecting
to take and, as a consequence, reverses the liability previously recorded for the
position, it may be appropriate to disclose the reversal of the liability in a
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separate line item. A sample line item description might be “Decrease in

unrecognized tax benefits as a result of the withdrawal of positions previously
taken or expected to be taken.” If the reporting entity chooses to reflect the
decrease in the liability in a more aggregated line item (such as “Decrease in
unrecognized tax benefits as a result of positions taken during the prior periods”),
it should consider separately disclosing that the adjustment relates to a change in
intention with regard to a particular filing position.
16.7.4.2 Increases and decreases in unrecognized tax benefits recorded for

positions taken during the year
On occasion, a reporting entity may take an uncertain tax position during the
year, and then change its assessment of the amount of benefit to be recognized
within the same annual reporting period. When this occurs, the tabular
reconciliation should only reflect the net addition in existence at the end of the
year when disclosing the gross amounts of increases and decreases in
unrecognized tax benefits as a result of tax positions taken during the entire year.
Question 16-5
Reporting entities sometimes take an uncertain tax position in a current year
return that they also took in a previous year return. How should the effects of
“rolling” positions be presented in the tabular rollforward?
PwC response
We believe that reporting entities should reflect the impact of the position taken
in the current year in the “Increases and decreases in unrecognized tax benefits
as a result of tax positions taken during the current period” line item. If the
statute of limitations on the earlier year position expires in the current year, the
impact should be reflected in the “Reductions to unrecognized tax benefits as a
result of a lapse of the applicable statute of limitations” line item in the tabular
rollforward.
Question 16-6
During an IRS audit of a prior year tax return, a reporting entity presents claims
for additional tax benefits that were not reported as part of that prior year return.
The timing and presentation of the claims complied with IRS policy that allows
claims to be directly submitted without requiring the filing of an amended return.
Assuming the reporting entity determines that the claims represent an
unrecognized tax benefit under ASC 740, when should the claims be included in
the tabular reconciliation footnote?
PwC response
For purposes of the tabular reconciliation footnote, the reporting entity is

assumed to have “taken” the position for additional tax benefits when it decided
to present the claims to the IRS. Accordingly, it should disclose any related
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unrecognized tax benefits in the period in which the claims were presented to the
IRS. These unrecognized tax benefits should be included as an increase in the
unrecognized tax benefits recorded for positions taken during the current year.
16.7.4.3 The amounts of decreases in the unrecognized tax benefits relating

to settlements with taxing authorities
Certain settlements with taxing authorities may result in no cash payments

(e.g., a taxing authority may concede a position taken on a tax return resulting in
no cash payments to the taxing authority for that position). Only amounts paid,
or tax attributes (e.g., net operating losses) used in lieu of payment, should be
included in this line item of the tabular reconciliation. Reporting entities should
reflect a decrease in unrecognized tax benefits resulting from concessions or
adjustments by the taxing authority as a change to prior-period unrecognized tax
benefits.
If unrecognized tax benefits on a prior-year uncertain tax position were both

established and paid out in the same year, reporting entities should report the
movement gross. That is, an increase should be reflected in “The gross amounts
of increases and decreases in unrecognized tax benefits as a result of tax positions
taken during a prior period” line, while the payment of cash to settle the position
should be reflected in “The amounts of decreases in the unrecognized tax benefits
relating to settlements with taxing authorities” line.
As illustrated in Example 16-7, an increase in unrecognized tax benefits on one

position and the settlement of an unrelated position during the same period, even
if for a similar amount, should be reported gross.
EXAMPLE 16-7
Tabular reconciliation — settlement of uncertain tax positions
In a prior year, FSP Corp had two unrecognized tax benefits of $100 and $150
(UTBs A and B, respectively) related to two different uncertain tax positions. For
UTB A, FSP Corp reached an agreement with the taxing authority to settle the
position for $80. For UTB B, it is in the appeals process and does not expect to
settle the position until the following year. The $80 settlement for UTB A is paid
after year end.
How should FSP Corp reflect the year’s activity associated with these unrelated
positions in its disclosure?
Analysis
A settlement reached with a taxing authority as of year end should generally be

shown in the line item “Decrease in unrecognized tax benefits relating to
settlements with taxing authority,” notwithstanding that the actual cash payment
is made subsequent to year end. This is because the uncertainty related to these
particular tax positions has been resolved as of the balance sheet date and it is
clear that a payment will be made subsequent to year-end.
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In this example, FSP Corp’s line item “Decrease in unrecognized tax benefits
relating to settlements with taxing authority” would show a decrease of $80 to
reflect the $80 settlement for UTB A. The line item “Gross amounts of increases
and decreases in unrecognized tax benefits as a result of tax positions taken
during a prior period” would reflect a decrease of $20 due to the unrecognized
tax benefit of $100 for UTB A being resolved for $80.
No change would be reflected for UTB B because it is still in the appeals process.
However, since FSP Corp expects to settle UTB B in the next year, it should
reclassify the associated liability to current liabilities from noncurrent liabilities.
16.7.4.4 Reductions to unrecognized tax benefits resulting from a lapse of the

applicable statute of limitations
Amounts reported in this line represent tax benefits that were sustained by the
reporting entity because the taxing authority’s period of assessment has passed.
16.7.4.5 Examples of the tabular reconciliation of unrecognized tax benefits
The following examples 16-8 through 16-10 illustrate the impact of various
scenarios on the tabular reconciliation of unrecognized tax benefits.
EXAMPLE 16-8
Tabular reconciliation — valuation allowances
FSP Corp has taken various tax positions on a tax return that resulted in a net
operating loss carryforward with a potential benefit of $10,000. The related
deferred tax asset, if recorded, would require a full valuation allowance. Assume
that only $3,000 of the potential $10,000 tax benefit has met the threshold for
financial statement recognition.
What amount should be included in the tabular reconciliation of unrecognized

tax benefits?
Analysis
FSP Corp should include $7,000 in the tabular reconciliation of unrecognized tax
benefits. This represents the difference between the amount taken on the tax
return ($10,000) and the amount recognized for financial reporting purposes
($3,000). In this case, the gross deferred tax asset and related valuation
allowance reported in the income tax footnote should be $3,000. For balance
sheet presentation purposes, no amount is recognized because the deferred tax
asset of $3,000 is offset by the $3,000 valuation allowance.
The $7,000 reduction in the deferred tax asset is considered an unrecognized tax
benefit and should be included in the annual tabular reconciliation, regardless of
the fact that a valuation allowance would be required if the $7,000 were
recognized.
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Income taxes
In summary, all gross unrecognized tax benefits, whether they result in a liability
or a reduction of deferred tax assets and/or refundable amounts, should be
included in the tabular reconciliation.
EXAMPLE 16-9
Tabular reconciliation — refund claim filed after the balance sheet reporting date
FSP Corp expects to file a refund claim (related to a current period tax position)
after the balance sheet reporting date. An unrecognized tax benefit of $10,000
will be included within the refund claim.
Should this unrecognized tax benefit be included in the year-end tabular

reconciliation, even though the refund claim that will give rise to the
unrecognized tax benefit has not been filed as of the balance sheet date?
Analysis
Yes. Though not recognized in the financial statements, the unrecognized tax
benefit associated with this claim should be disclosed in the tabular reconciliation
as required by ASC 740-10-50-15A(a).
A reporting entity is required to evaluate tax positions in a refund claim

regardless of whether the claim for refund is filed as of the current-period
balance sheet date or is expected to be filed, provided it is related to a
current-period or prior-period tax position.
EXAMPLE 16-10
Tabular reconciliation — determining when to include items in reconciliation
In the fourth quarter of 20X6, FSP Corp generates a loss of $1,000 related to the
sale of an investment. Because FSP Corp does not have ordinary income or
capital gains in the current year or the applicable carryback periods, the loss is a
carryforward. Management expects to take a tax return filing position
characterizing the loss as ordinary rather than capital in nature. There is some
support in the law for the position; however, in applying ASC 740-10-25-6,
management concludes that the position does not meet the more-likely-than-not
threshold for financial statement recognition.
The applicable tax rate in the jurisdiction is 40% for both ordinary income and
capital gains; however, capital losses can only be used to offset capital gains. FSP
Corp recognizes a $400 deferred tax asset because the carryforward constitutes a
tax attribute regardless of the nature of the loss.
In 20X7, FSP Corp generates a profit that is all ordinary in nature and utilizes all
of its loss carryforwards to reduce taxable income and taxes payable.
How should the unrecognized tax benefit be recorded and presented in 20X6 and
20X7?
PwC 16-33
Income taxes
Analysis
At December 31, 20X6, FSP Corp will not record a liability for the unrecognized
tax benefit as the tax position to be taken characterizing the loss as ordinary has
not resulted in a potential underpayment of tax. We believe, nonetheless, that
$400 of unrecognized tax benefit should be included in the 20X6 tabular
reconciliation. The capital loss attribute that would arise if the position was
unfavorably settled should not impact the tabular reconciliation. ASC 740-10-20
defines an unrecognized tax benefit as “the difference between a tax position
taken or expected to be taken in a tax return and the benefit recognized and
measured pursuant to Subtopic 740-10.” We believe this requirement is intended
to apply comprehensively to all changes to tax return positions that arise based
upon application of the ASC 740 recognition and measurement principles. This
includes positions characterizing a loss carryforward, since the characterization
determines the tax consequences of the attribute.
In 20X7, a $400 unrecognized tax benefit liability should be recorded on the

balance sheet because, at the time, FSP Corp began utilizing the “as filed” 20X6
loss carryforward to reduce taxable income and thus paid less income tax than it
would have had the original $1,000 loss been determined to be capital in nature.
With regard to the 20X7 tabular reconciliation, since the $400 unrecognized tax
benefit was included in 20X6, no additional entry is necessary in 20X7. In
addition, a deferred tax asset for the future deductible amount associated with
the capital loss should continue to be recorded during 20X7 (and possibly
beyond) even though, on an “as filed” basis, FSP Corp utilized the loss
carryforward on the 20X7 tax return.
It should be noted that in both 20X6 and 20X7, FSP Corp must assess the
realizability of the deferred tax asset based upon whether there is sufficient future
taxable income of the appropriate character (i.e., future capital gains). Otherwise,
a valuation allowance would be required against the deferred tax asset. In that
case, the unrecognized tax benefit amount would also be disclosed because it
would affect the effective tax rate (see FSP 16.7.5 for discussion of this disclosure
requirement).
In addition, respective disclosure of loss carryforwards should be provided on an

ASC 740 “as adjusted” basis. We believe footnote disclosure of the amounts of
loss and other tax carryforwards should be on the same basis as presented on the
balance sheet (i.e., net of unrecognized tax benefits). If reporting entities also
present the carryforwards in a footnote on a gross or “as filed” tax return basis,
additional disclosures may be necessary to help the reader understand the
difference between that amount and the balance sheet position.
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Income taxes
Question 16-7 – added May 2017

Should advance tax payments or tax deposits be included in the tabular
reconciliation of unrecognized tax benefits?
PwC response
No. Advance tax payments or tax deposits should not be included as an offset to
unrecognized tax benefits in the annual tabular reconciliation disclosure.
Advance tax payments or tax deposits do not serve as indicator of the uncertain
tax positions sustainability; their effect is neutral with regard to the liability for
unrecognized tax benefits. Therefore, the reconciliation of unrecognized tax
benefits should reflect the activity on a gross basis (not net).
16.7.4.6 Items that should not be included in the tabular reconciliation of

uncertain tax benefits
Indirect effects between jurisdictions
An unrecognized tax benefit in one jurisdiction could have an impact on a tax

liability in another jurisdiction (such as a state unrecognized tax benefit affecting
the amount of state taxes that would be deductible for US federal purposes).
When this occurs, the tabular reconciliation of unrecognized tax benefits should
not include consideration of the unrecognized tax benefit’s effect in other
jurisdictions. Indirect effects of uncertain tax positions on other jurisdictional tax
calculations should be recorded in the financial statements and not reflected in
the tabular rollforward.
Example 16-11 discusses the amount of unrecognized tax benefit to be reflected in

the tabular disclosure.
EXAMPLE 16-11
Exclusion of indirect effects of uncertain tax positions from the tabular disclosure
FSP Corp has an uncertain tax position in New Jersey of $1,000, which has not
met the threshold for financial statement recognition. If the position is not
sustained, FSP Corp will receive a $350 federal benefit for state taxes paid on
$1,000.
Given the available facts, how should the tabular rollforward be presented?
Analysis
In this case, only the $1,000 state unrecognized tax benefit should be included in
the tabular disclosure.
PwC 16-35
Income taxes
For purposes of balance sheet classification, consistent with ASC 740-10-45-11,

FSP Corp should recognize a state liability for unrecognized tax benefits of
$1,000 and a $350 federal deferred tax asset.
Interest and penalties
Interest and penalties should not be included in the annual tabular reconciliation
as unrecognized tax benefits, even if a reporting entity has elected an accounting
policy to classify interest and penalties as a component of income taxes.
Treatment of deposits
If a reporting entity makes an advance deposit (regardless of whether it is

refundable on demand or considered by the taxing authority as a payment of
taxes), it should have no impact on the amount of unrecognized tax benefit that is
reflected in the tabular reconciliation. This is because advance deposits are
essentially equivalent to advance tax payments. As such, they should not be
included as an offset to unrecognized tax benefits in the annual tabular
reconciliation disclosure.
16.7.5 Unrecognized tax benefits that, if recognized, would affect the

effective tax rate
ASC 740-10-50-15A(b) requires disclosure of the total amount of unrecognized

tax benefits that, if recognized, would impact the effective tax rate. This
disclosure should include only unrecognized tax benefits that affect (if
recognized) the tax provision within continuing operations.
Although this guidance specifically requires disclosure related to items that

would affect the tax provision within continuing operations, reporting entities
should also provide supplemental disclosures for resolutions of uncertain tax
positions that, if sustained, would affect items other than the tax provision from
continuing operations. Unrecognized tax benefits that may not affect the tax
provision within continuing operations include:
□ Timing-related uncertainties (e.g., accelerated depreciation)
□ Excess tax deductions from stock-based compensation recorded in equity

under ASC 718, Compensation-Stock Compensation
□ Acquisition-related measurement period adjustments pursuant to ASC 805,

Business Combinations
□ Measurement period adjustments occurring in connection with

reorganizations in fresh-start balance sheets pursuant to ASC 852,
Reorganizations
In addition, as discussed in FSP 16.7.4.6, the indirect effects of uncertain tax

positions in other jurisdictions should not be included within the tabular
rollforward of unrecognized tax benefits. We understand, however, that for
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Income taxes
purposes of applying the disclosure requirements specified in

ASC 740-10-50-15A(b), a reporting entity might consider the indirect effects in
other jurisdictions.
Further, uncertain tax positions embedded in a net operating loss carryforward

that carries a full valuation allowance would not affect the effective tax rate, as
long as the uncertainty is expected to be resolved while a full valuation allowance
is maintained. The guidance does not specify whether any of these positions are
required to be included in this disclosure. However, we believe reporting entities
should consider providing additional transparency in this disclosure. For
example, consider an uncertain tax benefit that could create an additional net
operating loss carryforward, along with an additional valuation allowance. In this
situation, a reporting entity may disclose that if the unrecognized tax benefit is
recognized, it would be in the form of a net operating loss carryforward, which is
expected to require a full valuation allowance based on present circumstances.
16.7.6 Tax years still subject to examination by a major tax jurisdiction
ASC 740-10-50-15(e) requires reporting entities to disclose all tax years that
remain open to assessment by a major tax jurisdiction. We believe, in certain
situations, this disclosure would include a jurisdiction where the reporting entity
has not filed a tax return. For example, the reporting entity may have taken a tax
position regarding a tax status of one of its legal entities whereby the potential tax
exposure related to the reporting entity could be significant. In this fact pattern,
the reporting entity may need to identify the tax jurisdiction as still being subject
to examination.
16.8 Required disclosures for other

transactions with income tax effects
ASC 740 and other accounting standards require disclosures for other
transactions that have income tax effects. These are discussed in the following
sections.
16.8.1 Income tax-related disclosures for stock-based compensation
ASC 740-718 requires extensive disclosures related to the income tax effects of
stock-based compensation. See FSP 15 for these required disclosures.
16.8.2 Pass-through entities
Some business structures are treated as a conduit for tax purposes, where the
business structure’s income is not taxed directly as a legal entity but is instead
passed to its owners or investors. These structures can include partnerships,
certain limited liability companies, and other entities disregarded for tax
purposes. As provided under ASC 740-10-50-16, a public reporting entity that is
not subject to income taxes because its income is taxed directly to its owners
should disclose that fact, as well as the net difference between the tax bases and
the reported amounts of the reporting entity’s assets and liabilities.
PwC 16-37
Income taxes
16.8.3 Specific disclosure required in the separate statements of a member

of a consolidated tax group
When a reporting entity is a member of a group that files a consolidated tax

return, it must disclose the following items in its separately issued financial
statements:
□ The aggregate amount of current and deferred tax expense for each income
statement presented, and the amount of any tax-related balances due to or
from affiliates as of the date of each balance sheet presented
□ The principal provisions of the method by which the consolidated amount of

current and deferred tax expense is allocated to members of the group, and
the nature and effect of any changes in that method (and in determining
related balances to or from affiliates) during the years for which the
disclosures are presented
These disclosure requirements are in lieu of, rather than in addition to, the
general disclosure requirements required under ASC 740. The disclosure
requirements are essentially the general requirements of ASC 850, Related Party
Disclosures, which are applied to intercorporate tax allocation. However, we
believe that it is generally appropriate in separately issued financial statements to
also include a description of the types, and potentially the amounts, of significant
temporary differences.
Some intercorporate tax-sharing agreements require the group members to settle

currently with the parent the deferred and current tax liability or receivable. This
may simply mean that the deferred tax provision is credited or charged to an
intercompany account, where it loses any separate identity as tax-related. Thus,
the separate statements of the subsidiary will not have deferred tax liabilities
and/or assets that are reflective of its temporary differences. In such
circumstances, we strongly suggest disclosing, at least in aggregate, the amounts
of the taxable and deductible temporary differences and/or carryforwards, in
addition to the corresponding amounts included in the intercompany accounts.
In SAB Topic 1.B, Allocation Of Expenses And Related Disclosure In Financial

Statements Of Subsidiaries, Divisions Or Lesser Business Components Of
Another Entity, the SEC staff indicates that the separate return basis is the
preferred method for computing the income tax expense of a subsidiary, division,
or lesser business component of another entity included in consolidated tax
returns. When the historical income statements in the filing do not reflect the tax
provision on the separate return basis, the SEC staff typically requires a pro
forma income statement for the most recent year and interim period reflecting a
tax provision calculated on the separate return basis.
When a reporting entity has been included in a consolidated US tax return, it is

jointly and severally liable with other members of the consolidated group for any
additional taxes that may be assessed. There may be circumstances in which it is
appropriate to disclose this contingent liability based on the disclosure
requirements for loss contingencies.
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Income taxes
For more information on separate financial statements of a subsidiary that is a

member of a consolidated tax group, refer to TX 14.
16.8.4 Significant risks and uncertainties disclosures
ASC 275 requires disclosures in annual and interim financial statements of risks
and uncertainties (e.g., use of estimates) related to certain key information that
helps users in assessing future performance.
Although ASC 740-10-50-15(d) essentially codifies ASC 275 for uncertain tax
positions, the disclosure requirements in ASC 275 are still relevant for other
income tax matters, such as valuation allowances and indefinite reversal
assertions for unremitted earnings of foreign subsidiaries. Additional disclosures
may be required with respect to assumptions that management uses to estimate
its balance sheet and income statement tax accounts.
When it is at least reasonably possible that a material adjustment will occur in

the near term (generally considered approximately one year), the financial
statements should disclose this potential uncertainty along with a range of
potential changes to the recorded amounts. This requirement is discussed in
ASC 275-10-50-6 through 50-15, and an example relating to valuation allowances
is provided in ASC 740-10-55-218 through 55-222.
The threshold for disclosure is “reasonably possible,” indicating that probability

is more than remote. The premise behind this threshold is that significant
one-time charges or benefits, such as a change in the assessment of the need for a
valuation allowance, should not surprise the reader of the financial statements.
The more significant the change in estimate, the more difficult it may be for a
reporting entity to justify that a significant one-time event was not reasonably
foreseeable at the time of its most recent previous filing. This is particularly
important for SEC registrants because of their quarterly reporting requirements.

Certain exceptions to the above requirements are available for nonpublic entities
as defined in the ASC 740 glossary. A nonpublic entity is not required to
numerically reconcile the statutory and effective rates or provide the approximate
tax effect of each type of temporary difference and carryforward that gives rise to
significant deferred tax assets and liabilities. However, a nonpublic entity must
disclose the nature of significant reconciling items as well as a description of the
significant temporary differences and carryforwards.
Nonpublic entities are not required to include the following disclosures:
□ Tabular reconciliation of the total amounts of unrecognized tax benefits at

the beginning and end of the reporting date
□ Tax holidays that have been granted by foreign jurisdictions
PwC 16-39
Income taxes
□ The net difference between the tax bases and the reported amounts of assets
and liabilities when they are structured as nontaxable entities
In addition, the following SEC requirements are only required of SEC registrants.
Figure 16-4
Disclose individual reconciling S-X 4-08(h) 16.6.2

items that are more than five
percent of the amount
computed by multiplying
pretax income by the statutory
tax rate
Disclose the source of income S-X 4-08(h) 16.6.4

(loss) before tax expense
(benefit) as either foreign or
domestic
Separately state for each major S-X 4-08(h) 16.6.4

component of income tax
expense the amounts
applicable to US federal
income taxes, to foreign
income taxes, and to other
income taxes
Disclose tax holidays granted SAB Topic 11.C 16.6.4

for a specified period, if the
entity conducts business in a
foreign jurisdiction
16-40 PwC
Chapter 17:
Business combinations
PwC 17-1

This chapter discusses the presentation and disclosure requirements of ASC 805,
Business Combinations. The disclosure provisions under ASC 805 are intended
to enable users of financial statements to evaluate the nature and financial effects
of all forms of business combinations.
Presentation and disclosure considerations for pushdown accounting are also

discussed in this chapter.
17.2 Scope
The disclosure guidance in ASC 805 applies to all transactions that meet the
definition of a business combination, including acquisitions by not-for-profit
reporting entities. It does not apply to the formation of a joint venture, nor to the
acquisition of a group of assets that do not constitute a business. It also does not
apply to business combinations between entities under common control.
If acquirees prepare separate financial statements, a question arises as to

whether the historical basis of the acquired company or the “stepped-up basis” of
the acquirer should be reflected in those separate financial statements. Pushdown
accounting refers to the latter, which means establishing a new basis for the
assets and liabilities of the acquired company based on a “push down” of the
acquirer’s stepped-up basis. Pushdown accounting is an accounting election. See
FSP 17.6 for further discussion regarding the application of and disclosure
requirement for pushdown accounting.
In some situations, reporting entities may consolidate an acquired business in

which they have less than 100% ownership. In these instances, the reporting
entities must report a noncontrolling interest representing the portion of the
acquired business they do not own. The presentation and disclosure
requirements associated with noncontrolling interests are addressed in FSP 5.
ASC 810-10-50-3 requires that the primary beneficiary of a variable interest

entity that is a business provide the disclosures required by ASC 805. The
primary beneficiary of a variable interest entity that is not a business must
disclose the amount of gain or loss recognized upon initial consolidation. Refer to
FSP 18 for the disclosure requirements for primary beneficiaries.
New guidance
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting
for Measurement Period Adjustments, which eliminates the requirement to
restate prior period financial statements for measurement period adjustments.
The guidance should be applied prospectively to measurement period
adjustments that occur after the effective date. For public business entities, the
new guidance is effective for interim and annual periods beginning after
December 15, 2015. For entities other than public business entities, the guidance
is effective for annual periods beginning after December 15, 2016 and interim
17-2 PwC
periods beginning after December 15, 2017. Early adoption is permitted for all
entities. Guidance on both the pre-adoption of ASU 2015-16 and post-adoption of
ASU 2015-16 are covered in this chapter at FSP 17.4.13.1 and 17.4.13.2,
respectively.

There are a number of items that should be recognized in income under ASC 805,
including transaction costs, restructuring charges, revaluations of contingent
consideration, adjustments to acquired contingencies, gain or loss on previously
held equity interests, and gain on bargain purchases. Reporting entities will need
to exercise judgment in determining the appropriate income statement
classification for these items based on their nature. Generally, the income
statement recognition of items in a business combination should mirror their
recognition outside of a business combination, and most items recognized in
income should be classified as part of operations. For example, transaction costs
should typically be recorded in operations, particularly if the acquiring reporting
entity has a history of making acquisitions or expects to make more acquisitions
in the future. Additionally, items that may occur as part of the business
combination, but that are recognized separate from the business combination,
such as employee compensation arrangements for postcombination services and
the settlement of certain preexisting relationships, should generally be recorded
in the income statement based on their nature.
Adjustments to an indemnification asset for an income tax liability should be

recorded in pretax income, not as a part of income tax expense. ASC 740
narrowly defines the term “income taxes” as domestic and foreign taxes based on
income. Recoveries under an indemnification agreement do not fall within the
scope of this definition. Therefore, although dollar-for-dollar changes in the
income tax liability and the related indemnification asset (subject to the
limitations of the indemnity and collectability) will be neutral on an after-tax
basis, pretax income and tax expense will both change when the amount of the
income tax liability and related indemnification asset change.
Changes in fair value measurements of items such as contingent consideration

may contain elements of both changes in assumptions used in the determination
of fair value and changes due to the passage of time (the time value of money).
Generally, we would not expect reporting entities to separate a change in fair
value into its components; we would expect the reporting entities to record the
entire change as a component of operating income.
17.4 Disclosures for business combinations

The disclosure provisions of ASC 805-10-50 are intended to enable users of
financial statements to evaluate the nature and financial effects of:
□ A business combination that occurs either during the current reporting

period or after the reporting date, but before the financial statements are
issued or are available to be issued
PwC 17-3
□ Adjustments recognized in the current reporting period that relate to

business combinations that occurred in current or previous reporting periods
The guidance indicates that the disclosure provisions should be considered

minimum requirements. Reporting entities should provide additional
disclosures, if necessary, to ensure the above objectives are met.
All disclosures should be made in the period in which the business combination
occurs. Reporting entities should typically include the disclosures in subsequent
financial statements if an acquisition occurred in a previous reporting period and
that period is presented in the financial statements. For example, assume a
reporting entity presents balance sheets for two years and income statements for
three years in its 20X6 financial statements. If they completed a material
acquisition in 20X4, then the reporting entities should disclose the 20X4
acquisition and the income statement-relevant disclosures in their 20X6 financial
statements. However, certain of the original disclosures about the acquisition-
date accounting may no longer be relevant to the financial statements presented,
since the 20X6 financial statements would not include a 20X4 balance sheet.
The disclosure requirements of ASC 805 are applicable to acquisitions made after
the balance sheet date, but before the financial statements are issued or are
available to be issued.
If the initial accounting for the business combination is incomplete, reporting

entities should describe which disclosures could not be made, which are
preliminary, and the reasons the acquisition accounting could not be completed.
Reporting entities may complete several business combinations in the same

accounting period. The disclosures outlined in ASC 805 must be reported for
each material business combination. Certain disclosures can be aggregated for
immaterial business combinations that are collectively material.
17.4.1 General acquisition disclosure
Per ASC 805-10-50-2, reporting entities should disclose the name and a
description of the acquiree (e.g., type of business). This disclosure should also
describe the primary reason the reporting entity completed the acquisition—for
example, to expand global reach, increase capacity, enter a new line of business,
etc. The disclosure should include the acquisition date (i.e., the date control is
obtained), as well as the percentage of ownership acquired (i.e., voting equity
interests). This disclosure should be included for each material business
combination that occurs during the reporting period.
17.4.2 Disclosures of consideration transferred
Reporting entities must disclose the acquisition date fair value of the total
consideration transferred (i.e., the purchase price) in a business combination.
The consideration transferred may include items in addition to, or in lieu of,
cash. In addition to disclosing the total consideration, the reporting entities must
disclose the acquisition date fair value of each major class of consideration.
17-4 PwC
Consideration may include cash, other assets (tangible or intangible), or a

business or subsidiary of the reporting entities. A business transferred as
consideration may trigger separate presentation and disclosure requirements,
such as the disclosures for a discontinued operation.
Consideration transferred may also be comprised of liabilities incurred for

contingent consideration or other liabilities incurred by the buyer to the former
owners of the acquiree (e.g., debt securities issued to the seller). Consideration
may also include common or preferred stock, options, or warrants of the
reporting entities or member interests of mutual entities. If equity instruments
are provided as consideration, disclosure should include the number of securities
issued or issuable, and the method of measuring fair value. If common stock of an
SEC registrant is provided as consideration, the disclosure typically includes the
number of shares issued and the price of the stock on the acquisition date.
17.4.3 Disclosure of contingent consideration and indemnification assets
The same information is required to be disclosed for both contingent

consideration arrangements (ASC 805-30-50-1(c)) and arrangements where the
seller indemnifies the buyer (e.g., indemnification assets) (ASC 805-20-50-1(a)):
Excerpt from ASC 805-30-50-1(c) and ASC 805-20-50-1(a)

1. The amount recognized as of the acquisition date
2. A description of the arrangement and the basis for determining the amount
of payment
3. An estimate of the range of outcomes (undiscounted) or, if a range cannot be

estimated, that fact and the reasons why a range cannot be estimated. If the
maximum amount of the payment is unlimited, the acquirer shall disclose
that fact.
Indemnification assets and the related liabilities are generally presented gross
(i.e., not netted against one another) because the right of offset typically does not
exist.
17.4.4 Disclosure of major classes of assets acquired and liabilities assumed
ASC 805-10-50-2 requires reporting entities to disclose the amount recognized

for assets acquired and liabilities assumed as of the date of acquisition. This
disclosure includes recognized contingent assets and liabilities. The disclosure is
required to be prepared by each major class of assets and liabilities, and is
typically presented in a tabular format that reconciles the consideration
transferred to the assets/liabilities acquired. Refer to example 17-2.
PwC 17-5
17.4.5 Disclosures of acquired receivables
The following information must be disclosed for acquired receivables that are not
subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired
with Deteriorated Credit Quality:
Excerpt from ASC 805-20-50-1(b) [edits applicable upon adoption of ASC

842, Leases]
1. The fair value of the receivables [(unless those receivables arise from sales-
type leases or direct financing leases by the lessor for which the acquirer shall
disclose the amounts recognized as of the acquisition date)]
2. The gross contractual amounts receivable
3. The best estimate at the acquisition date of the contractual cash flows not
expected to be collected.
ASC 805 requires these disclosures to be disaggregated by major class of

receivable, such as loans, direct finance leases in accordance with ASC 840-30,
Capital Leases, and any other class of receivables.
17.4.5.1 Disclosure requirements for finance receivables and allowance for

credit losses
Reporting entities that acquire finance receivables as part of a business

combination will need to assess the impact of acquired finance receivables on
their existing allowance for credit loss policies. They will need to classify the
acquired finance receivables into the appropriate portfolio segments and classes
to be reflected in accordance with the interim and annual disclosure provisions of
ASC 310 Receivables. Refer to FSP 8 for disclosure requirements related to
finance receivables.
17.4.6 Disclosures about assets and liabilities arising from contingencies
The following information related to contingencies should be included within the

financial statement footnote that describes the business combination:
Excerpt from ASC 805-20-50-1(d)

1. For assets and liabilities arising from contingencies recognized at the
acquisition date:
i The amounts recognized at the acquisition date and the measurement

basis applied (that is, at fair value or at an amount recognized in
accordance with Topic 450 [Commitments] and Section 450-20-25).
ii. The nature of the contingencies.
17-6 PwC
An acquirer may aggregate disclosures for assets or liabilities arising from

contingencies that are similar in nature.
2. For contingencies that are not recognized at the acquisition date, the
disclosures required by Topic 450 if the criteria for disclosures in that
Topic are met [i.e., the contingencies are deemed reasonably possible].
If the initial accounting of a contingency is incomplete, SEC registrants are

required to disclose that the purchase price allocation is preliminary/provisional.
In addition, SEC registrants should disclose the following:
□ A clear description of the nature of the contingency
□ The reasons why the allocation is preliminary/provisional, including

identification of the information that the SEC registrant has arranged to
obtain
□ When the allocation is expected to be finalized
□ Other available information that could enable a reader to understand the

magnitude of any potential adjustment
Refer to FSP 23 for further presentation and disclosure requirements related to

liabilities arising from contingencies.
17.4.7 Goodwill disclosures
The following information is required to be disclosed when an acquirer

recognizes goodwill in a business combination:
Excerpts from ASC 805-30-50-1

a. A qualitative description of the factors that make up the goodwill recognized,
such as expected synergies from combining operations of the acquiree and
the acquirer, intangible assets that do not qualify for separate recognition, or
other factors
d. The total amount of goodwill that is expected to be deductible for tax

purposes.
When reporting entities are required to disclose segment information, they

should disclose the amount of goodwill by reportable segment. In addition, if the
assignment of goodwill to reporting units is not complete as of the financial
statements issuance date, the reporting entities should disclose this fact.
Refer to FSP 8 for day-two presentation and disclosure requirements related to

goodwill.
PwC 17-7
17.4.8 In-process research and development (IPR&D) disclosures
SEC registrants are required to disclose the following for material IPR&D:
□ Appraisal method (e.g., based on discounted probable future cash flows on a

project-by-project basis)
□ Significant assumptions, such as:
a. The period in which material net cash inflows from significant projects
are expected to commence
b. Any anticipated material changes from historical pricing, margins, and

expense levels
c. The risk-adjusted discount rate applied to the project’s cash flows
17.4.9 Disclosures of separate transactions and preexisting relationships
Certain transactions are recognized separate from the business combination

transaction, such as transactions that effectively settle preexisting relationships
between the acquirer and acquiree, transactions that compensate employees or
former owners of the acquiree for future services, and transactions that
reimburse the acquiree or its former owners for the acquirer’s acquisition-related
costs.
For transactions that are recognized separate from the acquisition of assets and
assumption of liabilities in the business combination, the reporting entities
should disclose the following:
□ A description of the transaction
□ The accounting for the transaction
□ The amounts recognized for each transaction and the line item in the
financial statements in which each amount is recognized
□ If the transaction was the settlement of a preexisting relationship, the

method used to determine the settlement amount
The disclosures should include the amount of acquisition-related costs, the

amount recognized as an expense, and the line item or items on the income
statement in which those amounts are recognized. Additionally, reporting entities
should also disclose the amount of any issuance costs that were not expensed and
how they were recognized.
17.4.10 Disclosures of bargain purchases
As described in ASC 805-30-25-2 through 25-4, a bargain purchase arises when

the fair value of the net assets acquired in a business combination exceeds the
17-8 PwC
consideration transferred, resulting in a gain being recorded by the acquirer. In

business combinations where the acquirer makes a bargain purchase, the
following items must be disclosed:
Excerpt from ASC 805-30-50-1(f)
1. The amount of any gain recognized in accordance with paragraph ASC 805-
30-25-2 and the line item in the income statement in which the gain is
recognized
2. A description of the reasons why the transaction resulted in a gain.
ASC 805-30-55-14, Example 1, provides an illustration of these disclosure

requirements.
17.4.11 Partial acquisitions
The reporting entities should disclose the following for each business
combination in which the acquirer holds less than 100% of the equity interests in
the acquiree at the acquisition date:
□ The fair value of the noncontrolling interest in the acquiree at the acquisition
date
□ The valuation techniques and significant inputs used to measure the fair
value of the noncontrolling interest
In addition to the above disclosures for noncontrolling interests, ASC 805-10 also
requires the following disclosures for previously held equity interests in the
acquiree at the acquisition date:
ASC 805-10-50-2(g)
In a business combination achieved in stages, all of the following:
1. The acquisition-date fair value of the equity interest in the acquiree held by
the acquirer immediately before the acquisition date
2. The amount of any gain or loss recognized as a result of remeasuring to fair

value the equity interest in the acquiree held by the acquirer immediately
before the business combination (see paragraph 805-10-25-10) and the line
item in the income statement in which that gain or loss is recognized
3. The valuation technique(s) used to measure the acquisition-date fair value of

the equity interest in the acquiree held by the acquirer immediately before
the business combination
PwC 17-9
4. Information that enables users of the acquirer’s financial statements to assess

the inputs used to develop the fair value measurement of the equity interest
in the acquiree held by the acquirer immediately before the business
combination
17.4.12 Acquiree’s financial information and pro forma financial

information
In business combinations where the acquirer is a public business entity, as

defined in ASC 280, Segments, the acquirer must disclose certain financial
information related to the acquiree and provide pro forma financial data, as
described in the excerpt below:
Excerpt from ASC 805-10-50-2(h)
1. The amounts of revenue and earnings of the acquiree since the acquisition
date included in the consolidated income statement for the reporting period.
2. If comparative financial statements are not presented, the revenue and

earnings of the combined entity for the current reporting period as though
the acquisition date for all business combinations that occurred during the
year had been as of the beginning of the annual reporting period
(supplemental pro forma information).
3. If comparative financial statements are presented, the revenue and earnings

of the combined entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the comparable
prior annual reporting period (supplemental pro forma information). For
example, for a calendar year-end entity, disclosures would be provided for a
business combination that occurs in 20X2, as if it occurred on January 1,
20X1. Such disclosures would not be revised if 20X2 is presented for
comparative purposes with the 20X3 financial statements (even if 20X2 is
the earliest period presented).
4. The nature and amount of any material, nonrecurring pro forma adjustments
directly attributable to the business combination(s) included in the reported
pro forma revenue and earnings (supplemental pro forma information).
If any of the above disclosures are impracticable, the acquirer should disclose
that fact and explain why the disclosure is impracticable.
Question 17-1
If a reporting entity presents three years of income statements, are they required
to present three years of supplemental pro forma revenue and earnings of the
combined entity?
17-10 PwC
PwC response
No. Reporting entities are only required to present two years (the year of the
transaction, and the prior annual reporting period) of supplemental pro forma
revenue and earnings of the combined entity even if its financial statements
include three years of income statements. For interim reporting, the
supplemental pro forma information should be presented for both the quarter
and year-to-date periods.
Question 17-2
If a reporting entity acquires a business in 20X6 and presents comparative
financial statements for 20X5 and 20X4, is the supplemental pro forma
information for 20X5 determined by combining the revenue and earnings of the
acquirer and acquiree for that period?
PwC response
No. The guidance specifically requires that the supplemental pro forma
information be presented as though the business combination occurred as of the
beginning of the comparative period (in this case, January 1, 20X5). This means
that costs resulting from the business combination (e.g., transaction costs)
should be reflected in the 20X5 pro forma earnings as though the business
combination occurred on January 1, 20X5. Other specific considerations when
preparing pro forma information are discussed in the following sections and
Figure 17-1.
17.4.12.1 Preparation of ASC 805 pro forma information
ASC 805 does not provide specific guidance regarding how reporting entities
should calculate pro forma revenue and earnings. Generally, reporting entities
add the results from the financial statements of the acquiree to the historical
financial results of the acquirer after making adjustments for some or all of the
following:
□ Alignment of accounting policies. For example, reporting entities would

adjust the pro forma financial information for the effect of applying a
different inventory accounting policy at the acquiree level.
□ The effect of fair value adjustments. For example, reporting entities

would include amortization of intangible assets and depreciation of the
tangible assets recognized as part of the business combination.
□ Transaction costs. The reporting entity would include costs resulting from
the business combination in earnings as though the acquisition occurred as
of the beginning of the comparative period.
□ Taxation. The reporting entities would need to consider the tax effects of
the acquisition and related adjustments as if the acquiree had been part of
the reporting entity since the beginning of the comparative period.
PwC 17-11
□ Financial structure. The reporting entities would need to consider

adjustments reflecting the new capital structure, including additional
financing or repayments of debt as part of the acquisition.
Adjustments that are not factually supportable are not appropriate. For example,
it generally would not be appropriate to justify incorporating cost savings and
other synergy benefits resulting from the business combination in pro forma
amounts.
Pro forma financial information in interim financial statements of SEC

registrants is subject to additional disclosure considerations as required by
Article 10 of Regulation S–X.
Pro forma financial information giving effect to business combinations is often

presented in SEC registration statements, proxy statements, and Form 8-Ks as
required by Article 11 of Regulation S–X. Reporting entities should note that pro
forma information presented in accordance with ASC 805 will likely differ from
that required by Article 11 of Regulation S-X (see Figure 17-1).
Reporting entities are also required to provide disclosure of any material,

nonrecurring pro forma adjustments directly attributable to the business
combination.
17.4.12.2 Regulation S-X, Article 11 pro forma disclosures
Article 11 of Regulation S-X provides the SEC’s requirements for the presentation
of pro forma condensed financial information regarding significant business
combinations that have occurred during the most recent fiscal year or subsequent
interim periods. For more information on the preparation of Article 11 pro forma
condensed financial information, refer to SEC 4560.
The pro forma information presented in accordance with ASC 805 will likely
differ from what is required by Article 11 of Regulation S-X. Additionally, filing of
Article 11 pro forma financial information does not satisfy the requirement to
include ASC 805-10-50-2(h) pro forma disclosures in the footnotes.
Pro forma disclosures required by ASC 805-10-50-2(h) might be required even

when Article 11 pro forma financial information is not required due to differences
in the relevant materiality thresholds. Article 11 pro forma information is based
on the quantitative significance of the acquisition to the acquirer under Rule 1-
02(w) of Regulation S-X, whereas ASC 805 disclosure requirements are based on
quantitative and qualitative materiality to the financial statements taken as a
whole.
The following figure highlights ASC 805 and Article 11 requirements related to
the preparation of pro forma financial information.
17-12 PwC
Figure 17-1
ASC 805 and Article 11 pro forma requirements for acquired businesses
Topic ASC 805 Article 11
Periods to ASC 805 requires that US public Article 11 requires a pro forma balance
present business entities disclose unaudited sheet based on the latest balance sheet
supplemental pro forma included in the filing (unless the
information for the results of acquisition is already reflected in the
operations for the current period, historical balance sheet). The pro forma
as well as the results of operations condensed income statement is based
for the comparable prior period. on the latest fiscal year and subsequent
interim period included in the filing.
Pro forma financial information
related to results of operations of Comparative prior year interim period
periods prior to the combination is information is permissible, but not
limited to the results of operations required.
for the immediately preceding
period.
Length of Pro forma disclosures should be In a subsequent registration statement,

time repeated whenever the year or a pro forma condensed balance sheet is
disclosures interim period of the acquisition is not required if an acquisition is already
must be presented. reflected on the historical balance sheet;
“retained” however, disclosures related to the
For example, assume FSP Corp, a acquisition are required.
calendar year-end reporting entity,
acquired SUB Corp on May 15, Generally, a pro forma condensed
20X6, and the acquisition is income statement must be presented
material to the financial statements until the transaction to which the pro
of FSP Corp. FSP Corp would forma disclosure relates has been
present pro forma revenue and reflected in the audited financial
earnings as if the acquisition statements for a 12-month period.
occurred on January 1, 20X5, in the
interim financial statements to be For example, using the acquisition
included in both its second and details noted in the column to the left, if
third quarter Form 10-Qs in 20X6 FSP Corp were to file a new or amended
and in the annual financial registration statement before the Form
statements to be included in its 10-K for 20X7 is filed, FSP Corp may be
Form 10-K for 20X6. required to include updated pro forma
financial information. Refer to SEC
FSP Corp is required to repeat the 4560 for further guidance on this topic.
pro forma disclosures in the
interim financial statements to be
included in its second and third
quarter Form 10-Qs in 20X7, and
its annual financial statements to
be included in its Form 10-K for
20X7 and 20X8, because the period
of acquisition is presented as
comparative 20X6 information.
FSP Corp would continue to utilize
an assumed acquisition date of
January 1, 20X5, when preparing
the 20X6 pro forma results for the
period of acquisition.
No pro forma information is
required for each of the quarterly
periods in 20X7 or the annual
periods in 20X7 and 20X8 because
the results of the acquired business
are included in the consolidated
income statement for those
periods.
FSP Corp would not be required to
present pro forma information in
the financial statements included in
the first quarter 20X7 Form 10-Q
PwC 17-13

because the period of acquisition
would not be presented in the
comparative first quarter 20X6
financial statements. However, FSP
Corp would be permitted to include
first quarter 20X6 pro forma
information and should evaluate
whether inclusion of the
information would be beneficial to
the readers’ understanding of the
effects of the acquisition on the
consolidated financial statements.
Format ASC 805-10-50-2h requires Article 11 requires a pro forma

disclosure of revenue and earnings condensed balance sheet, pro forma
amounts on a pro forma basis. condensed income statements through
Additional line items (e.g., income (loss) from continuing
operating income, income from operations, and explanatory footnotes,
continuing operations) are along with an introductory paragraph
permissible. that provides a description of the
transaction, entities involved, and
periods for which the pro forma
information is presented.
Refer to SEC 4560 for further guidance
on alternatives for a registrant to
consider in presenting income from
continuing operations when there is
NCI.
Date of If comparative financial statements Rule 11-02(b)(6) of SEC Regulation S-X

combination are not presented, ASC 805 states that the pro forma adjustments
requires that the pro forma related to the condensed income
information be prepared for the statement should be computed
current reporting period as though assuming the transaction was
the acquisition had occurred as of consummated at the beginning of the
the beginning of the current annual fiscal year presented. The SEC staff has
reporting period. interpreted this to mean that the pro
forma adjustments are to be computed
If comparative financial statements for both the annual and interim income
are presented, the pro forma statements, assuming that the
information should be prepared as acquisition occurred at the beginning of
though the acquisition occurred at the annual period.
the beginning of the comparable
prior annual reporting period. The
“as if” date of the acquisitions
would not be revised in the pro
forma information in future
periods when additional financial
statement periods are presented.
Nonrecurring ASC 805 requires adjustments that Rule 11-02(b)(5) of SEC Regulation S-X
items are nonrecurring in nature to be requires that the pro forma condensed
included in the pro forma amounts. income statement adjustments (1) be
directly attributable to the transaction
in question, (2) have a continuing
impact on the operations, and (3) be
factually supportable. As a result,
charges or credits that result directly
from the transaction but do not have a
continuing impact (i.e., one-time in
nature or nonrecurring) are not
included in the pro forma condensed
income statement. In addition,
nonrecurring charges or credits (e.g.,
transaction costs) included in the
acquirer’s or acquiree’s historical
income statements that are directly
17-14 PwC

attributable to the transaction should be
eliminated. Such nonrecurring charges
or credits are reflected in retained
earnings on the pro forma condensed
balance sheet and disclosed in the
footnotes to the pro forma financial
information.
Footnotes ASC 805 requires disclosure of the Article 11 requires explanatory

nature and amount of any material, footnotes to be sufficiently detailed to
nonrecurring pro forma enable a clear understanding of the
adjustments directly attributable to assumptions and calculations involved
the acquisition included in the in developing each of the pro forma
reported pro forma revenue and adjustments.
earnings.
Other ASC 805 allows adjustments for Article 11 allows adjustments for
completed completed business acquisitions probable business acquisitions and
or probable but does not permit adjustments other significant transactions (e.g., a
transactions for probable business acquisitions completed or probable significant
or other significant transactions business disposition)
(e.g., a completed or probable
significant business disposition).
17.4.13 Financial statement effect of adjustments related to prior

acquisitions
The results of an acquired business disclosed for the first period after an
acquisition may not be indicative of the ongoing performance of such a business.
The disclosure provisions are intended to provide information that enables users
of financial statements to evaluate the financial effects of adjustments recognized
in the current reporting period relating to business combinations that occurred in
the current or previous reporting periods.
Reporting entities are required to disclose the following for each material
business combination, or in the aggregate for individually immaterial business
combinations that are collectively material:
□ Measurement period adjustments
□ Contingent consideration adjustments
□ Fair value disclosures under ASC 820
These disclosures are discussed in more detail in the following subsections.
New guidance
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting
for Measurement Period Adjustments which eliminates the requirement to
restate prior period financial statements for measurement period adjustments.
The guidance should be applied prospectively to measurement period
adjustments that occur after the effective date. For public business entities, the
guidance is effective for interim and annual periods beginning after December 15,
PwC 17-15
2015. For non-public business entities, the guidance is effective for annual
periods beginning after December 15, 2016 and interim periods beginning after
December 15, 2017. Early adoption is permitted for all entities. Guidance on both
the pre-adoption of ASU 2015-16 and post-adoption of ASU 2015-16 are covered
in this chapter at FSP 17.4.13.1 and 17.4.13.2, respectively.
17.4.13.1 Measurement period adjustments – before adoption of ASU 2015-16
An acquirer has up to one year from the acquisition date (referred to as the
measurement period) to finalize the accounting for a business combination. The
acquirer should book provisional amounts if the initial accounting for a business
combination is incomplete. During the measurement period, the acquirer should
retrospectively record measurement period adjustments made to provisional
amounts as if the accounting was completed at the acquisition date. The acquirer
should revise comparative information for prior periods presented in the
financial statements as needed, including making any change in depreciation,
amortization, or other income effects recognized in completing the initial
accounting.
Considerations related to interim reporting
The retrospective nature of measurement period adjustments and the resulting

need to revise historical financial information has additional implications if the
reporting entity prepares interim financial statements, as demonstrated by
Example 17-1.
EXAMPLE 17-1
Measurement period adjustments in interim reporting
FSP Corp is an SEC registrant that reports under US GAAP and has a calendar
year-end. FSP Corp acquires SUB Corp on October 1, 20X6. On May 31, 20X7,
new information related to facts that existed at the acquisition date arises that
leads to a measurement period adjustment. FSP Corp has already filed its Form
10-K for the year ended December 31, 20X6 and a Form 10-Q for the quarterly
period ended March 31, 20X7.
How should FSP Corp address the fact that its December 31, 20X6 Form 10-K
and March 31, 20X7 Form 10-Q do not reflect the measurement period
adjustment?
Analysis
FSP Corp should take the following actions in its June 30, 20X7 Form 10-Q:
□ Retrospectively adjust the December 31, 20X6 balance sheet
□ Reflect the adjustment related to the current year in the income statement,
statement of comprehensive income, cash flow statement, and statement of
17-16 PwC
changes in stockholders’ equity (if applicable) for the six-month period ended
June 30, 20X7
□ Disclose the nature and amount of the measurement period adjustment
FSP Corp should also perform the following in the December 31, 20X7 Form 10-K
to properly reflect the subsequent adjustments of the provisional amounts:
□ Retrospectively adjust the December 31, 20X6 balance sheet
□ Retrospectively adjust the income statement, statement of comprehensive

income, cash flow statement, and statement of changes in stockholders’
equity for the year ended December 31, 20X6
□ Retrospectively adjust the income statement for the quarterly periods ended
December 31, 20X6 and March 31, 20X7
□ Disclose the nature and amount of the measurement period adjustment
17.4.13.2 Measurement period adjustments – after adoption of ASU 2015-16
An acquirer has up to one year from the acquisition date (referred to as the
measurement period) to finalize the accounting for a business combination. The
acquirer should book provisional amounts if the initial accounting for a business
combination is incomplete. During the measurement period, the acquirer should
record the cumulative impact of measurement period adjustments made to
provisional amounts in the period that the adjustment is determined. As
discussed in ASC 805-20-50-4A(c), the acquirer should present separately on the
face of the income statement or disclose in the notes the portion of the
adjustment to each income statement line items that would have been recorded
in previous reporting periods if the adjustment to the provisional amounts had
been recognized as of the acquisition date.
When the accounting for a business combination includes provisional amounts,

the following information must be disclosed.
ASC 805-20-50-4A
If the initial accounting for a business combination is incomplete (see paragraphs

805-10-25-13 through 25-14) for particular assets, liabilities, noncontrolling
interests, or items of consideration and the amounts recognized in the financial
statements for the business combination thus have been determined only
provisionally, the acquirer shall disclose the following information for each
material business combination or in the aggregate for individually immaterial
business combinations that are material collectively to meet the objective in
paragraph 805-10-50-5:
a. The reasons why the initial accounting is incomplete
PwC 17-17
b. The assets, liabilities, equity interests, or items of consideration for which the
initial accounting is incomplete
c. The nature and amount of any measurement period adjustments recognized

during the reporting period in accordance with paragraph 805- 10-25-17,
including separately the amount of adjustment to current period income
statement line items relating to the income effects that would have been
recognized in previous periods if the adjustment to provisional amounts were
recognized as of the acquisition date. Alternatively, an acquirer may present
those amounts separately on the face of the income statement.
Considerations related to interim reporting
The prospective nature of measurement period adjustments and the need to

disclose the retrospective impact to historical financial information has
additional implications if the reporting entity prepares interim financial
statements, as demonstrated by Example 17-2.
EXAMPLE 17-2
Measurement period adjustments in interim reporting
FSP Corp is an SEC registrant that reports under US GAAP and has a calendar
year-end. FSP Corp acquires SUB Corp on October 1, 20X6. On May 31, 20X7,
new information related to facts that existed at the acquisition date arises that
leads to a measurement period adjustment. FSP Corp has already filed its Form
10-K for the year ended December 31, 20X6 and a Form 10-Q for the quarterly
period ended March 31, 20X7.
How should FSP Corp address the fact that the December 31, 20X6 Form 10-K
and March 31, 20X7 Form 10-Q do not reflect the measurement period
adjustment?
Analysis
FSP Corp should take the following actions in its June 30, 20X7 Form 10-Q:
□ Recognize the cumulative impact of the measurement period adjustment,

(i.e., the current and prior period impact), on the statements of income,
comprehensive income, cash flows, and changes in stockholders’ equity (if
applicable) for the three and six-month periods ended June 30, 20X7
□ Disclose the nature and amount of the measurement period adjustment,

including separately the amount of adjustment to the statement of income
line items in the three and six-month period ended June 30, 20X7 that would
have been recognized in previous periods if the adjustment to provisional
amounts were recognized as of October 1, 20X6
17-18 PwC
□ No adjustment to the December 31, 20X6 balance sheet or the statements of

income, comprehensive income, cash flows and changes in stockholder’s
equity (if applicable) for the year ended December 31, 20X6 and for three-
month period ended March 31, 20X7
In its December 31, 20X7 Form 10-K, FSP Corp should reflect the cumulative
impact of the measurement period adjustment, including the prior period impact,
on the 20X7 statements of income, comprehensive income, cash flows, and
changes in stockholders’ equity (if applicable). FSP Corp should disclose the
nature and amount of the measurement period adjustment, including separately
the amount of adjustment to income statement line items in 20X7 that would
have been recognized in previous periods if the adjustment to provisional
amounts were recognized as of October 1, 20X6. No adjustment should be
reflected in the financial statements as of and for the year ended December 31,
20X6 and the selected quarterly data in the footnotes to the financial statements
(if presented) for the quarterly periods ended December 31, 20X6 and March 31,
20X7.
17.4.13.3 Contingent consideration adjustments
The following disclosures must be provided when adjustments related to

contingent consideration arrangements are recorded in reporting periods
subsequent to the acquisition date:
a. For each reporting period after the acquisition date, until the entity
collects, sells, or otherwise loses the right to a contingent consideration
asset, or until the entity settles a contingent consideration liability, or the
liability is cancelled or expires, all of the following:
1. Any changes in the recognized amounts, including any differences

arising upon settlement.
2. Any changes in the range of outcomes (undiscounted) and the reasons

for those changes.
3. The disclosures required by section 820-10-50.
The disclosures required by ASC 820-10-50 relate to fair value disclosures, and
are discussed in the following section.
17.4.13.4 Fair value disclosures under ASC 820
The fair value disclosures required by ASC 820 are broadly applicable to most
assets and liabilities measured at fair value, including those acquired in a
business combination. ASC 820 requires different disclosures if the related assets
PwC 17-19
or liabilities are remeasured at fair value on a recurring basis. Refer to FSP 20 for
further information on fair value disclosure requirements.
ASC 805 also requires certain disclosures related to fair value. ASC 805-20-50-
1(e) requires that the acquirer disclose the fair value amount of the
noncontrolling interest whenever the acquirer completes a business combination
where it owns less than 100% of the acquired entity. It also requires the acquirer
to disclose the valuation techniques and significant inputs used to measure the
fair value of the noncontrolling interest.
When a business combination is accomplished in stages, the following

disclosures are required:
Excerpt from ASC 805-10-50-2(g)
1. The acquisition-date fair value of the equity interest in the acquiree held by
the acquirer immediately before the acquisition date.
2. The amount of any gain or loss recognized as a result of remeasuring to fair

value the equity interest in the acquiree held by the acquirer immediately
before the business combination (see paragraph 805-10-25-10) and the line
item in the income statement in which that gain or loss is recognized.
3. The valuation technique(s) used to measure the acquisition-date fair value of

the equity interest in the acquiree held by the acquirer immediately before
the business combination.
4. Information that enables users of the acquirer’s financial statements to assess

the inputs used to develop the fair value measurement of the equity interest
in the acquiree held by the acquirer immediately before the business
combination.
17.5 Sample disclosures

The following illustrates disclosures of a business combination and the goodwill
rollforward discussed in FSP 8 in the annual statements of a calendar year-end
reporting entity. This is one practical example, but reporting entities can use
various formats to meet the disclosure requirements. The example below
provides a reference to the applicable ASC 805 guidance at the end of each
disclosure. ASC 805-10-55-37 provides an additional example of the disclosure
requirements.
17-20 PwC
Figure 17-2
Sample business combination disclosures
Note X - Acquisitions
On August 1, 20X6, FSP Corp completed the acquisition of 50% of the common
shares of Submarine Corp (SUB Corp), increasing its interest from 20% to 70%,
and providing FSP Corp control over SUB Corp. SUB Corp became a consolidated
subsidiary of FSP Corp on this date. SUB Corp is a shoe and leather goods retailer
operating in the United States and most Western European countries. FSP Corp
previously accounted for its 20% interest in SUB Corp as an equity method
investment. As a result of the acquisition, FSP Corp is expected to expand the
sales of its shoe and leather products in the United States and Western European
markets [ASC 805-10-50-2 (a)–(d)].
The acquired business contributed revenues of $44,700 and earnings of $2,700

to FSP Corp for the period from August 1, 20X6 to December 31, 20X64 [ASC
805-10-50-2(h)(1)]. The following unaudited pro forma summary presents
consolidated information of FSP Corp as if the business combination had
occurred on January 1, 20X53 [ASC 805-10-50-2(h)(3)]:
Pro forma year ended Pro forma year ended

December 31, 20X6 December 31, 20X5
(unaudited) (unaudited)
Revenue $220,300 $205,300
Earnings $ 33,100 $ 13,200
FSP Corp did not have any material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings [ASC 805-10-50-2(h)(4)].
These pro forma amounts have been calculated after applying FSP Corp’s
accounting policies and adjusting the results of SUB Corp to reflect the additional
depreciation and amortization that would have been charged assuming the fair
value adjustments to property, plant, and equipment, and intangible assets had
been applied from January 1, 20X5, with the consequential tax effects.
In 20X6, FSP Corp incurred $200 of acquisition-related costs. These expenses

are included in general and administrative expense on FSP Corp’s consolidated
income statement for the year ended December 31, 20X65 [ASC 805-10-50-2(e)–
(f)] and are reflected in pro forma earnings for the year ended December 31,
20X5, in the table above.
PwC 17-21
The following table summarizes the consideration transferred to acquire SUB

Corp and the amounts of identified assets acquired and liabilities assumed at the
acquisition date, as well as the fair value of the noncontrolling interest in SUB
Corp at the acquisition date [ASC 805-30-50-1(b) and ASC 805-20-50-1(c)]:
Fair value of consideration transferred:

Cash $6,500
Common shares 5,500
Contingent consideration 2,000
Total $14,000
Fair value of FSP Corp’s investment in SUB Corp held

$5,600
before the business combination [ASC 805-10-50-2(g)(1)]
Fair value of the noncontrolling interest in SUB Corp [ASC
805-20-50-1(e)(1)] $8,000
Recognized amounts of identifiable assets acquired and liabilities

assumed:
Cash and cash equivalents $500
Trade receivables 6,500
Inventories 4,000
Available-for-sale financial assets 1,000
License (included in intangibles) 3,000
Trademarks (included in intangibles) 1,850
Property, plant, and equipment 63,500
Trade and other payables (12,500)
Liability arising from a contingency (1,000)
Borrowings (37,500)
Deferred tax liabilities (2,000)
Retirement benefit obligations (2,500)
Total identifiable net assets $24,850
Goodwill $2,750
FSP Corp issued 220 common shares that had a total fair value of $5,500 based
on the closing market price of $25 per share on August 1, 20X6, the acquisition
date.
As a result of FSP Corp obtaining control over SUB Corp, FSP Corp’s previously
held 20% interest was remeasured to fair value, resulting in a gain of $900. This
17-22 PwC
has been recognized in the line item “other (losses)/gains—net” on the

consolidated income statement [ASC 805-10-50-2(g)].
The fair value of the noncontrolling interest of $8,000 and the fair value of the
previously held equity interest of $5,600 in SUB Corp were estimated by applying
a market approach and an income approach, respectively. These fair value
measurements of the noncontrolling interest and the previously held equity
interest are based on significant inputs not observable in the market, and thus
represent Level 3 measurements. The fair value estimates for the noncontrolling
interest and the previously held equity interest are based on (1) an assumed
discount rate range of 20–25%, (2) an assumed terminal value based on a range
of terminal EBITDA multiples between 3 and 5 times (or, if appropriate, based on
long-term sustainable growth rates ranging from 3% to 6%), (3) assumed
financial multiples of reporting entities deemed to be similar to SUB Corp, and
(4) assumed adjustments because of the lack of control or lack of marketability,
as relevant, that market participants would consider when estimating the fair
value of the noncontrolling interest and the previously held equity interest in
SUB Corp [ASC 805-20-50-1(e), ASC 805-10-50-2(g)].
The acquisition of SUB Corp includes a contingent consideration arrangement

that requires additional consideration to be paid by FSP Corp to the sellers of
SUB Corp based on the future net income of SUB Corp over a three-year period.
Amounts are payable three years after the acquisition date. The range of the
undiscounted amounts FSP Corp could pay under the contingent consideration
agreement is between zero and $3,000. The fair value of the contingent
consideration recognized on the acquisition date of $2,000 was estimated by
applying the income approach [ASC 805-30-50-1(c)]. That measure is based on
significant Level 3 inputs not observable in the market. Key assumptions include
(1) a discount rate range of 10% to 15%, and (2) probability adjusted level of net
income between $8,000 and $8,500.
As of December 31, 20X6, there were no changes in the recognized amounts or

range of outcomes for the contingent consideration recognized as a result of the
acquisition of SUB Corp [ASC 805-30-50-4(a)].
The goodwill is attributable to the workforce of the acquired business and the
significant synergies expected to arise after FSP Corp’s acquisition of SUB Corp
[ASC 805-30-50-1(a)].
The goodwill is not deductible for tax purposes [ASC 805-30-50-1(d)]. All of the
$2,750 of goodwill was assigned to FSP Corp’s Retail Shoes segment [ASC 805-
30-50-1(e)].
The fair value of the assets acquired includes trade receivables of $6,500. The
gross amount due under contracts is $6,800, of which $300 is expected to be
uncollectible [ASC 805-20-50-1(b)]. FSP Corp did not acquire any other class of
receivable as a result of the acquisition of SUB Corp.
PwC 17-23
The fair values of the acquired license and trademark intangible assets of $3,000
and $1,850, respectively, are provisional pending receipt of the final valuations
for those assets [ASC 805-10-50-6].
Prior to the acquisition, FSP Corp had a preexisting relationship with SUB Corp.
FSP Corp had a receivable of $200 for certain trademark fees. These fees were
disputed by SUB Corp. In 20X4, FSP Corp filed a lawsuit against SUB Corp for
the $200 in disputed fees. As part of the acquisition terms, the lawsuit was
settled for $150. FSP Corp recorded a loss upon settlement of $50 as a result of
the acquisition, which was recorded separately from the business combination.
The settlement loss was recorded in general and administrative expense on FSP
Corp’s consolidated income statement [ASC 805-10-50-2(f)].
A liability arising from a contingency of $1,000 has been recognized at fair value
for expected warranty claims on products sold by SUB Corp during the last two
years. FSP Corp expects that the majority of this expenditure will be incurred in
20X7 and that all costs will be incurred by 20X9. The potential undiscounted
amount of all future payments that FSP Corp could be required to make under
the warranty arrangements is estimated to be between $500 and $1,500. As of
December 31, 20X6, there has been no change to the acquisition date amount
recognized for the liability, nor any change in the range of outcomes or
assumptions used to develop the fair value [ASC 805-20-50-1(d)].
See Note XY, Subsequent Events, for disclosures regarding the acquisition of LTR
Company, which took place after the balance sheet date, but before the issuance
of these financial statements [ASC 805-10-50-4].
17-24 PwC
Note Y—Goodwill
The changes in the carrying amounts of goodwill for the Retail Shoes and Retail
Coats segments are as follows [ASC 350-20-50-1]:
Retail Retail
shoes coats
segment segment Total
Balance as of January 1,
20X5
$6,600 $2,400 $9,000
Goodwill
Accumulated (300) (300) (600)
impairment loss
Balance as of January 1, 6,300 2,100 8,400
20X5, net
Reduction of (900) (500) (1,400)
goodwill related to
dispositions
Effect of foreign 100 100 200
currency
Balance as of December
31, 20X5
5,800 2,000 7,800
Goodwill
Accumulated (300) (300) (600)
impairment loss
Balance as of December 5,500 1,700 7,200
31, 20X5, net
Increase in goodwill 2,750 — 2,750
related
to ,acquisition
Reduction of (300) — (300)
goodwill related to
disposition
Effect of foreign 100 (200) (100)
currency
Balance as of December
31, 20X6
8,350 1,800 10,150
Goodwill
Accumulated (300) (300) (600)
impairment loss
Balance as of December $8,050 $1,500 $9,550
31, 20X6, net
PwC 17-25
17.6 Other considerations for business

combinations—pushdown accounting
Under US GAAP, an acquirer of a business initially recognizes most of the
acquired assets and liabilities at fair value. If the acquired business prepares
separate financial statements, a question arises as to whether the historical basis
of the acquired company or the “stepped-up basis” of the acquirer should be
reflected in those separate financial statements. Pushdown accounting refers to
the latter, which means establishing a new basis for the assets and liabilities of
the acquired company based on a “push down” of the acquirer’s stepped-up basis.
17.6.1 Change-in-control events
In November 2014, the FASB issued ASU 2014-07, Pushdown Accounting, that
gives all reporting entities the option to apply pushdown accounting when they
are acquired by another party (i.e., upon a change-in-control event).
Concurrently, the SEC staff eliminated its guidance which had required or
precluded pushdown accounting for registrants generally based on the
percentage of ownership. This new guidance was effective immediately.
For purposes of pushdown accounting, a change-in-control event is one in which

an acquirer obtains control of a company. An acquirer might obtain control of a
company in a variety of ways, including by transferring cash or other assets, by
incurring liabilities, by issuing equity interests, or a combination thereof. In some
cases, an acquirer might obtain control of a company without transferring
consideration, such as when certain rights in a contract lapse. The guidance on
consolidations in ASC 810 and business combinations in ASC 805 should be used
to determine whether an acquirer has obtained control of a company.
There may also be instances when there is a change-in-control event, but

business combination accounting under ASC 805 is not applied by the acquirer.
This may be the case, for example, if the acquirer is an individual that does not
prepare financial statements, or an investment company that accounts for its
investments at fair value (e.g., a private equity company). In these situations, an
acquired company could still elect to apply pushdown accounting as if the
acquirer had applied business combination accounting under ASC 805.
The election is available to the acquired company, as well as to any direct or

indirect subsidiaries of the acquired company. Each acquired company or any of
its subsidiaries can make its own election independently.
17.6.2 Making the election to apply pushdown accounting
Before making an election, it is important to consider the needs of the users of an

acquired company’s financial statements—and those needs may vary. Some users
may prefer the “stepped-up basis” that results from pushdown accounting. Other
users may prefer the historical basis to avoid distorting income statement trends
as a result of increased amortization and depreciation expense. Users that are
focused on cash flow and EBITDA measures may be indifferent as these measures
17-26 PwC
are often not significantly affected by pushdown accounting. Assessing user needs
may be more challenging when there are multiple users of the financial
statements with different needs (e.g., creditors versus equity investors).
Some acquirers may prefer to apply pushdown accounting at the acquired

company level to avoid separate tracking of assets, such as goodwill and fixed
assets, at two different values (historical and “stepped-up basis”). Conversely, an
acquired company may prefer to carry over its historical basis even when its
acquirer is applying business combination accounting. Companies may also want
to consider tax reporting implications and may prefer to carry over their
historical basis for financial reporting purposes when carry over basis is being
used for tax reporting purposes (that is, when there is no tax “step-up”).
The decision to apply pushdown accounting is usually made in the reporting

period in which the change-in-control event occurs. This means that a company
would have until its financial statements are issued (or are available to be issued)
to make the election.
The decision to apply pushdown accounting is irrevocable. However, if an entity

has not applied pushdown accounting for a change-in-control event, it may elect
to do so in a subsequent period as a change in accounting principle, if preferable.
The reporting entity would retrospectively adjust its reporting basis as of the date
of the most recent change-in-control event, even when that event preceded the
issuance of the pushdown accounting guidance.
Retrospective application of pushdown accounting may be appropriate at align

the reporting basis of a subsidiary with that of its parent. This would require the
use of the parent’s business combination accounting as of the most recent
change-in-control event. It would also require a roll-forward of that accounting
(e.g., depreciation and amortization of stepped-up values, and potential
impairments). Sometimes, the parent may not have applied business
combination accounting (e.g., a private equity parent) or may not have applied it
at a precise enough level for the subsidiary’s separate financial statements. In
those cases, the subsidiary would have to retrospectively determine the fair value
of its assets and liabilities as of the most recent change-in-control event, which
can be difficult and costly.
The decision of whether to apply pushdown accounting upon a change-in-control

event does not establish an accounting policy. That is, a company may elect to
apply pushdown accounting for one change-in-control event and, independent
from that election, decide not to apply pushdown accounting upon the next
change-in-control event, or vice versa.
17.6.3 Pushdown accounting presentation considerations
The application of pushdown accounting represents the termination of the old

accounting entity and the creation of a new one. Accordingly, it would not be
appropriate for financial statements for a given period to combine pre- and post-
pushdown periods. For example, it would be inappropriate for a reporting entity
with a December 31, 20X6 year-end, for which pushdown was applied as of
PwC 17-27
July 1, 20X6, to present an income statement for the 12 months ended December
31, 20X6. This would also apply to the statements of cash flows, changes in
stockholders’ equity, and comprehensive income. Footnote disclosures related to
pre- and post-pushdown periods should likewise not be combined.
For both the financial statements and in instances where footnote disclosure is
presented in a tabular format, reporting entities would generally include a
vertical black line between the predecessor and successor columns to highlight
for the reader the change in basis between the pre- and post-pushdown periods.
The columns related to the pre-pushdown period columns are generally labelled
“Predecessor Company,” while the post-pushdown period columns are labelled
“Successor Company.” Similar designations can be used. Also included in the
footnotes to the financial statements would be a discussion of the basis of
presentation. This discussion should notify the reader that the reporting entity’s
results of operations and cash flows after the transaction are not comparable with
those prior to the acquisition as a result of pushdown accounting, and therefore
have been segregated in the respective financial statements.
In addition, when pushdown accounting is applied, the retained earnings of the

predecessor company are not carried forward because a new basis of accounting
has been established.
17.6.4 Pushdown accounting disclosure considerations
If a reporting entity elects pushdown accounting in its separate financial

statements, the standard requires that disclosures are provided that enable users
to evaluate the effect of pushdown accounting.
ASC 805-50-50-6
Information to evaluate the effect of pushdown accounting may include the
following:
a. The name and a description of the acquirer and a description of how the
acquirer obtained control of the acquiree.
b. The acquisition date.
c. The acquisition-date fair value of the total consideration transferred by the

acquirer.
d. The amounts recognized by the acquiree as of the acquisition date for each
major class of assets and liabilities as a result of applying pushdown
accounting. If the initial accounting for pushdown accounting is incomplete
for any amounts recognized by the acquiree, the reasons why the initial
accounting is incomplete.
e. A qualitative description of the factors that make up the goodwill recognized,

such as expected synergies from combining operations of the acquiree and
the acquirer, or intangible assets that do not qualify for separate recognition,
17-28 PwC
f. or other factors. In a bargain purchase (see paragraphs 805-30-25-2 through

25-4), the amount of the bargain purchase recognized in additional paid-in
capital (or net assets of a not-for-profit acquiree) and a description of the
reasons why the transaction resulted in a gain.
g. Information to evaluate the financial effects of adjustments recognized in the

current reporting period that relate to pushdown accounting that occurred in
the current or previous reporting periods (including those adjustments made
as a result of the initial accounting for pushdown accounting being
incomplete [see paragraphs 805-10-25-13 through 25-14]).
The information in this paragraph is not an exhaustive list of disclosure

requirements. The acquiree shall disclose whatever additional information is
necessary to meet the disclosure objective set out in paragraph 805-50-50-5.
When an acquired company elects pushdown accounting, it should provide the

same disclosures that would be provided by the acquirer pursuant to ASC 805, as
applicable. It should also provide all relevant disclosures required by US GAAP in
periods subsequent to the business combination, including but not limited to
those relating to goodwill, intangible assets, and fair value measurements.
A company that does not elect pushdown accounting upon a change-in-control

event is not required to disclose that there was a change-in-control event or that
it decided not to elect pushdown accounting.
When pushdown accounting is applied, the reporting entity should consider

disclosing the pro forma information similar to that relating to business
combinations described in ASC 805 and S-X 10-01-(b)(4) in order to demonstrate
the effects of the acquisition and related pushdown accounting on the acquired
entity. If that pro forma information is presented, it should be presented for the
entire fiscal period (i.e., reflecting the impact of the business combination and
related pushdown accounting for the entire fiscal period). The pro forma
information should not be presented separately for the successor and predecessor
periods. Pro forma information for the prior year comparative period(s) should
also be included.

The requirements of ASC 805 apply equally to SEC registrants and private
companies. Disclosures and reporting requirements related to pro forma
financial information, and Articles 10 and 11 of S-X regulations only apply to SEC
registrants.
Refer to FSP 8.11.2 for discussion of the goodwill presentation and disclosure
requirements for private companies if a reporting entity adopts the private
company accounting alternative for goodwill.
PwC 17-29
Refer to FSP 8.11.2.2 for discussion of the disclosure requirements of certain

intangible assets subsumed into goodwill for private companies if a reporting
entity adopts the private company accounting alternative for intangible assets
acquired in a business combination. A private company that elects the accounting
alternative for intangible assets must also adopt the goodwill accounting
alternative.
17-30 PwC
Chapter 18:
Consolidation
PwC 18-1
Consolidation

This chapter addresses presentation and disclosure matters applicable to
consolidated entities and to interests in variable interest entities (VIEs) that are
not consolidated by their holders.
First, the chapter discusses presentation and disclosure considerations broadly

applicable to consolidated financial statements. Second, it addresses disclosure
objectives and specific disclosure requirements for reporting entities that hold
interests in VIEs. Third, the chapter addresses voting interest entities or VOEs.
The term VOE is not defined in authoritative accounting guidance, but it is
commonly used to refer to an entity that is not a VIE. Finally, the chapter
highlights other related presentation and disclosure matters, including
proportionate consolidation, presentation of nonhomogenous subsidiaries,
combined financial statements, and deconsolidation of a subsidiary.
The matters addressed in this chapter assume the reporting entity will
consolidate an entity on the date it obtains a controlling financial interest in the
entity in accordance with ASC 810, Consolidation, and ASC 805, Business
Combinations, which can be defined differently depending upon the
consolidation model applied. Accounting for transactions resulting in the initial
consolidation or deconsolidation of a subsidiary is discussed in PwC’s CG and
BCG.
18.2 Scope
The primary source of authoritative guidance on consolidation and
deconsolidation is ASC 810. ASC 810 prescribes consolidation requirements
specific to VIEs and VOEs (with specific guidance for VOE limited partnerships),
and also provides general accounting and disclosure guidance for all other
entities.
S-X 3A-01 through S-X 3A-05 include additional consolidation-related

accounting and disclosure requirements applicable to SEC registrants. Reporting
entities should be aware that VIE disclosures are incremental to disclosures
required by other applicable areas of U.S. GAAP (e.g., ASC 860, Transfers and
Servicing; and ASC 820, Fair Value Measurements).
In February 2015, the FASB issued ASU 2015-02, Amendments to the

Consolidation Analysis. The standard was effective for public reporting entities
for annual periods beginning after December 15, 2015, and is effective for
nonpublic reporting entities one year later. Early adoption is permitted.
The new guidance provides a scope exception for money market funds registered
with the SEC pursuant to Rule 2a-7 of the Investment Company Act of 1940
(registered money market funds) and “similar” unregistered money market
funds. Reporting entities that are subject to this scope exception must provide
additional disclosures.
18-2 PwC
Consolidation
ASC 810-10-15-12(f)(2)
A reporting entity subject to this scope exception shall disclose any explicit
arrangements to provide financial support to legal entities that are required to
comply with or operate in accordance with requirements that are similar to those
included in Rule 2a-7, as well as any instances of such support provided for the
periods presented in the performance statement. For purposes of applying this
disclosure requirement, the types of support that should be considered include,
but are not limited to, any of the following:
i. Capital contributions (except pari passu investments)
ii. Standby letters of credit
iii. Guarantees of principal and interest on debt investments held by the legal
entity
iv. Agreements to purchase financial assets for amounts greater than fair value
(for instance, at amortized cost or par value when the financial assets
experience significant credit deterioration)
v. Waivers of fees, including management fees.
18.3 General consolidation presentation and

disclosure principles
Consolidated financial statements include the accounts of the reporting entity
and all other legal entities in which the reporting entity holds a controlling
financial interest (that is, subsidiaries of the reporting entity). ASC 810-10-10-1
and S-X 3A-02 affirm the fundamental principle in U.S. GAAP that consolidated
financial statements are presumed to be more meaningful than separate financial
statements. Determining whether a reporting entity’s interest in a legal entity
provides it with a controlling financial interest depends on a number of different
factors.
□ If the legal entity is a VIE, the reporting entity applies the consolidation
criteria in ASC 810-10-25 (power and potentially significant benefits or
losses) to determine whether it has a controlling financial interest in the
VIE—and thus, should consolidate the VIE. Certain entities are exempt from
applying ASC 810’s guidance related to VIEs; see CG 2.1 for more details.
Refer to CG 2.4 for further details related to the determination of a VIE’s

primary beneficiary.
□ If the legal entity is not a VIE, the reporting entity generally evaluates
whether its ownership interest in the legal entity provides it with a
controlling financial interest.
PwC 18-3
Consolidation
As described in ASC 810-10-15-8, ownership of more than 50 percent of the

outstanding voting shares of another entity “is a condition pointing to
consolidation.” There are exceptions to this presumption that would prevent
consolidation by a majority equity owner or general partner as discussed in
ASC 810-10-25-2 through 14, ASC 810-20-25-4 through 21, and FSP 18.10.
Refer to CG 3 for further details on the VOE model.
Consolidation presentation and disclosure requirements vary depending on

whether the subsidiary is a VIE or a VOE. In any event, when a reporting entity
consolidates a wholly- or partially-owned subsidiary, it should disclose its
consolidation policy. In addition, if a reporting entity includes its consolidation
disclosures in multiple footnotes, it should cross-reference between them.
18.3.1 Presentation and disclosure considerations: partially-owned

consolidated subsidiaries
The reporting entity should disclose the effects of any changes in the subsidiary’s
equity that is attributable to the reporting entity (e.g., a capital contribution or
the reporting entity’s purchase or sale of its subsidiary’s equity).
When a reporting entity consolidates a less-than-wholly-owned subsidiary,

ASC 810-10-45-18 to 21 requires a parent to attribute the following amounts to
the controlling and noncontrolling investors on the face of the income statement:
□ Consolidated net income or loss
□ Consolidated comprehensive income or loss
Additionally, the following amounts that are attributable to the reporting entity
should be presented on the face of the financial statements or separately
disclosed in the footnotes:
□ Income from continuing operations
□ Income from discontinued operations
Lastly, a reporting entity should perform a reconciliation of the change in

stockholders’ equity as of the beginning and end of the most recent reporting
period, including the following components:
□ Total equity (net assets)
□ Equity (net assets) attributable to the reporting entity
□ Equity (net assets) attributable to the noncontrolling interest(s)
This reconciliation should also include separate disclosure of net income, each
component of comprehensive income, and transactions with owners acting in
18-4 PwC
Consolidation
their capacity as owners. For transactions with owners, contributions from and
distributions to the owners should be shown separately.
In addition, a reporting entity may have multiple consolidated subsidiaries for

which disclosure of information described in ASC 810-10-45-18 through 21 is
warranted. It may choose to present such information on an aggregated basis.
18.3.2 General consolidation disclosure considerations
Reporting entities should consider separate disclosure of instances when

(1) a majority-owned subsidiary is not consolidated, and (2) a less than
majority-owned subsidiary is consolidated. S-X 3A-02 provides specific
disclosure considerations for SEC registrants in these instances.
Consolidation is an area that frequently draws comments from the SEC staff. The
SEC staff may request additional disclosure when a reporting entity’s disclosures
do not provide adequate transparency regarding its conclusions related to
consolidation, including in the following areas:
□ The terms of the reporting entity’s interests in an entity
□ The factors considered by the reporting entity when determining whether it

does or does not consolidate an entity
□ A discussion of why the reporting entity does not consolidate an entity in

which it owns greater than 50 percent of the outstanding equity interests or
receives a majority of the entity’s economics (such as the nature and
substance of rights held by the minority investor), especially when these
types of conditions exist and an entity is being deconsolidated.
18.4 Variable interest entities (VIEs)

Reporting entities that hold variable interests in VIEs follow ASC 810-10’s
presentation and disclosure requirements. These requirements address the
presentation of a consolidated VIE and also stipulate specific disclosures that
vary depending upon whether the reporting entity consolidates the VIE.
18.4.1 Balance sheet presentation of consolidated VIEs
In accordance with ASC 810-10-45-25, a reporting entity that is the primary

beneficiary of a VIE is required to separately present each of the following in its
consolidated balance sheet:
□ The VIE’s assets that can be used to settle only the VIE’s obligations
□ The VIE’s liabilities if the VIE’s creditors (or beneficial interest holders) have
no recourse against the general credit of the primary beneficiary
PwC 18-5
Consolidation
The VIE’s liabilities and assets may not be offset and reported as a single line
item in the primary beneficiary’s financial statements; they are required to be
presented on a gross basis.
This reporting requirement does not require that each individual consolidated
VIE’s assets and liabilities be presented separately on the face of the balance
sheet. The same (or similar) assets of all consolidated VIEs may be aggregated
and presented as a single line item in the reporting entity’s consolidated balance
sheet. The same (or similar) liabilities may also be similarly aggregated as a
single line item in the liability section of the reporting entity’s balance sheet.
Refer to FSP 18.4.3 for additional information.
Because criteria for separate reporting of the assets and liabilities of a

consolidated VIE differ, it is possible that only the assets or only the liabilities,
but not necessarily both, of a particular VIE need to be separately presented. For
example, the primary beneficiary of a securitization structure or a real estate
entity may need to separately present the assets of the VIE because they can only
be used to settle the VIE’s beneficial interests or obligations. However, if the
primary beneficiary guaranteed the liabilities of the VIE, separate presentation of
the VIE’s obligations is not required since the beneficial interest holders or
lenders have recourse to the primary beneficiary’s general credit.
Only the assets and liabilities of a consolidated VIE meeting the conditions in
ASC 810-10-45-25 must be presented separately in the reporting entity’s financial
statements. While the guidance does not specify how the VIE’s assets and
liabilities should be presented, we believe the following methods are acceptable:
□ Parenthetically disclose the amount of assets and liabilities related to

consolidated VIEs included in each balance sheet line item
□ Separately present the assets and liabilities of a consolidated VIE as long as

they are appropriately captioned on the face of the balance sheet
Example 18-1 illustrates presentation alternatives for a consolidated VIE.
EXAMPLE 18-1
Balance sheet presentation alternatives for a consolidated VIE
FSP Corp determines that Company V is a VIE, and that FSP Corp is Company
V’s primary beneficiary. Company V’s assets consist primarily of cash and
accounts receivable, which can only be used to settle specific Company V
short-term and long-term debt obligations. Holders of those obligations do not
have recourse to FSP Corp’s general credit.
Is separate presentation of Company V’s assets and liabilities required?
18-6 PwC
Consolidation
Analysis
Yes, separate presentation is required. To comply with the presentation

requirements in ASC 810-10-45-25, FSP Corp may choose to report the assets
and obligations of Company V parenthetically, as shown below.
Assets
Cash (amounts related to VIE of $3) $20

Inventory 14
Accounts receivable (amounts related to VIE of $3) 8
Property, plant and equipment (net) 25
Other assets 3
Total assets $70
Liabilities and Stockholders’ Equity
Accounts payable $23

Short-term debt (including debt of VIE of $3) 10
Long-term debt (including debt of VIE of $3) 19
Other liabilities 13
Equity 5
Total liabilities and stockholders’ equity $70
If (1) Company V’s assets could be used to settle any of FSP Corp’s obligations, or
(2) Company V’s creditors had recourse to FSP Corp’s general credit, FSP Corp
would not be required to separately present Company V’s assets and liabilities.
If a VIE’s creditors have partial recourse against the VIE’s primary beneficiary,
separate reporting of the VIE’s assets and liabilities generally would not be
required but would be recommended. If the VIE’s assets and liabilities are not
separately reported by the primary beneficiary, then the primary beneficiary
should consider disclosing the reason why there is no separate reporting.
In some cases, a consolidated VIE’s outstanding equity interests may be owned

by one or more third-party investors. Provided the VIE’s equity interests are
reported within the equity section in the VIE’s stand-alone financial statements,
these interests should be reported in the primary beneficiary’s consolidated
balance sheet as noncontrolling interest (NCI), as shown on the example balance
sheet in FSP Figure 2-1. The primary beneficiary can make a policy election to
present NCI related to a consolidated VIE separately or on an aggregate basis.
PwC 18-7
Consolidation
18.4.2 VIE disclosures
If a reporting entity concludes that it has a variable interest in a VIE in

accordance with ASC 810, it should comply with both the VIE principle disclosure
objectives and the specific required VIE disclosures in ASC 810-10-50. The
specific required VIE disclosures vary depending upon whether the reporting
entity consolidates the VIE. Additional disclosures are often added to the specific
required disclosures to comply with the principle objectives.
The principal objective of the VIE disclosures is to provide users of the reporting
entity’s financial statements with information that includes the following:
□ Significant judgments and assumptions made in determining whether it

needs to consolidate a VIE and/or disclose information about its involvement
with a VIE
□ The nature of the restrictions, if any, on a consolidated VIE’s assets and on

the settlement of the VIE’s liabilities
□ The nature of and changes in the risks associated with a reporting entity’s
involvement with a VIE
□ How a reporting entity’s involvement with a VIE affects its financial position,
financial performance, and cash flows
The FASB’s inclusion of disclosure objectives emphasizes the need for reporting
entities not to assume that the specific disclosure requirements represent the
minimum requirements. Instead, reporting entities should apply judgment in
determining what is necessary to provide financial statement users with
decision-useful information.
The content of the VIE disclosures depends on the extent to which the reporting
entity is involved with the VIE, the significance and form of the involvement, and
whether the VIE is consolidated. Although ASC 810-10-50-8 articulates the broad
objectives of these disclosures in a principles-based manner, many of the
disclosure requirements in ASC 810-10-50 are granular and prescriptive.
However, reporting entities should ensure that their VIE disclosures, when
viewed in their totality, clearly communicate the purpose and design of these
entities and describe the significant judgments made in connection with the
primary beneficiary evaluation.
Public reporting entities should be mindful of SEC focus when the reporting
entity is not consolidating the VIE but is expected to absorb economics that are
disproportionate to its power over the VIE. In these instances, the reporting
entity should clearly disclose the existence and nature of such arrangements as
well as the judgments made when determining that the reporting entity is not the
VIE’s primary beneficiary.
Figure 18-1 summarizes ASC 810’s specific VIE disclosure requirements.
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Figure 18-1
VIE disclosure requirements
Relationship Disclosures
Holder of variable □ Methodology for concluding whether the reporting entity is

interests in a VIE, (or is not) the primary beneficiary of the VIE, including
regardless of disclosure of key factors, assumptions, and significant
whether the holder judgments used in making this determination
is the primary
beneficiary □ Which factors resulted in a change in reporting, if
(ASC 810-10-50-5A) applicable, including the impact of that change on the
consolidated financial statements (e.g., the reporting entity
previously consolidated the VIE and is no longer
consolidating it)
□ Whether financial or other support was (or will be)
provided that the reporting entity was not previously
contractually required to provide, including:
o The type and amount of support
o The primary reasons for providing that support
o If the reporting entity is not the primary
beneficiary, qualitative and quantitative
information regarding its involvement with the
VIE
□ Information (quantitative and qualitative) about the
reporting entity’s involvement with the VIE, including its
nature, size, purpose, activities, and how it is financed
□ A VIE may issue voting equity interests, and the reporting
entity that holds a majority voting interest also may be the
primary beneficiary of the VIE. If so, and if the VIE meets
the definition of a business and the VIE’s assets can be used
for purposes other than settlement of the VIE’s obligations,
all of these disclosures are not required
(ASC 810-10-50-5B).
Primary beneficiary □ The carrying amount and classification of the VIE’s assets
of the VIE and liabilities included in the consolidated financial
(ASC 810-10-50-3 statements, including qualitative information about the
and relationship(s) between those assets and liabilities
ASC 805-10-50-1
through 4) □ If creditors of a VIE have no recourse to the reporting
entity’s general credit, information about lack of recourse
□ Terms of arrangements that could require the reporting
entity to provide support to the VIE, including events that
could expose the reporting entity to loss
□ On initial consolidation of a business, disclosures required
by ASC 805, as described in FSP 17.4
□ On initial consolidation of a VIE that is not a business
(refer to BC 2), the amount of gain or loss recognized
(if any)
Not the primary □ The carrying amount and classification of the assets and
beneficiary of the liabilities in the reporting entity’s balance sheet that relate
VIE to the reporting entity’s variable interest in the VIE
(ASC 810-10-50-4)
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Relationship Disclosures
□ Maximum exposure to loss as a result of the reporting

entity’s involvement with the VIE, including how the
reporting entity determined that amount and the
significant sources of that exposure to loss
o Disclose if the reporting entity’s maximum exposure
to loss cannot be quantified
□ A tabular comparison of the carrying amounts of the assets
and liabilities, with the corresponding maximum exposure
to loss, accompanied by a description of all qualitative and
quantitative reasons for the differences between the
carrying amount of the assets and liabilities and maximum
exposure to loss (considering all variable interests and
arrangements, both explicit and implicit)
□ Information about liquidity arrangements, guarantees,
and/or other commitments by third parties that may affect
the fair value or risk of the reporting entity’s variable
interests in a VIE (encouraged but not required)
□ If the reporting entity is not the primary beneficiary of the
VIE because there is “shared power,” significant factors
considered and judgments made in determining that power
is shared (refer to CG 2.4.2.4 and CG 2.4.2.7)
The primary beneficiary of a VIE that is a business should comply with ASC 805’s
disclosure requirements, as detailed in FSP 17.4. The primary beneficiary of a VIE
that is not a business should disclose the amount of gain or loss, if any,
recognized on the initial consolidation of a VIE. Reporting entities should pay
particular attention to the sufficiency of their disclosures when such
circumstances exist.
Reporting entities may find it is useful for users of their financial statements to
see consolidating financial statements. A reporting entity may present
consolidating financial statements in its VIE footnote including summarized
balance sheet and income statement information.
In February 2015, the FASB issued ASU 2015-02. The standard was effective for
public reporting entities for annual periods beginning after December 15, 2015,
and is effective for nonpublic reporting entities one year later. Early adoption is
permitted. ASU 2015-02 introduced additional disclosure requirements for a
reporting entity that consolidates collateralized financing entities.
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ASC 810-10-50-20 through 50-22

A reporting entity that consolidates a collateralized financing entity and measures
the financial assets and the financial liabilities using the measurement alternative
in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8 shall
disclose the information required by Topic 820 on fair value measurement and
Topic 825 on financial instruments for the financial assets and the financial
liabilities of the consolidated collateralized financing entity.
For the less observable of the fair value of the financial assets and the fair value of
the financial liabilities of the collateralized financing entity that is measured in
accordance with the measurement alternative in paragraphs 810-10-30-10
through 30-15 and 810-10-35-6 through 35-8, a reporting entity shall disclose
that the amount was measured on the basis of the more observable of the fair
value of the financial liabilities and the fair value of the financial assets.
The disclosures in paragraphs 810-10-50-20 through 50-21 do not apply to the

financial assets and the financial liabilities that are incidental to the operations of
the collateralized financing entity and have carrying values that approximate fair
value.
VIE disclosure is an area that commonly draws SEC staff comments in their
reviews of filings by public registrants. In our experience, the SEC staff has
requested additional disclosure to comply with ASC 810-10’s general disclosure
objectives, such as:
□ A description of why the entity being evaluated for consolidation is not a VIE
□ If the reporting entity is not consolidating the VIE, particularly when it has a
significant economic interest, specific judgments made in that determination
□ When a VIE is deconsolidated by a reporting entity, but the reporting entity

retains a significant economic interest, more discussion of the judgments
made
□ When decision making (i.e., “power”) and economics are disproportionate,

provide more clear and transparent disclosure
□ For entities that issue financial guarantees, additional information about

reasons for changes in consolidation conclusions
□ For financial institutions:
o Why certain investment vehicles have been consolidated and others have
not
o The consolidation model applied to specific investments
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o The qualitative and quantitative analysis used to determine the primary

beneficiary
o The sufficiency of the related disclosures
18.4.3 Aggregation considerations
ASC 810 allows information about “similar” VIEs to be disclosed on an

aggregated basis. Aggregation is permitted if separate reporting would not
provide more useful information to investors. ASC 810-10-50-9 requires that the
assessment of “similar” consider the significance of each VIE to the reporting
entity, and the reporting entity’s exposure to the risks and rewards of each VIE on
a qualitative and quantitative basis. We believe qualitative characteristics could
include the following:
□ The purpose and design of the VIE
□ The risks it was designed to pass along to its variable interest holders
□ The nature of the VIE’s assets
□ The magnitude and nature of the reporting entity’s involvement with the VIE
When the reporting entity aggregates the disclosure, it should distinguish

between VIEs that are consolidated and VIEs that are not consolidated.
Reporting entities should also consider describing the basis for aggregating
“similar” VIEs.
18.4.4 Maximum loss
As noted in Figure 18-1, a reporting entity is required to provide certain

information about its exposure to “maximum loss” stemming from its
involvement with a VIE that it does not consolidate. The maximum loss
represents the loss that the reporting entity would incur if all of the VIE’s assets
were deemed worthless as of the reporting date. The amount disclosed should
include any additional costs the reporting entity would incur in connection with
its involvement with the VIE. Common examples include the following:
□ A holder of an equity method investment would be exposed to loss equal to

the current carrying value of the investment, assuming no future capital
funding requirements
□ A guarantor of an entity’s debt would be exposed to the amount of principal

(and interest) guaranteed
□ A reporting entity that has committed to purchase goods or services from a

VIE would be exposed to costs equal to the notional amount it is
contractually obligated to purchase
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A reporting entity should disclose its maximum potential loss, regardless of

probability. Further, reporting entities should assess whether their disclosures
provide sufficient qualitative and quantitative data regarding the methodology
used to calculate the maximum exposure to loss, including key inputs and
assumptions.
If a reporting entity is involved with multiple VIEs, it may disclose its maximum
exposure to potential losses on an aggregate basis for all similar VIEs.
18.4.5 VIE information “scope out”
ASC 810-10-15-17(c) provides a scope exception (commonly referred to as the

“information scope out”) for reporting entities that entered into arrangements
prior to December 31, 2003 that are unable to obtain the information necessary
to apply the VIE model. This scope exception exempts such a reporting entity
from determining whether a legal entity in which it has a variable interest is a
VIE only after making an “exhaustive effort” to obtain the necessary information.
Refer to CG 2.1.2.3 for additional information on the “information scope out”

exception.
ASC 810-10-50-6 states that a reporting entity choosing to avail itself of this
scope exception disclose the following:
□ The number of legal entities for which the information required to perform
the analysis has not been made available to the reporting entity, and the
reasons
□ The nature, purpose, size (if available), and activities of such entities, along
with the nature of the reporting entity’s involvement with those entities
□ The reporting entity’s maximum exposure to loss due to its involvement with
the legal entities
□ The amount of income, expense, purchases, sales, or other measure of

activity between the reporting entity and the legal entities for all periods
presented
Finally, reporting entities that invoke this scope exception should supplement
required disclosures with a discussion of the reasons the reporting entity is
unable to obtain this information.
18.4.6 Disclosure considerations for VIEs in certain jurisdictions
Arrangements involving VIEs are commonly used in jurisdictions where foreign

ownership of domestic companies is restricted. To overcome foreign ownership
restrictions, reporting entities use contractual arrangements, such as options and
other arrangements, to convey decision-making and economic rights to the
reporting entity, which could cause the reporting entity to consolidate the VIE.
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These structures may involve holding companies designed to comply with these
foreign ownership restrictions. In some cases, the registrant consolidates the
holding company and the holding company consolidates the VIE. These
structures have drawn increased SEC staff comments, particularly with regard to
registrants’ consolidation conclusions. SEC staff comments in this area often
include requests for expanded disclosures about the risks associated with the
registrant’s involvement with such VIEs, consistent with ASC 810-10-50-8 broad
disclosure objectives.
To help financial statement users better understand the judgments in connection

with the consolidation assessment of VIEs in jurisdictions where holding
companies are designed to comply with foreign ownership restrictions, we believe
(and the SEC staff stated at the 2013 AICPA Conference) that the reporting entity
should consider describing the following matters in sufficient detail relative to
these VIE arrangements:
□ Terms of the contractual arrangements with the VIE that were considered in
the consolidation analysis (e.g., duration, decisions requiring consent of
minority investors, renewal provisions, and revocability clauses)
□ Service or other fees paid by the VIEs to the holding company under
contractual arrangements
□ Cash paid from the VIE to the reporting entity
□ How such arrangements convey a controlling financial interest (i.e., the

power to direct the entity’s economically most significant activities and a
potentially significant economic interest in the VIE)
□ The critical judgments made in relation to the reporting entity’s involvement

in the VIE (e.g., the validity and enforceability of contracts with the parties
involved)
□ Whether there are any restrictions on the reporting entity’s contractual rights
□ Disaggregated balance sheet and income statement information
□ Disclosure about retained earnings of the VIE when deferred taxes are not
recognized
18.4.7 Disclosure requirements for reporting entities that hold interests in

registered and similar unregistered money market funds
ASU 2015-02 provides a new scope exception pertaining to certain money market
funds. The consolidation guidance no longer applies to money market funds
registered with the SEC pursuant to Rule 2a-7 of the Investment Company Act of
1940 (registered money market funds) and “similar” unregistered money market
funds.
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The scope exception also applies to all reporting entities that hold interests in
registered and similar unregistered money market funds, including investors,
sponsors, asset managers, and any other interest holders. None of the interest
holders will need to assess these funds for consolidation under any consolidation
model (VIE or VOE). However, reporting entities will be required to provide
enhanced disclosures regarding sources of support to these funds, which would
include:
□ Capital contributions to the money market fund
□ Standby letters of credit
□ Guarantees of principal and interest
□ Agreements to purchased troubled securities at amortized cost
□ Waiver of fees, including management fees
18.5 Voting interest entities (VOEs)

A reporting entity with an interest in an entity first determines whether the entity
is a VIE. Reporting entities applying the VIE model would follow the presentation
and disclosure requirements as discussed in FSP 18.4, in addition to those in
FSP 18.3.
If the entity is not a VIE, then the reporting entity would apply the VOE model.
Under the VOE model, the reporting entity (investor) will generally consolidate
the investee if it owns a majority of the entity’s voting shares. However,
ownership of a majority of voting shares does not always convey control to the
investor. Depending on the investee’s legal form (e.g., corporation, partnership or
limited liability company), rights held by other equity investors may indicate the
majority owner (or general partner or managing member) does not control the
investee. In that case, consolidation by the majority owner (or general partner or
managing member) is inappropriate. Reporting entities applying the VOE model
would follow the general consolidation presentation and disclosure principles in
FSP 18.3 and consider the disclosure requirements included in the following
sections, depending upon the legal form of the entity. Refer to CG Chapter 3 for
additional information on the VOE model.
18.5.1 Corporations
If a reporting entity owns an interest in a legal entity that (1) is not a VIE, and
(2) has a governance structure that operates like a corporation (i.e., it is governed
by a board of directors (or equivalent) appointed or approved by its stockholders
or owners), consolidation of the investee is generally required if the reporting
entity owns greater than 50 percent of the investee’s outstanding voting shares
(or interests).
Despite owning a majority of a corporation’s outstanding voting shares, in certain

circumstances a reporting entity may conclude that consolidation is
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inappropriate. This might occur when the minority equity investors have
substantive participating rights. Refer to CG 3.4.2 for additional information on
participating rights and their impact on the VOE model.
In such instances, the reporting entity should consider disclosing the following:
□ The noncontrolling rights that allow the minority investors to effectively

participate in decisions made in the ordinary course of business, the
frequency with which such rights can be exercised, and why they are
substantive
□ The dispute resolution process if the majority investor and minority investors
are unable to reach an agreement
EXAMPLE 18-2
Disclosure considerations when substantive participating rights prevent a
majority investor from consolidating a voting interest entity
FSP Corp owns 60% of VOE Corp’s outstanding equity, with the remaining 40%
owned by ABC Corp. Through its 60% equity interest, FSP Corp can appoint a
majority of VOE Corp’s board members.
FSP Corp determines that VOE Corp is not a VIE. Accordingly, FSP Corp applies
the voting interest entity model to determine whether it should consolidate VOE
Corp.
Although FSP Corp owns a majority of VOE Corp’s equity, it determines that it
does not have a controlling financial interest in VOE Corp since ABC Corp can
veto the hiring, firing, and compensation of VOE Corp’s Chief Executive Officer,
Chief Operating Officer, and Chief Financial Officer.
What disclosures, if any, should FSP Corp consider in its consolidation footnote?
Analysis
FSP Corp should consider disclosing the existence of the participating right held
by ABC Corp and the judgments made in concluding that this right (1) is
substantive, and (2) provides ABC Corp with the ability to block key decisions
made in the ordinary course of business.
FSP Corp’s specific disclosures should provide transparency into the judgments
made when concluding that it should not consolidate VOE Corp, despite its
majority ownership interest.
18.5.2 Partnerships
A reporting entity with an interest in a partnership first determines whether the

partnership is a VIE. Assuming the partnership reporting entity is not a VIE, the
reporting entity would apply the VOE model and follow the general presentation
and disclosures covered in FSP 18.3. In addition, a reporting entity may wish to
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present additional information to investors about consolidated partnerships or

similar entities that are not VIEs. ASC 810-20-45-1 indicates that this additional
information could be conveyed by: (1) providing consolidating financial
statements, or (2) separately by classifying the partnership’s assets and liabilities
of the partnerships on the reporting entity’s consolidated balance sheet. Other
presentation alternatives may be acceptable.
If the reporting entity is the general partner of a partnership that is a VOE (or an
entity with a governance structure that is the functional equivalent of a limited
partnership) and is not consolidating the partnership, it should consider
disclosing the reason why. This may include the nature of substantive kick-out,
liquidation, or participating rights held by the limited partners, and the specific
factors considered when determining that such rights are substantive (e.g., such
rights are exercisable by a simple majority of the limited partners unrelated to the
general partner).
Refer to CG 3.4.2 and CG 3.5.2 for additional information on participating rights

and kick-out rights.
In practice, kick-out and liquidation rights are most commonly granted to limited
partners in a limited partnership. When limited partners have been granted
liquidation rights, the reporting entity (general partner) should consider
disclosing the following:
□ The limited partners’ mechanism to call a vote to liquidate the limited

partnership
□ The frequency with which such rights can be exercised
□ That the liquidation right can be exercised without cause
□ The vote required to liquidate the limited partnership, including whether the
vote is cast on an absolute basis or instead is based on the relative magnitude
of the limited partners’ capital accounts
□ Whether the general partner and its related parties are excluded from the
vote
□ Whether the limited partners are subject to operational or financial barriers

that would preclude or disincentivize them from exercising such rights (e.g., a
significant termination penalty payable to the general partner upon
dissolution of the limited partnership, absent cause)
If the limited partners have been granted participating rights, the reporting entity
(general partner) may consider disclosure of the following:
□ The noncontrolling rights that allow the limited partners to effectively

participate in decisions made in the ordinary course of business
□ The frequency with which such rights can be exercised
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□ Whether the exercise of such rights is subject to any operational barriers
□ The dispute resolution process if the general partner and limited partners are
unable to reach an agreement
EXAMPLE 18-3
Disclosure considerations when substantive participating rights prevent a general
partner from consolidating a limited partnership
FSP Corp is the general partner of VOE LP. FSP Corp determines that VOE LP is
not a VIE because a simple majority of the limited partners, unrelated to FSP
Corp, were granted the right to liquidate VOE LP without cause at any time
(and no other VIE criteria were met). As such, FSP Corp evaluates VOE LP for
consolidation under the voting interest entity model for limited partnerships
(ASC 810-20). FSP Corp evaluated the substance of the liquidation right and
determined that it should not consolidate VOE LP.
What information should FSP Corp disclose in its consolidation footnote with
respect to its involvement with VOE LP?
Analysis
Although not required by ASC 810-20, FSP Corp should consider disclosing the
key judgments made when determining that the liquidation right prevents FSP
Corp, as general partner, from unilaterally controlling VOE LP.
Such disclosures may include the following:

□ A description of the mechanism that allows the limited partners to exercise
the liquidation right
□ Whether any barriers that would disincentivize the limited partners from
exercising the vote exist, for example, termination penalties
Refer to FSP 18.5.2 for additional factors that a reporting entity may wish to
consider disclosing.
18.6 Proportionate consolidation

The term “proportionate consolidation,” although not included in the
codification, means presenting an investor’s pro-rata share of its assets and
liabilities in each applicable line item of the investor’s balance sheet, and pro-rata
results of operations in each applicable line item in its income statement. Refer to
CG 6.4 for information on proportionate consolidation.
18.7 Combined financial statements – updated

May 2017
If a reporting entity concludes that consolidated financial statements are not
required, it may still be appropriate to bring together the balance sheet, income
statement, equity, and cash flow accounts of two or more affiliated companies
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into a single set of comprehensive financial statements (i.e., as a single reporting

entity). This may also be appropriate when components of a business that are not
legal entities are carved-out from a reporting entity. The financial statements of
the affiliated group are referred to as “combined” financial statements and should
be labeled as such (as opposed to “consolidated”).
While consolidated financial statements are prepared on the basis of a controlling

financial interest, as defined in the applicable model in ASC 810, combined
financial statements are not. Combined statements may be prepared, for
example, for entities under common control, because the resulting financial
statements may be more meaningful than consolidated financial statements of
the common parent. Combined financial statements may also be appropriate
when entities are under common management.
In certain instances, ASC 810-10-45-10 requires that combined financial

statements be presented as if they are consolidated financial statements. Like in
consolidated financial statements, reporting entities eliminate intra-entity
transactions in combined financial statements. Also, a reporting entity would
treat noncontrolling interests (NCI), foreign operations, different fiscal periods,
and income taxes in the same manner as in consolidated financial statements.
When the guidance states that NCI should be treated the same manner in
combined and consolidated financial statements, it refers to NCI in the
subsidiaries of one or more of the entities being combined. The existence of a
noncontrolling interest at the parent level is not reflected in combined financial
statements of the subsidiaries, as illustrated in the following example.
EXAMPLE 18-4
Presentation of noncontrolling interest in combined financial statements
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1. How would the interest not held by Parent Company in Company B be

presented in the combined financial statements of Company A and
Company B?
2. How would Company B’s interest in Company C be presented in the

combined financial statements of Company A and B?
Analysis
1. The combined financial statements of Company A and Company B would

reflect 100% of Company B. There would be no accounting for the 20%
not owned by Parent Company.
2. In the combined financial statements of Company A and Company B, the

10% of Company C not owned by Company B would be reflected as a
noncontrolling interest.
18.8 Consolidation procedures

The preparation of consolidated financial statements is based on the assumption
that the reporting entity and its consolidated subsidiaries operate as a single
economic entity. The presentation of a consolidated group may require certain
adjustments for transactions occurring between the reporting entity and its
subsidiaries. As a general rule, the amounts reported in consolidated financial
statements should reflect the economic effects of only those transactions between
the consolidated reporting entity and third parties.
18.8.1 Eliminating intra-entity transactions in consolidation
Consistent with the single economic entity premise, when preparing consolidated
financial statements, a consolidated reporting entity should eliminate all
intra-entity balances and transactions with its consolidated subsidiaries,
including:
□ Accounts payable/receivable
□ Sales and purchases
□ Interest
□ Dividends
□ Intra-entity lease arrangements
□ Intra-entity profit or loss on assets remaining within the consolidated group
As a result of the foreign exchange transaction guidance in ASC 830, foreign

exchange gains (losses) on intra-entity transactions, if present, may not eliminate
in consolidation. Reporting entities are encouraged to consider disclosure in such
situations.
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Refer to CG 6.2 for additional information on intra-entity transactions in

consolidation.
18.8.1.1 Capital transactions between a reporting entity and its subsidiaries
A reporting entity may enter into transactions with a consolidated subsidiary that
impact the subsidiary’s capital structure. Such transactions include the
subsidiary’s payment of stock dividends to the reporting entity or a
recapitalization of the subsidiary. Although these transactions may affect the
subsidiary’s stand-alone financial reporting, they should not affect the reporting
entity’s consolidated retained earnings balance, as such amounts would eliminate
in consolidation.
For purposes of presenting consolidated financial statements, the reporting

entity’s retained earnings balance should reflect its accumulated retained
earnings balance, which includes its proportionate share of the retained earnings
of the subsidiary accumulated after the date the reporting entity obtains a
controlling financial interest in the subsidiary (i.e., the acquisition date), less any
distributions made to the reporting entity’s stockholders.
Similarly, a reporting entity and a consolidated subsidiary may enter into

intra-company lending arrangements for commercial and/or tax purposes. Upon
initial consolidation of the subsidiary, the reporting entity should eliminate the
intercompany receivable/payable balances in consolidation and related interest
income or expense.
18.8.2 Fiscal periods of a reporting entity and its subsidiary
The financial information in a set of consolidated financial statements is

generally presumed to have been prepared as of the same date. If a subsidiary’s
financial statements are not available in a timely manner, a reporting entity may
consolidate a subsidiary’s financial statements as of a date that differs from the
reporting entity, provided the difference does not exceed 93 days, as described in
ASC 810-10-S99-2.
If the consolidated financial statements include the financial information of

subsidiaries as of a date that differs from the reporting entity, the consolidated
reporting entity should recognize, by disclosure or adjustment, the effects of
events at the subsidiary level that have occurred during the intervening lag period
and are material to the consolidated balance sheets or income statements. Each
case requires an evaluation of the facts and circumstances to determine whether
such events should be addressed through disclosure, or whether an adjustment to
the consolidated financial statements is appropriate. In practice, recognition of
most intervening events, other than intercompany transactions requiring
elimination in consolidation, is typically by disclosure only. The reporting entity
should also expressly indicate the closing date of the subsidiary financial
information and briefly explain why different reporting dates were used.
Anytime a consolidated subsidiary reports the results of its operations on a lag

relative to its parent, the presentation of the subsidiary’s operations may appear
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unusual. These presentation issues may be more pronounced in the year a

reporting entity acquires a subsidiary whose results of operations will be reported
on a lag. We encourage disclosure when a reporting entity’s financial statements
do not fully reflect the income statement and/or balance sheet of a
recently-acquired subsidiary due to presentation of the subsidiary’s financial
information on a lag, so users of the financial statements understand the impact
of a newly-acquired subsidiary on the consolidated financial statements.
EXAMPLE 18-5
Initial consolidation of a subsidiary that reports its operations on a lag relative to
its parent
FSP Corp acquires Target Corp on February 1, 20X4. Although FSP Corp and
Target Corp both have fiscal years that end on December 31, FSP Corp will not be
able to obtain quarterly financial results for Target Corp in time to report those
results as part of its publicly-filed consolidated financial statements for the
interim period ended March 31, 20X4. FSP Corp expects a similar delay in
obtaining Target Corp’s results in all future periods. Therefore, FSP Corp adopts
an accounting policy whereby the operations of Target Corp are consolidated on a
one quarter (i.e., three months) lag and Target Corp’s operating results for the
period from February 1, 20X4 (date of acquisition) through March 31, 20X4 are
omitted from FSP Corp’s consolidated statement of operations for the quarter
ended March 31, 20X4. These results will be included in FSP Corp’s consolidated
statement of operations for the quarter ended June 30, 20X4.
Should FSP Corp disclose the impact of its consolidation policy for Target Corp in
its first quarter consolidated financial statements? If so, what specific
information should be disclosed?
Analysis
Yes. FSP Corp should disclose its policy of reporting Target Corp’s results on a
one quarter lag, the fact that Target Corp’s 20X4 first quarter results of
operations are excluded from its consolidated results of operations, and the fact
that the Target Corp balance sheet information included in FSP Corp’s
consolidated balance sheet as of March 31, 20X4 is as of the acquisition date and,
if applicable, whether such amounts are preliminary and subject to potential
measurement period adjustments. FSP Corp should also disclose or adjust its
consolidated operating results for any intervening events at Target Corp (between
the acquisition date and March 31, 20X4) that materially impact FSP Corp’s
consolidated financial position or results of operations. These same policy and
related disclosures would also be included in FSP Corp’s annual financial
statements.
A change in the reporting date of a subsidiary is an accounting change which can

be made only if the change results in preferable accounting in accordance with
ASC 250. It would be difficult to justify the preferability of a change in the
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reporting period of a subsidiary that has the result of creating (or lengthening) a
lag period.
The reporting entity should follow the disclosure requirements in ASC 250-10-50
for changes in an accounting principle when a reporting entity changes or
eliminates a previously-existing difference in subsidiary reporting periods. That
is, the reporting entity would retrospectively adjust the financial statements for
all prior periods presented and disclosure should be made in the footnotes.
ASC 250-10-45-9 provides an exception in cases where retrospective adjustment

is not practicable. If a reporting entity meets the conditions to qualify for the
impracticability exception, it would not be required to retrospectively apply the
effects of the change in accounting principle.
When a reporting entity creates, changes, or eliminates a difference in an existing

subsidiary’s reporting period, it would be inappropriate to include a subsidiary’s
results for a period greater or less than twelve months in the reporting entity’s
consolidated annual financial statements. Reporting and disclosing changes in an
accounting principle are addressed in FSP 30.
18.8.3 Specialized industry accounting principles in consolidation
Reporting entities may encounter recognition and measurement complexities

when consolidating subsidiaries that follow specialized industry accounting
principles. For example, a private equity fund that is consolidated by its general
partner may report its investments at fair value in its stand-alone fund financial
statements in accordance with the specialized industry accounting principles in
ASC 946, Financial Services - Investment Company.
Under ASC 810-10-25-15, reporting entities should retain specialized industry

accounting in consolidation and related accounting policy disclosures, if material,
assuming the specialized accounting practice is appropriate at the subsidiary
level. However, we believe reporting entities should carefully evaluate such
situations to avoid potential abuses of this guidance.
18.8.4 Presentation of nonhomogeneous subsidiaries
As noted in FSP 18.3, a reporting entity generally consolidates another entity in

which it holds a controlling financial interest. In some situations, the reporting
entity and a consolidated subsidiary may have very different or
“nonhomogeneous” operations (e.g., the reporting entity is a manufacturer and
the subsidiary is in the insurance industry).
No detailed authoritative guidance directly addresses how the assets, liabilities,

and results of operations attributable to a nonhomogeneous subsidiary should be
presented and disclosed in the consolidated financial statements of its parent. It
is our understanding that the FASB did not prescribe presentation guidance with
respect to nonhomogeneous subsidiaries to provide reporting entities flexibility
based on their unique situation.
PwC 18-23
Consolidation
In our view, a reporting entity should consider various factors when determining
the best presentation alternative for users of its financial statements.
□ Regulation S-X rules and financial statement user needs
Both are biased toward expanded line item disclosure and disaggregation of
information.
□ The materiality of the nonhomogeneous subsidiary
For example, the more material a subsidiary with an unclassified balance

sheet is to the consolidated financial statements, the more likely that it is
appropriate to present a consolidated unclassified balance sheet.
□ Diversity of the reporting entity and nonhomogeneous subsidiary’s

operations
The more diverse a nonhomogeneous subsidiary’s operations are from the

remainder of the reporting entity, the more appropriate expanded line item
disclosure may be.
□ Future plans with regard to the subsidiary
A reporting entity’s strategic plan for the subsidiary may affect whether the
subsidiary’s financial information should be presented on an aggregated or
disaggregated basis. For example, it may be appropriate to disaggregate a
nonhomogeneous subsidiary that is expected to expand. Disaggregated
information may provide transparency that allows financial statement users
to understand the nonhomogeneous subsidiary’s contribution to the
reporting entity’s overall growth and performance.
In some cases, reporting entities may choose to provide consolidating financial

data. This presentation alternative separates all income statement and balance
sheet elements of the nonhomogeneous subsidiary from the remainder of the
reporting entity in columnar format. Such amounts are then totaled to derive
consolidated amounts.
There are several possible approaches for presentation of nonhomogeneous

operations. The reporting entity should choose a reasonable approach that it
believes will be most meaningful to its financial statement users, being mindful of
the prohibition in Regulation S-K Item 10(e) against including non-GAAP
financial measures in the financial statements.
18.9 Change in entities in the consolidated

group
S-X 3A-03 requires public reporting entities to disclose material changes in the
subsidiaries it includes or excludes in its consolidated or combined financial
statements when compared to the prior fiscal year.
18-24 PwC
Consolidation
Reporting entities should follow ASC 805’s disclosure requirements (addressed

in FSP 17) for newly-consolidated entities and, if applicable, those required by
ASC 810.
If a subsidiary of an SEC registrant is not consolidated, the reporting entity

should disclose the reason for excluding the subsidiary from its consolidated
financial statements and the basis of accounting for its investment.
A change in a reporting entity’s interest in an investee may impact the manner in

which it accounts for that interest. For example, a reporting entity may account
for its interest in an investee following the equity method of accounting and
subsequently acquire additional shares, thereby resulting in consolidation. The
following sections addresses the presentation and disclosure requirements to
consider in such instances.
18.9.1 Change from equity method or cost method to consolidation
Initial consolidation of an investee previously reported under the equity or cost

method should be accounted for prospectively as of the date the entity obtained a
controlling financial interest. Although prior years’ financial statements of the
subsidiary would not be consolidated with those of its parent because there was
no controlling financial interest at those dates, public business entities should
provide pro forma information required by ASC 805-10-50-2. See FSP 17.4.12.1
for more details.
If a change in ownership occurs after the balance sheet date, it may be a

nonrecognized subsequent event requiring disclosure. Refer to FSP 28.6.3.9 for
further discussion.
18.9.2 Deconsolidation
A reporting entity will deconsolidate a subsidiary (or derecognize a group of

assets that meet the definition of a “business”) upon the loss of control,
consistent with the guidance in ASC 810-10-40-3A. Upon deconsolidation, the
reporting entity would no longer present the subsidiary’s assets, liabilities, and
results of operations in its consolidated financial statements. The reporting entity
may, however, be required to follow the presentation and disclosure
requirements for discontinued operations following the deconsolidation of a
subsidiary or “business,” as further discussed in FSP 27.
In the period a subsidiary is deconsolidated (or a group of assets that meet the
definition of a business is derecognized), the reporting entity should include the
following disclosures in its footnotes or, where appropriate, on the face of its
income statement, as required by ASC 810-10-50-1B:
□ The amount of any gain (loss) recognized
□ The portion of any gain (loss) recognized that relates to the remeasurement
of any retained interest in the deconsolidated subsidiary (or derecognized
group of assets) to fair value
PwC 18-25
Consolidation
□ The income statement line item in which the gain (loss) is included (unless
separately presented on the face of the income statement)
□ A description of the valuation techniques utilized to measure the fair value of

any direct or indirect retained interest in the deconsolidated subsidiary
(derecognized “business”). Other disclosures may also apply (e.g., those
required by ASC 820 regarding the fair value measurement’s level within the
fair value hierarchy)
□ Information regarding the inputs used to measure the fair value of the
retained interest
□ The nature of any continuing involvement with the former subsidiary (group
of assets) upon deconsolidation (derecognition)
□ Whether the transaction resulting in deconsolidation (derecognition)

involved a related party
□ Whether the former subsidiary (“business”) will be a related party after

deconsolidation (derecognition)
It may be more effective to include such disclosures in the notes to the

consolidated financial statements rather than on the face of the reporting entity’s
income statement. A reporting entity should present the information in a single
note or by cross-referencing other footnotes.

S-X 3A-01 through S-X 3A-04 provide reporting requirements applicable only to
SEC registrants.
ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control

Leasing Arrangements (ASC 810-10-15-17A through C), allows companies that
are not public business entities to avoid applying the VIE model to certain
qualifying common control leasing arrangements. If elected, the presentation
alternative comes with certain disclosure requirements.
18.10.1 Private company alternative — common control leasing

arrangements
Many companies lease properties from sister entities (the lessor) that are under
the control of a common parent. These arrangements are required to be analyzed
under the VIE consolidation guidance, which may lead to the lessee consolidating
the lessor. However, a nonpublic business entity (referred to in this section as
“private company”) may elect not to apply the VIE model to these arrangements
if certain criteria are met. If the private company lessee qualifies and adopts this
accounting guidance, it should disclose information about the lessor legal entity
in combination with the disclosures required by other authoritative accounting
literature in a single note or by cross-referencing within the footnotes. These
disclosures include the following:
18-26 PwC
Consolidation
□ The amount and key terms of liabilities recognized by the lessor that could
potentially require the private lessee to provide financial support to the lessor
(such as amount of debt, interest rate, maturity, pledged collateral, and
guarantees of the debt)
□ A qualitative description of circumstances not recognized in the financial

statements of the lessor that could potentially require the private lessee to
provide financial support to the lessor
The lessor entity may have recognized outstanding debt obligations,

environmental liabilities, or asset retirement obligations in its stand-alone
financial statements that the private lessee should consider when making such
disclosures. Additionally, the private lessee may have unrecognized commitments
and contingencies related to the common control leasing arrangement that
should also be considered for disclosure.
The private company should disclose guarantees associated with these

arrangements in combination with the disclosures required by other authoritative
accounting literature (e.g., ASC 460, ASC 850, and ASC 840) and may combine
them in a single footnote or by cross-referencing other footnotes.
PwC 18-27
Chapter 19:
Derivatives and hedging

Derivatives represent certain rights or obligations that meet the definitions of
assets or liabilities. Reporting entities use derivatives to manage their exposure to
various risks such as interest rate risk, foreign exchange risk, price risk, and
credit risk, or for speculation. This chapter discusses the requirements for
presenting and disclosing freestanding and embedded derivatives, including
those to which hedge accounting is applied. The following topics are addressed:
□ Balance sheet classification and presentation of derivatives, including

offsetting considerations
□ Income statement presentation of derivatives
□ Disclosure requirements
□ Presentation and disclosure considerations for presentation of derivatives

executed with central clearing houses
19.2 Scope
ASC 815, Derivatives and Hedging, establishes presentation and disclosure
requirements for all nongovernmental reporting entities that use derivative
instruments.
Regulation S-X 4-08(n) requires disclosure of the accounting policies for

derivatives that materially affect the financial statements of public companies.
ASC 820, Fair Value Measurement, provides guidance on determining fair value
of all instruments, including derivatives. The presentation and disclosure
requirements specific to fair value measurements are included in FSP 20.
an active project on hedge accounting that may affect the presentation and
publication are therefore encouraged to monitor the status of the project and, if

All derivative instruments subject to ASC 815 should be recognized on the
balance sheet at fair value.
19.3.1 Balance sheet classification—current versus noncurrent
ASC 815 does not provide specific guidance on the balance sheet classification of
derivatives. General guidance on classification is included in ASC 210-10-45 and
19-2 PwC
detailed in FSP 2.3.4. Regardless of whether it follows this general guidance, or

applies any of the specific situational guidance discussed in this section, a
reporting entity with significant derivative activity should disclose its accounting
policy for determining the balance sheet classification of derivatives.
Applying the general classification guidance to a derivative can be difficult since a

derivative may be either an asset or a liability at any point in time. It may be an
asset in one period and switch to a liability in the next period (or vice versa), and
its fair value is often a “net” number that may consist of a current asset and a
noncurrent liability or a noncurrent asset and a current liability at any point in
time. Additionally, because of the unique characteristics of derivatives,
comparison to other balance sheet accounts may not be helpful. Even securities
subject to ASC 320, Investments—Debt and Equity Securities,1 which are
classified in accordance with the same guidance in ASC 210, Balance Sheet, do
not share all of the characteristics of derivatives.
A reporting entity should review those individual derivatives whose fair values
are net assets to ascertain whether the current portion is a liability. It will often
know (or be able to estimate) whether the current portion of a derivative is a
liability either through its knowledge of forward prices/rates for the underlying
or from details contained in the derivative’s valuation report.
Consistent with the guidance in ASC 210, a derivative should be separated into its
current and noncurrent components depending on the timing of the cash flows.
That is, the fair value related to the cash flows occurring within one year should
be classified as current, and the fair value related to the cash flows occurring
beyond one year should be classified as noncurrent.
In addition, given the unique nature of derivatives and the lack of specific
classification guidance for them, we believe these concepts should govern the
determination of the balance sheet classification for a derivative in a classified
balance sheet:
□ A derivative that matures within one year should be classified as current.
□ A derivative that allows the counterparty to terminate the arrangement at fair

value at any time should be classified as current when its fair value is a net
liability, as required by ASC 210-10-45-7 for liabilities due on demand
(addressed in FSP 12.3.2.1). Such termination provisions may be found in
either the trade confirmation or the master agreement with the counterparty.
For example, an option written by a reporting entity is a liability and should
be classified as current if exercisable within one year.
Notwithstanding the above, different classification may be appropriate in certain

situations, as discussed below.
1After adoption of ASU 2016-01, the guidance related to the accounting and disclosure of equity
securities will be addressed in ASC 321, Investments—Equity Securities, and ASC 320 will be
renamed to Investments—Debt Securities.
PwC 19-3
□ A derivative that would otherwise have been classified as a current liability in

whole or in part may be shown as noncurrent if all of the following occur:
o The derivative is designated as a hedge of the forecasted issuance of

long-term debt.
o After the balance sheet date but before the balance sheet is issued, the
reporting entity has issued long-term debt (or entered into a financing
arrangement that clearly permits the reporting entity to refinance on a
long-term basis).
o All of the applicable conditions in ASC 470-10-45 for refinancing

short-term debt on a long-term basis have been met.
an active project on debt classification that may affect the ability to present debt
that is refinanced after the balance sheet date as noncurrent, which may similarly
affect the ability to present derivatives that are renegotiated after year end as
noncurrent. Financial statement preparers and other users of this publication are
therefore encouraged to monitor the status of the project and, if finalized,
evaluate the effective date of the new guidance and the implications on
□ A derivative that would otherwise have been classified as a current asset

because its fair value is a net asset and its final maturity is within one year
should be presented as noncurrent if the derivative is designated as a fair
value or cash flow hedge of (1) the acquisition or construction of a noncurrent
asset or (2) the liquidation of debt that is classified as long-term.
This is supported by the provisions of ASC 210-10-45-4, which discuss the

classification of assets designated for expenditure in the acquisition or
construction of noncurrent assets or segregated for the liquidation of
long-term debt. If the derivative were designated to offset maturing debt that
is a current liability, it may be classified as a current asset.
□ From a practical standpoint, the bifurcation of derivatives into their current

and noncurrent portions and the determination of their fair values may add
another layer of complexity to applying the provisions of ASC 815. If
discounting is not considered significant to the valuation of the current
portion of the derivative instrument, we do not object to presenting the
current portion undiscounted. In this instance, the current portion would be
based on the net cash flows expected within one year, and the noncurrent
portion would reflect the difference between the total fair value and that
shown as current.
19-4 PwC
□ A reporting entity may choose not to separate a derivative into its current and
long-term portions, provided the following rules are consistently applied to
all derivatives in all periods:
o A derivative whose fair value is a net liability is classified in total as

current.
o A derivative whose fair value is a net asset is classified in total as

noncurrent, except if the current portion is a liability, in which case the
current portion should be presented as a current liability.
EXAMPLE 19-1
Balance sheet classification of a derivative that is a net liability
On January 1, 20X6, FSP Corp enters into a forward contract with Counterparty
B that requires FSP Corp to acquire specified volumes of a commodity, which will
be delivered on December 31, 20X7 and December 31, 20X8. The contract does
not allow either party to terminate the contract prior to maturity. There is no
master netting agreement in place with Counterparty B. At inception, the forward
contract has a fair value of zero, and FSP Corp accounts for it as a derivative
(i.e., the normal purchases and normal sales scope exception does not apply).
On December 31, 20X6, the derivative contract is in a $100 unrealized loss

position from FSP Corp’s perspective (i.e., it is a liability). The fair value is
determined from observable market data, inclusive of FSP Corp’s credit risk.
Based on FSP Corp’s analysis of the expected cash flows, approximately $40 of
the unrealized loss position relates to commodities to be delivered during 20X7,
and the final delivery will be during 20X8.
How should FSP Corp present this derivative in a classified balance sheet?
Analysis
As of December 31, 20X6, FSP Corp may present the derivative in either of the
following ways, provided the approach taken is applied consistently.
Separately present current and noncurrent portions
Current liabilities Noncurrent liabilities
Derivative liability $ 40 $ 60
Present entirely as a current liability
Current liabilities Noncurrent liabilities
Derivative liability $ 100 $0
PwC 19-5
EXAMPLE 19-2
Balance sheet classification of a derivative that is a net asset
On June 30, 20X6, FSP Corp enters into an interest rate swap agreement with
Counterparty C. The contract requires annual payments commencing on June 30,
20X7 for three years. The terms of the arrangement call for FSP Corp to receive
from Counterparty C payments based on 30-day LIBOR and pay to Counterparty
C a fixed rate of interest.
On December 31, 20X6, the contract is in a $2 million unrealized gain position

from FSP Corp’s perspective (i.e., it is an asset). The unrealized gain is made up
of the net present value of each of the three payments:
Payment date Fair value
June 30, 20X7 $ (500,000)
June 30, 20X8 $ 850,000
June 30, 20X9 $ 1,650,000
$ 2,000,000
How should FSP Corp present this derivative in its December 31, 20X6 classified
balance sheet?
Analysis
At December 31, 20X6, FSP Corp should present this derivative as follows:
Noncurrent assets $2,500,000
Current liability $(500,000)
However, if the current portion of the derivative instrument were an asset, FSP
Corp could have elected to (1) present the entire derivative as noncurrent or
(2) separately present the components as current and noncurrent, as applicable.
19.3.2 Balance sheet offsetting of derivatives
As discussed more fully in FSP 2.4, assets and liabilities should only be netted on
the balance sheet if they meet the conditions in ASC 210-20-45-1. Those
conditions are:
□ The parties owe each other determinable amounts.
□ The reporting party has the legal right to set off the amount owed with the
amount owed by the other party.
□ The reporting party intends to set off.
19-6 PwC
□ The right of setoff is legally enforceable.
However, ASC 815-10-45-5 provides an exception for derivatives to the third

criterion, intent to set off. Even if the reporting party does not intend to set off
the gross amounts, ASC 815 allows netting if the derivatives are with the same
counterparty and the reporting entity has the right to set off the amounts owed
under the derivatives pursuant to a master netting arrangement that is legally
enforceable.
Although the term “master netting arrangement” is not specifically defined,

ASC 815-10-45-5 provides some insight into master netting arrangements.

A master netting arrangement exists if the reporting entity has multiple
contracts, whether for the same type of derivative instrument or for different
types of derivative instruments, with a single counterparty that are subject to a
contractual agreement that provides for the net settlement of all contracts
through a single payment in a single currency in the event of default on or
termination of any one contract.
Legal analysis and judgment are required in determining whether a transaction is

governed by a master netting arrangement or similar agreement and in
determining the legal rights that the reporting entity/counterparty have, as it
may vary by contract and by jurisdiction. Determining the legal rights should
include an analysis of the operation of the contract itself and the enforceability of
rights to set off.
The standard contracts for over-the-counter (OTC) derivatives developed by the

International Swaps and Derivatives Association, Inc. (ISDA) generally contain
such provisions and qualify for the netting treatment, provided they are
enforceable at law in the jurisdiction in which they are transacted. These
agreements may allow for net settlements of payments in the normal course and
offsetting of all contracts with a given counterparty in the event of bankruptcy or
default of one of the two parties to the transaction. To avail themselves of the net
presentation, reporting entities should ensure their contractual arrangements
include the appropriate terms and that they are enforceable.
If the conditions for offsetting are met, a reporting entity may elect to report the
fair value of its derivative transactions on a net basis by counterparty. The choice
to offset or not is an accounting policy election. Reporting entities should disclose
the policy and apply it consistently.
19.3.2.1 Balance sheet offsetting of derivatives in qualifying accounting

hedges
Notwithstanding the guidance discussed in FSP 19.3.2, ASC 815-10-45-2

indicates that netting a hedging derivative’s asset/liability against the hedged
liability/asset is not permitted even if all four criteria in ASC 210-20-45-1 are
met.
PwC 19-7
Question 19-1
Futures exchanges require an initial margin deposit and maintenance of the
margin as long as the contract is open.
If the initial margin is in cash, should it be classified as part of the carrying

amount of an item that is being hedged, or may it be netted against the
derivative?
PwC response
The initial margin represents a current receivable from the broker and should not
be included as part of the carrying amount of the hedged item.
However, initial margin may be netted against the fair value of the derivative if
the requirements for netting of derivatives are met.
The initial margin also does not constitute an initial net investment 2 since it is a
separate contractual requirement imposed by the futures exchange (i.e., as
collateral for the futures contract) and is not a part of the futures contract itself.
19.3.2.2 Offsetting collateral
A reporting entity is required to recognize amounts for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable).
ASC 815-10-45-5 permits a reporting entity to offset “fair value amounts”
recognized for derivatives and “fair value amounts” recognized related to
collateral arising from derivatives that are subject to a master netting agreement.
ASC 815-10-45-5 indicates that for the collateral receivable or payable, “fair value
amounts” include amounts that approximate fair value. This applies only to
collateral and should not be analogized to other receivables and payables.
A reporting entity that reports its derivatives net should also offset its cash
collateral asset or liability against the fair value amounts recognized for
derivatives executed with the same counterparty under the same master netting
agreement provided the amounts for collateral meet the criteria for offsetting.
As a corollary, if the reporting entity does not report its derivatives on a net basis,
it is precluded from netting the related fair value amounts with the cash
collateral.
19.3.3 Presentation of hybrid financial instruments measured at fair value
ASC 815 requires reporting entities that have hybrid financial instruments with
embedded derivative features meeting certain criteria to separately account for
the embedded derivative feature and the host contract. Although this requires
2 Initial net investment is the second of three criteria, all of which must be met for a financial
instrument to be considered a derivative in accordance with ASC 815-10-15-83. This guidance states
that to be classified as a derivative, the “contract requires either no initial net investment or an initial
net investment that is smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors.”
19-8 PwC
separate accounting, we do not believe this requires separate financial statement

presentation.
For purposes of balance sheet presentation, we believe the embedded feature and
host contract may be presented on a combined basis because the combined
presentation is reflective of the overall cash flows for that instrument. However,
when the host contract would be presented in equity or mezzanine equity, we
generally believe the host contract and embedded derivative feature should be
presented separately.
In addition, ASC 815-15-30-1 allows a reporting entity to elect fair value

accounting (the fair value option, as discussed in FSP 20.5) for an entire hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, unless the instrument is included in the listing of scope
exceptions in ASC 825-10-15-5. Thus, the instrument would not be separated into
the embedded derivative feature and the host in the financial statements.

This section addresses income statement geography and gross versus net
presentation for derivative instruments. In some cases, the presentation differs
based on whether the derivative is designated in a qualifying hedge under
ASC 815. However, ASC 815 generally does not provide much guidance for
determining income statement presentation of derivatives. However, in
recognition of the potential diversity in practice that could arise, the guidance
does require detailed disclosure of where derivative-related gains and losses are
presented in the income statement.
19.4.1 Presentation of derivative gains and losses — gross versus net
Generally, the determination of whether gains and losses on derivatives should be

reported as separate line items in the income statement (presented gross) or
combined in a single financial statement line item (presented net) is a matter of
judgment that depends on the relevant facts and circumstances. Reporting
entities should consider the guidance in ASC 845, Nonmonetary Transactions,
relative to nonmonetary exchanges and the gross versus net reporting indicators
provided in ASC 605-45, Revenue Recognition—Principal Agent
Considerations,3 in making this determination. Further, as discussed in
ASC 815-10-55-62, to support gross presentation, there should be economic
substance to the transaction. Reporting entities that present gains and losses
gross should disclose the policy for gross presentation in the footnotes.
If a derivative is held for trading purposes, ASC 815-10-45-9 indicates that gains
and losses (realized and unrealized) should be shown net in the income
statement, whether or not settled physically.
3Upon adoption of ASC 606, Revenue from Contracts with Customers, gross vs. net indicators will
be included in ASC 606-10-55-39. See FSP 3 for information on the effective date of ASC 606.
PwC 19-9
19.4.2 Presentation of gains and losses on hedging derivatives
ASC 815 does not specify the income statement geography of changes in the fair
value of derivatives designated as hedges. In practice, reporting entities generally
reflect the effective portion of the changes in fair value of derivatives in the same
income statement line item as that of the hedged item. For fair value hedges, the
effective portion of the derivative is reported through income. For cash flow
hedges, the effective portion is reclassified into income from AOCI. For net
investment hedges, the effective portion of the gain or loss on the hedging
derivative is recorded in CTA. The ineffective portion is recorded directly in
income.
For the ineffective portion, reporting entities may present the ineffectiveness
(1) in the same line item as that of the hedged item (as the ineffectiveness may be
viewed as a related cost of the hedging relationship), or (2) in a separate line item
such as other income or expense (as the ineffectiveness may be viewed as being
extraneous to the hedging relationship).
19.4.3 Presentation of derivatives not in qualifying accounting hedges
ASC 815 does not provide specific guidance on the income statement
presentation of gains and losses of derivatives that are not designated in a
hedging relationship. Thus, diversity in practice has developed.
The reporting entity may make a policy election regarding the income statement
classification of non-hedging derivatives. They may either report the fair value
fluctuations associated with the derivative in the same line as the hedged item, or
in another reasonable income statement line item. For example, a reporting
entity earns revenue in a currency other than its functional currency and executes
a foreign currency derivative to hedge that exposure. Although it represents an
economic hedge, the reporting entity chooses not to designate this derivative as a
hedge under ASC 815. The reporting entity may elect to either report the changes
in fair value associated with the derivative in the same line as revenue, or in
foreign currency gains and losses in the income statement. We believe either is
acceptable as long as the policy decision is reasonable and applied consistently.
ASC 815 allows for income statement presentation within multiple income
statement line items only for the effective and ineffective portions of gains and
losses related to derivatives that are designated and qualify for hedge accounting.
Otherwise, all changes in fair value of a derivative should be shown in a single
line item in the income statement.
If a derivative is not designated in a qualifying hedge relationship, splitting gains

and losses into more than one income statement line item or “recycling” the gains
and losses by recognizing them in multiple line items in different periods is
generally not appropriate. Recycling involves reporting changes in fair value in
one income statement line item in one period and then reclassifying the gains
and losses into another line item in a later period when the derivative is settled in
cash.
19-10 PwC
Classification should be consistent with the nature and intent of the derivative
instrument. Some view these derivatives as “economic hedges” and believe they
should follow similar income statement presentation as hedging derivatives
(i.e., including realized gains and losses in the same location as the economically
hedged item and unrealized gains and losses in a separate location). However,
this is generally not considered appropriate because it is similar to the “synthetic
accounting” model, which is not permitted under ASC 815.
Income statement presentation may vary by industry. Generally, the banking

industry applies the practice of reporting all derivatives that do not qualify for
hedge accounting in a single line item in the income statement. Other reporting
entities, including many insurers, determine income statement classification on
an instrument-by-instrument basis, treating similar derivatives in a consistent
manner. For example, derivatives that an insurer believes economically hedge
policyholder benefit obligations may be recognized in the benefits expense line
item, while derivatives entered into purely for investment reasons may be
classified as investment income.
Question 19-2
Reporting entities may issue warrants that are classified as liabilities and
recognized at fair value through net income. The terms of these warrants may
entitle the holder to dividend payments when dividends are paid to common
stockholders.
How should the issuer classify the dividend-equivalent payments to the warrant
holder in its income statement?
PwC response
We believe the warrant holder’s right to dividend-equivalent distributions
impacts the fair value of the warrant and should be included in determining the
change in fair value of the warrant through the income statement. The payment
in cash for the actual dividend would then reduce the recorded amount of the
warrant on the balance sheet, representing a partial settlement of the warrant
liability. As a result, the issuer should recognize a gain or loss on the fair value
change of the warrant, rather than a warrant expense only when a dividend is
declared.
Since gains or losses on non-hedging derivatives should not be split into multiple
line items, the income statement effect of the warrant should be shown on one
line item. Once the line item is identified, the reporting entity should apply this
accounting policy decision consistently.
PwC 19-11
Question 19-3
A reporting entity has two derivatives. The first, an interest rate swap,
economically hedges the reporting entity’s exposure to the variability in cash
flows of a specific floating-rate asset. The second derivative, an interest rate cap,
economically hedges the reporting entity’s exposure to the variability in cash
flows on a specific floating-rate liability should interest rates rise above a certain
level.
The reporting entity did not apply hedge accounting under ASC 815. Because
hedge accounting was not applied, these derivatives have been recorded at fair
value on the balance sheet with changes in fair value recorded in current-period
net income.
How should the gains and losses on the two derivatives be presented in the
reporting entity’s income statement?
PwC response
We believe the gain/loss can be presented on the same income statement line
item as the economically hedged item or on a separate line item, such as “other
income/expense.” If the reporting entity took the former approach, the gains or
losses on the derivatives would be reported in different line items of the income
statement. Gains or losses on the swap would be recognized in the “interest
income” line item, while the gains or losses on the cap would be recognized in the
“interest expense” line item. If the reporting entity took the latter approach, it
would recognize the gains or losses on both derivatives in the “other
income/expense” line of the income statement.
Whichever approach the reporting entity selects should be applied consistently.

In addition, when derivatives are used as economic hedges of assets or liabilities,
the reporting entity should disclose the purpose of the derivative activity and its
accounting policy for the derivatives, including where the gains or losses are
presented on the income statement and the amounts for each period.
19.5 Disclosure
The disclosure guidance outlined in this chapter applies to all interim and annual
reporting periods for which a balance sheet and income statement are presented.
If information on derivatives (or nonderivatives that qualify and are designated

as hedging instruments) is disclosed in more than one footnote, the reporting
entity should cross-reference the derivative footnote to any other applicable
footnotes.
19-12 PwC
19.5.1 Disclosure objectives
The FASB explicitly includes in ASC 815-10-50-1 three primary disclosure

objectives for a reporting entity’s derivative activity. Those objectives are to
disclose information to help financial statement users understand:
□ How and why a reporting entity uses derivatives
□ How derivatives and related hedging items are accounted for
□ How derivatives and related hedging activities affect a reporting entity’s

financial position, financial performance, and cash flows
19.5.2 Qualitative disclosure requirements
As described in ASC 815-10-50-1A, a reporting entity that holds or issues

derivatives (or nonderivatives that are designated and qualify as hedging
instruments) should describe in the footnotes the objective, context, and
strategies for issuing or holding derivatives. The purpose of these disclosures is to
enhance the overall transparency of a reporting entity’s derivative activity by
helping stakeholders understand the nature of the derivatives and evaluate the
success of those activities, their importance to the reporting entity, and their
effect on the reporting entity’s financial statements.
As discussed in ASC 815-10-50-2 and 50-5, these qualitative disclosures may be

more meaningful if described in the context of a reporting entity’s overall
risk-management profile. In its qualitative disclosures, the reporting entity
should distinguish between:
□ Objectives and strategies for derivatives used for risk management purposes
and those used for other purposes (at a minimum based on the instruments’
primary underlying risk exposure such as interest rate risk or credit risk)
□ The accounting designations of derivative instruments (e.g., cash flow

hedging, fair value hedging, and net investment hedging relationships)
For derivatives not designated as hedging instruments, reporting entities should

also describe the purpose of the derivative activity.
A reporting entity should disclose derivative contracts by the type of risk being
hedged (e.g., interest rate, commodity price risk, foreign currency).
19.5.2.1 Accounting policy disclosures
S-X 4-08(n) requires that SEC registrants’ disclosures include descriptions of the
accounting policies used for derivative financial instruments and derivative
commodity instruments, and the methods of applying those policies that
materially affect their financial performance.
PwC 19-13
SEC registrants should describe:
□ Each method used to account for derivative financial instruments and

derivative commodity instruments and the types of instruments accounted
for under each
□ The criteria required to be met for each accounting method used, including
for hedge accounting, and the accounting method used if the criteria are not
met
□ The method used to account for terminations of derivatives designated as

hedges or derivatives used to affect directly or indirectly the terms, fair
values, or cash flows of a designated item
□ The method used to account for derivatives when the designated item
matures or is sold, extinguished, or terminated, as well as the method used to
account for derivatives hedging a forecasted transaction, when the forecasted
transaction is no longer likely to occur
□ Where and when derivative financial instruments and derivative commodity

instruments, and their related gains and losses, are reported in the financial
statements
There is some overlap between these SEC-specific requirements and those that
are required for all entities by ASC 815.
ASC 815-10-50-4C, for example, requires disclosure of the amount of gains and
losses on derivative instruments and related hedged items and the line item on
the income statement in which they are included (or, when applicable, identify
gains and losses initially recognized in OCI), as discussed in FSP 19.5.3.1. By
extension, a reporting entity should likewise disclose where in the income
statement ineffectiveness is recorded.
In addition, ASC 815-30-50-1 requires disclosure of the amount of gains and

losses reclassified into earnings as a result of the discontinuance of cash flow
hedges because it is probable that the original forecasted transactions will not
occur by the end of the originally specified time period or within the additional
period of time. This is discussed further in FSP 19.5.3.4.
19.5.2.2 Balance sheet classification
A reporting entity with a significant number of derivatives should disclose its

accounting policy for determining the balance sheet classification of derivatives.
19.5.3 Quantitative disclosure requirements
The disclosures outlined in the following sections are primarily quantitative in

nature, but may include qualitative features that are intended to provide context
to a reporting entity’s derivative or hedging activities. Further, the quantitative
disclosures about derivatives may be enhanced if similar information is disclosed
about other financial instruments or nonfinancial assets and liabilities to which
19-14 PwC
the derivative instruments are related by activity. As such, a reporting entity is

encouraged, but not required, to present a thorough depiction of its activities by
disclosing that information.
19.5.3.1 Disclosures required in a tabular format
A reporting entity that holds or issues derivatives (or nonderivatives designated

and qualifying as hedging instruments) is required to disclose the following in a
tabular format:
□ The fair value of the derivatives and the line item on the balance sheet in
which they are included
□ The amount of gains and losses on derivative instruments and related hedged
items and the line item on the income statement in which they are included
(or, when applicable, identify gains and losses initially recognized in OCI)
The FASB decided to prescribe a tabular format as it believed that using tables
would improve the transparency of the disclosure and would help financial
statement users understand the effects of derivatives on a reporting entity’s
balance sheet, income statement, and statement of cash flows.
ASC 815-10-55-182 provides an example of the tabular quantitative disclosure.
Gross disclosure in the footnotes versus net presentation on the

balance sheet
The fair values of the derivatives included in the tabular disclosure should be
prepared using gross fair value amounts, even though their presentation in the
balance sheet may give effect to applicable master netting arrangements and
credit support arrangements with collateral (as discussed in FSP 19.3.2). The
FASB expressed its belief that disclosing the fair value amounts on a gross basis
would help users understand how and why a reporting entity uses derivatives.
In addition to segregating by grouping and by major type of instrument

(e.g., interest rate contracts, foreign exchange contracts, equity contracts,
commodity contracts, and credit contracts), derivative assets and liabilities
should be segregated between those that are qualifying and designated as
hedging instruments and those that are not. When segregating derivative assets
and liabilities, a reporting entity should consider the classification within the
classified balance sheet (i.e., current, noncurrent).
Because ASC 815 requires the tabular disclosure to be prepared on an

instrument-by-instrument basis that disregards the effect of netting
arrangements and collateral positions, it is possible that individual amounts
included in the disclosure will not agree with the amounts presented in the
balance sheet. The FASB accepted this potential inconsistency between the gross
amounts disclosed in the footnote and those presented net in the balance sheet
because the alternative of disclosing information on a net basis could provide
misleading information about the types of risks being managed with derivatives.
PwC 19-15
A reporting entity that has multiple derivatives with a single counterparty subject
to a master netting arrangement may incorporate certain risks
(e.g., nonperformance risk) into its valuation of the derivatives at the portfolio
level. While the reporting entity may determine on a qualitative basis that the
impact of those portfolio-level valuation adjustments need not be allocated for
purposes of its ASC 815 hedge effectiveness assessment, a reasonable allocation
for purposes of preparing the contract-level tabular disclosures may be necessary.
Although not required by ASC 815, reporting entities may wish to enhance these
tabular disclosures by including a reconciliation of the amounts in the table to the
amounts in the balance sheet.
Gains and losses by type of contract
ASC 815-10-50-4A requires disclosure of the amount of gains and losses for
derivatives and related hedged items and where those amounts are reported in
the income statement (or, when applicable, the balance sheet, for gains and losses
initially recognized in OCI).
The disclosure requirement includes tabular presentation, provided in separate

columns for gains and losses by accounting designation (e.g., fair value hedges,
cash flow hedges, or net investment hedges) and by type of derivative contract
(e.g., interest rate contracts, foreign exchange contracts, equity contracts,
commodity contracts, credit contracts).
Gains and losses are required to be presented separately for fair value hedges,
cash flow hedges, net investment hedges and derivatives that are not qualifying
or designated as hedging instruments.
In addition to these disclosure requirements, additional disclosure considerations

are included in the following sections of this chapter: fair value hedges of foreign
currency (FSP 19.5.3.3), cash flow hedges (FSP 19.5.3.4), net investment hedges
(FSP 19.5.3.5), and non-qualifying or non-designated (FSP 19.5.3.6).
The income statement table does not require the disclosure of gains and losses on
derivatives to distinguish between those that exist at the end of the reporting
period and those that are no longer held at the end of the reporting period. In
addition, a reporting entity with fair value hedges may present the gains and
losses related to hedged items in a nontabular format.
ASC 815-10-50-4C also requires the gains and losses related to hedged items that
are qualifying and designated in a hedging relationship to be disclosed apart from
gains and losses related to hedged items that are not qualifying or designated in
hedging relationships. The FASB concluded that if amounts were aggregated, it
would be difficult for users to analyze the effect of the underlying risks being
managed—especially because there is no requirement to designate the hedging
instrument and hedged item at the start of the hedging relationship.
19-16 PwC
Finally, if a proportion of a derivative is designated in a qualifying hedging

relationship and a proportion is not designated, the reporting entity should
allocate the related amounts in the disclosure table.
19.5.3.2 Volume of derivative activity
ASC 815-10-50-1B requires disclosure about the volume of derivative activity.

This might include the total notional amount of interest rate derivatives
outstanding during a period, described and segregated in a meaningful way to
allow a user to understand the gross or net financial implications. It may also
include other directional information about the reporting entity’s derivative
positions (e.g., distinguishing receive-fixed interest rate swaps from pay-fixed
interest rate swaps).
19.5.3.3 Fair value hedges of foreign currency
Fair value hedges relating to foreign currency exposure require additional

disclosure beyond those in FSP 19.5.3.1.
Derivatives and nonderivatives may give rise to foreign currency transaction

gains or losses under ASC 830, Foreign Currency Matters. For those that have
been designated and qualify as fair value hedging instruments, and for the related
hedged items, as described in ASC 815-25-50-1, a reporting entity should disclose
the requirements in Figure 19-1.
Figure 19-1
Additional required disclosures for foreign currency transaction gains or losses
Hedged items/
hedging
instrument ASC reference Required disclosures
For foreign 815-25-50-1(a) The net gain or loss recognized in

currency net income during the reporting
derivatives and period representing (1) the amount
nonderivatives of the hedges’ ineffectiveness and
that have been (2) the component of the derivative
designated and instruments’ gain or loss, if any,
have qualified as excluded from the assessment of
fair value hedging hedge effectiveness.
instruments and
for the related 815-25-50-1(b) The amount of net gain or loss
hedged items recognized in net income when a
hedged firm commitment no longer
qualifies as a fair value hedge.
Complying with these requirements can be complex. For example, in the case of
fair value hedges, a reporting entity will need to make separate disclosures for the
net gain or loss recognized in net income during the reporting period that
represents the amount of the hedges’ ineffectiveness, and the component of the
PwC 19-17
derivatives’ gain or loss that is excluded from the assessment of hedge

effectiveness.
19.5.3.4 Cash flow hedges
Cash flow hedges require additional disclosure beyond those in FSP 19.5.3.1. In
accordance with ASC 815-10-50-4C, a reporting entity should disclose, in a
tabular format, the location and amount of gains and losses by type of contract
related to the following:
□ The effective portion recognized in OCI
□ The effective portion accumulated in other comprehensive income (AOCI)

during the term of the hedging relationship subsequently reclassified to net
income
□ The ineffective portion and the amount excluded from effectiveness testing
In addition, the following requirements specific to a cash flow hedge are

described in ASC 815-30-50-1:
ASC 815-30-50-1
a. Subparagraph Not Used
b. A description of the transactions or other events that will result in the

reclassification into earnings of gains and losses that are reported in
accumulated other comprehensive income
c. The estimated net amount of the existing gains or losses that are reported
in accumulated other comprehensive income at the reporting date that is
expected to be reclassified into net income within the next 12 months
d. The maximum length of time over which the entity is hedging its
exposure to the variability in future cash flows for forecasted transactions
excluding those forecasted transactions related to the payment of
variable interest on existing financial instruments
e. The amount of gains and losses reclassified into earnings as a result of

the discontinuance of cash flow hedges because it is probable that the
original forecasted transactions will not occur by the end of the originally
specified time period or within the additional period of time discussed in
ASC 815-30-40-4 through 40-5.
ASC 815-30-45 provides guidance for determining the amount of gains and losses
that will be reclassified into net income in the next 12 months for hedge
relationships with multiple cash flow exposures that are designated as the hedged
item for a single derivative. It indicates that the total amount reported in OCI
should first be allocated to each of the forecasted transactions. The sum of the
amounts expected to be reclassified into net income in the next 12 months for
19-18 PwC
each of those items would then be the amount disclosed, which could result in an
amount greater than or less than the net amount reported in AOCI.
A reporting entity should display, as a separate classification within OCI, the net
gain or loss on derivative instruments designated and qualifying as cash flow
hedging instruments that are reported in OCI (as described in ASC 815-30-50-2),
in addition to the disclosure requirements associated with AOCI, as described in
FSP 4.5.
Reporting entities should also separately disclose a rollforward of the activity for
such net gains and losses that are deferred in OCI pursuant to ASC 220,
Comprehensive Income. The rollforward should include the beginning and
ending accumulated net derivative gain or loss, the related change in the net gain
or loss that is associated with current period transactions, and any amount of the
net gain or loss that was reclassified as net income during the period.
Figure 19-2
Sample disclosure of AOCI rollforward for cash flow hedge activity
As of December 31, 20X6, FSP Corp, a US based commodity manufacturer and

exporter, has entered into the following cash flow hedge transactions.
□ In 20X4, FSP Corp entered into a forward exchange contract to hedge the
foreign currency risk associated with the anticipated purchase of equipment
from a vendor in the United Kingdom4 (i.e., a cash flow hedge of a forecasted
foreign-currency denominated transaction). The purchase occurred as
planned at the end of 20X4, and the loss recognized on the forward exchange
contract was deferred in OCI and is being reclassified into net income
consistent with the depreciation of the equipment.
□ In 20X4, FSP Corp entered into a 10-year interest rate swap concurrent with
its issuance of 10-year variable-rate debt (i.e., a cash-flow hedge of future
variable-rate interest payments).
□ During the period 20X3 through 20X6, FSP Corp continually purchased corn
futures contracts to hedge its anticipated purchases of corn inventory (i.e., a
cash-flow hedge of future variable corn-price payments). FSP Corp applies
the first-in first-out (FIFO) method to value its inventory.
□ In January 20X6, FSP Corp entered into a two-year forward exchange

contract to hedge a forecasted export sale of corn cereal to a large customer
in Japan. The sale is to be denominated in Japanese yen and is expected to
occur in December 20X8.
4 In this transaction, FSP Corp had a selection of vendors in the United Kingdom from which to
purchase the equipment. It determined at the beginning of 20X4 that it was best to hedge the foreign
currency exposure on the expected equipment price (through a forward exchange contract) and
continue to search for a vendor of choice rather than to negotiate a firm commitment with a specific
vendor.
PwC 19-19
□ In June 20X6, FSP Corp closed out the forward contract, but it does not
expect the forecasted transaction not to occur.
Assume FSP Corp has a 40% effective tax rate.
How should FSP Corp disclose the impact on AOCI of these transactions in the
rollforward of AOCI in the 20X6 financial statements?
Analysis
The following table is the before-tax tax reconciliation (FSP Corp could
alternatively select an after-tax option) of beginning and ending AOCI amounts
for 20X6 as supporting documentation for the comprehensive income
disclosures. Assume for simplicity that the only activity in AOCI is the cash flow
hedge amounts reclassified out of AOCI.
The required disclosures regarding the income statement line item for each
reclassification adjustment and the qualitative information related to the cash
flow hedges are not presented in this analysis for simplicity.
Before-tax rollforward of accumulated other comprehensive income
(AOCI) in equity
Derivative Amount
(gains) amortized or
Year Beginning losses reclassified Ending
adjustments balance recognized out of OCI balance
originated in AOCI in OCI to net in AOCI
in AOCI1 1/1/X6 in 20X6 income 12/31/X6
Equipment2 20X4 $ 240 N/A $ (60) $180
Interest-
rate swap
hedging
variability of
future cash
flows3 20X4–20X6 (80) (20) 10 (90)
Futures
hedging
forecasted
purchase of
inventory4 20X3–20X6 (350) (170) 300 (220)
Forward
hedging
future
export sale5 20X6 — 100 — 100
Totals $(190) $ (90) $250 $ (30)
1
The column is not a required disclosure but included for illustrative purposes.
2
The initial loss deferred in OCI was $300. The life of the equipment is five years, resulting in a
removal from OCI of $60 per year of the previously-deferred loss. The timing and percentage of the
removal matches the timing and percentage of the equipment’s annual depreciation. For purposes of
this example, it is presumed that the equipment has no salvage value.
19-20 PwC
3
Amounts deferred in OCI are recognized in net income as the variable rate changes.
4
Amount reflected in OCI represents the effects of netting the results from the purchase of several
futures contracts each year with reclassifications to net income pursuant to inventory sales. Amounts
removed from OCI and recognized in net income vary depending on FSP Corp’s inventory cost flow
assumption (FIFO, for purposes of this example).
5
The amount will be removed from OCI when the forecasted sale occurs.
The disclosures of the related tax effects allocated to each component of the
balances accumulated in other comprehensive income would be presented as
follows:
Related tax effects allocated to each component of other

Before-tax Tax expense Net of tax

amount (benefit) amount
Effects of cash flow hedges

included in OCI:
Derivative gains $ (90) $ 36 $ (54)
Reclassification adjustments 250 (100) 150
Total $ 160 $ (64) $ 96
Note: Alternatively, in this illustrative example, the tax amounts for each component can be displayed
parenthetically on the face of the financial statement in which OCI is reported.
The following table presents a rollforward of accumulated other comprehensive

income by component. All amounts are shown before tax. Only one year was
presented for simplicity.
Changes in accumulated other comprehensive income by component
Accumulated
Forward other
exchange Interest-rate Futures comprehensive
contracts1 swaps contracts income
Beginning
balance,
January 1,
20X6 $240 $(80) $(350) $(190)
Current period
change2 40 (10) 130 160
Ending balance,
December 31,
20X6 $280 $(90) $(220) $ (30)
1
Amounts represent the combined activity for the anticipated equipment purchase and the forward
contract.
PwC 19-21
2
For simplicity, the change for the period has been reflected as a single line item rather than splitting
the change into new amounts entering into OCI from hedging transactions and amounts reclassified
from AOCI into net income, as is required by ASC 815-30-50-2 and ASC 220-10-45-14A. For an
example of the full disclosure, refer to FSP 4.5.4.1.
Although this table displays the change in OCI for each type of derivative
contract, ASC 815-30-50-2(b) requires disclosure of only the net changes in the
cash flow hedge amounts in OCI.
19.5.3.5 Net investment hedges
Net investment hedges require disclosures that are incremental to those

discussed in FSP 19.5.3.1. In accordance with ASC 815-10-50-4C, a reporting
entity should disclose, in a tabular format, the location and amount of gains and
losses by type of contract related to:
□ The effective portion recognized in OCI
□ The effective portion subsequently reclassified to net income
□ The ineffective portion and the amount excluded from effectiveness testing
19.5.3.6 Non-qualifying or non-designated derivatives
In accordance with ASC 815-10-50-4C(e), a reporting entity should separately

disclose the amount of gains and losses related to derivative instruments not
qualifying or designated as hedging instruments in a tabular format, as well as
the income statement line item in which they are included.
A reporting entity may elect a policy to include in its trading activities derivative
instruments that are not designated or qualifying as hedging instruments. In this
situation, ASC 815-10-50-4F permits the reporting entity to not separately
disclose gains and losses relating to these activities in a tabular form provided all
of the following are disclosed:
□ The gains and losses on trading activities recognized in the income

statement, disaggregated by major types of items (e.g., fixed income/interest
rates, foreign exchange, equity, commodity, or credit)
□ The line items on the income statement in which trading activities gains and
losses are included
□ A description of the nature of its trading activities and related risks and how
the reporting entity manages those risks
If a reporting entity uses this disclosure option, it should include a footnote in the
required tables (discussed throughout FSP 19.5.3 and its subsections) referencing
the alternative disclosure presentation for trading activities.
The FASB’s intent for these disclosures is to assist investors and creditors in
understanding a reporting entity’s objectives for all of its derivatives. As noted in
FSP 19.5.2, when derivatives are used as economic hedges of assets or liabilities,
19-22 PwC
preparers are required to disclose the purpose of the derivative activity. Further,
we believe reporting entities should disclose their accounting policy with respect
to economic hedges, including where the gains or losses are presented on the
income statement and the amounts for each period.
19.5.4 Disclosure of credit-risk-related contingent features
ASC 815-10-50-4H provides the disclosure requirements related to

credit-risk-related contingent features, as summarized in Figure 19-3.
Figure 19-3
Disclosures relating to credit-risk-related contingent features
Disclosure ASC
attribute reference Required to disclose
Credit-risk- 815-10-50- Existence and nature of derivatives that

related 4H (a—b) contain credit-risk-related contingent features
contingent and the circumstances in which those features
features could be triggered in derivatives that are in a
net liability position at the end of the
reporting period
4H (c) Aggregate fair value amounts of derivatives

that contain credit-risk-related contingent
features that are in a net liability position at
the end of the reporting period
4H (d) Aggregate fair value of assets already posted

as collateral at the end of the reporting period
4H (e—f) Aggregate fair value of additional assets that

would be required to be posted as collateral
and/or needed to settle the instrument
immediately, if the credit-risk-related
contingent features were triggered at the end
of the reporting period
19.5.5 Disclosure of credit derivatives
In accordance with ASC 815-10-50-4K, for each balance sheet presented, the
seller of credit derivatives (e.g., credit default swaps, credit spread options, credit
index products) should disclose the following for each credit derivative (or each
group of similar credit derivatives) and hybrid instrument that has an embedded
credit derivative. These disclosures are required even if the likelihood of the seller
having to make payment under the credit derivative is remote.
□ The nature of the credit derivative, including:
o The approximate term of the credit derivative
o The reason(s) for entering into the credit derivative
PwC 19-23
o Any events or circumstances that would require the seller to perform

under the credit derivative
o The current status (as of the balance sheet date) of the payment/
performance risk of the credit derivative, which may be based either on
recent external credit ratings or current internal groupings used by the
reporting entity to manage its risk
□ The fair value of the credit derivative
□ The nature of any recourse provisions that enable the seller to recover all or a
portion of the amounts paid under the credit derivative, including the nature
of any collateral held by third parties that the seller can liquidate
□ The approximate extent to which the seller can use the proceeds of collateral
held by third parties to reduce the maximum potential amount of future
payments under the credit derivative
□ The maximum potential amount of future payments the seller could be

required to make under the derivative (and, if applicable, including if the
credit derivative provides for no limitations to the maximum potential future
payments)
o This should be presented on an undiscounted basis and should not be

reduced by any recourse or collateral provisions
o If the seller is unable to develop an estimate of the maximum potential

amount of future payments, the reasons why such an estimate cannot be
made should be disclosed
Reporting entities that use internal groupings as the basis for disclosing the
current status of the payment/performance risk are required to disclose how
those groupings are determined and used for managing risk. Given the latitude
provided by the FASB to use internal groupings, diversity in practice regarding
these disclosures exists. Reporting entities should use judgment to determine
whether the information disclosed achieves the objectives. Reporting entities
should consider whether additional contextual information is needed to
understand these disclosures and to enhance comparability with peers.
We believe the disclosures required by ASC 815-10-50-4K are also applicable to

investments classified as trading and investments classified as available-for-sale.
Therefore, investors should maintain an inventory of all investments in beneficial
interests, including trading securities and those for which the fair value option
has been applied. This inventory can be used to determine whether the investors
are sellers of credit derivatives as a result of their investment, and thus subject to
the disclosure requirements in ASC 815-10-50-4K.
Additionally, when hybrid instruments have embedded credit derivatives, the

seller of the embedded credit derivative should disclose the information for the
entire hybrid instrument, not just the embedded feature. ASC 815-10-50-4L
19-24 PwC
provides further guidance on how a reporting entity may present the information
on credit derivatives.
Excerpt from ASC 815-10-50-4L

One way…would be first to segregate disclosures by major types of contracts…and
then, for each major type, provide additional subgroups for major types of
referenced (or underlying) asset classes...
We believe reporting entities should consistently apply a meaningful aggregation

methodology for disclosing this information. That will enable financial statement
users to understand, at a reasonable level of detail, the amount of credit risk the
reporting entity is exposed to due to these instruments.
In certain situations, a reporting entity may engage in other risk management

activities that could offset its maximum potential exposure. For example, a
reporting entity may manage its risk on a net basis, or its derivatives may be
subject to master netting arrangements that it uses to manage exposure to certain
risks across multiple types of derivatives. In such instances, we believe reporting
entities should consider providing additional disclosure that provides appropriate
context for the disclosure of maximum potential future payments.
Traditional credit-linked notes provide that repayment of note principal to the

investor/credit derivative seller is not required upon default of the referenced
obligation. Thus, the investor is exposed to the credit risk of both the issuer and
the referenced obligation. Because the seller does not make any physical cash
payment under the terms of the embedded credit derivative, questions have
arisen as to whether disclosure of the maximum potential amount of future
payments is required for credit-linked notes. Given the FASB’s intent to provide
users with similar informative disclosures for instruments with similar economic
risks, we believe reporting entities should disclose the outstanding principal
balance as the maximum amount of future payments, consistent with the
economics of the hybrid instrument. That is, by forgoing the principal amount
due under the host contract, the seller of the credit derivative may be viewed as
“paying” to the insured party the host note principal upon default of the
referenced obligation.
The disclosure requirements do not apply to embedded derivative features

relating to the transfer of credit risk that are in the form of subordination of one
financial instrument to another (i.e., when the subordination scope exception in
ASC 815-15-15-9 applies). Therefore, an investor in, or issuer of, beneficial
interests in a fully-funded cash vehicle would not be subject to these disclosures if
there were no other written credit derivatives present in the vehicle.
19.5.6 Disclosure of offsetting (netting) of derivatives
A reporting entity should disclose its policy of entering into master netting
arrangements to mitigate the credit risk of financial instruments. It should also
disclose information about the arrangements to which the reporting entity is
PwC 19-25
party and a brief description of the terms, including the extent to which they
would reduce the reporting entity’s maximum amount of loss due to credit risk.
Reporting entities should describe the rights of setoff associated with their
recognized assets and liabilities that are subject to an enforceable master netting
arrangement or similar agreement, including the nature of those rights.
Additionally, reporting entities may conclude that other qualitative disclosures
are necessary for fulsome disclosure of the reporting entity’s use of offsetting.
A reporting entity may make a decision to offset derivatives against cash collateral
(discussed in FSP 19.3.2.2). ASC 815-10-50-8 requires the following disclosures
depending on the netting election.

a. A reporting entity that has made an accounting policy decision to offset fair
value amounts shall separately disclose amounts recognized for the right to
reclaim cash collateral or the obligation to return cash collateral that have
been offset against net derivative positions in accordance with paragraph
815-10-45-5.
b. A reporting entity shall separately disclose amounts recognized for the right
to reclaim cash collateral or the obligation to return cash collateral under
master netting arrangements that have not been offset against net derivative
instrument positions.
c. A reporting entity that has made an accounting policy decision to not offset
fair value amounts shall separately disclose the amounts recognized for the
right to reclaim cash collateral or the obligation to return cash collateral
under master netting arrangements.
Refer to FSP 2.4 for general presentation requirements and FSP 19.3 for balance
sheet presentation requirements specific to derivatives.
In addition to the disclosure requirements in ASC 815, ASC 210-20-50-1 through

50-6 provides the balance sheet offsetting disclosure requirements for
derivatives, including embedded derivatives, repurchase agreements, reverse
repurchase agreements, securities borrowing, and securities lending transactions.
These disclosures require the presentation of gross and net information about
transactions that are (1) offset in the financial statements or (2) subject to an
enforceable master netting arrangement or similar agreement, regardless of
whether the transactions are actually offset in the balance sheet.
For these types of transactions, reporting entities are required to disclose certain
quantitative information in a tabular format, separately for assets and liabilities.
The information required includes:
□ The gross amounts of those recognized assets and those recognized liabilities
19-26 PwC
□ The amounts offset in accordance with the guidance in ASC 210-20-45 and
ASC 815-10-45 to determine the net amounts presented in the balance sheet
□ The net amounts presented in the balance sheet
□ The amounts subject to an enforceable master netting arrangement or similar

agreement not otherwise included in the second bullet (not netted on the
balance sheet), including:
o The amounts related to recognized financial instruments and other

derivatives for which management makes an accounting policy election
not to offset, or the amounts do not meet some or all of the guidance in
either ASC 210-20-45 or ASC 815-10-45
o The amounts related to financial collateral (including cash collateral)
□ The net amount after deducting the amounts relating to the master netting
arrangement from the amounts presented in the balance sheet
All transactions subject to agreements that legal counsel has determined qualify
as master netting arrangements and are in scope of the disclosure requirements
should be included in the tabular offsetting disclosure. Specifically, they should
be included in the column “Gross amounts not offset in the statement of financial
position” (if they are not offset in the financial statements), not just transactions
denominated in the same currency. When the master netting agreement permits
netting across currencies, all transactions should be included in column D.
Figure 19-4
Illustrative tabular disclosure of offsetting
This figure is excerpted from ASC 210-20-55-20 and explained in the sections
that follow.
Gross amounts not offset

in the statement of
financial position
D
Description Gross Gross Net Financial Cash Net

amounts of amounts amounts instruments collateral amount
recognized offset in of assets received
assets the presented
statement in the
of statement
financial of
position financial
position
A B C=A-B Da Db F=C-D
PwC 19-27
19.5.6.1 Disclosure of collateral
The offsetting balances disclosed in column D may include both cash and
financial instrument collateral. However, there are limits to the amount of
offsetting that is permissible, such as excess collateral, thereby limiting the
amounts reported in column D. For example, assume a reporting entity entered
into a reverse sale and repurchase agreement. The agreement is accounted for as
a collateralized lending whereby the carrying amount of the loan is $90 million
and the fair value of the collateral received is $105 million. The amount of
collateral received included in the disclosure is limited to the carrying value of the
loan (e.g., $90 million) unless rights to collateral can be enforced across financial
instruments.
Therefore, collateral balances disclosed in accordance with the guidance may not
agree with other collateral disclosures, or may not provide financial statement
users with a full appreciation of the nature of collateral received or posted given
the exclusion of overcollateralization from column D. Reporting entities may
wish to provide information on overcollateralization as a supplement to the
required disclosures.
Additionally, the balances disclosed in the financial instrument collateral

disclosures may not be included on the balance sheet due to the related
recognition guidance for that instrument. For example, the collateral associated
with a reverse repurchase agreement accounted for as a secured lending would
not be recorded on the balance sheet. Although such collateral is not recognized
in the financial statements, it will be captured by the disclosure requirements
(as illustrated in Example 1 in ASC 210-20-55-20 and Example 2 in
ASC 210-20-55-21).
While not required, reporting entities may further disaggregate the collateral
balances disclosed into additional categories, such as on-balance sheet collateral
and off-balance sheet collateral. This supplemental disclosure may help financial
statement users better understand how the amounts disclosed are reported in the
19.5.6.2 Level of disaggregation
The guidance allows for flexibility with respect to how certain items are disclosed.
Reporting entities can choose to disclose items either by type of financial
instrument (e.g., derivatives or reverse repurchases) or by counterparty for
columns C through F. When disclosures are disaggregated by financial
instrument type, collateral data by instrument may not be available. For example,
a single ISDA master netting agreement may govern many different types of
derivatives. In some cases, collateral is only posted once the aggregate fair value
of the derivatives subject to the single master agreement exceeds a defined
threshold.
ASC 210-20-55-22 provides an offsetting disclosure example for a sophisticated

entity. This example disaggregates derivatives by instrument type and by clearing
mechanism (e.g., exchange-traded versus over-the-counter). The example notes
19-28 PwC
that a sophisticated entity is one that engages in “significant derivative activity.”

In this example, the reporting entity further disaggregates the derivative line item
into underlying risk, as discussed in ASC 815-10-50-4D, with further
disaggregation based on how the derivative is transacted.
There will be judgment involved in determining the level of disaggregation

required. We believe the extent of a reporting entity’s derivative activity and its
business purpose should be the drivers of this determination, in addition to the
materiality of the transactions. For example, a non-financial services reporting
entity may engage in material derivative activity for hedging purposes, but the
types of derivatives it enters into or the associated clearing mechanism may be
relatively narrow in scope (e.g., solely foreign exchange derivative contracts). In
contrast, a financial institution that has extensive derivative operations and
transacts in multiple types of derivatives using multiple types of clearing
mechanisms should consider providing more disaggregated disclosures.
For reporting entities that elect to disaggregate the disclosure by financial

instrument type instead of by counterparty, collateral posted by or received from
a given counterparty will need to be allocated to the respective financial
instruments with that counterparty. While collateral may not be posted on an
instrument-by-instrument basis (e.g., in a pool across instrument types), we
believe a reasonable allocation methodology should be utilized to allocate
collateral received by instrument type for disclosure purposes. A similar
approach may be taken to allocate the netting that is applied on the balance sheet
by counterparty (e.g., column B in the disclosure).
The allocation method adopted is a matter of judgment and a variety of methods

may be appropriate, depending on the facts and circumstances. Whatever
method is adopted, reporting entities should apply it consistently and consider
disclosing the methodology used. Reporting entities may want to consider the
allocation methods described in FV 8.2.4.1 and 8.2.4.2 in the context of allocation
methods for credit risk in the determination of fair value.
The tabular disclosure of offsetting requires gross and net balances related to
transactions that are subject to master netting arrangements, regardless of
whether those balances are offset in the balance sheet. If a reporting entity has
instruments that meet the scope of the disclosures, but that do not meet the
offsetting guidance in ASC 210 or ASC 815, or that management does not elect to
offset, the amounts required to be disclosed in column A would equal the
amounts required in column C.
The amounts disclosed in column C should reconcile to the individual financial

statement line item on the balance sheet. To facilitate this reconciliation,
reporting entities may elect to include all derivatives, repurchase agreements,
and securities lending transactions in the disclosure, regardless of whether the
transactions are subject to an enforceable master netting arrangement or similar
agreement. Typically, reporting entities separate contracts that are subject to
master netting arrangements or similar agreements from ones that are not, but
still include them in the disclosure, to facilitate reconciliation to the balance
sheet.
PwC 19-29
If a reporting entity only includes transactions subject to a master netting

arrangement in its disclosure, and the balances in column C feed into a financial
statement line item that includes other balances (e.g., other assets or liabilities
not subject to a master netting arrangement), the reporting entity should
reconcile the disclosure to the total derivative, repurchase agreement, or
securities lending balance (including those types of transactions that are not in
the scope of the disclosure because they are not subject to a master netting
arrangement or similar agreement).
We do not believe that details of the other balances in the financial statement line
item need to be included in that reconciliation. For example, if derivative assets
are reported as part of “other assets,” we do not believe it is necessary to include
details about other items reported in “other assets” in reconciling derivative
assets in this disclosure to the financial statement line item.
Question 19-4
A reporting entity that transacts in the futures market is often required to
maintain a margin deposit account with its broker or the futures exchange.
Depending upon the contract terms, an open futures contract may require
periodic cash payments based on market movements. Should those periodic cash
payments be included in the tabular disclosure?
PwC response
The determination of whether such periodic cash payments are a settlement of a
contract (and the entering into of a new contract) or the posting of collateral may
impact what is required to be disclosed. A reporting entity should consult with
legal counsel to make this determination.
We believe that if margin and periodic cash payment amounts are considered
collateral amounts associated with the open positions, they should be included in
the disclosure. If such amounts are considered settlements of an open contract,
then they would not be required to be included, as they would not be considered
collateral. In that case, these amounts would not appear in the disclosure at all.
Question 19-5
How should a reporting entity allocate collateral in the disclosure if the amounts
relate to both derivatives and nonderivative positions?
PwC response
It depends. An entity may engage in derivative transactions with a counterparty
that are accounted for as derivatives under ASC 815 and also transactions that
meet the definition of a derivative or are legally considered derivatives subject to
a master netting arrangement or similar agreement, but are not accounted for as
derivatives under ASC 815 because they meet a scope exception. Collateral may
be posted on these transactions based on the net position.
19-30 PwC
When posting collateral on the net position, reporting entities should consider
whether the disclosure should include the entire collateral balance or only an
allocated portion. The allocation method adopted is a matter of judgment and a
variety of methods may be appropriate, depending on the facts and
circumstances. Whatever method is adopted, reporting entities should apply it
consistently and disclose the methodology used.
In addition, reporting entities should consider if they are already using an

allocation method for items such as allocation of collateral when presenting the
net derivative position on their balance sheet as a result of credit or netting
adjustments. The allocation methodology used for collateral generally will not
impact the balance sheet because the balance sheet is often more aggregated than
the tabular disclosure. Because the tabular disclosure requires disaggregation of
balances by class and collateral is often posted on a pooled basis, the allocation
methodology for collateral will impact how it is allocated to each class of
transaction in the table. If the reporting entity is already using an allocation
methodology on the balance sheet, a consistent methodology should be utilized
for the disclosure (so it reconciles to the balance sheet).
19.5.7 Hybrid financial instruments measured at fair value
FSP 20.5.3 includes disclosures for instruments measured at fair value under the
fair value option, including hybrid financial instruments. Further,
ASC 815-15-50-2 requires that reporting entities disclose information that allows
users to understand the effect of changes in the fair value of these instruments on
net income, whether at fair value because of the fair value option or the
practicability exception in ASC 815-15-30-1(b).
19.5.8 Embedded conversion options
When an embedded conversion option previously accounted for as a derivative

no longer meets the separation criteria, ASC 815-15-50-3 indicates that a
reporting entity should disclose:
□ The changes causing the embedded conversion option to no longer require

separation as a derivative
□ The amount of the conversion option reclassified to stockholder’s equity
19.6 Use of clearing houses

Reforms mandated by the Dodd-Frank Act changed the way certain reporting
entities trade certain derivatives (such as interest rate and credit default swaps)
by requiring them to be traded through designated electronic trading platforms,
and cleared through registered clearing houses. As a result, derivatives have
increasingly been executed through clearing houses, rather than transacted
bilaterally in an over-the-counter (OTC) market.
There are significant differences between OTC derivatives that are traded
bilaterally and those that are traded through a clearing house. A bilateral trade
PwC 19-31
generally only requires one contract (for example, an ISDA agreement

supplemented by a credit support annex that governs the rules for
collateralization between the two parties). Cleared derivatives require multiple
legal contracts between the end user, the swap execution facility, the swap dealer,
and the clearing member. The clearing members, in turn, need to have contracts
with the clearing house. The end-user firm commonly enters into a futures
account agreement (FCM agreement) with the clearing member and an
“OTC addendum,” which is needed to accommodate these derivatives. The
following figure highlights some of the key differences between bilateral and
cleared derivatives that may affect presentation and disclosure.
Figure 19-5
Key differences between derivatives executed bilaterally versus through a clearing
house
Bilateral derivatives Cleared derivatives
□ All aspects of an agreed trade— □ Trades are executed through a

legal, credit, market, and swap execution facility/swap
operational risks—are addressed dealer and then “back to back” or
directly between the two novated to the clearing house.
transacting parties. Multiple parties are involved,
including an end-user (e.g., a
□ Posting of collateral is not
corporate reporting entity), swap
required unless each party agrees
execution facility, swap dealer
to it as a requirement for the
broker, clearing member, and
trade. Any collateral agreements
clearing house.
are customized.
□ Requirements for initial margin
□ Nonperformance risk of the trade
are set by the clearing house
resides with both parties to the
irrespective of the quality of the
extent the trade is
counterparty.
uncollateralized.
□ Variation margin is subject to
daily movement.
Figure 19-6 illustrates the flow of a derivative when a clearing house is used. It
demonstrates that an end-user may have relationships with different clearing
members associated with the same clearing house. Note that certain trades may
clear through more than one clearing house, and although not depicted in the
figure, there may be a futures commission merchant (FCM) or another
intermediary between the end user and the clearing member.
19-32 PwC
Figure 19-6
Flow of cleared derivatives
Determining the appropriate presentation for cleared derivatives requires a legal

analysis of the facts and circumstances and the contractual rights. Reporting
entities need to review trades individually to see if netting provisions exist with
different clearing members when evaluating their ability to net under ASC 210
and ASC 815. Netting requires the trade to flow through both the same clearing
member and clearing house. We are not aware of instances in which legal counsel
has supported the netting of transactions that are traded through different
clearing members (e.g., clearing member 1 and 2 in Figure 19-2), even if the
trades ultimately clear through the same clearing house.
19.6.1 Margin
The clearing house requires margin to be posted to protect itself from any losses
as a result of adverse price movements or default of the clearing member or
end-user.
19.6.1.1 Initial margin
Initial margin is an amount that is required to be posted per trade to begin

transacting through the clearing house. It can consist of cash, securities, or other
collateral.
When a reporting entity posts a financial asset other than cash, it should evaluate
the guidance in ASC 860, Transfers and Servicing, to determine whether it has
relinquished effective control, and accordingly, if it is appropriate to derecognize
the financial asset.
PwC 19-33
Less commonly, cash is provided as initial margin. In that case, the reporting
entity will typically record a receivable “due from the clearing member” equal to
the cash posted.
19.6.1.2 Variation margin — updated May 2017
Variation margin is an amount that is required to be paid or received periodically

as dictated by the clearing member and/or clearing house. The clearing house
will determine a “value mark” used to calculate the amount of variation margin
owed or due to be received. This value mark may not be the fair value under
ASC 820 because the clearing house may incorporate an additional amount to be
posted, in excess of the change in fair value of the derivative, to mitigate any
nonpayment risk or for other reasons.
A reporting entity may present the periodic movements of variation margin as

either a (1) payment of collateral or (2) settlement of an open position, depending
on the legal determination under the ISDA or other agreements. This is not an
accounting election, but rather requires a legal assessment of the specific terms of
each trade and the legal relationship with the clearing member and clearing
house.
The legal form of the variation margin, whether deemed to be collateral or a

settlement payment, may have accounting and reporting implications. For
further discussion, see PwC’s In depth US2017-09.

Most requirements for reporting and disclosing derivatives are applicable to both
public and nonpublic reporting entities. Only one set of requirements, the
accounting policy disclosures in S-X 4-08(n), are not applicable to private
companies. However, two of the accounting policy disclosures have similar
requirements under ASC 815 that are applicable to private companies, as noted in
FSP 19.5.2.1.
Also, there is one election that simplifies hedge accounting for private companies
in certain cases.
19.7.1 Private company alternative — hedge accounting
Entities that are not public business entities may elect a hedge accounting
alternative (a simplified hedge accounting approach) for certain types of swaps
that economically convert a variable-rate borrowing into a fixed-rate borrowing.
This simplified approach is only available when all six qualifying conditions are
met.
The simplified approach allows a private company to measure a designated swap

at settlement value rather than at fair value. The disclosures for fair value
measurements required by ASC 820 are still required for amounts disclosed at
settlement value. Disclosures related to swaps measured at settlement value
should be clearly designated separate from the fair value disclosures. All of the
19-34 PwC
presentation and disclosure requirements of ASC 815 continue to apply. See

FSP 20 for information on the disclosures for fair value measurements.
In addition, reporting entities that record a swap under the simplified hedge
accounting approach should not consider the instrument a derivative for
purposes of determining if the fair value disclosure requirements of
ASC 825-10-50-3 are applicable. Therefore, a private company with total assets
less than $100 million that only records swaps under the simplified hedge
accounting approach will be exempt from those fair value disclosures.
New guidance
ASU 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 (PCC 15-01), made the
simplified approach effective immediately so that entities that did not adopt it at
an earlier effective date could still do so. Revised transition guidance is included
in ASC 815-10-65-6.
PwC 19-35
Chapter 20:
Fair value
PwC 20-1
Fair value

This chapter outlines the presentation and disclosure considerations for assets
and liabilities measured or disclosed at fair value. This includes quantitative and
qualitative disclosure requirements for fair value measurements.
It also details the additional disclosures required for assets and liabilities
presented at fair value based on the fair value option.
The fair value hierarchy, the basis for many of the required fair value disclosures,
is addressed in more detail in FV 4.
20.2 Scope
ASC 820, Fair Value Measurement (“ASC 820” or the “fair value standard”),
defines fair value and establishes a framework for measuring it. ASC 820 includes
disclosure requirements for fair value measurements that are required or
permitted by all accounting pronouncements.
ASC 820-10-50-1 states that fair value disclosures are required for assets and
liabilities measured at fair value on a recurring and nonrecurring basis after
initial recognition (i.e., on “Day 2”). Fair value disclosures are not required for
assets and liabilities that are only initially recognized at fair value (e.g., in a
business combination, asset retirement obligations (AROs) under ASC 410, or
exit or disposal cost obligations under ASC 420).
ASC 820-10-50-2 indicates that measurements based on fair value (e.g., fair
value less cost to sell) are also subject to the disclosure requirements in ASC 820.
The requirements related to the presentation of assets and liabilities at fair value
are addressed in other US GAAP and are not within the scope of ASC 820.
ASC 825, Financial Instruments, includes incremental fair value disclosures. It

was amended by ASU 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities. See FSP 9 for information on the effective date
of ASU 2016-01.
ASU 2016-01 also includes enhanced disclosures for equity securities without
readily determinable fair values, which are addressed in LI 12.6.2.
an active project that may affect fair value disclosure requirements. Financial
statement preparers and other users of this publication are therefore encouraged
to monitor the status of the project, and if finalized, evaluate the effective date of
the new guidance and the implications on presentation and disclosure.
20-2 PwC
Fair value
20.2.1 Determining whether account balances are included in scope
Because there are various accounting pronouncements that govern the reporting
of balances at fair value, questions often arise as to what balance sheet items
should be included within the fair value disclosure requirements. This section
describes the requirements related to several common balance sheet categories.
20.2.1.1 Cash equivalents
Many reporting entities classify certain short-term debt and equity securities,
such as treasury bills, money market funds, and commercial paper, as part of
cash equivalents. This classification is consistent with the statement of cash flows
guidance in ASC 230-10-20. However, these securities may still be subject to the
disclosure requirements for investments in ASC 320-10-501 andASC 820.
Whether cash equivalents are within the scope of the fair value standard’s
disclosure requirements depends upon how the instruments presented as cash
equivalents are classified for measurement purposes.
Certain held-to-maturity securities (HTM) may be considered cash equivalents

and carried at amortized cost. Such instruments are subject to the more limited
disclosure requirements of ASC 820-10-50-2E for instruments disclosed at fair
value, but not measured at fair value.
20.2.1.2 Investments
Debt and equity securities classified as trading or available-for-sale2, and

therefore measured at fair value, are subject to the fair value disclosure
requirements of ASC 820. Held-to-maturity securities are carried at amortized
cost and are therefore subject to the more limited disclosure requirements of
ASC 820-10-50-2E. The fair values of HTM securities are required to be
measured consistent with the provisions of ASC 820 when preparing the
disclosures required by ASC 320, Investments in Debt and Equity Securities.
20.2.1.3 Servicing assets and liabilities
When recorded at fair value at the reporting date, servicing assets and liabilities
are subject to the disclosure requirements of ASC 820, in addition to the
disclosures required by ASC 860-50-50. Those disclosures are addressed in
FSP 22.
20.2.1.4 Hedged items
For a hedged item that is reported at fair value or has been in a hedging
relationship for changes in its overall fair value from inception such that it is
1 After adoption of ASU 2016-01, ASC 320 will address debt securities and ASC 321 will address equity
securities.
2 After adoption of ASU 2016-01, this will be “equity securities and debt securities classified as trading
or available-for-sale.”
PwC 20-3
Fair value
essentially measured at its full fair value, we believe it would be appropriate to

apply the disclosure requirements of ASC 820-10-50-1 through 50-3.
For a hedged item reported on a measurement basis other than fair value, we do
not believe the partial measurement of fair value, achieved through the
adjustments of carrying value, requires the reporting entity to provide the
disclosures of the fair value standard for the hedged item as a whole or for the
adjustments to the carrying value separately.
20.2.1.5 Pension plan assets
Plan assets of a defined benefit pension or other postretirement plan accounted

for under ASC 715, Compensation—Retirement Benefits, are excluded from the
scope of ASC 820. However, these assets are subject to the disclosures required
by ASC 715-20-50-1(d)(iv) for public entities and ASC 715-20-50-5(c)(iv) for
nonpublic entities. Refer to FSP 13 for these disclosure requirements.
20.2.1.6 Excess 401(k) plans
Excess 401(k) plans provide employees with an opportunity to increase savings

beyond the limits of the reporting entity’s qualified 401(k) plan. Employee
contributions to an excess 401(k) plan are generally part of the general assets of
the reporting entity but the amount due to the employee is tracked using a
“phantom account.”
We believe reporting entities can make a policy election to measure the phantom
account at fair value. If the reporting entity measures the liability at fair value,
the disclosures required by ASC 820 are necessary. If it is not measured at fair
value, the phantom account is not subject to ASC 820 for measurement or
disclosure.
20.2.1.7 Goodwill and indefinite-lived intangibles
While goodwill and indefinite-lived intangibles are not remeasured at fair value
on a recurring basis, the impairment models for goodwill and indefinite-lived
intangible assets are based on an assessment of fair value. When an impairment
loss is recognized, the goodwill and indefinite-lived intangible assets are recorded
at fair value and are subject to the disclosures of ASC 820. This information will
supplement the required disclosures in ASC 350, Intangibles—Goodwill & Other.
In the absence of an impairment, there is no requirement to disclose information
about the fair value used in the impairment test.
20.2.1.8 Long-lived assets to be disposed of by sale
An adjustment to assets held for sale to reflect fair value less costs of disposal is
recognized on a nonrecurring basis. Such adjustments are recognized only in
periods in which the fair value does not exceed the carrying value at the date the
decision to sell was made. Therefore, the ASC 820 disclosure requirements will
apply each time the reporting entity adjusts the recorded amount of the
long-lived assets held for sale.
20-4 PwC
Fair value
20.3 Fair value hierarchy

To increase consistency and comparability in fair value measurements, the fair
value standard establishes a hierarchy to prioritize the inputs used in valuation
techniques. Knowledge of the fair value hierarchy is important in understanding
the disclosure requirements for assets and liabilities measured and/or disclosed
at fair value. The level in the fair value hierarchy and the significant inputs used
in a fair value measurement are two of the fundamental disclosure requirements
of the fair value standard.
20.3.1 Overview
There are three levels to the fair value hierarchy. Level 1 is the highest priority
and, along with Level 2, represents observable inputs, and Level 3 is the lowest
priority and represents unobservable inputs.
By distinguishing between inputs that are observable in the marketplace, and

therefore more objective, and those that are unobservable, and therefore more
subjective, the hierarchy is designed to indicate the relative reliability of the fair
value measurements.
Disclosure is required by level; as the level decreases, disclosure requirements

increase. Certain required disclosures are applicable only to those fair value
assets and liabilities characterized as Level 3.
The following figure illustrates the steps in determining the level within the fair
value hierarchy of a fair value measurement. Level 1 fair value measurements
have been excluded from the framework as they have a Level 1 price for the entire
unit of account.
PwC 20-5
Fair value
Figure 20-1
Fair value hierarchy framework for Levels 2 and 3
20.3.2 Steps 1 through 3 in the fair value hierarchy framework
The first three steps in the fair value hierarchy framework provide the
information to determine the level of inputs, which in turn, provides the basis for
disclosure. The decisions made in these steps affect the measurement of the asset
or liability’s fair value and lead to the classification in Step 4. Steps 1 through 4
are addressed in more detail in FV 4. In this guide, we summarize Step 4 and
address Steps 5 and 6.
Step 1, Determine all inputs to valuation techniques, requires reporting entities

to inventory the assumptions that were used in determining fair value.
Step 2, Determine which inputs are significant, requires reporting entities to

assess the significance of each input. This step is important for purposes of
meeting the disclosure requirements as the asset or liability is categorized in its
entirety in the lowest level of a significant input.
Step 3, Determine if significant inputs are observable or unobservable, directly

impacts the level in which the asset or liability will be disclosed.
20-6 PwC
Fair value
20.3.3 Step 4: Determine level in the hierarchy of the significant input

(or all significant inputs)
The evaluation of the significant input(s) determines the asset’s or liability’s

classification within the fair value hierarchy. Some of the key characteristics of
each level in the hierarchy are included in Figure 20-2.
Figure 20-2
Characteristics of each level in the fair value hierarchy
Level Characteristics
1 Observable
Quoted prices for identical assets or liabilities in active markets
(unadjusted)
2 Quoted prices for similar items in active markets

Quoted prices for identical/similar items, no active market
Liabilities traded as assets in inactive markets
3 Unobservable inputs (e.g., a reporting entity’s own data)

Market participant (not entity-specific) perspective is still
required
A common misconception is that securities that are “less risky” should be

categorized in Level 1. For instance, many might perceive US Treasury securities
as essentially risk-free, and, therefore expect them to be in Level 1 of the fair
value hierarchy. However, certain Treasury securities are more appropriately
categorized in Level 2 because they do not trade in an active market.
Level 1
In practical terms, the list of instruments that likely qualify as Level 1 fair value
measurements is fairly narrow. It includes the following:
□ Listed equity securities traded in active, deep markets (for example, NYSE,
NASDAQ, etc.)
□ London Metal Exchange (LME) futures contract prices
□ On-the-run Treasury bonds3
3 On-the-runTreasury bonds and notes are the most recently issued of a given maturity. They are the
most frequently traded and, therefore, the most liquid.
PwC 20-7
Fair value
□ Treasury bills (both on- and off-the-run,4 because of the high volume of
trades and pricing that is based on those trades)
□ Exchange-traded futures and options
□ Open-ended mutual funds with published daily net asset values (NAV) at
which investors can freely subscribe to or redeem from the fund (these are
investments that do not use NAV as a practical expedient and, therefore, are
still required to be leveled within the fair value hierarchy — unlike funds that
use NAV as a practical expedient, as discussed in FSP 20.4.1.4)
□ Closed-ended registered mutual funds (for example, exchange-traded funds

or ETFs) traded on active markets (the exchange price may represent a
Level 1 input)
Question 20-1
Can a single price source or quote be considered a Level 1 valuation?
PwC response
Maybe. Absent the source being transactions on an exchange, in general, a single
source would not be a Level 1 input since a single market-maker would almost, by
definition, suggest an inactive market. However, in some rare cases, a single
market-maker dominates the market for a particular security such that trading in
that security is active, but all trading flows through that market-maker. In those
limited circumstances, a reporting entity may be able to support a determination
that the input is Level 1.
Absent that fact pattern, the reporting entity should determine if the single
broker quote represents a Level 2 or Level 3 input. These are determinations
based on facts and circumstances. Key considerations in making this assessment
are addressed in FV 4.
Question 20-2
Should a reporting entity that invests in a fund that invests primarily in
exchange-traded equity securities “look through” the fund to determine the level
of the fund in the fair value hierarchy?
PwC response
No. The reporting entity should first determine the appropriate unit of account
(i.e., what is being measured). As indicated in ASC 820-10-35-2E, the unit of
account is determined based on other applicable US GAAP.
4 Off-the-run Treasury bills, bonds, and notes are those that were issued before the most recent issue
and are still outstanding.
20-8 PwC
Fair value
We would expect the unit of account for interests in mutual or alternative fund
investments to be the interest in the fund itself, rather than the individual assets
and liabilities held by the fund. An investor cannot simply “look through” an
interest in an alternative investment to the underlying assets and liabilities to
determine the classification of the fair value measurement. Thus, the reporting
entity should assess the categorization within the fair value hierarchy based on
the interest in the fund itself and not the securities within the fund.
The investment could be classified as Level 1 if the fair value measurement of the
interest in the fund (not the underlying investments) was based on observable
inputs that reflect quoted prices (unadjusted) for identical assets in active
markets (i.e., the fund is exchange-traded).
Level 2
Examples of Level 2 inputs include the following:
□ A dealer quote for a nonliquid security, provided the dealer is standing ready
and able to transact
□ Posted or published clearing prices, if corroborated with market transactions
□ Vendor- or broker-provided indicative prices, if due diligence by the

reporting entity indicates such prices were developed using observable
market data
Examples of instruments that are typically Level 2 measurements include the

following:
□ Most US public debt
□ Short-term cash instruments
□ Certain derivative products
Level 3
Examples of inputs that are considered Level 3 include the following:
□ Inputs obtained from broker quotes that are indicative (i.e., not firm and able
to be transacted upon) or not corroborated with market transactions
□ Management assumptions that cannot be corroborated with observable

market data
□ Vendor-provided prices, not corroborated by market transactions
PwC 20-9
Fair value
Examples of instruments that are typically Level 3 measurements include the

following:
□ Complex instruments, such as longer-dated interest rate and currency swaps

and structured derivatives
□ Fixed income asset-backed securities, depending on the specific asset owned

(i.e., the specific tranche), the nature of the valuation model used, and
whether the inputs are not observable
□ Goodwill or indefinite-lived intangible assets, when recognized at fair value

in the period in which an impairment is recognized
□ Held-for-sale real estate
□ Contingent consideration that is subsequently measured at fair value
20.3.4 Step 5: Assess disclosure required by the fair value standard
The disclosure requirements of the fair value standard can be divided into two
areas: those explaining (1) the fair value of the entire asset or liability, and (2) the
significant input(s) to the fair value measurement.
20.3.4.1 Disclose the fair value of the entire asset/liability by level
ASC 820-10-50-2(b) requires reporting entities to disclose the level that a

measurement falls in its entirety within the fair value hierarchy. The disclosure
should segregate Level 1, Level 2, and Level 3 measurements by class of assets or
liabilities. A fair value measurement, which may be the result of multiple inputs,
is categorized in its entirety by reference to its lowest level (i.e., least reliable)
significant input. For a Level 1 measurement, there is only a Level 1 price.
20.3.4.2 Disclose all significant Level 3 inputs in a table
To conclude that a fair value measurement should be classified as Level 3,

reporting entities only have to identify one significant unobservable input. The
fair value standard’s disclosure requirements, however, require reporting entities
to identify all significant unobservable inputs and disclose quantitative
information about them. Also, reporting entities need to describe the valuation
techniques and inputs. Figure 20-4 includes disclosure requirements related to
significant inputs.
20.3.5 Step 6: Reassess
The categorization of a particular instrument in the fair value hierarchy may

change over time. As markets evolve, certain markets become more or less liquid,
inputs become more or less observable, and the level within the fair value
hierarchy could change. Therefore, it is important to evaluate the continued
appropriateness of the levels in which fair value measurements are categorized at
each reporting date.
20-10 PwC
Fair value
20.4 Disclosure
The disclosure requirements in the fair value standard are intended to provide
information about the following:
□ When a reporting entity measures assets and liabilities at fair value
□ The valuation techniques and inputs used to measure fair value
□ The effect of fair value measurements on net income and other

The fair value disclosure requirements vary depending on whether (1) the asset or
liability is measured on a recurring or nonrecurring basis, (2) it is classified in
Level 1, 2, or 3 of the fair value hierarchy, and (3) the reporting entity is public or
nonpublic, as defined in ASC 825.
New guidance
After adoption of ASU 2016-01, the fair value disclosure requirements will vary
depending on whether the reporting entity is a public business entity. See FSP
20.4.1.6 for information on the effective date of this provision of ASU 2016-01.
ASC 820 sets out minimum requirements and emphasizes the reporting entity’s
responsibility to meet the overall disclosure objectives, which may require
additional disclosures if necessary to provide additional context based on the
reporting entity’s facts and circumstances.
20.4.1 Main requirements
For all interim and annual reporting periods, there are specific quantitative and
qualitative disclosures required for assets and liabilities measured at fair value.
Reporting entities should make the disclosures for, at a minimum, each class of
asset and liability, with sufficient detail to permit reconciliation of the disclosures
to the line items in the balance sheet.
Figure 20-3 delineates the fair value disclosure requirements for both recurring
and nonrecurring measurements, other than those specific to valuation
techniques and unobservable inputs (which are included in Figure 20-4).
Quantitative disclosures included within this figure should be presented in a

tabular format in accordance with ASC 820-10-50-8.
PwC 20-11
Fair value
Figure 20-3
Fair value disclosure requirements other than valuation techniques and
significant inputs
Disclosure requirement ASC reference Related information
The fair value measurement at 820-10-50-2(a)

the end of the reporting
period
For nonrecurring fair value
measurements, the reasons
for the measurement
The level into which a 820-10-50-2(b) ASC 820-10-50-2E

measurement falls in its indicates that this
entirety within the fair value disclosure is also
hierarchy, segregated between applicable to assets and
Level 1, Level 2 and Level 3 liabilities for which fair
measurements, by class of value is only disclosed.
assets or liabilities
For discussion of the fair
(Not applicable to value hierarchy, see FV 4
investments measured at NAV (summarized in
using the practical expedient, FSP 20.3).
per ASU 2015-07, but
applicable to investments
measured at NAV not as a
practical expedient)
For recurring fair value 820-10-50-2(bb) Disclose transfers into

measurements of assets and each level separately from
liabilities held at the end of transfers out of each
the reporting period: level.
□ The amounts of any For further discussion of
transfers between Level 1 transfers between levels,
and Level 2 see FSP 20.4.1.2.
□ The reasons for the

transfers
□ The reporting entity’s
policy for determining
when a transfer has
occurred
For recurring Level 3 fair 820-10-50-2(c) Disclose transfers into

value measurements, a Level 3 separately from
reconciliation of the transfers out of Level 3.
beginning and ending
balances (e.g., the Level 3 Present these rollforward
rollforward), separately disclosures on either a
presenting changes during the gross or a net basis.
period attributable to any of
the following.
20-12 PwC
Fair value
□ Total gains or losses for ASC 820-10-55-101

the period, separately illustrates an example
rollforward disclosure for
presenting gains or losses
recurring Level 3 fair
recognized in income and value measurements.
gains or losses recognized
in OCI For further discussion,
see FSP 20.4.1.3.
□ A description of where the
gains or losses are
recognized in income or
recognized in OCI are
reported in the income
statement or in OCI
□ Purchases, sales, issues,
and settlements (each
type disclosed separately)
□ All transfers in and out of
Level 3, the reasons for
those transfers, and the
reporting entity’s policy
for determining when a
transfer occurs
For recurring Level 3 fair 820-10-50-2(d) The amount disclosed as

value measurements the unrealized gain/loss
relating to assets and
□ The total amount of gains liabilities held at the end
or losses for the period of the reporting period
included in income should be consistent with
attributable to the change (1) the reporting entity’s
in unrealized gains and policy for the timing of
losses transfers of securities into
and out of Level 3
□ The line item where those (e.g., beginning of the
unrealized gains and period or end of the
losses are reported in net period) and (2) the
amount of total gains and
income
losses included in the
Level 3 rollforward table
for that period. This is
because the unrealized
gain/loss should only be
included for the period in
which the instrument was
Level 3.
PwC 20-13
Fair value
The highest and best use of a 820-10-50-2(h) ASC 820-10-50-2E

nonfinancial asset measured indicates that the
or disclosed at fair value when disclosure is also
it differs from its current use, applicable to assets and
and why liabilities for which fair
value is only disclosed.
The accounting policy 820-10-50-2D See FV 6 for discussion of

decision to use the exception the portfolio exception.
applicable to financial assets
and liabilities with offsetting
positions in market risks or
counterparty credit risk
(the “portfolio exception”)
Existence of the credit 820-10-50-4A See FV 8 for a discussion

enhancement (for issuers of of the measurement of
debt with an inseparable liabilities with
third-party credit inseparable third-party
enhancement that is recorded credit enhancements.
as a liability that is measured
at fair value)
The nature and risks of the 820-10-50-6A For further discussion,

investments and whether the see FSP 20.4.1.4.
investments are probable of
being sold at amounts
different from NAV per share
(for investments for which
NAV per share is calculated,
regardless of whether the
practical expedient to use
NAV as fair value is used)
20.4.1.1 Disclosure of asset impairments
When a long-lived asset is impaired, it is written down to fair value and should be
included as a nonrecurring fair value measurement (1) in the quarter in which the
impairment was taken, (2) in subsequent quarters, and (3) in the year of
impairment.
The reporting entity should include the nonrecurring measurement disclosures

from the quarter in which the impairment was recorded in its subsequent
quarterly and annual filings that cover the period in which the impairment was
recognized. We believe this approach is consistent with the interim and annual
disclosure requirements for impairments under ASC 360, Property, Plant &
Equipment.
20-14 PwC
Fair value
20.4.1.2 Transfers between levels in the hierarchy
As noted in 20.3.5, there are instances when the level of a fair value measurement
may change. Reporting entities should disclose and consistently follow a policy
for determining when transfers between levels are recognized. The policy should
be the same for transfers in and out of all levels.
Examples of the different policies that can be used to record transfers include
(1) the actual date of the transfer, (2) assuming the transfer occurs at the
beginning of the period (i.e., beginning of the quarter or year-to-date period), or
(3) assuming the transfer occurs at the end of the period.
There are practical implications associated with the reporting entity’s chosen
policy regarding when transfers are recorded. For example, unrealized and
realized gain and loss activity during the period would not be reflected in the
Level 3 rollforward for the period if a reporting entity applies an end-of-period
convention for transfers in.
As a practical matter, reporting entities may only have formal procedures for
assessing the level in the hierarchy at the end of an external reporting period
(i.e., at the end of each quarter). In this case, assuming end-of-period transfers in
and out may be the most efficient.
A reporting entity’s policy choice with respect to the timing of transfers in and
out of the levels will also impact the relationship between the year-to-date
disclosures and quarter disclosures. Use of end-of-period or beginning-of-period
methods generally will result in quarterly information that does not sum to the
year-to-date totals because the beginning and ending dates for timing of a
transfer may be different in a year-to-date disclosure than in a quarterly
disclosure. Once a reporting entity makes the election of either the end-of-period
or beginning-of-period method, it should be applied consistently.
Reporting entities should evaluate transfers to determine the reason for the
transfer between levels. They should assess whether the transfer is being made in
the appropriate period or should be evaluated as a correction of an error.
20.4.1.3 Level 3 rollforward disclosure
A reporting entity can exclude from the Level 3 rollforward instruments

purchased and sold or transferred in and out of Level 3 in the same period.
Question 20-3
How should a reporting entity calculate unrealized gains and losses for an
interest bearing security held at period-end for purposes of the Level 3
rollforward?
PwC 20-15
Fair value
PwC response
There are several acceptable methods for determining unrealized gains/losses for
items still held at the reporting date.
□ Method A — Balance sheet view
Determine unrealized gains and losses as the fair value of the security less its
amortized cost basis. This view holds that gains and losses are realized at
maturity or sale date; thus the entire gain/loss is considered unrealized until
maturity or sale.
□ Method B — Income statement view
Determine unrealized gains and losses as the total gains and losses during the
period less the cash received or paid (i.e., what is realized) for those items.
This view holds that each individual cash receipt or settlement represents a
realized gain or loss.
□ Method C
First, determine any realized gains or losses as the difference between the
beginning-of-the-period expected cash flows and actual cash flows for the
period. Then, determine unrealized gains or losses as the difference between
the remaining expected cash flows for future periods at the beginning and
end of the period.
The fair value standard does not specify a particular method. As a result, we
consider all views to be acceptable. Reporting entities should select a method,
disclose which method is used, and apply it consistently.
Question 20-4
Are impairment losses, including other-than-temporary impairments (OTTI),
considered realized or unrealized in the Level 3 rollforward?
PwC response
The fair value standard requires disclosure of recognized gains and losses and
unrealized gains and losses related to assets and liabilities held at the balance
sheet date in the Level 3 rollforward.
We believe there are two acceptable methods to preparing the Level 3 rollforward
information for fair value adjustments to securities for which there has been an
OTTI.
□ Method A
Present OTTI losses and significant declines in value as “realized” in the

Level 3 rollforward table. This view is supported by the guidance in ASC 320,
which describes the nature of OTTI losses as “realized.”
20-16 PwC
Fair value
□ Method B
Present OTTI losses and significant declines in value as “unrealized” in the

Level 3 rollforward table. The overall objective of the Level 3 rollforward
disclosures is to present the income statement impact of Level 3 fair value
measurements the reporting entity has not verified with an observable
transaction (i.e., a sale in the marketplace). Proponents of this view believe
that recognition of an OTTI is not an observable or realized transaction.
The fair value standard does not specify a particular method. As a result, we
consider both views to be acceptable. Reporting entities should select a method,
disclose which method is used, and apply it consistently.
New guidance
ASU 2016-13, Measurement of Credit Losses on Financial Instruments, creates a

new model for determining credit losses on available-for-sale debt securities that
does not include the concept of other-than-temporary impairments. Under the
new guidance, credit losses will be recorded as an allowance as opposed to a
direct write-off of the value of the security.
For information on the effective date of ASU 2016-13, see FSP 9.
Example 20-1 illustrates the fair value standard’s requirements for disclosure of
amounts transferred between levels in the Level 3 rollforward.
EXAMPLE 20-1
Calculating unrealized gains or losses in the Level 3 rollforward
A reporting entity has an accounting policy that, for purposes of the required
Level 3 rollforward transfers into and out of Level 3, are deemed to occur at the
beginning of the quarter.
What amounts should be included in the disclosure for the quarter and
year-to-date periods for items transferred into or out of Level 3 during the
quarter?
Analysis
The value of Investment A, a trading security, changes during the six-month

period as follows:
PwC 20-17
Fair value
1/1/20X6 $100
Unrealized loss $(5)
3/31/20X6 $95
Unrealized loss $(10)
6/30/20X6 $85
Transfer into level 3
Investment A is classified as Level 2 at 1/1/20X6 and 3/31/20X6. Management

transfers Investment A in the second quarter ending 6/30/20X6 and classifies it
as Level 3 at that date. There are no other Level 3 securities.
The rollforward table required to be disclosed is as follows:
3 months ended 6 months ended

Level 3 rollforward 6/30/20X6 6/30/20X6
Beginning balance $0 $0
Transfer in $95 $95
Unrealized loss $(10) $(10)
Ending balance $85 $85
Amount of total loss for the period included

in income that is attributable to the change
in unrealized loss relating to assets held at
the end of the reporting period $(10) $(10)
Because the reporting entity has a policy that all transfers are deemed to occur at
the beginning of the quarter, the unrealized loss while classified as a Level 3
investment is ($10), whereas a policy that considered the transfers as of the
beginning of the period (1/1/20X6) would have reflected a cumulative
year-to-date unrealized loss of ($15).
Transfer out of level 3
Assume instead that Investment A is classified as Level 3 at 1/1/20X6 and

3/31/20X6. Management transfers Investment A out of a Level 3 measurement in
the quarter ending 6/30/20X6 and classifies it as Level 2 at that date.
The rollforward table required to be disclosed is as follows:
20-18 PwC
Fair value
3 months ended 6 months ended

Level 3 rollforward 6/30/20X6 6/30/20X6
Beginning balance $95 $100
Transfer out $(95) $(95)
Unrealized loss $(0) $(5)
Ending balance $0 $0
Amount of total loss for the period included

in income attributable to the change in
unrealized loss relating to assets held at the
end of the reporting period $(0) $(5)
Because the reporting entity recorded the transfer as of the beginning of the
quarter (i.e., 4/1/20X6), the unrealized loss during the three months ended
June 30, 20X6 is not part of the rollforward. For the same reason, the unrealized
loss reported in the first quarter is reflected in the rollforward for the six month
period ended June 30, 20X6.
In this example, if the reporting entity were to deem transfers as occurring at the
beginning of the year-to-date period (January 1 for the year-to-date six months
ended June 30), it would result in different disclosures.
20.4.1.4 New guidance — Use of net asset value as a practical expedient
The fair value standard contains a practical expedient under which reporting
entities are permitted to use NAV, without adjustment, as fair value for
investments that meet the criteria of ASC 820-10-15-4 through 15-5. Investments
that would qualify include most interests in hedge funds, private equity funds,
real estate funds, venture capital funds, offshore fund vehicles, and funds of
funds.
It is important for a reporting entity to determine whether it is using NAV as a

practical expedient or NAV as fair value, since the required disclosures will
depend on the answer. Because of ASU 2015-07, Disclosures for Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),
investments measured at NAV as a practical expedient need not disclose the
investment’s level within the fair value hierarchy or any of the related disclosures
in ASC 820-10-50-2. For example, there is no requirement to include these
investments in the Level 3 rollforward. As such, the Level 3 rollforward and the
total fair values by level within the fair value hierarchy will not agree to the
balance sheet. Therefore, ASU 2015-07 requires reporting entities to provide a
reconciliation of the fair value hierarchy disclosure to the balance sheet by
disclosing the fair value of investments measured at NAV as a practical expedient.
PwC 20-19
Fair value
Under ASU 2015-07, reporting entities that elect to measure investments at NAV
as a practical expedient are still required to make certain disclosures about the
nature and risks of the investments.
ASU 2015-07 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015 for public business entities. For all
other entities, the guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2016. Early adoption is
permitted. Reporting entities should apply the guidance retrospectively to all
periods presented beginning in the entity’s fiscal year of adoption. Additionally,
reporting entities should disclose the nature of and reason for the change.
ASC 820-10-50-6A also requires disclosures related to investments for which

NAV is calculated. These disclosures are required for each interim and annual
period, regardless of whether the practical expedient is used. ASC 820-10-55-107,
which was amended by ASU 2015-07, illustrates the requirements and includes
the following description of the intent of the disclosures.
Excerpt from 820-10-55-107

…this Topic requires a reporting entity to disclose information that helps users to
understand the nature, characteristics, and risks of the investments by class and
whether the investments, if sold, are probable of being sold at amounts different
from net asset value per share…
20.4.1.5 Practical expedient not elected
ASU 2015-07 removed the requirement for reporting entities to disclose

information about the nature and risks of investments that are eligible to be
measured using the practical expedient, but for which the practical expedient is
not elected.
20.4.1.6 Disclosures for financial instruments not measured at fair value
ASC 825 requires that reporting entities, except those that meet the criteria in
ASC 825-10-50-3 (i.e., nonpublic entities, entities with total assets less than $100
million, and certain entities that do not invest in derivatives), annually disclose
the fair value of all financial instruments, whether or not recognized on the
balance sheet at fair value, except for any of the instruments listed in
ASC 825-10-50-8.
20-20 PwC
Fair value
ASC 825-10-50-8
a. Employers’ and plans’ obligations for pension benefits, other postretirement
benefits including health care and life insurance benefits, postemployment
benefits, employee stock option and stock purchase plans, and other forms of
deferred compensation arrangements (see Topics 710; 712; 715; 718; and
960)
b. Substantively extinguished debt subject to the disclosure requirements of
Subtopic 405-20
c. Insurance contracts, other than financial guarantees (including financial
guarantee insurance contracts within the scope of Topic 944) and investment
contracts, as discussed in Subtopic 944-20
d. Lease contracts as defined in Topic 840 (a contingent obligation arising out
of a cancelled lease and a guarantee of a third-party lease obligation are not
lease contracts and are subject to the disclosure requirements in this
Subsection)
e. Warranty obligations (see Topic 450 and the Product Warranties Subsections
of Topic 460)
f. Unconditional purchase obligations as defined in paragraph 440-10-50-2
g. Investments accounted for under the equity method in accordance with the
requirements of Topic 323
h. Noncontrolling interests and equity investments in consolidated subsidiaries
(see Topic 810)
i. Equity instruments issued by the entity and classified in stockholders’ equity
in the statement of financial position (see Topic 505)
* j. Receive-variable, pay-fixed interest rate swaps for which the simplified hedge
accounting approach is applied (see Topic 815)
* k. Fully benefit-responsive investment contracts held by an employee benefit
plan
* l. Investments in equity securities accounted for under the measurement
guidance for equity securities without readily determinable fair values
(see Topic 321)
* m. Trade receivables and payables due in one year or less
* n. Deposit liabilities with no defined or contractual maturities
* o. Liabilities resulting from the sale of prepaid stored-value products within the
scope of paragraph 405-20-40-3
* ASC 825-10-50-8 (j) through (o) were added by, and become effective upon adoption of,
ASU 2016-01.
PwC 20-21
Fair value
New guidance
ASU 2016-01 eliminated the requirement to disclose the fair value of financial
instruments measured at amortized cost that are prescribed in ASC 825 for
entities that are not public business entities.
Although ASU 2016-01’s mandatory effective date for entities that are not public
business entities is periods beginning after December 15, 2018, and interim
periods within fiscal years beginning after December 15, 2019, this exemption is
available for early application as of the beginning of the fiscal year of adoption for
financial statements that have not yet been made available for issuance.
ASC 825-10-50-2E notes the specific disclosures required for financial

instruments for which fair value is only disclosed. They are referenced in the
“Related Information” column of Figures 20-3 and 20-4.
If these disclosures are in more than one footnote, ASC 825-10-50-12 requires
that one of the footnotes include a summary table listing fair value and the
related carrying amounts and referencing where the other disclosures can be
found.
Also, ASC 825-10-50-15 indicates that the fair values of financial instruments
should not be netted unless the conditions for offsetting under ASC 210, Balance
Sheet, or ASC 815, Derivatives and Hedging, are met. These are addressed in
FSP 2.4 (General conditions) and FSP 19.3.2 (Conditions for derivatives).
When carrying value approximates fair value
A fair value measurement for financial instruments recorded on a basis other

than fair value is required to be disclosed, unless carrying value approximates fair
value. Management should evaluate a conclusion that the fair value of its
financial instruments approximates carrying value. Even if carrying value
approximates fair value, the disclosure of the level in the fair value hierarchy of
the fair value measurements is still required.
Trade receivables and payables
ASC 825-10-50-14 provides an exception to the fair value disclosures for trade
receivables and trade payables with carrying values that approximate fair value.
Because these instruments are scoped out of the fair value disclosure
requirement, reporting entities are not required to provide fair value hierarchy
information. We do not believe this exception to the disclosure should be
extended to other financial assets or financial liabilities, as this guidance is
specific to trade receivables and trade payables.
As with financial instruments, management should evaluate a conclusion that the

fair value of its trade receivables or trade payables approximates carrying value.
While that may be the case, management should consider the nature, risk, and
terms of the trade receivable or payable. For example, the fair value of structured
20-22 PwC
Fair value
or long-term trade receivables and payables may not approximate their carrying
amounts. In such cases, a reporting entity would be required to disclose the fair
value of the related trade receivable or payable along with the level in the fair
value hierarchy.
New guidance
ASU 2016-01 superseded the guidance in ASC 825-10-50-14. No disclosure is

required for trade receivables and payables that are due within one year.
When it is not practicable to estimate fair value
ASC 825-10-50-16 states that when it is not practicable to estimate the fair value
of a financial instrument based on an assessment of the cost versus the related
benefit, the reporting entity should still disclose information pertinent to the fair
value, such as the carrying amount, effective interest rate, and maturity, along
with the reasons why it is not practicable to estimate the fair value.
At times, it may be practicable to estimate the fair value of a portfolio, rather than
a single instrument. If that is the case, the reporting entity may disclose that
portfolio fair value. Further, if the reporting entity can only measure the fair
value of a subset of a class of financial instruments, it should disclose the fair
values of the instruments within the subset.
New guidance
ASU 2016-01 superseded the guidance in ASC 825-10-50-16. As a result, there is

no longer an impracticability exemption.
For equity securities without readily determinable fair values, reporting entities
may elect to measure the securities at cost less impairment, adjusted for any
changes in observable prices. If such election is made, the alternative disclosures
in ASC 321-10-50-3 are required, as discussed in LI 12.6.2.
20.4.2 Disclosure of valuation techniques and unobservable inputs
The following figure includes the qualitative and quantitative fair value disclosure
requirements relating to valuation techniques and inputs. The concepts of
valuation techniques and inputs are addressed in FV 4.
PwC 20-23
Fair value
Figure 20-4 — updated May 2017

Fair value disclosure requirements of valuation techniques and unobservable
inputs
Disclosure
requirement ASC reference Related information
For Level 2 and Level 3 820-10-50-2(bbb) ASC 820-10-50-2E

fair value indicates that these
measurements, a disclosures are also
description of the applicable to assets and
valuation technique(s) liabilities for which fair
and the inputs used in value is only disclosed.
determining the fair
For further discussion of
values of each class of
qualitative disclosures for
assets or liabilities
Level 3 instruments, see
If the reporting entity FSP 20.4.2.4.
has changed its
valuation technique,
disclose the change and
the reason for making
it.
New guidance
ASU 2016-19, Technical
Corrections and
Improvements,
amended this
disclosure requirement.
Reporting entities need
to disclose a change in
valuation approach
and/or valuation
technique. For further
discussion, see
FSP 20.4.2.1.
For Level 3 fair value 820-10-50-2(bbb) These disclosures are not

measurements, required for assets and
quantitative liabilities for which fair
information about all value is only disclosed.
significant
For further discussion, see
unobservable inputs
FSP 20.4.2.2.
used in the fair value
measurement.
New guidance
After adoption of
ASU 2016-01, this
disclosure requirement
will not apply to Level 3
instruments measured
at fair value via the fair
value option.
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Fair value
Disclosure
requirement ASC reference Related information
For Level 3 fair value 820-10-50-2(f) ASC 820-10-55-105

measurements, a requires that a reporting
description of the entity expand its disclosure
valuation processes of policies and guidelines,
used by the reporting and provide additional
entity (including, for information on internal
example, how an entity reporting procedures.
decides its valuation
policies and procedures
FSP 20.4.2.4.
and analyzes changes in
fair value
measurements from
period to period)
For recurring Level 3 820-10-50-2(g) If there are

fair value interrelationships between
measurements, a those inputs and other
narrative description of unobservable inputs used
the sensitivity of the in the fair value
fair value measurement measurement, a reporting
to changes in entity should also provide a
unobservable inputs if a description of those
change in those inputs interrelationships and how
to a different amount they might magnify or
might result in a mitigate the effect of
significantly higher or changes in unobservable
lower fair value inputs on the fair value
measurement measurement.
FSP 20.4.2.4.
20.4.2.1 Change in valuation approach or valuation technique — updated

May 2017
ASU 2016-19, Technical Corrections and Improvements, amended the disclosure

requirement pertaining to changes in valuation technique and approach.
Reporting entities are now required to disclose changes in a valuation approach
and/or technique for each class of instrument (not for each individual
instrument). This change in the disclosure requirements applies to both recurring
and nonrecurring measurements of instruments characterized within Levels 2
and 3 of the fair value hierarchy.
Prior to adopting ASU 2016-19, reporting entities are required to disclose the
valuation approach and technique used by class of instrument for valuations that
fall within Levels 2 and 3 of the fair value hierarchy. In certain cases, a reporting
entity’s valuation policy may permit a choice among valuation techniques or
approaches, or may require the use of multiple approaches and/or techniques
depending on market conditions and the availability of data that maximizes the
usage of observable market information. For example, if a reporting entity
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observes a recent sale of a security that it holds (or a similar security), the entity
may use that price as a basis for their valuation (a market approach). However, if
there is not a recent transaction, the entity may choose to use a discounted cash
flow analysis (an income approach).
Under the guidance in ASU 2016-19, reporting entities may limit disclosure to
only address changes from the established valuation policy for each class of
instrument at the measurement date. They need not disclose a change in actual
valuation approach or technique used if the approaches/techniques are
consistent with the existing policy. In the example above, no disclosure of the
change in approach/technique would be required if both techniques were
contemplated by the policy and disclosed. Reporting entities should review their
disclosures in light of the guidance in ASU 2016-19.
The amended disclosure requirement is effective for all reporting entities for
fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. For calendar year-end entities, this would be the first quarter
of 2017.
20.4.2.2 Table of significant unobservable inputs
The main disclosure requirement for unobservable inputs is a quantitative

disclosure of significant unobservable inputs.
Level of disaggregation — table of significant unobservable inputs
The quantitative disclosures of significant unobservable inputs are presented by

class of assets and liabilities. Reporting entities need to apply judgment to
determine the appropriate classes of assets and liabilities and should provide
information sufficient to permit reconciliation to the line items presented in the
balance sheet. Although the disclosure requirements of the fair value standard do
not specifically require disclosing such a reconciliation, it has become a leading
practice.
The fair value standard does not prescribe the level of disaggregation (below the
class level of assets and liabilities), but it does state that fair value measurements
will often require greater disaggregation than the line items in the balance sheet
and a reporting entity should determine classes based on the nature,
characteristics, and risks of the assets and liabilities. The disclosure should
contain sufficient detail to allow users to understand the unobservable inputs and
how those inputs vary over time.
When considering how detailed the quantitative disclosures should be, a

reasonable starting point is an evaluation of the classes for each of the assets and
liabilities included in other fair value disclosures (e.g., the fair value hierarchy),
followed by consideration of the nature and risk of the types of assets and
liabilities and inputs in each class. The objective of this exercise is to determine
whether there are reasonable levels of homogenous pools of inputs for the Level 3
assets and liabilities that can be separated out of the related class.
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Fair value
The classification of measurements in the fair value disclosures as Level 3 assets

or liabilities typically affects the level of disaggregation (i.e., the number of
classes may need to be greater for fair value measurements using significant
unobservable inputs). ASC 820-10-50-2B indicates that using the classes
determined in other standards (e.g., ASC 320) is acceptable.
For example, a reporting entity’s derivative assets and liabilities may be

disaggregated at the class level (e.g., interest rate instruments, commodity
instruments, and foreign exchange rate instruments). However, the reporting
entity’s commodity instruments may comprise a number of different types of
commodities that do not share similar risk characteristics. The reporting entity
may conclude that disaggregating its commodity derivatives by type of
commodity would provide more meaningful information.
Similarly, a reporting entity may disaggregate mortgage-backed securities into

residential and commercial securities, or disaggregate private equity securities by
industry.
ASC 820-10-55-100 provides an example of disaggregation. Note that the

guidance was amended to add the reconciliation required by ASU 2015-07,
discussed in FSP 20.4.1.4.
Wide range of values
When there is a wide range of values for the significant unobservable inputs, we
believe it is a best practice to include the weighted average, or some other
measure of the distribution, and to disclose the way in which it is calculated. This
will de-emphasize the impact of outliers. Assuming like portfolios, inclusion of
weighted averages will aid in comparing disclosures for different reporting
entities.
Inputs to inputs
Level 3 fair value measurements may contain a number of unobservable inputs.

Such unobservable inputs may be developed using a variety of assumptions and
“underlying” unobservable inputs (e.g., a number of assumptions are used to
arrive at a long-term growth rate input).
We would generally not expect these underlying inputs used to develop

significant unobservable inputs (“inputs to inputs”) to be included in the
quantitative disclosures. Most inputs use underlying assumptions; the disclosure
of these underlying assumptions could result in a significant amount of
additional information being disclosed, adding unnecessary complexity to the
disclosure. As a result, the overall disclosure could become less understandable.
We believe inclusion of such information is beyond the scope of the disclosure
requirement.
In addition, the example in ASC 820-10-55-103 includes disclosure of inputs such

as weighted average cost of capital, long-term revenue growth rate, and long-term
pretax operating margin. These unobservable inputs are based on a variety of
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assumptions. For example, a weighted average cost of capital input may include a
number of assumptions such as the risk-free rate, effective tax rate, required equity
rate of return, and the proportion of debt versus equity. These underlying inputs
are not included in the example disclosure.
Derivative assets and liabilities and their related unobservable

inputs
We believe, similar to the fair value hierarchy table disclosure, derivative assets
and liabilities should generally be presented on a gross basis in the quantitative
disclosure of unobservable inputs.
Any unobservable inputs that are applied to positions valued on a gross basis
should be classified with the corresponding derivative asset or liability on a gross
basis.
Unobservable inputs applied to value a net derivative position (such as when it

meets the requirements for netting on the balance sheet or is a net position under
the “portfolio exception”) may be shown net in the disclosure.
20.4.2.3 Third-party pricing
Management is responsible for all valuation and should evaluate whether it has
performed sufficient diligence over the fair value measurements and inputs
obtained externally, including the related fair value hierarchy level
determinations.
ASC 820-10-50-2(bbb) allows a reporting entity to omit certain quantitative

disclosures if the unobservable inputs are not developed by the reporting entity
(e.g., when a reporting entity uses prices from prior transactions or obtained
from third-party pricing sources without adjustment).
Even if the reporting entity elects the “third-party exception,” it should provide
the qualitative sensitivity disclosures for any significant inputs if required by
ASC 820-10-50-2(g) and reasonably available.
Reporting entities should not ignore quantitative unobservable inputs that are
significant to the fair value measurement and that are reasonably available to the
entity. Therefore, when a reporting entity is contemplating use of this exception,
we would expect it to make a reasonable attempt to obtain quantitative
information from the third party about unobservable inputs being used.
The third-party exception may only be applied if a reporting entity uses the price
obtained from a prior transaction or a third party without significant adjustment.
Consequently, significant adjustments would invalidate the third-party pricing
exception and require the reporting entity to make the quantitative disclosures in
ASC 820-10-50-2(bbb).
Under ASC 820-10-55-104(b), reporting entities that use third-party pricing for
their fair value measurements should also consider whether it is appropriate to
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Fair value
disclose how third-party information such as broker quotes, pricing services, net
asset values, and relevant market data were considered in the measurement of
fair value. Whenever a reporting entity uses unobservable inputs it has not
developed, it should consider disclosing information to allow users of the
financial statements to understand how it has used those inputs in its fair value
measurements. Specifically, disclosures would include the following:
□ How and the extent to which the reporting entity uses brokers and pricing
services to determine its fair value measurements
□ The nature and amount of assets valued using brokers or pricing services
□ The classification of the assets and liabilities valued based on brokers or

pricing services in the fair value hierarchy
□ Information on the use of multiple broker quotes
□ The reasoning and methodology for any adjustments made to prices from
brokers or pricing services
□ The extent to which the brokers are using observable market information as
compared to proprietary models and unobservable data
□ Whether the quotes are binding
□ Procedures performed to validate the fair value measurements
20.4.2.4 Qualitative disclosures for Level 3 fair value measurements
In addition to the quantitative disclosures, the fair value standard requires

certain qualitative disclosures relating to Level 3 fair value measurements. As
listed in Figure 20-4, these disclosure requirements include (1) a description of
the valuation process in place for both recurring and nonrecurring Level 3 fair
value measurements and (2) a qualitative discussion about sensitive inputs used
in recurring Level 3 fair value measurements.
ASC 820-10-50-2(g) requires a narrative disclosure about the sensitivity of

recurring Level 3 fair value measurements to certain changes in unobservable
inputs. The disclosure should include, at a minimum, discussion of the
unobservable inputs included in the quantitative table. This guidance requires
the potential effect of changes in unobservable inputs to be described if such
changes might result in a significantly different fair value measurement.
Furthermore, if there are interrelationships between those inputs and other
unobservable inputs used in the fair value measurement, the reporting entity
should also disclose such interrelationships and the potential impact on
sensitivity. ASC 820-10-55-106 provides an example disclosure of the sensitivity
analysis.
The guidance does not require a quantitative disclosure about sensitivity;

therefore, reporting entities are not required to provide specific amounts or
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Fair value
quantify the potential changes in the inputs or the fair value measurements.
Reporting entities typically elaborate on the sensitivity of significant
unobservable inputs associated with each type of classification included in the
quantitative recurring Level 3 disclosure. For instance, if a reporting entity has
corporate debt and collateralized mortgage-backed securities (CMBS) classified
as Level 3, it may disclose how the significant unobservable input of yield is
affected by movement in credit spreads, or movements in prepayment
assumptions, respectively.
20.4.3 Concentrations of credit risk of all financial instruments
Reporting entities are required to disclose all significant concentrations of credit

risk arising from financial instruments. This disclosure applies to significant
credit risk from an individual counterparty or groups of counterparties if those
counterparties are engaged in similar activities and have similar economic
characteristics (referred to as “group concentrations”).
The required disclosures for each significant concentration are identified in

Figure 20-5. These requirements are not applicable to the financial instruments
referenced within ASC 825-10-50-22, which include financial instruments of a
pension plan and the securities described in ASC 825-10-50-8(a), (c), (e), and (f).
Figure 20-5
Required disclosures for each significant concentration of credit risk
Disclosure
requirement Related information
Information that Shared activity, region, or economic characteristic

identifies group
concentrations
Maximum amount of □ Amount the reporting entity would incur if

loss due to credit risk counterparties failed based on the gross fair
value of the financial instrument, and assuming
the collateral proved to be of no value to the
reporting entity
Collateral □ The reporting entity’s policy of requiring

collateral
□ The reporting entity’s access to that collateral
□ The nature and description of the collateral
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Disclosure
requirement Related information
Master netting □ The reporting entity’s policy of entering into

arrangements master netting arrangements
□ The arrangements to which the reporting entity
is a party at the balance sheet date
□ A description of the terms of the arrangements,
including their ability to reduce the reporting
entity’s maximum amount of loss
20.4.4 Market risk of all financial instruments
Reporting entities are encouraged to disclose quantitative information about the

market risk of financial instruments, while taking into consideration its
management of those risks. These disclosures will likely differ and evolve for each
reporting entity. Example quantitative disclosures are included in
ASC 825-10-50-23, and reporting entities are encouraged to develop others when
appropriate. This is in addition to the information regarding market risk of
financial instruments in the MD&A that is required by Financial Reporting
Release 48.
20.5 Fair value option

In addition to the standards that require assets and liabilities to be reported at
fair value, GAAP provides reporting entities with a fair value option (FVO) to
measure certain financial instruments and other items on the balance sheet at
fair value.
The key standards that have a FVO, as discussed in FV 5, include:
□ ASC 815-15, Derivatives and Hedging—Embedded Derivatives, which

provides a FVO for certain hybrid financial instruments that contain an
embedded derivative that would otherwise require separation
□ ASC 860-50, Transfers and Servicing—Servicing Assets and Liabilities,

which permits a reporting entity to choose between the amortization method
and the fair value measurement method for each class of
separately-recognized servicing assets and servicing liabilities
□ ASC 825-10, Financial Instruments—Overall, which provides a measurement

basis election for most financial instruments (i.e., a choice of either historical
cost or fair value), including equity method investments, allowing reporting
entities to mitigate potential mismatches that arise under the current mixed
measurement attribute model
Because the FVO is not a requirement, its election may result in reduced
comparability of financial reporting, both among similar reporting entities and
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Fair value
within a single entity, because similar assets or liabilities could be reported under
different measurement attributes (i.e., some at historical cost and some at fair
value). However, the disclosure provisions in those topics are intended to
mitigate this by requiring (1) identification of instruments for which the option is
elected, and (2) extensive information about the effects on the financial
statements.
20.5.1 Presentation of FVO
ASC 825-10 permits reporting entities to apply the FVO on an

instrument-by-instrument basis. Therefore, a reporting entity can elect the FVO
for certain instruments, but not others, within a group of similar instruments
(e.g., only a portion of an identical portfolio of corporate securities).
20.5.1.1 Presentation of instruments with FVO versus without FVO
ASC 825-10-45-2 permits reporting entities to present the fair value and
non-fair-value amounts (1) aggregated in the same balance sheet line item
(parenthetically disclosing the amount measured at fair value included in the
aggregate amount), or (2) in two separate line items.
Securities for which the reporting entity elects the FVO are presented in the same
category (i.e., trading, available for sale, or held-to-maturity) as other securities
required to be measured at fair value with changes in fair value recorded in
income. If a reporting entity elects the FVO for one or more investments, it may
use terminology such as “securities carried at fair value” in describing these
securities, instead of the “trading” terminology in ASC 320.5
20.5.1.2 Presentation of changes in fair value under the FVO
ASC 825-10 does not include guidance on geography for items measured at fair
value under the FVO, including how to present dividend income, interest income,
or interest expense, but the reporting entity should disclose its policy for such
recognition.
We believe reporting entities may apply one (or some variation) of the following
models for reporting interest income and expense.
□ Present the entire change in fair value of the FVO item, including the
component related to accrued interest, in a single line item in the income
statement.
Some industries, such as investment companies, are required to show

investment income separately, and therefore, can only apply this approach to
a certain extent. For others, presenting investment income separately is
common industry practice. When determining the amount to separately
report as investment income from instruments for which the fair value option
is elected, if existing US GAAP prescribes a method of calculating interest
5After adoption of ASU 2016-01, ASC 320 will apply to debt securities and ASC 321 will apply to
equity securities.
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Fair value
income for identical instruments not carried at fair value, we believe the
same model should be applied to instruments carried at fair value.
□ Separate the interest income or expense from the full change in fair value of
the FVO item and present that amount in interest income/expense. Present
the remainder of the change in fair value in a separate line item in the income
statement. The allocation of the change in fair value to interest
income/expense should use an appropriate and acceptable method under
US GAAP.
Examples of instances when interest income or expense is permitted to be

broken out separate from other changes in fair value are: (1) derivatives that
have been designated in qualifying hedging relationships, (2) certain
investments in debt and equity securities, (3) certain originated or acquired
loans (as referenced in ASC 825-10-50-28(e)(2)), and (4) certain debt.
Each presentation reflects the same net change in fair value, but the impact on
individual line items in the income statement may significantly differ. We
encourage reporting entities to use the single line presentation because the total
change in fair value is a more meaningful number. In either case, reporting
entities should select a policy for income statement presentation that is
appropriate for their facts and circumstances, disclose the policy in the footnotes,
and follow it consistently.
20.5.2 New guidance — Presentation of financial liabilities for which the

fair value option is elected
Upon adoption of ASU 2016-01, reporting entities will present the portion of the
total change in the fair value of financial liabilities for which the fair value option
is elected that results from a change in the instrument-specific credit risk
separately in other comprehensive income.
The separate presentation in OCI is not applicable for financial liabilities of a

consolidated collateralized financing entity (CFE) measured using the
measurement alternative. Disclosures for CFEs are discussed in FSP 20.5.4.
20.5.3 Disclosure of FVO
FVO disclosures help financial statement readers understand the extent to which
the reporting entity uses the FVO, management’s reasons for electing the FVO,
and how changes in fair values affect net income for the period.
The disclosures in ASC 825-10-50-28 through 50-32 are required for instruments
measured at fair value under the FVO in ASC 825 and the FVO in ASC 815-15.
For all interim and annual periods, ASC 825-10-50-28 requires the following
disclosures for instruments for which the fair value option is elected for each
period in which a balance sheet is presented:
□ Management’s reasons for electing the fair value option
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□ For each balance sheet line item that includes items for which the fair value
option has been elected, both:
o Disclosure of carrying amount and fair value reported in the balance

sheet, and information to help users understand how each balance sheet
line item relates to major classes of assets and liabilities in the fair value
disclosures
o The aggregate carrying amount of items included in each balance sheet

line item that are not eligible for the fair value option, if any
If the FVO is elected for only some of the eligible items within a group of similar
eligible items, ASC 825-10-50-28(b) requires the notes to include a description of
those similar items and the reasons for partial election. In addition, the reporting
entity should disclose how the group of similar items relates to what is recorded
on the balance sheet.
When a reporting entity has elected the fair value option for loans, long-term
receivables, long-term debt, or loans held as assets, ASC 825-10-50-28(d)
requires specific disclosures related to these instruments:
□ The difference between the aggregate fair value and the aggregate unpaid
principal balance
□ For loans held as assets
o The aggregate fair value of loans that are 90 days or more past due
o The aggregate fair value of loans in nonaccrual status (if the entity’s
policy is to recognize interest income separate from other changes in fair
value)
o The difference between the aggregate fair value and the aggregate unpaid
principal balance for loans that are 90 days or more past due, in
nonaccrual status, or both
For all interim and annual periods, ASC 825-10-50-30 requires the following
disclosures for instruments for which the fair value option is elected for each
period in which an income statement is presented:
□ For each balance sheet line item, the amounts of gains and losses from fair
value changes included in earnings during the period, and which income
statement line item includes those gains and losses
□ A description of how interest and dividends are measured and where they are
reported in the income statement
□ For loans and other receivables held as assets, (1) the estimated amount of
gains or losses included in earnings during the period attributable to changes
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in instrument-specific credit risk and (2) how the gains or losses attributable
to changes in instrument-specific credit risk were determined
For annual periods only, ASC 825-10-50-31 requires disclosure of the methods
and significant assumptions used to estimate the fair value of financial
instruments for which the FVO is elected.
New guidance
After adoption of ASU 2016-01, entities will not be required to disclose the
quantitative disclosures about significant unobservable inputs used in measuring
the fair value of FVO instruments that are Level 3. See Figure 20-4.
20.5.3.1 Disclosures pertaining to instrument-specific credit risk for

financial liabilities for which the fair value option is elected
ASC 825-10-50-30(d) requires disclosure of information about

instrument-specific credit risk for financial liabilities for which the fair value
option is elected. Reporting entities are required to disclose:
□ The estimated gain or loss from instrument-specific credit risk that is

included in net income
□ Qualitative information about the reasons for the change in fair value due to
instrument-specific credit risk
□ How the gains and losses attributable to changes in instrument-specific

credit risk were determined
New guidance — Disclosures pertaining to instrument-specific credit

risk for financial liabilities for which the fair value option is elected
ASU 2016-01 amended the disclosures pertaining to instrument-specific credit

risk for financial liabilities for which the fair value option is elected. After
adoption, disclosures will include:
□ The change in fair value of the liability that is attributable to

instrument-specific credit risk (both during the period and cumulatively)
□ How the gains and losses attributable to changes in instrument-specific

credit risk were determined
□ If a liability is settled during the period, any amount previously recognized in

OCI that was ultimately recognized in net income at settlement
20.5.3.2 Disclosures for instruments that would otherwise have been

accounted for under the equity method
ASC 825-10-50-28(f) requires reporting entities that have elected to account for
certain equity method investments using the fair value option to also disclose
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certain equity method disclosures, specifically, the requirements of

ASC 323-10-50-3, excluding ASC 323-10-50-3(a)(3), (b) and (d). Refer to FSP 10
for discussion of equity method disclosure requirements.
20.5.3.3 Sample disclosure — FVO
ASC 825-10-55-6 through 55-13 includes a sample disclosure that integrates FVO
disclosure requirements with the fair value standard’s requirements. The
example is for illustrative purposes only and does not present the only method to
comply with the disclosure requirements.
20.5.4 Disclosures for collateralized financing entities
Typically, if a reporting entity elects the fair value option, financial assets and
financial liabilities of a CFE are measured separately at their fair values. As a
result, the aggregate fair value of the financial assets might differ from the
aggregate fair value of the financial liabilities. A measurement alternative in
ASC 810 allows the reporting entity to measure both using the more observable of
the fair value of the financial assets or the fair value of the financial liabilities.
This eliminates the measurement difference that may exist when the financial
assets and the financial liabilities are measured independently.
Reporting entities that elect the measurement alternative are required to follow
the disclosure requirements within ASC 820 and ASC 825 for the CFE’s financial
assets and financial liabilities. As such, reporting entities will have to apply
judgment to determine the level within the fair value hierarchy of the less
observable financial element.
We believe a reporting entity needs to evaluate the significance of all of the

unobservable inputs (in relation to the total fair value) of the more observable of
the financial assets or financial liabilities when determining the appropriate level
within the fair value hierarchy in which the less observable of the two would be
disclosed.
For example, if the fair value of the financial liabilities are used to measure the
financial assets, and a significant amount of the financial liabilities valuations are
considered Level 3, the financial assets (considered one unit of account for
measurement purposes) would be disclosed as Level 3. Since identical inputs are
not used, the less observable will not be Level 1.

Certain of the fair value disclosures are not required for nonpublic entities. The
fair value standard refers to the first definition of a “nonpublic entity” within the
Master Glossary of the FASB Codification.
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Nonpublic Entity: Any entity that does not meet any of the following conditions:
a. Its debt or equity securities trade in a public market either on a stock

exchange (domestic or foreign) or in an over-the-counter market, including
securities quoted only locally or regionally.
b. It is a conduit bond obligor for conduit debt securities that are traded in a
public market (a domestic or foreign stock exchange or an over the counter
market, including local or regional markets).
c. It files with a regulatory agency in preparation for the sale of any class of debt
or equity securities in a public market.
d. It is required to file or furnish financial statements with the Securities and

Exchange Commission.
e. It is controlled by an entity covered by criteria (a) through (d).
ASC 820-10-50-2F indicates that the disclosures not required for nonpublic
entities, as defined, include the following.
□ The level that a measurement falls in its entirety within the fair value
hierarchy, segregated between Level 1, Level 2 and Level 3 measurements, by
class of assets or liabilities (ASC 820-10-50-2(b))
□ Information about transfers between Level 1 and Level 2 of the fair value
hierarchy (ASC 820-10-50-2(bb))
□ For Level 3 fair value measurements, quantitative information about all

significant unobservable inputs used in the fair value measurement
(ASC 820-10-50-2(bbb))
□ Information about the sensitivity of a fair value measurement categorized

within Level 3 to changes in unobservable inputs and any interrelationships
between those unobservable inputs (ASC 820-10-50(g))
□ The highest and best use of a nonfinancial asset measured or disclosed at fair
value when it differs from its current use, and why (ASC 820-10-50-2(h))
Further, as noted in FSP 20.4.1.6, the disclosures for financial instruments that
are not measured at fair value are not required for any nonpublic entity that
meets the criteria in ASC 825-10-50-3.
New guidance
Upon adoption of ASU 2016-01, an entity that is not a public business entity will
no longer be required to disclose the fair value of certain financial instruments
that are not measured at fair value.
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At the July 19, 2016 PCC meeting, FASB members and staff stated that they
expect to do a technical correction to remove certain fair value disclosure
requirements for held-to-maturity debt securities for entities that are not public
business entities. These disclosures, which are in ASC 320-10-50-5, are discussed
in FSP 9.6.3.
20.6.1 Private company alternative — hedge accounting
Entities that are not public business entities may elect a hedge accounting
alternative (a simplified hedge accounting approach) for certain types of swaps to
economically convert a variable-rate borrowing into a fixed-rate borrowing. Refer
to FSP 19.7.1 for further discussion.
The guidance allows a private company to measure the designated swap at

settlement value rather than fair value. All of the presentation and disclosure
requirements of ASC 815 and ASC 820 continue to apply; however, as the
simplified approach allows for the swap to be recorded at settlement value, this
may be used in place of fair value for disclosure purposes. Any amounts disclosed
at settlement value should be clearly designated as such, and disclosed separately
from amounts disclosed at fair value.
New guidance
Originally, the simplified approach was effective for annual periods beginning
after December 15, 2014, and interim periods within annual periods beginning
after December 15, 2015. However, ASU 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, made the simplified approach effective immediately so that
entities that did not adopt it at the earlier effective date could still do so. Revised
transition guidance is included in ASC 815-10-65-6.
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Chapter 21:
Foreign currency
PwC 21-1
Foreign currency

In today’s global business environment, a reporting entity is likely to have
transactions in foreign currencies and may have foreign operations.
This chapter addresses the key elements of presentation and disclosure guidance
and other considerations necessary for complete and accurate financial reporting
of the impact of foreign currency.
The presentation of foreign currency cash flows is addressed in FSP 6.
21.2 Scope
ASC 830, Foreign Currency Matters, provides financial accounting and reporting
guidance for foreign currency transactions and for translating foreign currency
21.3 Transaction gains and losses

ASC 830 defines transaction gains and losses.

Transaction Gain or Loss: Transaction gains or losses result from a change in
exchange rates between the functional currency and the currency in which a
foreign currency transaction is denominated. They represent an increase or
decrease in both of the following:
a. The actual functional currency cash flows realized upon settlement of foreign
currency transactions
b. The expected functional currency cash flows on unsettled foreign currency

transactions.
21.3.1 Presentation – updated May 2017
Aggregate foreign currency transaction gains and losses included in determining

net income for the period are required to be disclosed either on the face of the
income statement or in the footnotes.
Practice has been to aggregate all transaction gains and losses and classify the net
amount in a single caption in the income statement. Although ASC 830 does not
specify classification, we believe classification of the transaction gains and losses
in operating income is reasonable given the general nature of the accounts that
generate these gains and losses.
If reporting entities chooses to disaggregate transaction gains and losses and

report them in the line items to which they relate rather than classify them in a
single caption, they should do so consistently. For example, it may be
21-2 PwC
Foreign currency
inappropriate to classify foreign exchange gains and losses related to cost of sales
in cost of sales if those related to revenue are not similarly presented in revenue.
If a reporting entity elects a disaggregated presentation, it should apply that

presentation consistently for both transaction gains and losses and for all periods
presented. Although presented on a disaggregated basis, reporting entities are
still required to disclose the aggregate amount of transaction gains and losses.
A reporting entity should consistently apply and disclose its accounting policy
election related to the presentation of foreign currency transaction gains and
losses.
Some believe inclusion of the foreign currency transaction gains or losses on a

reporting entity’s income statement in a single line along with all other
transaction gains and losses may not appropriately reflect the reporting entity’s
financial performance. One example is a foreign subsidiary in a country
experiencing high inflation that has the same functional currency as the parent
and has issued variable rate debt in the local currency. In these cases, the foreign
subsidiary may choose to reflect the gains or losses on remeasurement in a line
item that they believe more accurately reflects the economic substance, as
illustrated in Example 21-1. Generally, we would not object to this presentation.
EXAMPLE 21-1
Presentation of foreign currency gains in highly inflationary economies
A foreign subsidiary of a US reporting entity has a US dollar functional currency

because either the foreign economy is deemed highly inflationary under ASC 830,
or because the foreign subsidiary is considered an extension of the parent.
The foreign subsidiary (which is US dollar functional) has debt denominated in

the foreign currency. The interest rate on such debt is variable, and given that the
rate of inflation in the country, is high. The remeasurement of the foreign-
currency-denominated liability results in an exchange gain.
May the foreign subsidiary classify the foreign currency gain as part of interest
expense?
Analysis
Yes. It is not unreasonable to present the incurred interest expense net of the
related exchange gain.
Economies with high inflation rates tend to also have high interest rates. As a
result, the variable interest rate on the debt may result in unusually high interest
expense.
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Foreign currency
21.3.1.1 Presentation option for dealer transactions
ASC 830-20-45-2 provides banks and other dealers in foreign currency an option
to present gains and losses arising from foreign currency transactions as dealer
gains or losses rather than as transaction gains or losses.
21.3.1.2 Presentation of transaction gains and losses on deferred tax assets

and liabilities
Deferred tax assets and liabilities are considered monetary items and should be
remeasured at current exchange rates with the related gains and losses included
in income. ASC 830-740-45-1 indicates that the transaction gain or loss on
deferred tax assets and liabilities may be presented either (1) with other
transaction gains and losses or (2) as a component of the deferred tax benefit or
expense on the income statement if that presentation is deemed more useful to
financial statement users.
21.3.2 Disclosure – updated May 2017
ASC 830-20-45-1 requires the reporting entity to disclose the aggregate

transaction gain or loss (if it is not presented in its own line item on the face of
the income statement). If transaction gains and losses are included in various
financial statement line items or with other amounts, the reporting entity would
need to disclose the aggregate transaction gain or loss in the footnotes.
Further, as noted in FSP 21.3.1, a reporting entity should disclose its presentation
election with regard to transaction gains or losses.
21.3.2.1 Disclosure of transaction gains and losses on deferred tax assets and
liabilities
If the reporting entity chooses to present transaction gains and losses in the
income tax line item on the income statement, it should still include such
amounts in the disclosure of the aggregate transaction gain or loss for the period
required by ASC 830-20-45-1.
21.4 Cumulative translation adjustments

Cumulative translation adjustment (CTA) results from the process of translating
financial statements from a foreign entity’s functional currency into the reporting
currency of the reporting entity. Unlike foreign currency transaction gains and
losses, which are recorded in net income, CTA should be reported in OCI.
21.4.1 Presentation
When presenting CTA in the financial statements, the title of the line item should
be clear so the reader understands that the balance is due to foreign currency
translation. The FASB has recommended the title “Equity Adjustment from
Foreign Currency Translation” for this account.
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Foreign currency
ASC 830-30-45-18 indicates that an analysis of the changes in the CTA account
during the period can be included in any of the following.
□ A separate financial statement
□ The footnotes
□ The statement of changes in stockholders’ equity
In the statement of stockholders’ equity, CTA can be shown individually or

aggregated with other items that affect OCI such as unrealized gains and losses
on available-for-sale investments. FSP Figure 5-1 presents an example statement
of stockholders’ equity with OCI as one line item.
If aggregated as in Figure 5-1, the reporting entity should present a detailed

break-out of all components of other comprehensive income in the statement of
comprehensive income or the footnotes.
ASC 830-230-55-4 includes an example showing the presentation of CTA as part

of the reconciliation of stockholders’ equity. CTA may be included as its own line
item or aggregated with other items in AOCI, with the detail presented in the
statement of comprehensive income or the footnotes.
FSP Figures 4-2 and 4-3 illustrate the presentation of CTA on the statement of
21.4.1.1 Release of CTA
ASC 830-30 precludes the release of CTA for derecognition events that occur
within a foreign entity (i.e., when a reporting entity ceases to have a controlling
financial interest in a subsidiary or a group of assets that by itself was not a
foreign entity) unless such events represent a complete or substantially complete
liquidation of the foreign entity. Derecognition events related to investments in a
foreign entity (i.e., when a reporting entity ceases to have a controlling financial
interest in a subsidiary or a group of assets that is itself a foreign entity) result in
the release of all CTA related to the derecognized foreign entity, even when a
noncontrolling financial interest is retained.
The release of CTA would generally be recorded as part of the gain or loss on sale,
which is a component of operating income, although presentation in
nonoperating income may also be acceptable.
21.4.2 Disclosure
ASC 830-30-45-20 details what should be included in the CTA disclosure.
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Foreign currency
ASC 830-30-45-20
At a minimum, the analysis shall disclose all of the following:
a. Beginning and ending amount of cumulative translation adjustments
b. The aggregate adjustment for the period resulting from translation

adjustments (see paragraph 830-45-12) and gains and losses from certain
hedges and intra-entity balances (see paragraph 830-20-35-3)
c. The amount of income taxes for the period allocated to translation

adjustments (see paragraph 830-30-45-21)
d. The amounts transferred from cumulative translation adjustments and

included in determining net income for the period as a result of the sale or
complete or substantially complete liquidation of an investment in a foreign
entity (see paragraph 830-30-40-1).
Reporting entities should also consider disclosing a description of the translation

principle employed in the financial statements. Figure 21-1 includes a sample
disclosure of a translation principle.
Figure 21-1
Sample disclosure—translation principle
Note X—Significant accounting policies—Foreign currency
Assets and liabilities have been translated to the reporting currency using the
exchange rates in effect on the consolidated balance sheet dates. Equity accounts
are translated at historical rates, except for the change in retained earnings
during the year which is the result of the income statement translation process.
Revenue and expense accounts are translated using the weighted average
exchange rate during the period. The cumulative translation adjustments
associated with the net assets of foreign subsidiaries are recorded in accumulated
other comprehensive loss in the accompanying consolidated statements of
21.5 Other disclosures

In addition to the required disclosures, entities may consider disclosures in the
following areas depending on materiality and facts and circumstances.
□ The existence of foreign currency commitments and contingencies (FSP

21.5.1)
□ The effects of changes in foreign currency exchange rates subsequent to

period-end (FSP 21.5.2)
21-6 PwC
Foreign currency
□ The effects of changes in foreign currency exchange rates during the period
on the results of operations (FSP 21.5.3)
□ How functional currency is determined (FSP 21.5.5)
□ Foreign currency hedging policies (FSP 21.5.4)
□ The use of multiple foreign currency exchange rates (FSP 21.5.6)
□ Operations in highly inflationary economies (FSP 21.5.7)
Disclosures in these areas will provide the users of the financial statements with
increased transparency into how foreign currency has impacted the operations
and financial position of the business.
21.5.1 Foreign currency commitments and contingencies
As outlined in FSP 23, reporting entities are required to disclose commitments

and contingencies in the footnotes. When commitments and contingencies (such
as leases, dividend restrictions, or the income tax effect of unremitted earnings)
are denominated in a foreign currency, the reporting entity should disclose these
amounts in the reporting currency.
ASC 830 does not specify the exchange rate to be used to present the amounts in
such instances; however, common practice is to present the amounts using the
exchange rate at the balance sheet date, with disclosure of the fact that current
rates have been used, as suggested by ASC 830-20-30-3 and ASC 830-20-35-2.
In certain instances, alternative exchange rates or disclosures may be more

appropriate, including the following.
□ A singular, significant unrecognized contingency exists for a number of

years (e.g., a foreign tax assessment)
The amount may be disclosed in the foreign currency with parenthetical

disclosure of the reporting currency amount specified at current rates. This
approach avoids the possible confusion resulting from the effects of
subsequent rate changes.
□ Disclosure of foreign retained earnings (e.g., subject to either taxation on

repatriation or dividend restrictions)
The amount may appear inappropriate if translated at current rates when the
retained earnings themselves are translated at historical rates in the primary
financial statements. In such cases, judgment and expanded disclosure (e.g.,
use of a dual translation) should resolve any potential confusion.
PwC 21-7
Foreign currency
21.5.2 Effects of exchange rate changes subsequent to year-end
If significant exchange rate changes occur subsequent to the balance sheet date,
ASC 830-20-50-2 indicates that reporting entities should consider additional
disclosure, including the effect on unsettled balances pertaining to foreign
currency transactions. If it is not practical to determine the effects of changes on
unsettled transactions, ASC 830-20-50-2 prescribes that the reporting entity
state that fact in the footnotes.
Also, subsequent changes in exchange controls could significantly impact the

ability of a reporting entity to transact in a foreign currency after the balance
sheet date due to restrictions on purchases and sales of foreign currency within a
specific country.
For further discussion of subsequent events, see FSP 28.
21.5.3 Effects of foreign currency exchange rate changes during the period
on the results of operations
Reporting entities include the effects of all exchange rate changes occurring
during the year either in income (for transaction gains and losses) or as a
component of OCI (for translation gains and losses).
Reporting entities may consider additional disclosure regarding the broader

economic circumstances surrounding rate changes to assist financial statement
users in understanding the effects on the results of operations and to improve the
comparability of current results with prior periods.
ASC 830-20-50-3 notes that this disclosure is “encouraged,” and that it may
include (1) the effects of translating revenue and expenses at different rates than
used in the previous period, and (2) the economic effects of rate changes,
including the effects on selling prices, sales volume, and cost structures.
21.5.4 Foreign currency hedging policy
Reporting entities should consider disclosing their foreign currency hedging

policy when it has a material impact on the financial statements and/or its
disclosure will enhance the comparability and transparency of the financial
statements. See FSP 19 for discussion of derivatives and hedging disclosures.
21.5.5 Determination of functional currency
ASC 830 does not require disclosure of the factors considered in determining
functional currency. Nevertheless, in some instances, disclosure of the factors
may be helpful to provide comparability and improved understanding of the
results of operations.
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Foreign currency
21.5.6 Multiple foreign currency exchange rates
Often, in economies with high inflation, significant currency exchange controls

exist. In these situations, governments sometimes allow multiple legal exchange
rates to exist and different rates may be used to remeasure monetary balances
denominated in a foreign currency and to translate balances from a foreign
entity’s functional currency to the reporting currency. This may occur when one
exchange rate is available for use in exchanging funds to be used for payment of
purchases and an alternative rate is required for the payment of dividends.
ASC 830-30-S99 outlines the minimum expected disclosure requirements for

SEC registrants when different exchange rates are used for remeasurement of
monetary balances and for the translation of functional currency financial
statements.
Excerpt from ASC 830-30-S99-1

● Disclosure of the rates used for remeasurement and translation.
● A description of why the actual US dollar denominated balances differ from

the amounts reported for financial reporting purposes, including the reasons
for using two different rates with respect to remeasurement and translation.
● Disclosure of the relevant line items (e.g., cash, accounts payable) on the
financial statements for which the amounts reported for financial reporting
purposes differ from the underlying US dollar denominated values.
● For each relevant line item, the difference between the amounts reported for
financial reporting purposes versus the underlying US dollar denominated
values.
● Disclosure of the amount that will be recognized through the income

statement (as well as the impact on the other financial statements) as part of
highly inflationary accounting.
21.5.7 Operations in highly inflationary economies
We encourage robust disclosure regarding operations in highly inflationary

economies. Reporting entities should consider disclosing the following related to
subsidiaries in highly inflationary economies:
□ A description of the business (including the types and amounts of materials

imported, plant and equipment in country, and the impact of regulations
such as price controls on the business)
□ Summarized financial information (including balance sheet, statement of

cash flows, and income statement)
□ Net monetary assets and liabilities by currency
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Foreign currency
□ The amount of any gain or loss that resulted from exchange rates that have
changed

The requirements of ASC 830 apply equally to public and private companies. SEC
requirements in ASC 830-30-S99 regarding disclosure in the case of multiple
foreign currency exchange rates apply only to SEC registrants.
21-10 PwC
Chapter 22:
Transferred financial
assets, servicing assets,
and servicing liabilities
PwC
22-1
Transferred financial assets, servicing assets, and servicing liabilities

This chapter discusses the presentation and disclosure requirements for transfers
of financial assets and provides sample disclosures for various types of transfers.
It also discusses presentation and disclosure considerations relating to recognized
servicing assets and liabilities.
First, the chapter addresses disclosure objectives and the aggregation of

disclosures. Next, it discusses presentation and disclosure considerations
applicable to various types of transfers, including those exchanges accounted for
as sales and those reported as collateralized borrowings. The chapter concludes
with a discussion of presentation and disclosure considerations pertinent to
servicing assets and liabilities.
Disclosure samples included in this chapter address some of the more common
types of financial asset transfers, including:
□ An originator’s sale of whole loans to a securitization trust that it does not

consolidate, with the reporting entity retaining servicing and holding an
economic interest in the trust
□ A lender’s periodic sales of participation interests in certain loans to third-

party investors
□ A reporting entity’s periodic transfers of trade receivables to a multi-seller

commercial paper conduit in exchange for cash and a subordinated interest in
the receivables sold
□ Repurchase and securities lending transactions involving exchanges of

securities for cash and reported as collateralized borrowing arrangements
The sample disclosures are illustrative only and are written in general terms. As
such, they may not include all the disclosures required by authoritative accounting
literature relevant to a particular transaction’s facts and circumstances.
22.2 Scope
ASC 860, Transfers and Servicing, is the principal source of authoritative
guidance for evaluating the financial reporting and disclosure implications of
transfers of financial assets within its scope. Servicers of financial assets must also
consider the financial statement presentation and disclosure requirements in
ASC 860 that apply to recognized servicing assets and liabilities.
Also highlighted in the chapter are the presentation and disclosure requirements
for SEC registrants in Rules 4-08(b) and 4-08(m) of Regulation S-X, which deal
with collateralized financing activities (principally transactions involving
repurchase or reverse repurchase agreements).
22-2 PwC
Further, S-X 9-03 includes guidance on banks’ presentation of receivables and

payables arising from resale and repurchase agreements accounted for as secured
financings.
22.3 Disclosure objectives and aggregation of

disclosures
The disclosure requirements under US GAAP capture a broad array of
transactions involving the transfer of a financial asset. As explained more fully in
TS 2, a reporting entity first determines whether a transfer meets the criteria for
sale accounting (derecognition) in ASC 860 or whether the transfer should be
reported as a secured borrowing. This determination dictates the characterization
of the transaction for financial statement purposes. The scope and content of the
required disclosures depend, in part, on the accounting for the transfer (sale or
secured borrowing) and the extent to which the transferor continues to be
involved with the asset(s) subsequent to the transfer.
For the most part, the disclosure provisions in ASC 860 are detailed and
prescriptive. However, reporting entities should keep in mind ASC 860’s broader
disclosure objectives when applying the requirements in practice. This is
particularly true when a reporting entity is evaluating how to summarize and
present information about numerous complex transactions involving transfers of
financial assets in a manner most useful to readers.
22.3.1 Disclosure objectives
ASC 860-10-50-3 cites four broad objectives that frame the specific disclosure
requirements set forth elsewhere in ASC 860. A reporting entity may need to
supplement those required disclosures with additional information to achieve the
broad disclosure objectives. In this regard, 860-10-50-4 emphasizes that a
reporting entity should pay particular attention to disclosing the facts and
circumstances of a transfer, the nature of its continuing involvement with
transferred financial assets, and the effect that such involvement may have on the
reporting entity’s financial position, financial performance, and cash flows.
A reporting entity’s “continuing involvement” with transferred assets can take

many forms, consistent with the Master Glossary’s broad definition.
Excerpt of definition from ASC Master Glossary

Continuing Involvement: Any involvement with the transferred financial assets
that permits the transferor to receive cash flows or other benefits that arise from
the transferred financial assets or that obligates the transferor to provide
additional cash flows or other assets to any party related to the transfer.
Common forms of continuing involvement on the part of the transferor include:
□ Contracts to service the assets subsequent to transfer
PwC 22-3
□ Seller representations and warranties with respect to the assets sold
□ Recourse or guarantee arrangements relating to the transferred assets, or

similar undertakings
□ Derivatives, such as interest rate swaps and call options, executed with the
transferee contemporaneously with, or in contemplation of, the transfer
□ Beneficial interests (e.g., debt securities and/or trust certificates) issued by a

securitization vehicle that acquired the financial assets
TS 2.2 and ASC 860-10-05-4 provide additional examples of potential forms of

continuing involvement by a transferor.
ASC 860’s sale accounting model requires consideration of all forms of

involvement that the reporting entity (including consolidated affiliates and
agents) has or expects to have with transferred financial assets. The underlying
sale accounting analysis (including related legal opinions, if any) may serve as a
useful starting point for identifying elements of continuing involvement that may
warrant disclosure.
22.3.2 Aggregation of disclosures
ASC 860-10-50-4A permits a reporting entity to aggregate disclosures for multiple

transfers having similar characteristics if separate reporting of each transfer
would not provide financial statement users with information that is more useful.
However, at a minimum, aggregated disclosures generally should distinguish
between transfers that are accounted for as sales and those that are accounted for
as secured borrowings. Transfers that are accounted for as sales should also
distinguish between (1) transfers to securitization entities and (2) all other
transfers. Reporting entities should also disclose how similar transfers have been
aggregated.
ASC 860-10-50-5 provides the following quantitative and qualitative

considerations when determining how to aggregate:
□ The nature of the transferor’s continuing involvement
□ The types of assets transferred
□ Risks attributable to the transferred assets that the transferor continues to

bear and how that risk profile changed because of the transfer
□ Information regarding risks and uncertainties required to be disclosed in

ASC 310-10-50-25 and concentrations involving loan product terms
We believe reporting entities that intend to provide aggregated information about

multiple transfers of financial assets may also consider the following
characteristics when evaluating the most meaningful basis on which to aggregate
this information:
22-4 PwC
□ The legal form of the financial assets transferred
□ If receivables or loans have been transferred, whether collateralized and, if so,

the type of collateral (e.g., first-lien residential mortgage loans, second-lien
home equity loans or lines of credit, commercial real estate loans, and auto
loans)
□ The nature and extent of the transferor’s continuing involvement with the
transferred assets (e.g., subordinated or senior beneficial interests issued by
securitization trusts, guarantees or similar credit support arrangements, or
derivative instruments, such as interest rate or total return swaps)
□ Similar valuation assumptions and techniques used to measure beneficial

interests in the transferred assets
We understand that the SEC staff has required registrants to provide the
disclosures called for in ASC 860-20-50 (discussed in FSP 22.4) by each type of
asset sold in securitization transactions.
Striking a balance between disclosures that are too detailed or too aggregated can
be highly facts-and-circumstances specific. However, ASC 860-10-50-6 reminds
reporting entities that, regardless of their relative level of detail, the disclosures
should “clearly and fully” explain the following:
□ The transferor’s risk exposure related to transferred financial assets
□ Any restrictions on the assets of the reporting entity stemming from these
transactions
22.3.3 Location of disclosures
In practice, we find that reporting entities sometimes incorporate ASC 860-

related disclosures into footnotes that address broader topical matters or provide
information required by other accounting pronouncements, including the
following:
□ Providing information about transfers of financial assets to securitization

entities and describing the forms of involvement with those assets and
beneficial interests retained in a footnote that also discloses information
about variable interest entities required by ASC 810, Consolidation
(see FSP 18)
□ Disclosing information about repurchase and resale agreements, and

securities lending activities, in a footnote that also addresses the reporting
entity’s collateralized financing activities more generally
□ Providing information about the reporting entity’s approach to valuing

servicing assets and servicing liabilities in a footnote that also discloses
information about fair value measurements for all asset classes in accordance
with ASC 820, Fair Value Measurement (see FSP 20)
PwC 22-5
22.3.4 Considerations for consolidated financial statements
When evaluating the necessary disclosures, a reporting entity should consider not
only the transferor’s involvement with transferred financial assets, but also
involvements on the part of the transferor’s consolidated affiliates included in the
financial statements presented and the transferor’s agents. For disclosure
purposes, involvement by consolidated affiliates and agents is considered
equivalent to involvement by the transferor itself, as noted in ASC 860-10-50-7.
22.3.5 Accounting policy disclosures footnote
Reporting entities should describe their principal accounting policies for transfers
of financial assets if such transactions are common and/or material. These policy
disclosures should be tailored to address specific types of transfers that the
reporting entity has undertaken or that remain outstanding.
The following is an sample summary of a reporting entity’s accounting policies

relating to transfers of financial assets generally. More prescriptive accounting
policy disclosures required by ASC 860 or Regulation S-X with respect to such
transfers are discussed later in this chapter.
Figure 22-1
Sample disclosure—summary of significant accounting policies for transfers of
financial assets
Note X—Summary of Significant Accounting Policies
Transfers of Financial Assets
The Company accounts for transfers of financial assets as sales when it has
surrendered control over the related assets. Whether control has been
relinquished requires, among other things, an evaluation of relevant legal
considerations and an assessment of the nature and extent of the Company’s
continuing involvement with the assets transferred. Gains and losses stemming
from transfers reported as sales are included in “[line item]” in the accompanying
statements of income. Assets obtained and liabilities incurred in connection with
transfers reported as sales are initially recognized in the balance sheet at fair
value.
Transfers of financial assets that do not qualify for sale accounting are reported as
collateralized borrowings. Accordingly, the related assets remain on the
Company’s balance sheet and continue to be reported and accounted for as if the
transfer had not occurred. Cash proceeds from these transfers are reported as
liabilities, with attributable interest expense recognized over the life of the related
transactions.
22-6 PwC
22.4 Transfers reported as sales with

transferors having continuing involvement
ASC 860-20-50-3 and 50-4 prescribe the disclosures for securitizations,
asset-backed financing arrangements, and similar transfers that meet the
following two conditions:

a. The transfer is accounted for as a sale
b. The transferor has continuing involvement with the transferred financial

assets.
Certain disclosures for these types of transfers are required for each income
statement presented, while others must be made for each balance sheet presented.
22.4.1 Disclosures for each income statement presented
For each period for which an income statement is presented, disclosure

requirements for transfers reported as sales with transferors having continuing
involvement include:
□ Characteristics of the transfer
This information should include (1) a description of the reporting entity’s

continuing involvement with the transferred assets, (2) the nature and initial
fair value of proceeds obtained and liabilities incurred, and (3) the gain or loss
on sale.
□ Information about initial fair value measurements of assets obtained and

liabilities incurred in connection with the transfer
This should include their level within the fair value hierarchy, key inputs and
assumptions used in measuring fair values, and valuation techniques used.
The reporting entity should provide quantitative information about (1)
assumed discount rates, (2) expected prepayments (including the expected
weighted-average life of prepayable financial assets), and (3) anticipated
credit losses, including expected static pool losses.
The reporting entity may report the range of assumptions used if it has
aggregated its transfer-related disclosures.
□ Cash flows between the transferor and transferee(s)
There should be separate disclosures of (1) proceeds from new transfers, (2)
proceeds from collections reinvested in revolving-period transfers, (3)
purchases of previously transferred financial assets, (4) servicing fees, and (5)
PwC 22-7
cash flows received from interests (including beneficial interests) in the

transferred assets held by the transferor.
See Figures 22-2 and 22-4 for an illustration of these disclosure requirements.
22.4.2 Disclosures for each balance sheet presented
As of each balance sheet date, regardless of when the related transfer occurred,
ASC 860-20-50-4 requires a transferor to disclose the following information
about its ongoing involvement with the financial assets sold:
□ Qualitative and quantitative information about the transferor’s continuing

involvement with transferred financial assets
o With respect to the transferred assets, (1) the total amount of principal
outstanding at the balance sheet date, (2) the amount that has been
derecognized, and (3) the amount that continues to be recorded in the
balance sheet
o Contractual arrangements that could require the reporting entity to

provide financial support (e.g., liquidity arrangements and obligations to
purchase assets) to the transferee or its beneficial interest holders
o A description of circumstances that could expose the reporting entity to

loss, and the amount of maximum exposure to loss, stemming from
contractual support arrangements
o The type, amount and reason for any support–financial or otherwise—

provided by the reporting entity to the transferee (or its beneficial interest
holders) that was not previously contractually required. Additionally, if
the reporting entity assisted the transferee (or its beneficial interest
holders) in obtaining support, that should be disclosed.
A reporting entity is encouraged–but not required—to disclose any third-

party liquidity arrangements, guarantees, and/or other commitments that
may affect the fair value of the reporting entity’s interest in the
transferred assets.
These disclosures should allow financial statement users to readily

comprehend the reason(s) for the reporting entity’s continuing
involvement with the transferred financial assets and the risk profile of
that involvement. The disclosures should also clarify whether and how the
transfer altered the reporting entity’s risk profile to those assets, including
(but not limited to) credit and interest rate risk.
□ Information relating to subsequent measurements of assets or liabilities

attributable to the reporting entity’s continuing involvement with transferred
financial assets
22-8 PwC
o A discussion of relevant accounting policies
o Key assumptions (or range of assumptions, if the disclosures have been

aggregated) used to measure the fair value of such assets or liabilities,
including, but not limited to, (1) discount rates, (2) expected prepayments
(including the expected weighted-average life of prepayable financial
assets), and (3) anticipated credit losses, including expected static pool
losses, if applicable
□ Sensitivity analysis
This disclosure should include the hypothetical impact on the fair value of a
transferor’s interests in the transferred assets (including servicing assets and
servicing liabilities) stemming from two or more unfavorable variations from
expected levels for each key assumption, keeping all other key assumption(s)
unchanged. Further, the reporting entity should describe the objectives,
methodology, and limitations of the sensitivity analysis or stress test.
In practice, although there is no explicit requirement, certain reporting

entities stress their key assumptions using variations of 10% and 20%.
However, a reporting entity should use the thresholds that it considers most
meaningful in the circumstances.
□ Asset quality of transferred financial assets and managed assets
This includes:
o Information about the asset quality of transferred financial assets and any
other assets the reporting entity manages together with them (separated
between assets that have been derecognized and assets that continue to be
recognized)
o For receivables, delinquencies at the end of the period and credit losses,
net of recoveries, during the period
This asset quality information is intended to provide financial statement

users with an understanding of the risks inherent in the transferred
financial assets within the broader context of other financial assets and
liabilities (and the associated risks) the reporting entity manages together
with transferred assets.
The disclosures in ASC 860-20-50-4 are in addition to those that may be

required under other US GAAP. For example, a reporting entity that owns
a beneficial interest in transferred financial assets in the form of an asset-
backed security should also consider the disclosure requirements in
PwC 22-9
ASC 320, Investments–Debt and Equity Securities,1 applicable to debt

securities more generally. See FSP 9 for a discussion of those
requirements.
Figure 22-2 illustrates a sample disclosure for a securitization of receivables (in

this case, loans secured by automobiles) reported as a sale with continuing
involvement. For simplicity, this and the following sample disclosures omit any
required comparative amounts.
Figure 22-2
Sample disclosure—securitizations of auto loans reported as sales with beneficial
interests obtained and servicing retained
This sample disclosure illustrates the application of certain of the requirements in

ASC 860-20-50-3 and 50-4.
Note X—Securitization of Automobile Loans
During 20x6, the Company sold pools of automobile loans in various

securitization transactions. In these securitizations, the Company retained
servicing responsibilities and received beneficial interests in the form of
subordinated asset-backed securities. The Company owns only an insignificant
portion of these subordinated securities and receives annual servicing fees
approximating x% of the outstanding principal balance of the loans serviced. The
Company and other investors in the subordinated beneficial interests have rights
to cash flows after the investors holding each securitization trust’s senior
securities have first received their contractual returns. The investors and the
securitization trusts have no recourse to the Company’s assets; holders of the
securities issued by each trust can look only to the loans owned by the trust for
payment. The beneficial interests held by the Company are subject principally to
the credit risk stemming from the underlying transferred auto loans.
The securitization trusts used to effect these transactions are variable interest
entities that the Company does not consolidate. See Note Z, “Variable Interest
Entities,” for more information about these trusts.
The asset-backed securities received in connection with these transactions are

initially measured in the Company’s balance sheet at their fair value. Related
servicing assets are also initially recognized at fair value. Gains or losses arising
from these securitizations are measured as the difference between the transferred
loans’ carrying values and the sum of (a) the initial fair value of the beneficial
interests received and any servicing asset and (b) cash proceeds. In 20X6, the
Company recognized pretax gains of $xx.x million attributable to the foregoing
securitization activity. These gains are included in “[line item]” reported in the
accompanying statements of income.
1After adoption of ASU 2016-01, Recongnition and Measurement of Financial Assets and Financial
Liabilities, this will be ASC 320, Investments in Debt Securities. Disclosures after adoption of ASU
2016-01 are addressed in LI 12.
22-10 PwC
Quoted market prices are rarely available for beneficial interests obtained in
connection with these transactions. Accordingly, the Company generally estimates
the initial fair value of its subordinated interests based on the present value of
expected future cash flows. These cash flows are calculated using best estimates of
market-based assumptions—anticipated credit losses, prepayment speeds and
weighted average lives of the related loans, and discount rates commensurate with
the risks inherent in the interests. These estimates are sometimes developed based
on inputs observable in relevant markets, in which case the beneficial interests
may fall within Level 2 of the fair value hierarchy. In other instances, because
certain of the inputs used are not observable, the beneficial interests fall within
Level 3 of the hierarchy.
Key economic assumptions used in measuring the beneficial interests obtained at

the securitization date resulting from securitizations completed during 20X6 were
as follows:
□ Expected credit losses on underlying loans: x.x% to x.x% (annual rate)
□ Expected annual prepayment rate of underlying loans: x.x% to x.x%
□ Weighted average life of underlying loans: x.x to x.x (years)
□ Rates used to discount residual cash flows: xx.x% to xx.x%
The Company remeasures the carrying value of its subordinated beneficial

interests and servicing assets at each reporting date to reflect their current fair
value, with corresponding gains and losses credited or charged to income. At
December 31, 20X6, key economic assumptions and the sensitivity of the current
fair value of the subordinated beneficial interests held by the Company to 10%
and 20% adverse changes in those assumptions are as follows ($ in millions):
20X6
Carrying amount/fair value of subordinated beneficial interests $x,xxx
Weighted average life of underlying loans (years) x.x-x.x
Assumed prepayments (annual rate) x.x-x.x%

Impact of 10% adverse change $(xx)
Impact of 20% adverse change $(xxx)
Expected credit losses (annual rate) x.x-x.x%

Annual rate used to discount residual cash flows xx.x-xx.x%

PwC 22-11
These sensitivities are hypothetical and should be viewed in that context. As the
figures indicate, the change in fair value based on a stated percentage variation in
an assumption generally cannot be extrapolated because the relationship between
the change in an assumption and the change in fair value may not be linear. Also,
the effect of a variation in a particular assumption on the fair value of the
beneficial interests is calculated independently of any other assumption. In reality,
changes in one assumption may result in changes to other(s), leading to a
combined effect that could magnify or counteract the indicated change in value.
For example, increases in market interest rates generally slow prepayments and
may lead to increased credit losses.
The following table summarizes certain cash flows received from and paid to
securitization trusts during 20X6 ($ in millions):
Proceeds from securitizations $x,xxx
Servicing fees received xx
Principal and interest collections received on subordinated beneficial xxx

interests
Purchases of delinquent loans, and payments relating to seller (xx)

representation and warranty recourse obligations
The following table presents quantitative information about automobile loans

managed by the Company (including those owned and securitized) and related
delinquent loans ($ in millions) as of December 31,20X6:
Principal Net credit

amount of loans losses (charge
Principal 60 days or more offs) during
amount of loans past due 20X6
Total loans
managed (owned
and securitized) $x,xxx $xxx $xx
Components of
managed loans:
Securitized loans x,xxx xx xx
Loans held in
portfolio or for
sale xxx xx x
22-12 PwC
22.4.3 Disclosures for other transfers of financial assets reported as sales
ASC 860-20-50-4D directs that reporting entities disclose certain information

about transactions that (1) involve a transfer of a financial asset reported as a sale
and (2) are accompanied by an agreement (entered into with the transferee in
contemplation of the transfer) that results in the reporting entity retaining
substantially all of the exposure to the economic returns of the transferred asset
during the transaction’s term. Examples of these transactions include:
□ Cash-settled repurchase agreements having a fixed or determinable

redemption price that settle prior to the maturity date of the transferred
financial asset
□ Transfers of financial assets accompanied by an agreement under which the
reporting entity retains substantially all of the transferred asset’s economic
returns (e.g., in the form of a total return swap)
Transfers of financial assets meeting the two conditions cited in ASC 860-20-50-2
(noted in 22.4) are scoped out of ASC 860-20-50-4D’s disclosure requirements.
These transfers would be subject to the detailed disclosure requirements in
ASC 860-20-50-3 and 50-4 (see FSP 22.4.2).
Similarly, the disclosure provisions do not extend to repurchase agreements

accounted for as sales because the financial assets to be re-acquired fail to meet
the conditions in ASC 860-10-40-24(a) to be considered “substantially the same.”
Under ASC 860-20-50-4D, a reporting entity is required to disclose the following

about transactions subject to its scope at each reporting date:
Excerpt from 860-20-50-4D

a. The carrying amount of assets derecognized as of the date of derecognition:
1. If the amounts that have been derecognized have changed significantly from
the amounts that have been derecognized in prior periods or are not
representative of the activity throughout the period, a discussion of the
reasons for the change shall be disclosed.
b. The amount of gross cash proceeds received by the transferor for the assets
derecognized as of the date of derecognition.
c. Information about the transferor’s ongoing exposure to the economic return
on the transferred financial assets:
1. As of the reporting date, the fair value of assets derecognized by the
transferor.
2. Amounts reported in the statement of financial position arising from the
transaction (for example, the carrying value or fair value of forward
repurchase agreements or swap contracts). To the extent that those amounts
are captured in the derivative disclosures presented in accordance with
paragraph 815-10-50-4B, an entity shall provide a cross-reference to the
appropriate line item in that disclosure.
PwC 22-13
3. A description of the arrangements that result in the transferor retaining

substantially all of the exposure to the economic return on the transferred
financial assets and the risks related to those arrangements.
22.5 Sales of loans and trade receivables

ASC 860-20-50-5 requires reporting entities to present separately in the income
statement or disclose in the footnotes the aggregate amount of gains or losses on
sales of loans or trade receivables (including adjustments to record loans held for
sale at the lower of cost or fair value) for each period presented. In certain
instances, the reporting entity may find it appropriate to integrate this
information into the disclosures required for loans and trade receivables by
ASC 310, Receivables. See FSP 8.3 for more information about those disclosure
requirements.
Figure 22-3 illustrates a sample disclosure about periodic sales of participating

interests in certain loans to institutional investors. Disclosures of loans in general
are addressed in FSP 8.
Figure 22-4 illustrates a sample disclosure about sales of trade receivables to a

multi-seller commercial paper conduit under a revolving financing facility.
Figure 22-3
Sample disclosure—sales of loans (transfers of participating interests)
This sample disclosure illustrates the application of certain of the requirements of

ASC 860-20-50-5.
Note X—Sales of Loan Participations
During 20X6, the Company sold participations in certain commercial and

construction development loans in transactions negotiated with various
institutional investors. In each case, the Company retains servicing
responsibilities for the underlying loan as well as a participating interest in the
loan. Interests sold and retained are pari passu, and entitle each holder (including
the Company) to all cash flows received from the underlying loan proportionate to
its interest, net of the servicing fee. The Company receives annual servicing fees
approximating x% (for commercial loans) and x% (for construction development
loans) of the outstanding loan balance owned by others.
The investors have no recourse to the Company for failure of the underlying
debtors to pay amounts contractually due. Since all participating interests are pari
passu, the Company’s retained interests are subject to the same credit,
prepayment, and interest rate risks as the transferred interests, and mirror the
risks of each loan as a whole. These interests are included in the Company’s loan
portfolio and are accounted for at amortized cost, net of an allowance for loan
losses.
22-14 PwC
In 20X6, the Company recognized pretax gains of $xx.x million on sales of

participations in commercial loans and $x.x million on similar sales involving
construction development loans.
Figure 22-4
Sample disclosure—sales of trade receivables (under a revolving financing facility
with a multi-seller commercial paper conduit)

ASC 860-20-50-3 through 50-5.
Note X—Sales of Trade Receivables
In 20X6, the Company entered into a revolving accounts receivable financing

arrangement with a multi-seller commercial paper conduit managed by a major
domestic bank. The facility, whose maximum capacity is $xxx million, is
scheduled to expire in October 20X7 unless renewed by the mutual consent of the
parties.
Under the arrangement, the Company may sell eligible short-term trade
receivables to the conduit on a monthly basis in exchange for cash and a
subordinated interest. The transfers are reported as sales in the accompanying
financial statements. The subordinated interest, a receivable from the conduit, is
referred to as the “deferred purchase price (DPP).” Generally, at the transfer date,
the Company receives cash equal to approximately 90% of the value of the sold
receivables. The Company continues to service the receivables sold in exchange for
a fee.
The DPP is carried at fair value, which is remeasured monthly to take into account
activity during the period (the Company’s interest in newly-transferred
receivables and collections on previously transferred receivables attributable to
the DPP), as well as changes in estimates of future interest rates and anticipated
credit losses. Changes in the DPP’s value attributable to fluctuations in interest
rates and revised estimates of anticipated credit losses have been and are expected
to be immaterial, as the underlying receivables are short-term and of high credit
quality. The valuation estimate of the DPP falls within Level 3 of the fair value
hierarchy.
During 20X6, the Company sold receivables having an aggregate face value of $xx
million to the conduit in exchange for cash proceeds of $xx million, of which $xx
million was funded by re-invested collections. Losses incurred on these sales
during the year amounted to $x.x million, and are included in “[line item]” in the
accompanying statements of income. Related servicing fees for the period were
immaterial.
At December 31, 20X6, the outstanding principal amount of receivables sold

under this facility amounted to $xx million. The carrying amount of the related
DPP receivable in the accompanying balance sheet was $x.x million and is
classified within “[line item].”
PwC 22-15
22.6 Collateral and transfers reported as

secured borrowings
A borrower may grant a security interest in financial assets to a lender (the
secured party) that serves as collateral for the borrower’s obligation(s). Under
these arrangements, the debtor frequently is required to transfer the collateral to
the lender or to a custodian. This section assumes that this transfer of collateral
would not result in derecognition of the collateral under ASC 860. ASC 860 and
Regulation S-X prescribe certain presentation and disclosure requirements for
reporting entities involved in these transactions.
22.6.1 Balance sheet presentation—general considerations
If a secured party (transferee of collateral) has the right by contract or custom to

sell or repledge collateral received, ASC 860-30-45-1 requires the transferor of the
collateral to report the asset on its balance sheet separately from other assets not
encumbered or pledged (e.g., as “securities pledged to creditors”). However,
ASC 860-30-45-3 clarifies that a transferor has discretion regarding the
classification and terminology used to comply with this requirement.
Similarly, ASC 860-30-45-2 directs that liabilities incurred by the secured party
(obligor) arising from securities lending transactions or repurchase agreements
(also referred to as “repos”) be separately classified on its balance sheet. However,
once again, ASC 860 does not prescribe how a reporting entity should characterize
these liabilities. In practice, we have seen the following descriptions used:
□ “Securities loaned or sold under repurchase agreements” or “Securities loaned

or sold under agreements to repurchase”
□ “Repurchase agreements”
□ “Securities sold under agreements to repurchase” or “Securities sold under

repurchase agreements”
Similarly, we have seen reporting entities use the following terms to describe
receivables relating to resale agreements (also referred to as “reverse repurchase
agreements” or “reverse repos”) and securities borrowing transactions:
□ “Securities borrowed or purchased under resale agreements” or “Securities

borrowed or purchased under agreements to resell”
□ “Resale agreements” or “Securities borrowed”
□ “Securities purchased under agreements to resell” or “Securities purchased

under resale agreements”
Reporting entities that prepare their financial statements in accordance with

Regulation S-X should also consider these presentation requirements:
22-16 PwC
□ Under S-X 4-08(m), if the aggregate carrying amount (or market value, if
higher) of securities or other assets sold under repurchase agreements exceeds
10% of total assets, a registrant is required to present the aggregate related
liability separately on the balance sheet. Similarly, if the aggregate carrying
amount of reverse repurchase agreements exceeds 10% of total assets, a
registrant is required to present the aggregate related receivable separately on
the balance sheet.
□ Banks subject to the reporting requirements in S-X 9-03 frequently combine

amounts owed by them (due to them) under repurchase agreements or
securities lending agreements with the liability (receivable) arising from
borrowing (selling) Federal funds, and report the aggregate liability
(receivable) amount as a single line item on the balance sheet. S-X 9-03
prohibits any net presentation of these obligations and receivables.
22.6.2 Balance sheet presentation—offsetting considerations
A reporting entity may offset (present net) receivables and payables if a right of
setoff exists, as defined in ASC 210-20-45-1. Contractual terms and settlement
conventions prevalent in the securities lending markets usually preclude these
transactions from meeting the four conditions cited in that paragraph. Thus,
receivables and payables stemming from securities lending and borrowing
activities are often reported gross on the balance sheet.
Notwithstanding the criterion in ASC 210-20-45-1(c), payables and receivables

arising from repurchase and reverse repurchase agreements may also qualify for
balance sheet offset if the contractual terms and related settlement arrangements
meet the six criteria cited in ASC 210-20-45-11. These conditions are specific to
repos/reverse repos, and are not applicable by analogy to other transactions.
Further, the reporting entity’s choice to offset (or not) is to be applied
consistently.

…[A]n entity may, but is not required to, offset amounts recognized as payables
under repurchase agreements accounted for as collateralized borrowings and
amounts recognized as receivables under reverse repurchase agreements
accounted for as collateralized borrowings if all of the following conditions are
met:
a. The repurchase and reverse repurchase agreements are executed with the
same counterparty.
b. The repurchase and reverse repurchase agreements have the same explicit
settlement date specified at the inception of the agreement.
c. The repurchase and reverse repurchase agreements are executed in

accordance with a master netting arrangement.
PwC 22-17
d. The securities underlying the repurchase and reverse repurchase agreement

exist in book entry form and can be transferred only by means of entries in the
records of the transfer system operator or securities custodian…
e. The repurchase and reverse repurchase agreements will be settled on a

securities transfer system…, and the entity must have associated banking
arrangements in place...
f. The entity intends to use the same account at the clearing bank or other
financial institution at the settlement date in transacting both the cash inflows
resulting from the settlement of the reverse repurchase agreement and the
cash outflows in settlement of the offsetting repurchase agreement.
A reporting entity may not offset payables and receivables arising from repurchase
and reverse repurchase agreements based solely on the existence of a master
netting arrangement with the counterparty.
22.6.3 Disclosure considerations relating to offsetting and master netting

arrangements
A reporting entity that offsets amounts attributable to (1) repurchase and reverse
repurchase agreements and/or (2) securities borrowing and lending transactions
is subject to the disclosure requirements in ASC 210-20-50. The disclosures in
ASC 210-20-50 also extend to reverse repurchase and repurchase agreements, and
to securities borrowing and lending transactions, subject to enforceable master
netting arrangements regardless of whether the related receivables and payables
are offset in the reporting entity’s balance sheet.
See FSP 19.5.6 for information about ASC 210-20-50’s disclosure requirements.
22.6.4 Collateralized financing transactions: disclosures by obligors

(transferees of noncash collateral)
For repurchase agreements, repurchase-to-maturity transactions, and securities

lending agreements reported as secured borrowings, ASC 860-30-50-7 directs
obligors (i.e., reporting entities that have transferred financial assets (collateral))
to provide the following information for each interim and annual period:

[A]n entity shall disclose the following information for each interim and annual
period about the collateral pledged and the associated risks to which the
transferor continues to be exposed after the transfer:
a. A disaggregation of the gross obligation by the class of collateral pledged. An
entity shall determine the appropriate level of disaggregation and classes to be
presented on the basis of the nature, characteristics, and risks of the collateral
pledged.
22-18 PwC
b. Total borrowings under those agreements shall be reconciled to the amount of

the gross liability for repurchase agreements and securities lending
transactions disclosed in accordance with paragraph 210-20-50-3(a) before
any adjustments for offsetting. Any difference between the amount of the
gross obligation disclosed under this paragraph and the amount disclosed in
accordance with paragraph 210-20-50-3(a) shall be presented as reconciling
item(s).
c. The remaining contractual maturity of the repurchase agreements, securities
lending transactions, and repurchase-to-maturity transactions. An entity shall
use judgment to determine an appropriate range of maturity intervals that
would convey an understanding of the overall maturity profile of the entity’s
financing agreements.
d. A discussion of the potential risks associated with the agreements and related
collateral pledged, including obligations arising from a decline in the fair
value of the collateral pledged and how those risks are managed.
ASC 860-30-55-4 illustrates one approach for meeting ASC 860-30-50-7’s

quantitative disclosure requirements.
22.6.5 Regulation S-X disclosures specific to repurchase and reverse

repurchase agreements
If the aggregate carrying amount (or market value, if higher) of securities or other
assets sold under repurchase agreements exceeds 10% of total assets, S-X 4-08(m)
requires a registrant to disclose in the footnotes:
□ The carrying value and market value of the assets sold (exclusive of trading
assets or assets obtained under reverse repurchase agreements), segregated by
security type and grouped by ranges of the agreements’ maturity dates, along
with the associated liability and related interest rate(s), presented in a tabular
format
□ If the amount at risk under these agreements (as defined in the rule) with any
single counterparty (or group of related counterparties) exceeds 10% of
stockholders’ equity, the counterparty’s (or group’s) name, the amount at risk
with each, and the weighted average maturity of the underlying agreements
If the aggregate carrying amount of reverse repurchase agreements exceeds 10%

of total assets, a registrant is required to provide the following disclosures:
□ The registrant’s policy with regard to taking possession of the securities or

assets under the agreements
□ Provisions to ensure that the market value of the underlying assets remains
sufficient to protect the registrant in the event of counterparty default and
disclosures about the nature of those provisions
PwC 22-19
□ If the amount at risk under these agreements (as defined in the rule) with any
single counterparty (or group of related counterparties) exceeds 10% of
stockholders’ equity (or net asset value, if an investment company), the
counterparty’s (or group’s) name(s), the amount at risk, and the weighted
average maturity of the underlying agreements
22.6.6 Collateral-related disclosures
ASC 860-30-50-1A requires the following disclosures about collateral:
□ The reporting entity’s policy for requiring collateral or other security in

repurchase agreements and securities lending transactions
□ As of the latest balance sheet date presented, the carrying amount and
classification of assets pledged as collateral that are not reclassified and
separately reported in the balance sheet, and associated liabilities
□ As of the latest balance sheet date presented, qualitative information about

the relationship between the pledged assets and associated liabilities (e.g.,
restrictions on the use of the collateral pledged to secure certain obligations)
□ With respect to collateral the reporting entity is permitted to sell or repledge:
o The fair value of the collateral and the fair value of any portion sold or
repledged for each balance sheet presented
o Information about the sources and uses of the collateral
S-X 4-08(b) also requires registrants to provide information about assets

mortgaged, pledged, or otherwise subject to lien, and identify the obligations
collateralized for the most recent balance sheet filed. This information may appear
on the face of the balance sheet or in the footnotes.
Figure 22-5 illustrates a sample disclosure of accounting and reporting policies

relating to repurchase (resale) agreements and securities lending (borrowing)
transactions, accompanied by a discussion of its policies regarding related
collateral.
22-20 PwC
Figure 22-5
Sample disclosure—summary of significant accounting policies: repurchase and
securities lending transactions and related collateral arrangements

ASC 860-30-50-1A.
Note X—Summary of Significant Accounting Policies
Securities Financing Arrangements
Securities purchased under agreements to resell and securities sold under

agreements to repurchase are reported as financing transactions, and thus the
related receivables and payables are presented in the accompanying balance
sheets at the amounts at which the securities subsequently will be resold or
reacquired as specified in the respective agreements. Such amounts include
accrued interest. Receivables and payables arising from these agreements are
offset in the balance sheet when permitted under applicable accounting standards.
It is the Company’s policy to take possession of securities purchased under
agreements to resell. On a daily basis, the Company monitors the fair value of the
underlying securities as compared to the related receivable, including accrued
interest, and requests additional collateral as necessary. The Company’s
agreements with third parties specify their rights to request additional collateral.
All collateral is held by the Company or a custodian.
Securities borrowed and securities loaned transactions also are reported as

financing transactions, and thus the related receivable and payables are carried at
the amounts of cash advanced and received, respectively, plus accrued interest.
The Company measures the fair value of the securities borrowed and loaned
against the cash collateral on a daily basis. Additional cash collateral is obtained as
necessary to ensure such transactions are adequately collateralized. The
Company’s agreements with third parties specify their rights to request additional
collateral. All collateral is held by the Company or a custodian. It is the Company’s
policy to accept only cash collateral in connection with these transactions.
For certain resale agreements and securities-borrowed transactions, securities

received qualify for recognition on the balance sheet, in which case they are
recorded at fair value, along with a corresponding obligation to return them. Cash
collateral received in connection with repurchase agreements and securities-
lending arrangements is recorded on the Company’s balance sheet, along with the
related obligation to reacquire the securities. Securities sold under repurchase
agreements and securities loaned that the transferee-borrower may sell or
repledge are reclassified and reported separately on the accompanying balance
sheet.
PwC 22-21
22.7 Servicing assets and servicing liabilities

Inherent in all financial assets, servicing comprises activities such as collecting
principal and interest, maintaining escrow accounts, pursuing workouts and
restructurings of delinquent loans, and initiating foreclosures. A reporting entity
may recognize a servicing asset or a servicing liability arising from a contractual
undertaking to service a financial asset or group of financial assets. TS 5.2
discusses the circumstances under which a servicing asset or liability should be
recognized.
Servicing assets and liabilities are initially measured at fair value, consistent with
the guidance in ASC 860-50-30.
Servicing assets are to be reported separately from servicing liabilities on the

reporting entity’s balance sheet. Offsetting is not permitted. Further,
ASC 860-50-45-1 requires that a reporting entity’s balance sheet distinguish
between servicing assets/liabilities subsequently measured at fair value and those
measured using the amortization method.
ASC 860-50-45-2 provides two options for how a reporting entity may meet the
separate reporting requirement:
□ Presenting separate line items for the amounts subsequently measured at fair
value versus those subsequently measured under the amortization method
□ Combining all amounts in one line, with parenthetical disclosure of the

amount measured at fair value
22.7.2 Disclosures applicable to all servicing assets and liabilities
Recognized servicing assets and/or liabilities are subject to the applicable

disclosure requirements in ASC 860-50-50. The scope and content of the
disclosures depends, in part, on whether the servicer measures the assets and
liabilities at amortized cost or fair value, which is an accounting policy election.
TS 5.2 discusses the principal accounting and measurement considerations
relative to these assets and liabilities.
A reporting entity should first consider the disclosure requirements in

ASC 860-50-50-2, which are generally applicable to servicing assets and
liabilities, and then apply the specific disclosure requirements predicated on how
these assets and liabilities are subsequently measured.
22-22 PwC
Excerpt from ASC 860-50-50-2 [edits applicable upon adoption of ASC 606,
Revenue from Contracts with Customers]
For all servicing assets and servicing liabilities, all the following shall be disclosed:
a. Management’s basis for determining its classes of servicing assets and

servicing liabilities.
b. A description of the risks inherent in servicing assets and servicing liabilities

and, if applicable, the instruments used to mitigate the income statement
effect of changes in the fair value of the servicing assets and servicing
liabilities.
c. The amount of contractually specified servicing fees, late fees, and ancillary
fees earned [recognized] for each period for which results of operations are
presented, including a description of where each amount is reported in the
statement of income.
d. Quantitative and qualitative information about the assumptions used to

estimate fair value (for example, discount rates, anticipated credit losses, and
prepayment speeds).
See TS 5.2.5 for matters a reporting entity should consider when identifying
classes of servicing assets and liabilities. The remaining disclosure requirements
in ASC 860-50-50 are class-specific, so the reporting entity’s determination of the
appropriate classes of servicing assets and liabilities has both accounting and
disclosure implications.
ASC 860-50-50-2 also encourages, but does not require, a reporting entity to
disclose quantitative information about instruments used to manage the risks
inherent in servicing assets and liabilities. This information may include the fair
value of the instruments at the beginning and end of the period and the
assumptions used to estimate the fair value. As part of this discussion, reporting
entities may find it useful to explain why certain instruments were chosen to
execute related risk management strategies, and how they are used in the context
of those strategies.
See Figure 22-6 for an illustration of certain of these required disclosures.
22.7.3 Disclosures of servicing assets and liabilities subsequently measured

at fair value
Servicing assets and liabilities that are subsequently measured at fair value are
subject to the fair value disclosure requirements in ASC 820, which are addressed
in FSP 20. In addition, for each income statement period presented, with respect
to servicing assets and liabilities subsequently measured at fair value, the
reporting entity should disclose the activity in the balance of each class of
servicing assets and liabilities in accordance with ASC 860-50-50-3, including, but
not limited to:
PwC 22-23
□ Beginning and ending balances
□ Additions (purchases of servicing assets, assumptions of servicing liabilities,

and recognition of servicing obligations that result from transfers of financial
assets)
□ Disposals
□ Changes in fair value during the period attributable to (1) changes in valuation
inputs or assumptions or (2) other changes in fair value and a description of
those changes
□ Other changes that affect the balance and a description of those changes
The disclosure should include a description of where changes in fair value are
reported in the income statement. See Figure 22-6 for an illustration of certain of
these required disclosures.
22.7.4 Disclosures of servicing assets and liabilities subsequently measured

under the amortization method
ASC 860-50-50-4 requires the following disclosures for servicing assets and
liabilities subsequently measured under the amortization method for each period
for which an income statement is presented:
□ The activity in the balance of each class of servicing assets and liabilities
including but not limited to:
o Beginning and ending balances
o Additions (purchases of servicing assets, assumptions of servicing

liabilities, and recognition of servicing obligations resulting from transfers
of financial assets)
o Disposals
o Amortization
o Valuation allowance to adjust the carrying value of servicing assets
o Other-than-temporary impairments
o Other changes that affect the balance and a description of those changes
This disclosure should include a description of where changes in the

carrying amount are reported in the income statement for each period.
□ The fair value for each class of recognized servicing assets and liabilities at the
beginning and end of the period
22-24 PwC
□ The risk characteristics used to stratify servicing assets for purposes of

measuring impairment. If the predominant risk characteristics and
corresponding strata are changed, the reporting entity should disclose that
fact and the reasons for those changes.
□ For each period for which an income statement is presented, the activity by
class in any valuation allowance of servicing assets, including:
o Beginning and ending balances
o Aggregate additions charged and recoveries credited to operations
o Aggregate write-downs charged against the allowance
Figure 22-6 illustrates a sample disclosure of accounting and reporting policies

relating to servicing assets and liabilities, and the disclosures about the changes in
the balances of those assets and liabilities during the reporting period.
Although presented here as a single footnote, a reporting entity may prefer instead
to include some of the information in its summary of significant accounting
policies.
Figure 22-6
Sample disclosure—servicing assets and servicing liabilities

ASC 860-50-50-2 through 50-4.
Note X: Servicing Assets and Servicing Liabilities
In accordance with applicable accounting standards, the Company records a

separate servicing asset or servicing liability representing the right or obligation to
service third-party mortgage loans or mortgage loans that it has securitized in
transactions accounted for as a sale. If servicing is retained in connection with
these securitizations, the resulting servicing asset or liability is initially recorded
at its fair value as a component of the transaction’s sale proceeds. Initial
measurement is based on an analysis of discounted cash flows based on
assumptions that market participants use to estimate fair value including, but not
limited to, estimates of prepayment rates, default rates, discount rates, contractual
servicing fee income, escrow account earnings, and ancillary income and late fees.
Servicing assets and servicing liabilities are subsequently measured at either fair
value or amortized in proportion to, and over the period of, estimated net
servicing income. The Company elects one of those methods on a class basis. A
class is determined based on (1) the availability of market inputs used in
determining the fair value of servicing assets and servicing liabilities, and/or (2)
our method for managing the risks of servicing assets and servicing liabilities.
Based on consideration of these factors, the Company currently applies the fair
value method when accounting for servicing rights related to residential real
PwC 22-25
estate loans. The amortization method is followed with respect to servicing rights
for commercial mortgage loans.
Servicing assets and servicing liabilities relating to commercial mortgage loans are
amortized in proportion to, and over the period of, estimated net servicing
income. The impairment of those servicing assets or increases in fair values of
servicing liabilities (above carrying values) are evaluated through an assessment
of the fair value of those assets and liabilities via a disaggregated, discounted
cashflow method under which the assets and liabilities are disaggregated into
various strata, based on predominant risk characteristics. The net carrying value
of each stratum is compared to its estimated fair value to determine whether
adjustments should be made to carrying values or amortization schedules.
Impairment of a servicing asset is recognized through a valuation allowance and a
charge to current period earnings if it is considered to be temporary or through a
direct write-down of the asset and a charge to current period earnings if it is
considered other-than-temporary. An increase in the fair value of a servicing
liability above its carrying value is recognized through an increase in the liability
and a charge to current period earnings. The predominant risk characteristics of
the underlying commercial mortgage loans that are used to stratify the servicing
assets and liabilities for impairment purposes generally include the (1) loan
origination date, (2) loan rate, (3) loan type and size, (4) loan maturity date, and
(5) geographic location.
The rate of prepayment of loans serviced (both commercial and residential) is the
most significant estimate involved in the measurement process. Estimates of
prepayment rates consider prepayment history, projections observed or inferred
in the marketplace, industry trends, and other considerations. Actual prepayment
rates frequently differ from those projected by management due to changes in a
variety of economic factors, including prevailing interest rates and the availability
of alternative financing sources to borrowers. If actual prepayments of the loans
being serviced were to occur more quickly than projected, the Company may be
required to write down the carrying value of servicing through a charge to
earnings (or in the case of a servicing liability, reduce the carrying value through a
credit to earnings in certain circumstances) in the current period. Conversely, if
actual prepayments of the loans being serviced were to occur more slowly than
had been projected, the carrying value of servicing assets could increase, and
servicing income would exceed previously projected amounts; in the case of a
servicing liability, a charge to earnings may be required in these circumstances.
Accordingly, the servicing assets actually realized, or the servicing liabilities
actually incurred, could differ from the amounts initially recorded.
Changes in the balances of servicing assets and servicing liabilities for residential
mortgage loans measured using the fair value method for the year ended
December 31, 20X6 were:
22-26 PwC
Residential mortgage loans
Servicing assets Servicing liabilities
Fair value as of January 1, 20X6 $xx,xxx $xxx
Additions:
Purchases of servicing assets x,xxx N/A
Assumption of servicing obligations x,xxx xx
Servicing obligations that result

from transfers of financial assets xx,xxx xx
Subtractions—disposals: (xx) (x)
Changes in fair value:
Due to change in valuation inputs

or assumptions used in valuation
model xx/(xx) xx/(xx)
Other changes in value xx/(xx) xx/(xx)
Fair value as of December 31, $xxx,xxx $xx

20X6
Changes in the balances of servicing assets and servicing liabilities for commercial
mortgage loans subsequently measured using the amortization method for the
year ended December 31, 20X6 are as follows:
PwC 22-27
Commercial mortgage loans
Carrying amount as of January 1,

20X6 $xx,xxx $xxx
Additions:
Purchases of servicing assets xxx N/A
Assumption of servicing obligations xx x
Servicing obligations that result

from transfers of financial assets x,xxx x
Subtractions:
Disposals (xx) (x)
Amortization (x,xxx) (xx)
Other-than-temporary impairments (xx) N/A
Recognition of additional servicing

liability stemming from increase in
fair value N/A x
Carrying amount before valuation

allowance xx,xxx xxx
Valuation allowance for servicing

assets:
Beginning balance xxx N/A
Provision charged to operations xx N/A
Other-than-temporary impairments (xx) N/A
Sales and disposals (xx) N/A
22-28 PwC
Commercial mortgage loans
Ending balance xxx N/A
Carrying amount as of December

31, 20X6 $xx,xxx $xxx
Fair value as of January 1, 20X6 $xx,xxx $xxx
Fair value as of December 31, 20X6 $xx,xxx $xxx
22.7.5 Disclosures related to electing fair value measurement of servicing

assets and liabilities in a subsequent year
ASC 860-50-35-3(d) allows a reporting entity, at the beginning of its fiscal year, to
subsequently measure at fair value a class of servicing assets or liabilities
previously accounted for under the amortization method. ASC 860-50-50-5
requires separate disclosure of the amount of the cumulative-effect adjustment to
retained earnings resulting from the election, which is irrevocable.

The presentation and disclosure considerations required in ASC 860 are
applicable to both public and private entities.
The presentation and disclosure requirements in S-X 4-08(b), S-X 4-08(m), and
S-X 9-03 pertain only to financial statements filed with the SEC.
PwC 22-29
Chapter 23:
Commitments,
contingencies, and
guarantees
PwC 23-1
Commitments, contingencies, and guarantees

This chapter discusses the presentation and disclosure considerations related to
commitments, contingencies and guarantees. Certain topics that may reasonably
fall under the umbrella of commitments, contingencies and guarantees are
discussed in other chapters due to their close relationship to the topics in those
chapters. FSP 23.8 provides cross references to other chapters that include
additional information related to these topics. In addition, certain commitments
are unique to certain industries and are discussed in the accounting guidance
specific to that industry. Because this guide is intended for a broad array of
reporting entities, industry-specific guidance is not covered.
23.2 Scope
ASC 440, Commitments, provides general guidance for commitments. The
guidance within ASC 440 is broken down into two categories of commitments:
general commitments and unconditional purchase obligations. Both categories are
covered in this chapter.
ASC 450, Contingencies, contains guidance on the recognition, measurement,

presentation and disclosure requirements related to loss contingencies.
Disclosures of gain and loss contingencies continue to be an area of focus for the
SEC, investors, and auditors.
ASC 460, Guarantees, provides guidance on a guarantor’s recognition,

measurement, and disclosures for certain guarantees, including financial
guarantees, performance guarantees, indemnifications, indirect guarantees of
indebtedness of others, and product warranties. The required disclosures include
information on the nature of the guarantees, potential maximum payments under
the guarantees, as well as possible recoveries.
23.3 Commitments
Although ASC 440 is the prevailing guidance related to commitments, it does not
address presentation matters. For SEC registrants, S-X 5-02 (25) requires
commercial and industrial companies to include the caption "Commitments and
contingent liabilities” on the balance sheet. The SEC staff requires this caption to
appear on the balance sheet whenever a footnote bears such a title or one that is
similar. If no such footnote exists or the only disclosed commitments are, for
example, immaterial lease commitments, then the caption need not appear on the
balance sheet.
23.3.1 General commitments
ASC 440 requires the following items to be disclosed in the financial statements:
□ Unused letters of credit (See FSP 12)
□ Long-term leases (See FSP 14)
23-2 PwC
□ Assets pledged as security for loans (See FSP 12)
□ Pension plans (See FSP 13)
□ The existence of cumulative preferred stock dividends in arrears (See FSP 5)
Additionally, reporting entities should disclose commitments, including those

related to a commitment to acquire a plant, an obligation to reduce debts, an
obligation to maintain working capital, or an obligation to restrict dividends.
23.3.2 Unconditional purchase obligations
Unconditional purchase obligations, such as take-or-pay contracts and

through-put contracts, are types of commitments for which specific disclosures
are required. An unconditional purchase obligation that has all of the following
characteristics is required to be disclosed:

a. It is noncancelable, or cancelable only in any of the following circumstances:
1. Upon the occurrence of some remote contingency
2. With the permission of the other party
3. If a replacement agreement is signed between the same parties
4. Upon payment of a penalty in an amount such that continuation of the

agreement appears reasonably assured.
b. It was negotiated as part of arranging financing for the facilities that will
provide the contracted goods or services or for costs related to those goods or
services (for example, carrying costs for contracted goods). A purchaser is not
required to investigate whether a supplier used an unconditional purchase
obligation to help secure financing, if the purchaser would otherwise be
unaware of that fact.
c. It has a remaining term in excess of one year
Future minimum lease payments that might otherwise constitute an

unconditional purchase obligation using the criteria in ASC 440-10-50-2 are not
required to be disclosed as long as the required disclosures associated with
ASC 840, Leases, [or ASC 842, Leases, upon its adoption] are met.
The nature and extent of the required disclosures related to unconditional

purchase obligations will vary depending on whether these commitments are
unrecognized or recognized.
PwC 23-3
23.3.2.1 Unrecognized commitments
The following disclosures are required for material unrecognized commitments,

unless the aggregate commitment for all unrecognized commitments is
immaterial:
□ The nature and term of the commitment
□ The aggregate amount of the purchase obligation that is fixed and

determinable as of the balance sheet date and for each of the five succeeding
years (if determinable)
□ The nature of any variable components of the commitment
□ The amounts purchased under the purchase obligation for each period that an
income statement is presented
ASC 440 encourages, but does not require, reporting entities to disclose the
amount of imputed interest necessary to reduce the unconditional purchase
obligations to present value. The discount rate should be the initial effective
interest rate of the borrowings that financed the facility that will provide the goods
or services, if known. If the discount rate is not known, the reporting entity should
use its incremental borrowing rate at the time the commitment originated.
Question 23-1
Are capital leases not yet recorded by the lessee (because the lease term has not
yet commenced) subject to the disclosure requirement of ASC 440?
PwC response
Yes. Although the lease is not subject to the specific disclosure requirements of
ASC 8401, disclosure similar to those provided for a commitment for the purchase
or construction of properties to be owned would be appropriate. Similar disclosure
would be appropriate for operating leases between inception and the beginning of
the lease term.
Assume a lease is signed on November 1; however, the term of the lease and usage
of the leased property begin the following February 1 and the lessor will retain
possession and control of the property through January 31. The classification of
the lease, as either capital/finance or operating, should be determined as of
November 1, the date of the inception of the lease. The lessee should record the
lease at the beginning of the lease term, February 1; however, the lease represents
a commitment that, if material, should be disclosed at any intervening financial
statement dates.
1 The requirements of the ASC 842, Leases, are addressed in PwC’s leases guide.
23-4 PwC
23.3.2.2 Recognized commitments
For unconditional purchase obligations recorded on the balance sheet, reporting

entities must disclose the aggregate amount of payments for the obligations for
each of the five succeeding years following the balance sheet date. Commonly
recognized commitments include capital/finance leases and net losses on firm
inventory purchase commitments. Unconditional purchase obligations may also
be subject to the provisions of ASC 815, Derivatives and Hedging. (See DH 9 for
discussion of purchase commitments as derivatives). In this instance, reporting
entities would follow the disclosure requirements of both ASC 440 and ASC 815.
23.4 Contingencies — updated May 2017

US GAAP defines a contingency as follows:

Contingency: An existing condition, situation, or set of circumstances involving
uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an
entity that will ultimately be resolved when one or more future events occur or fail
to occur.
The following sections discuss the disclosure considerations for loss and gain
contingencies as provided by ASC 450.
23.4.1 Loss contingencies
Loss contingencies are relatively common. Examples include product warranties,

litigation exposure and environmental remediation, among others.
There are three separate potential recognition, presentation and disclosure

outcomes with regard to loss contingencies. Depending on the facts and
circumstances, loss contingencies may require a reporting entity to (1) accrue a
liability and disclose the nature of the contingency (FSP 23.4.1.1), (2) disclose the
loss contingency, but not accrue a liability (FSP 23.4.1.2), or (3) neither accrue nor
disclose (FSP 23.4.1.3).
23.4.1.1 Accrual and disclosure required
A loss contingency should be accrued if it is both (1) probable and (2) reasonably
estimable.
ASC 450-20-20 defines "probable" to mean that "the future event or events are
likely to occur." Some have questioned whether "probable" should be interpreted
asmore likely than not (i.e., a greater than 50% chance of occurring) or a higher
threshold (say, a 75% chance of occurring). Although the appropriate threshold
may vary according to the particular circumstances, practice generally has applied
the higher threshold.
PwC 23-5
Reporting entities should evaluate any information available prior to issuance of

the financial statements to determine whether a loss contingency is probable at
the balance sheet date. Events giving rise to new information often occur in the
period between the balance sheet date and financial statement issuance. However,
it is important to distinguish between events that provide additional information
with respect to conditions that existed at the balance sheet date (recognized
subsequent events) and events that provide information with respect to conditions
that did not exist at the balance sheet date (non-recognized subsequent events).
Although ASC 450-20-50-9 generally requires disclosure of these events, it is not
appropriate to accrue a liability at the balance sheet date for a loss contingency
related to a condition that did not exist at the balance sheet date. ASC 855 and
FSP 28 provide further guidance on subsequent events.
ASC 450-20-30-1 provides guidance on the amount to be accrued.

If some amount within the range of loss appears at the time to be a better estimate
than any other amount within the range, that amount shall be accrued. When no
amount within the range is a better estimate than any other amount, however, the
minimum amount in the range should be accrued.
The amount of a contingent liability should be estimated and evaluated

independent from any claim for recovery. See FSP 23.4.3.1.
Discounting the accrued liability
Accrued liabilities for contingencies are generally not discounted. However,

discounting a liability is acceptable when the aggregate amount of the liability and
the timing of cash payments for the liability are fixed or reliably determinable. For
example, this may occur when a large volume of relatively small claims have a
highly predictable settlement pattern (e.g., workers compensation claims).
ASC 450-20-S99-1 (SAB Topic 5.Y, Accounting and Disclosures Relating to Loss
Contingencies) specifies that the discount rate used should produce an amount at
which the liability could be settled in an arm’s length transaction with a third
party.
The guidance in SAB Topic 5.Y also indicates that the discount rate used should
not exceed the interest rate on monetary assets that are essentially risk free and
have maturities comparable to that of the liability. In many instances, it is difficult
in practice to determine the discount rate that would result from an insurance
company or other third party settlement/transfer transaction. The insurance
company or third party would expect to be compensated for the risks assumed
along with a profit; therefore, the rate to assume the liability is generally less than
the risk-free rate. However, because these settlement rates are often not
determinable, practice has gravitated toward using the risk-free rate of monetary
assets that have comparable maturities. We believe the guidance on discounting
should apply to all contingent liabilities, and to private and public companies.
23-6 PwC
Conceptually, the discount rate applied to a liability should not change from
period to period if the liability is not recorded at fair value. However, many
liabilities recorded for contingencies consist of numerous claims that are
established and settled in multiple periods. Keeping track of the period for which
estimates for liabilities were recorded and later revised adds additional complexity
when the discount rate is established.
Entities with liabilities that are eligible for discounting are not required to
discount those liabilities. The decision of whether to discount is a matter of
accounting policy that should be consistently applied and disclosed. If an entity
wishes to discount liabilities related to contingencies, it should have sufficient
historical information with which to reasonably estimate the amount and timing
of ultimate settlement costs, as described in ASC 835-30-15-2, Interest -
Imputation of Interest, ASC 450-20-S99-1 (SAB Topic 5.Y), and ASC 410-30,
which addresses the discounting of environmental remediation liabilities.
Switching from not discounting liabilities to discounting liabilities should be

treated as a change in the method of applying an accounting principle, subject to
preferability. However, a change from discounting to not discounting because
there has been a change in the facts and circumstances regarding the inherent
predictability in the timing and amount of the payments is not considered a
change in the method of applying an accounting principle.
Classification of the accrual
The balance sheet classification of the accrual should consider when the
contingency will be settled. If the period of expected settlement is within one year
of the balance sheet date, the reporting entity should classify the contingency as a
short-term liability. Otherwise, it should be classified as long-term.
The income statement classification of the accretion of the liability to its

settlement amount is an accounting policy decision that should be consistently
applied and disclosed.
Disclosure
Because these accruals are estimates, the FASB recommends that reporting
entities use terms such as “estimated liability” or “a liability of an estimated
amount” in describing the nature of the accrual. The term “reserve” should not be
used. A reporting entity should disclose any losses that may be incremental to
what was accrued if the additional loss is reasonably possible and materially
different from what has been accrued.
23.4.1.2 No accrual, but disclosure required
Disclosure is required when the loss contingency is not both probable and
reasonably estimable:
□ A material loss contingency is probable but not reasonably estimable.
PwC 23-7
A reporting entity is required to disclose the nature of the contingency and the
fact that an estimate cannot be made, or
□ A material loss contingency is reasonably possible but not probable.
A reporting entity is required to disclose the nature of the contingency and an

estimate of the possible loss, range of loss, or disclose the fact that an estimate
cannot be made.
If a material loss contingency arises after the balance sheet date but before the
financial statements are issued, disclosure may be necessary. Assessment of
whether disclosure is necessary should be based on the principles articulated in
ASC 855, Subsequent Events. If disclosure is deemed necessary, a reporting entity
should describe the nature of the loss contingency and an estimate of the loss or
range of possible losses. If no estimate can be made, then the reporting entity
should disclose that fact. Refer to FSP 28 for further information on subsequent
events disclosures.
For material loss contingencies that are reasonably possible but not probable, the
SEC frequently comments on reporting entities that have incomplete or omitted
disclosures pursuant to ASC 450, specifically related to the lack of disclosures
regarding the nature of the contingency and the possible range of loss amounts or
the statement that an estimate cannot be made. The SEC staff also cautions
reporting entities that the recording of a material accrual for a contingent liability
should typically not be the first disclosure regarding the material contingency. A
foreshadowing disclosure that precedes an accrual for a material contingent
liability is typically expected.
ASC 450 does not provide specific guidance as to the level of disclosures required
(that is, individual contingency or some other aggregate level). However, it
requires that reporting entities disclose information to keep the financial
statements from being misleading. One way to alleviate some of this tension is to
aggregate losses. The SEC staff has accepted this approach, which enables users to
have sufficient data, but does not provide such specific information that it could
prejudice a legal matter.
Unasserted claims
An unasserted claim is one that has not yet been asserted either because the
potential claimant is unaware of the matter or because the potential claimant has
elected not to pursue it. As discussed in ASC 450-20-50 and ASC 450-20-55-14
through 55-15, if assertion of a claim is judged probable, accrual or disclosure, or
both, should be made based on the probability of, and ability to estimate, any loss
arising from the claim. ASC 450-20-50-6 indicates that disclosure is required
when assertion of the claim is considered probable and there is a reasonable
possibility the outcome will be unfavorable. While ASC 450-20-50-6 indicates
when disclosure of unasserted claims is required, we believe the reporting entity
should consider disclosure even if the claim is not considered probable.
Reporting entities should evaluate the need for accrual or disclosure of a loss
contingency when circumstances indicate that the potential exists for claims
23-8 PwC
against the company. For example, the restatement of prior annual or interim
financial statements to correct an error may be indicative of an unasserted claim
because of the possibility that shareholders may make claims against the company
for having issued allegedly false and misleading financial statements. Any
restatements to correct an error in previously-issued financial statements should
be evaluated in this light. See ASC 450-20-55-14 for other examples of how
unasserted claims might arise.
23.4.1.3 Neither accrual nor disclosure required
Disclosure is generally not required for a loss contingency involving an unasserted

claim or assessment if it is not probable that a claim will be asserted. Additionally,
ASC 450 does not require disclosure of loss contingencies when the possibility of
loss is remote. However, reporting entities should consider disclosing information
in the footnotes if the disclosure would keep the financial statements from being
misleading. Though ASC 450 does not require disclosure of remote contingencies,
ASC 460 requires certain remote loss contingencies to be disclosed. Refer to
FSP 23.6.1 for further discussion related to these contingencies.
23.4.2 Accruing legal costs
As discussed in ASC 450-20-S99-2, there is no definitive guidance on whether

legal defense costs should be accrued. Some believe that the accrual of the loss
contingency should factor in all costs, including legal costs if they are reasonably
estimable, regardless of whether a liability can be estimated for the contingency
itself. Others contend that legal fees should be recognized as incurred when the
legal services are provided, and therefore should not be recognized as part of a
loss contingency accrual. As specified in ASC 450-20-S99-2, how an entity treats
legal costs is an accounting policy choice that should be consistently applied and
disclosed.
Question 23-2
In a two-step income statement, where should a reporting entity include litigation
expense?
PwC response
Generally, litigation expense, whether expensed as incurred or accrued as part of
the ASC 450 accrual, should be classified as an operating expense.
23.4.3 Recovery of a loss
A claim for loss recovery (e.g., an insurance claim) generally can be recognized
when a loss event has occurred and recovery is considered probable. If the claim is
subject to dispute or litigation, a rebuttable presumption exists that recoverability
of the claim is not probable. If the potential recovery exceeds the loss recognized
in the financial statements or relates to a loss not yet recognized in the financial
statements, such recovery should be recognized under the gain contingency model
discussed in FSP 23.5.
PwC 23-9
ASC 450-20-S99 (SAB Topic 5.Y) includes the SEC staff's view that there is a
rebuttable presumption that an asset should not be recognized for a claim for
recovery from a party that asserts that it is not liable to the registrant. Registrants
that overcome that presumption should disclose the amount of recorded
recoveries that are being contested and discuss the reasons for concluding that the
amounts are probable of recovery. Although discussed in the context of
environmental liabilities, we believe these concepts are equally applicable to other
non-environmental liabilities and related recoveries (e.g., asbestos claims and
related insurance coverage).
23.4.3.1 Insurance recoverables
Reporting entities often manage risk by purchasing traditional insurance.

Although a reporting entity transfers risk through an insurance policy, it generally
has the primary obligation with respect to any losses. Therefore, the reporting
entity is typically required to accrue and present the gross amount of a loss even if
it purchased insurance to cover the loss.
Generally, amounts receivable under an insurance contract should not be offset

against the reporting entity’s liability, as purchasing insurance generally does not
relieve the purchaser of its primary obligation to make payments related to losses
that result from risk.
ASC 720-20-45-1
Unless the conditions of ASC 210-20-45-1 are met, offsetting prepaid insurance
and receivables for expected recoveries from insurers against a recognized
incurred but not reported liability or the liability incurred as a result of a past
insurable event would not be appropriate.
Sometimes, an insurance company may agree to pay the harmed party directly, on
the insured’s behalf, but this does not typically extinguish or provide a legal
release from the insured’s obligation prior to payment to the harmed party, as is
required for liability extinguishment.
For example, most states require an employer to provide its employees with
workers’ compensation coverage if they are injured on the job. Accordingly, an
employer has an obligation to its employees. The employer may choose to
purchase insurance for some or all of its workers’ compensation risk. The
employer’s decision in this respect generally does not change its legal obligation to
its employees, although its decision could affect whether there is an asset to record
when an employee is injured. In addition, an employer’s legal obligation is not
altered if the purchased insurance contract includes all claims handling and direct
contact with employees. Even if (1) the insurance company is not a credit risk, or
(2) the state provides an insurance guarantee fund for insolvent insurance
carriers, the employer generally still has the primary obligation to pay any claims
and, if so, should record a liability. Laws in certain jurisdictions (especially certain
state laws related to workers’ compensation) may dictate that when a reporting
entity purchases an insurance policy for certain claims, the reporting entity is
relieved from being the primary obligor because the insurer has assumed that
23-10 PwC
role. Reporting entities with this fact pattern may need to seek assistance from
legal counsel to understand whether the primary obligor designation has been
transferred to the insurance company, and whether the related liability has been
extinguished by purchasing workers’ compensation insurance.
23.4.3.2 Financial statement classification of recovery
Several pieces of guidance govern the presentation and disclosure of insurance

recoveries:
□ ASC 605-40, Revenue Recognition – Gains and Losses2
□ ASC 410-30, Environmental Obligations
□ ASC 225-30, Income Statement – Business Interruption Insurance
Revenue recognition model (ASC 605-40)
ASC 605-40 provides guidance on involuntary conversions of nonmonetary assets

(such as property or equipment) to monetary assets (such as insurance proceeds).
It requires recognition of a gain or loss on this type of involuntary conversion,
measured as the difference between the carrying amount of the nonmonetary
asset and the amount of monetary assets received. As such, insurance recoveries
are recorded in the same financial statement line as the related loss up to the
amount of loss. If insurance proceeds are in excess of the related loss, which may
occur with replacement cost insurance, the gain is typically included in other
income. In a two-step income statement, it is often shown as nonoperating
income. Most insurance proceeds do not require the insured to perform anything
further to keep the proceeds and are typically not refundable; therefore, full or
partial deferral of recognition of the proceeds should be rare.
EXAMPLE 23-1
Considerations for casualty loss with a potential insurance recovery
On June 1, 20X6, FSP Corp’s equipment is heavily damaged while being

transported from its manufacturing facility to its retail facility. Due to the nature
of the damage, FSP Corp determines that there is a total loss. The equipment had
a net book value of $7 million and an estimated replacement value of $6 million as
of the date of loss. FSP Corp files a property and casualty claim with its insurer for
recovery of $6 million. Based on its discussions with the insurer and review of the
policy by in-house experts, FSP Corp concludes that it has a covered loss under
the policy and that it is probable the insurer will settle the claim for at least $5
million. However, the insurer has communicated to FSP Corp that the amount of
final settlement is subject to verification of the identity of the equipment damaged
and the receipt of additional market data regarding its value.
2 In May 2014, the FASB released new revenue guidance that is effective for public companies
beginning in 2018. The revenue guidance discussed in this chapter does not reflect this new guidance.
For information on the new revenue recognition guidance, refer to PwC’s accounting and financial
reporting guide for Revenue from contracts with customers, global edition.
PwC 23-11
How should FSP Corp recognize, measure, and disclose the loss of the equipment
and the potential insurance recovery?
Analysis
FSP Corp should recognize a reduction in the net book value of the equipment of
$7 million and recognize an asset of $5 million for the probable recovery of its loss
(a loss recovery asset on the balance sheet). FSP Corp should recognize any
remaining recovery (i.e., any excess over $5 million) when recovery of an
additional amount is probable (e.g., when the identity of the damaged equipment
has been established and additional market data confirm its value). FSP Corp
should record the insurance recovery in the same financial statement line item in
the income statement as the related loss was recorded. To the extent the loss is
material, FSP Corp should disclose the nature of the events leading to the loss and
additional amounts that are expected to be recovered.
Insurance recoveries of environmental obligations (ASC 410)
ASC 410-30-35-8 and ASC 410-30-35-9 address insurance recoveries related to

environmental obligations. The guidance indicates that an asset related to an
insurance recovery should be recognized only when realization of the claim
underlying the recovery is probable. The guidance stipulates that there is a
rebuttable presumption that realization of the claim is not probable if the claim is
the subject of litigation.
Probable recoveries should be reflected separately as an asset in the balance sheet

and not netted against the remediation liability, consistent with ASC 210-20,
Balance Sheet—Offsetting. ASC 410-30-45-2 states that it would be rare, if ever,
that the facts and circumstances surrounding environmental remediation
liabilities and related receivables and potential recoveries would meet the criteria
of ASC 210-20. The financial statements should also include a discussion of
material uncertainties that may affect the measurement and realization of the
asset and liability.
Business interruption insurance (ASC 225)
ASC 225 provides guidance related to the presentation and disclosure of business
interruption insurance proceeds. Business interruption insurance is insurance
that a reporting entity might purchase to cover losses caused by the loss of use of
property and equipment. This insurance typically provides for reimbursement of
qualifying costs while a reporting entity rebuilds the damaged property. The
guidance allows a reporting entity to determine the classification of recoveries as
long as the classification does not conflict with existing US GAAP. For example, to
classify business interruption insurance recoveries as revenue, the requirements
of FASB Concepts Statement No. 6, Elements of Financial Statements, must be
met.
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ASC 225 also requires a reporting entity to disclose certain information in the
footnotes for period(s) in which recoveries are recognized. These include:
□ The nature of the event that caused the business interruption losses
□ The aggregate amount of business interruption insurance recoveries

recognized each period and the income statement line item in which the
recoveries were included
23.4.4 Lawsuits covered by insurance
SEC staff comment letters have emphasized disclosures related to pending

settlements regarding lawsuits that are covered by insurance. Specifically,
reporting entities have been asked to disclose how insurance arrangements have
affected conclusions concerning settlements and the likely effect that litigation
and future settlements will have on the financial statements. Accordingly, it is
important for reporting entities to ensure that any liabilities that are covered by
insurance are properly disclosed in accordance with ASC 450.
23.5 Gain contingencies

ASC 450 indicates that contingent gains should not be recognized prior to the gain
being “realized” or “realizable.” A realized gain is one where cash (or other assets,
such as claims to cash) has already been received without expectation of
repayment. A gain is realizable when assets are readily convertible to known
amounts of cash or claims to cash. We believe the recognition of a gain is
appropriate at the earlier of when the gain is realizable or realized. The
assessment of whether a gain not yet realized is realizable requires significant
judgment and should include the evaluation of the following factors, among
others:
□ Whether there is a signed agreement or legally enforceable contract that

stipulates the terms of the gain or settlement, and whether the settlement is
subject to any pending or expected appeal
□ Whether the counterparty has the ability or wherewithal to pay the amount
□ Whether the right to receive the proceeds meets the definition of an asset in
CON 6, Elements of Financial Statements (i.e., a probable future economic
benefit obtained or controlled as a result of past transactions or events)
As discussed in FSP 23.4.2, a claim for loss recovery (e.g., an insurance claim)
generally can be recognized when a loss event has occurred and recovery is
considered probable. If the potential recovery exceeds the loss recognized in the
financial statements or relates to a loss not yet recognized in the financial
statements, such recovery should be evaluated under the gain contingency model.
23.5.1 Recoveries representing gain contingencies
Consistent with the guidance in ASC 450, Contingencies, AICPA TPA 5400.05,
Question 4, states that a gain related to an insurance recovery should not be
PwC 23-13
recognized until any contingencies relating to the insurance claim have been
resolved (as the gain would not be realized until the related contingencies have
been resolved).
AICPA TPA 5100.35 illustrates the treatment of a gain relating to an insurance

recovery for an involuntary conversion of a building caused by a natural disaster
that was not in dispute and that is realized after the date of the balance sheet but
before the release of the financial statements. The guidance notes that the gain
(the amount of insurance proceeds received in excess of the carrying value of a
building which was destroyed prior to the balance sheet date) cannot be
recognized until the subsequent period because it was not realized at the balance
sheet date. This guidance does not explicitly address the recognition of the
insurance proceeds equal to the carrying value of the destroyed building (the loss
recognized in the financial statements), although the example implies that a
receivable was recorded equal to the recognized loss by noting that “there was no
loss to record” at the balance sheet date.
A gain contingency may be considered “realizable” prior to the receipt of cash,

depending on the facts and circumstances. For example, a gain could be recorded
at the balance sheet date if (1) it is acknowledged by the insurance company that a
payment is due, (2) information is received prior to the release of the financial
statements that will confirm the amount, and (3) collection is probable. However,
if the existence of the claim is being disputed by the insurance company, the
amount would not be considered realizable and should only be recognized upon
settlement of the dispute.
If the reporting entity expects a possible gain contingency, disclosure is required:
ASC 450-30-50-1
Adequate disclosure shall be made of a contingency that might result in a gain, but
care shall be exercised to avoid misleading implications as to the likelihood of
realization.
23.6 Guarantees
For guarantees that fall within the scope of ASC 460, guarantors are required to
recognize a liability equal to the fair value of the guarantee upon its issuance and
to provide specific disclosures related to the guarantee. Guarantors may be
excluded from the scope of the initial liability recognition provisions included in
ASC 460-10-25-1 depending on the type of guarantee; however, the disclosure
requirements outlined in ASC 460 may still be required.
Guarantees and indemnification for litigation arising out of the performance of

the directors’ and officers’ duties are not within the scope of ASC 460.
ASC 460-10-15-7 states that employment-related guarantees are excluded from
the scope. Because indemnification of directors and officers would be considered
part of their respective compensation packages, it therefore represents an
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employment-related guarantee outside the scope of ASC 460. See

ASC 460-10-15-7 for additional arrangements that are excluded from its scope.
The disclosures required by ASC 460 do not eliminate or affect disclosure

requirements under other applicable guidance, such as disclosures required
under:
□ ASC 825 related to disclosures of the fair value of financial guarantees
□ ASC 450 related to disclosures for contingent losses that have a reasonable
possibility of occurring
□ ASC 815 related to guarantees accounted for as derivatives
□ ASC 275 for disclosures of significant risks and uncertainties that could
significantly affect the amounts reported in the financial statements in the
near term
23.6.1 ASC 460 disclosure requirements
Guarantors are required to disclose the following information about each

guarantee, or group of similar guarantees. ASC 460 is silent as to whether the
disclosures relate to the current period only, or to comparative periods presented
in the financial statements. Our view is that comparative disclosures are required
for all of the following for all periods for which a balance sheet is presented:
□ The nature of the guarantee including:
o Approximate term
o How it originated
o Events and circumstances that would require performance
o Current status (as of the balance sheet date) of the payment/performance

risk
If a reporting entity uses internal groupings for disclosure of the

payment/performance risk status of its guarantees, it must disclose how such
groupings are determined and used for managing risk.
□ The maximum potential amount of future payments (undiscounted) that the

guarantor could be required to make under the guarantee. With regard to this
disclosure:
o The amount of potential future payments should not be reduced by any

potential recoveries under collateralization or recourse provisions in the
guarantee.
o If there is no limitation to the maximum potential future payments based

on the terms of the guarantee, then this fact must be disclosed.
PwC 23-15
o If the amount of the maximum estimated future payments under the

guarantee cannot be estimated, the guarantor must disclose this fact along
with the reasons for why an estimate cannot be determined.
□ The current carrying amount of any guarantor’s obligations under the

guarantee (including any amount recognized under the contingency guidance
within ASC 450). This disclosure is required regardless of whether the
guarantee is freestanding or embedded within another contract.
□ The nature of recourse provisions, if any, that would allow the guarantor to
recover amounts paid under the guarantee. A reporting entity should also
consider disclosing the value of any recovery that could occur, such as from
the guarantor’s right to proceed against an outside party, if the amount is
estimable.
□ The nature of any assets held either by third parties or as collateral that the
guarantor could obtain to recover amounts paid under the guarantee, upon
the occurrence of any triggering event or condition.
□ The approximate extent to which the proceeds from the liquidation of assets
held either by third parties or as collateral would cover the maximum
potential future payments under the guarantee, if such amount is estimable.
The information outlined above is required to be disclosed even when there is a

remote probability of the guarantor making any payments under the guarantee or
group of guarantees. ASC 460 states the following:
ASC 460-10-50-2
An entity shall disclose certain loss contingencies even though the possibility of
loss may be remote. The common characteristic of those contingencies is a
guarantee that provides a right to proceed against an outside party in the event
that the guarantor is called on to satisfy the guarantee. Examples include the
following:
a. Guarantees of indebtedness of others, including indirect guarantees of

indebtedness of others
b. Obligations of commercial banks under standby letters of credit
c. Guarantees to repurchase receivables (or, in some cases, to repurchase the

related property) that have been sold or otherwise assigned
d. Other agreements that in substance have the same guarantee characteristic.
Guarantees issued by a reporting entity to benefit related parties, such as equity

method investees and joint ventures, require incremental disclosures pursuant to
ASC 850, Related Party Disclosures. Additionally, guarantees of a reporting
entity’s indebtedness by its principal shareholders or other related parties should
be disclosed, if material, as required by ASC 850-10-50. Although not in the scope
23-16 PwC
of ASC 460, we believe that guarantees obtained by a reporting entity (as opposed
to those made by it) should also be disclosed, as such disclosures may indicate
that the reporting entity is not able to obtain financing without the guarantees of
others. Related party transactions are addressed in FSP 26. ASC 460-10-50-2
requires disclosure of guarantees of the indebtedness of others, including indirect
guarantees as defined therein. In addition, the recognition and disclosure
requirements of ASC 460 apply to such indirect guarantees if they are legally
binding.
The following is an example of the intercompany guarantee disclosure

requirements.
EXAMPLE 23-2
Intercompany guarantees
FSP Corp provides a guarantee on a loan that Sub Co has received from a third
party bank. FSP Corp issues consolidated financial statements that include Sub
Co. In addition, Sub Co issues stand-alone financial statements.
Which reporting entity’s financial statements should include disclosure about the
intercompany guarantee?
Analysis
As the issuer of the guarantee, FSP Corp must include disclosure of the guarantee
in any parent company financial statements it issues. Although Sub Co is not
required to disclose FSP Corp’s guarantee of its debt in Sub Co’s stand-alone
financial statements, we believe Sub Co should disclose the parent’s guarantee so
users of Sub Co’s financial statements have an understanding of Sub Co’s liquidity.
See FSP 31 for additional presentation and disclosure requirements for parent
company financial statements.
23.6.2 Fair value disclosures
Reporting entities that issue guarantees must also consider the disclosure
requirements set forth in ASC 825, Financial Instruments. The disclosure
requirements vary depending on whether an entity is an SEC registrant or a
private company.
ASC 825 requires reporting entities to disclose the fair value of all financial
instruments regardless of whether the instrument is carried at fair value in the
balance sheet. A guarantee generally would be considered a financial instrument.
Therefore, while an entity may not be remeasuring a guarantee at fair value for
purposes of recording it on the balance sheet, a reporting entity may be required
to determine the fair value of a guarantee for disclosure purposes. This would also
include determining where the guarantee belongs in the fair value hierarchy
(i.e., Level 1, 2, or 3). See FSP 20 for more on fair value disclosure requirements.
PwC 23-17
23.6.3 Joint and several liability
Under joint and several liability, the total amount of an obligation is enforceable
against any of the parties to the arrangement. For example, under joint and
several liability in a lending arrangement, the lender can demand payment in
accordance with the terms of the arrangement for the total amount of the
obligation from any of the obligors or any combination of the obligors. The
obligors cannot refuse to perform on the basis that they individually only
borrowed a portion of the total, nor that other parties are also obligated to
perform. However, the paying obligor may be able to pursue repayment from the
other obligors, depending on the agreement among the co-obligors and the laws
covering the arrangement.
ASC 405-40, Obligations Resulting from Joint and Several Liability

Arrangements, addresses disclosure of obligations resulting from joint and
several liability arrangements for which the total amount under the arrangement
is fixed at the reporting date. The guidance does not address obligations resulting
from joint and several liability arrangements that are specifically addressed within
other existing guidance, such as asset retirement and environmental obligations
(refer to FSP 11), contingencies (refer to FSP 23.4), compensation retirement
benefits (refer to FSP 13), and taxes (refer to FSP 16).
23.6.3.1 Disclosure requirements
A reporting entity is required to disclose for each liability or each group of similar
liabilities resulting from joint and several liability arrangements:
□ The nature of the arrangement, including how the liability arose, the
relationship with other co-obligors, and the terms and conditions of the
arrangement
□ The total amount outstanding, which cannot be reduced by the effect of any
amounts that may be recoverable from other co-obligors, under the
arrangement
□ The carrying amount, if any, of the reporting entity’s liability and the carrying
amount of any receivable recognized
□ The nature of any recourse provision that would allow for recovery from other
entities of amounts paid, including any limitations on the potential recovery of
amounts
□ In the period of initial recognition and measurement or in a period the

measurement of the liability changes significantly, the corresponding entry
and where it was recorded in the financial statements.
While not addressed in the guidance, we would encourage reporting entities to

disclose the undiscounted amount of the liability, as well as the discount rate used,
if discounted.
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23.7 Off-balance sheet considerations

Off-balance sheet credit risk refers to the credit risk related to off-balance sheet
loan commitments, standby letters of credit, certain financial guarantees, and
other similar instruments (except for derivative instruments).
23.7.1 Off-balance-sheet credit risk
ASC 942-825, Financial Instruments, requires the following disclosures for

financial instruments with off-balance-sheet credit risk (except for those
instruments in the scope of ASC 815, Derivatives and Hedging):

a. The face or contract amount
b. The nature and terms, including, at a minimum, a discussion of the:
1. Credit and market risk of those instruments
2. Cash requirements of those instruments
3. Related accounting policy
c. The entity’s policy for requiring collateral or other security to support

financial instruments subject to credit risk, information about the entity’s
access to that collateral or other security, and the nature and a brief
description of the collateral or other security supporting those financial
instruments.
In addition to the disclosure requirements discussed above, a reporting entity

should evaluate whether there are credit losses related to these instruments. If the
conditions of ASC 450-20 are met, a liability for the credit loss on these
instruments should be recognized and reported separately from the allowance for
loan and lease losses.
23.8 Interaction with other guidance

US GAAP requires reporting entities to disclose other commitments and
contingencies related to specific accounting topics. Refer to the following chapters
for further presentation and disclosure considerations on these topics:
□ Commitments to make future ESOP contributions (FSP 15)

□ Environmental costs (FSP 11)
□ Leases, including guarantees (FSP 14)
□ Product and extended warranty programs (FSP 11)
□ Subsequent events (FSP 28)
PwC 23-19
23.9 Considerations for private companies –

updated May 2017
The SEC requirement for a specific balance sheet caption for commitments and
continent liabilities in S-X 5-02(25) applies only to SEC registrants. The guidance
in ASC 450-20-S99-1 on the rate to be used to discount loss contingencies and in
ASC 450-20-S99-2 on accruing legal costs is specific to SEC registrants. Based on
limited authoritative guidance, we believe that private companies should consider
applying these concepts as well.
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Chapter 24:
Risks and uncertainties
PwC 24-1

Risks and uncertainties represent conditions that may impact a reporting entity’s
financial results in future periods. Providing information about these conditions
to financial statement users is therefore useful to enable them to assess a
reporting entity’s future prospects.
With regard to disclosing risks and uncertainties, this chapter covers the
following topics:
□ Scope of ASC 275, Risks and Uncertainties
□ Disclosures required by ASC 275
□ Interaction of ASC 275 with other guidance
□ Going concern disclosure considerations
□ Considerations for private companies
24.2 Scope
ASC 275 requires that financial statements include disclosures about the risks
and uncertainties existing as of the date of the financial statements with respect
to:
□ The nature of the reporting entity’s operations (FSP 24.3.1)
□ The use of estimates in preparing the financial statements (FSP 24.3.2)
□ Certain significant estimates (FSP 24.3.3)
□ Current vulnerability related to certain concentrations (FSP 24.3.4)
These required disclosures apply to all reporting entities that issue financial
statements prepared in conformity with US GAAP. The disclosure requirements
do not encompass risks and uncertainties that may be associated with the
following:
□ Management or key personnel
□ Proposed changes in government regulations or accounting principles
□ Internal control deficiencies
□ Impacts of acts of war, God, or sudden catastrophes
The assessment of a reporting entity’s ability to continue to operate as a going

concern also falls under the umbrella of risks and uncertainties. Going concern is
a specific uncertainty related to the assumption that a reporting entity is viewed
24-2 PwC
as continuing in business for the foreseeable future with neither the intention nor
the necessity of liquidation, ceasing trading, or seeking protection from creditors
pursuant to laws or regulations. Historically, there was no US GAAP guidance
addressing going concern, but PCAOB AU 341, The Auditor’s Consideration of an
Entity’s Ability to Continue as a Going Concern, addressed potential disclosures
specific to going concern uncertainties that reporting entities should consider in
certain circumstances. However, in August 2014, the FASB issued accounting
guidance requiring management to assess their reporting entity’s ability to
continue as a going concern and provide disclosure in certain circumstances.
24.3 Disclosure
This section discusses the disclosure requirements of ASC 275. Reporting entities
should assess these disclosure requirements at each reporting date, considering
changes to internal operations as well as changes to the industry and broader
macroeconomic environment.
ASC 275 does not require disclosures to be segregated in the financial statements
or otherwise identified as being provided to comply with ASC 275. The required
disclosures may be grouped together in one footnote or included in other
footnote disclosures as appropriate. When comparative periods are presented,
the disclosure requirements of ASC 275 apply only to the most recent period
presented.
24.3.1 Nature of the reporting entity’s operations
A reporting entity should disclose the following within the financial statements
related to the nature of its operations:
□ Major products or services sold or provided
□ Principal markets, including the locations of those markets
□ For reporting entities that operate in more than one business, the relative
importance (without quantification) of each business and the basis for such
determination. For example, a reporting entity may disclose that its two
business lines generate equal amounts of revenue or that one business line
accounts for substantially all net income.
Typically, SEC registrants combine this information with their segment

disclosures. Not-for-profit entities should describe their principal services
performed and the revenue sources for those services.
Refer to Examples 1 and 2 within ASC 275-10-55 for examples of disclosures

related to the nature of the reporting entity’s operations.
24.3.2 Use of estimates in preparing the financial statements
Accounting estimates represent a reporting entity’s judgment about the outcome

of future events. A reporting entity should disclose that management’s
PwC 24-3
application of US GAAP requires the pervasive use of estimates. This disclosure is

intended to inform users of the inherent uncertainties present in the financial
statements of all reporting entities, and that subsequent resolution of some
matters could differ significantly from the resolution that is currently expected.
Typically this disclosure is included in the basis of presentation footnote, though
it is not required to be included there.
Example 3 within ASC 275-10-55 provides an example of this disclosure. While

this example provides generic language for this required disclosure, reporting
entities will often tailor this disclosure to list specific accounting policies that are
subject to estimates (e.g., pension and benefit plans, valuation of goodwill and
intangible assets, and allowance for doubtful accounts). Additionally, reporting
entities should consider disclosing how estimates are developed (e.g., historical
experience or other assumptions believed to be reasonable given the facts and
circumstances). In practice, these disclosures are typically included within the
relevant financial statement footnotes.
24.3.3 Certain significant estimates
A reporting entity should disclose certain significant estimates that affect the
carrying amount of assets and liabilities, as well as those that were used in
developing the disclosures related to gain or loss contingencies. ASC 275 provides
criteria to help determine which estimates must be disclosed.

Disclosure regarding an estimate shall be made when known information
available before the financial statements are issued or are available to be
issued…indicates that both of the following criteria are met:
a. It is at least reasonably possible that the estimate of the effect on the

financial statements of a condition, situation, or set of circumstances that
existed at the date of the financial statements will change in the near term
due to one or more future confirming events. . . .
b. The effect of the change would be material to the financial statements.
A reporting entity should consider all information available before the financial
statements are issued or available to be issued as defined in ASC 855, Subsequent
Events, in assessing the above criteria. The assessment of the criteria for
disclosure under ASC 275 should be performed separately from any assessment
under ASC 855. For example, an event subsequent to the balance sheet date may
not meet the criteria for disclosure under ASC 855, but disclosure may still be
required under ASC 275. Such a disclosure should include a description of the
uncertainty and indicate that it is at least reasonably possible that a change in the
estimate will occur in the near term. Refer to FSP 28 for a further discussion of
disclosure requirements related to subsequent events.
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ASC 275 indicates that “reasonably possible” should be interpreted to mean that
the likelihood of occurrence is more than remote but less than likely. “Near term”
should be interpreted as not exceeding one year from the date of the financial
statements.
Reporting entities should consider risk-reduction activities when assessing

whether the above criteria have been met. Disclosure is not required if a
reporting entity concludes that the impact of a change in estimate would not be
material as a result of risk-reduction activities. For example, a reporting entity
may conclude that a change in the allowance for doubtful accounts estimate
would not have a material impact on the financial statements because of a
requirement that customers prepay for orders if they do not pass a credit check. A
reporting entity should assess materiality based on the magnitude of the
potential change in the recorded amount and not the amount currently recorded
(which could be zero).
Additionally, ASC 275 clarifies how to assess materiality when considering the
change in useful life of an intangible asset. The criterion would be met if a change
in useful life of an intangible asset or a change in expected likelihood of renewal
or extension of an intangible asset would be material either individually or in the
aggregate by major intangible asset class.
ASC 275 includes a list of areas where these types of disclosures may be more
common, though the list is not intended to be comprehensive.

The following are examples of assets and liabilities and related revenues and
expenses, and of disclosure of gain or loss contingencies included in financial
statements that, based on facts and circumstances existing at the date of the
financial statements, may be based on estimates that are particularly sensitive to
change in the near term:
a. Inventory subject to rapid technological obsolescence
b. Specialized equipment subject to technological obsolescence
c. Valuation allowances for deferred tax assets based on future taxable income
d. Capitalized motion picture film production costs
e. Capitalized computer software costs
f. Deferred policy acquisition costs of insurance entities
g. Valuation allowances for commercial and real estate loans
h. Environmental remediation-related obligations
i. Litigation-related obligations
PwC 24-5
j. Contingent liabilities for obligations of other entities
k. Amounts reported for long-term obligations, such as amounts reported for

pensions and postemployment benefits
l. Estimated net proceeds recoverable, the provisions for expected loss to be

incurred, or both, on disposition of a business or assets
m. Amounts reported for long-term contracts.
Part of the challenge in determining the need for disclosure is assessing whether
an estimate is subject to change in the near term.
EXAMPLE 24-1
Disclosure of percentage-of-completion contract estimates
FSP Corp enters into a material long-term construction contract with a customer
that is accounted for under the percentage-of-completion (POC) method in
accordance with ASC 605-35, Construction-Type and Production-Type
Contracts. Prior to year end, FSP Corp identifies an issue with the building site
that may require additional construction costs of up to 50% of the original
budget. Further survey of the land is required to determine the extent of
additional construction and should be completed within six months. FSP Corp
considers it reasonably possible that the additional costs will be incurred. The
additional costs, if required, would represent a material increase in the budgeted
amount.
Is disclosure required under ASC 275?
Analysis
This estimate would meet the criteria for disclosure under ASC 275-10-50-8. FSP
Corp considers the likelihood of incurring the additional costs as reasonably
possible and the confirming event (the land survey) will occur in the near term.
Additionally, the additional costs would be material. FSP Corp should disclose
that it is at least reasonably possible that completion costs for the contract will
materially increase in the near-term. Based on the above facts, this change in
estimate does not represent an error as contemplated by ASC 250, Accounting
Changes and Error Corrections. Refer to FSP 30 for disclosure requirements
related to errors in previously issued financial statements.
The SEC staff has frequently commented on significant estimates related to:
□ Business combinations (estimates used in the valuation of acquired

intangible assets and contingent consideration)
□ Goodwill and asset impairments (estimates driving fair value in goodwill and
asset impairment analysis)
24-6 PwC
□ Contingencies (estimates of reasonably possible loss/range of reasonably

possible losses or an explanation of why the reporting entity is unable to
make such an estimate)
□ Income taxes (valuation allowances and permanent reinvestment of foreign

undistributed earnings assertion)
For more information on disclosure considerations related to business

combinations, goodwill and asset impairments, contingencies, and income taxes,
refer to FSP 17, FSP 8, FSP 23, and FSP 16, respectively.
Also refer to ASC 275-10-60 for references to additional examples of disclosures.
24.3.4 Current vulnerability related to certain concentrations
Vulnerabilities from concentrations arise when a reporting entity is exposed to a

greater risk of loss than if it had mitigated that risk through diversification. A
reporting entity should disclose such concentrations when all of the following
criteria are met:
□ Concentration exists at the financial statement date
□ Concentration results in vulnerability to a near-term severe impact
□ It is at least reasonably possible that the events that could result in the severe
impact will occur in the near team
“Severe impact” in this context means a significant financially disruptive effect on

a reporting entity’s normal functioning. Severe impact is a higher threshold than
material. Matters may be material in that they impact the decisions of a financial
statement user but do not disrupt the operations of a reporting entity. For
example, the loss of business from a large customer may materially impact a
reporting entity’s results but not disrupt the entity’s operations. The concept of
severe impact, however, would include matters that are less than catastrophic.
“Reasonably possible” and “near term” should be interpreted consistent with the
discussion in FSP 24.3.3.
ASC 275 requires disclosure of the following defined concentrations (as opposed
to a broader set of potential concentrations about which management may be
aware) if they meet the criteria listed in the first set of bullets above in this
section:
□ Volume of business transacted with a specific customer, supplier, or lender

(disclosure is required for public entities (as defined in ASC 280) when
revenue from a specific customer equals 10% or more of total revenue;
however, a reporting entity should still consider disclosure in cases where the
threshold has not been met)
□ Revenue from particular products or services for which a severe impact may
result due to volume or price changes or the loss of patent protection
PwC 24-7
□ Available sources of supply for materials, labor, or services
□ Market or geographic area in which a reporting entity conducts its operations
ASC 275-10-50-18 states that it is always considered at least reasonably possible

that any customer, grantor, or contributor will be lost in the near term and that
operations located outside the reporting entity’s home country may be disrupted
in the near term.
Concentrations meeting the criteria in the first set of bullets above in this section
should be disclosed in sufficient detail to inform users of the general nature of the
associated risk.
ASC 275 includes additional disclosure requirements for concentrations of labor

subject to collective bargaining agreements and concentrations of operations
outside of a reporting entity’s home country if the criteria for disclosure of
concentrations are met.

For those concentrations of labor…subject to collective bargaining agreements
and concentrations of operations located outside of the entity’s home
country…the following specific disclosures are required:
a. For labor subject to collective bargaining agreements, disclosure shall include

both the percentage of the labor force covered by a collective bargaining
agreement and the percentage of the labor force covered by a collective
bargaining agreement that will expire within one year.
b. For operations located outside the entity’s home country, disclosure shall
include the carrying amounts of net assets and the geographic areas in which
they are located.
Sufficiently disclosing concentrations is a challenge for many reporting entities as

the disclosure often reflects a potential company weakness. As a result, the SEC
staff has commented on certain risks related to concentrations. Frequent areas of
comment include:
□ Concentration of significant customers or class of customers, including

identifying the magnitude of receivables by foreign governments
□ Concentration of cash or operations in specific countries or regions, and

whether there are government regulations in those countries protecting the
balances (similar to Federal Deposit Insurance Corporation (FDIC)
insurance)
□ Existence of concentrations of credit risk including specific counterparties or

groups of counterparties that are similarly impacted by macroeconomic
factors
24-8 PwC
Refer to Examples 2 and 4 through 8 in ASC 275-10-55 for examples of

disclosures related to concentrations.
24.3.5 Assessment of disclosure criteria
Significant judgment is required to determine whether a material change in

estimate or near-term severe impact from a concentration is reasonably possible.
The outcome of future events alone should not be used to determine whether the
reporting entity’s inclusion or exclusion of a particular disclosure was an error.
For example, if the reporting entity discloses a significant estimate, but that
estimate is not followed by a material change, it does not imply that the
disclosure should not have been made. Likewise, if the reporting entity
experiences a severe impact related to a concentration that was not previously
disclosed, it would not suggest that the reporting entity failed to comply with the
disclosure requirements if an appropriate judgment had been made that the
concentration did not meet the requirements for disclosure.
24.4 Interaction with other guidance

Disclosures required by ASC 275 are not mutually exclusive with those required
by other US GAAP, as many of the requirements are similar to or overlap with
other required disclosures. In addition, certain disclosure requirements in ASC
275 supplement the requirements of other authoritative pronouncements. While
there are many pieces of accounting guidance that address disclosures of risks
and uncertainties, the following topics are specifically referenced by ASC 275.
24.4.1 ASC 450, Contingencies
ASC 450 requires the disclosure of loss contingencies as discussed in FSP 23. ASC
275 does not change those requirements but supplements them. For example,
ASC 450 does not differentiate between near- and long-term contingencies.
Therefore, if an estimate within the scope of ASC 450 meets the criteria for
disclosure under ASC 275 as discussed in FSP 24.3.3, the reporting entity should
also disclose that it is at least reasonably possible that a change in the estimate
will occur in the near term.
In addition, estimates that do not require disclosure in accordance with ASC 450
should be assessed under ASC 275. For example, estimates associated with long-
term operating assets and amounts reported under profitable long-term contracts
that are not within the scope of ASC 450 should be considered for disclosure
under ASC 275. Disclosures related to the estimate of gain on a contract
accounted for under the percentage-of-completion method would not be within
the scope of ASC 450, but may meet the criteria discussed in FSP 24.3.3 above.
24.4.2 ASC 360, Property, Plant, and Equipment
The disclosure requirements of ASC 275 are applicable to potential near-term

impairments of long-lived assets accounted for under ASC 360. ASC 360 includes
examples of events or changes in circumstances that indicate when the carrying
PwC 24-9
amount of such assets may not be recoverable. However, a reporting entity

should not base its conclusion on the need for disclosure on the outcome of an
impairment test performed under ASC 360. Disclosure may be required under
ASC 275 even if a reporting entity concludes that an impairment charge is not
required. Refer to FSP 8 for further discussion.
24.4.3 ASC 280, Segment Reporting
Disclosure of some concentrations, such as assets or operations located outside

the reporting entity’s home country, may be made to comply with ASC 280. Such
disclosures need not be repeated to comply with ASC 275 and may be combined
with segment footnote disclosures. Refer to FSP 25 for further discussion.
24.4.4 ASC 825, Financial Instruments
Disclosures of the concentration of credit risks and other financial instruments

are not required under ASC 275. However, disclosure of these concentrations
may be required pursuant to ASC 825. Refer to FSP 20 for further discussion.
24.5 Going concern

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial
Statements – Going Concern (Subtopic 205-40), requiring management to assess
the reporting entity’s ability to continue as a going concern. Prior to the issuance
of this guidance, there was no accounting guidance specific to disclosures about
going concern. Instead, auditing standards were the primary guidance for going
concern assessments.
Reporting entities are required to comply with the new guidance for the first
annual period ending after December 15, 2016, but early adoption is permitted.
24.5.1 Assessing going concern
Financial reporting under US GAAP assumes that a reporting entity will continue
to operate as a going concern until its liquidation becomes imminent. This is
commonly referred to as the going concern basis of accounting.
If a reporting entity faces conditions that give rise to uncertainties about its
ability to continue to operate (e.g., recurring operating losses), it may be
necessary to make adjustments in the reporting entity’s financial statements (e.g.,
asset impairment losses) and provide related disclosures. Nevertheless, financial
statements should continue to be prepared using the going concern basis of
accounting, even when the going concern uncertainties are significant.
Disclosures may be required to alert investors about the underlying financial
conditions and management’s plans to address them.
Building on the auditing standards, ASC 205-40 provides management with

direct guidance on going concern assessments and disclosures. ASC 205-40:
24-10 PwC
□ Requires management to assess going concern each annual and interim

reporting period with a look-forward period of one year from the financial
statement issuance date (or the date the financial statements are available to
be issued)
□ Defines substantial doubt (see FSP 24.5.2)
□ Requires disclosures when there is substantial doubt about the company’s

ability to continue as a going concern, even when an initially-identified
substantial doubt is alleviated by management’s plans (see FSP 24.5.3). ASC
205-40-55-1 provides a flowchart to help navigate the accounting and
disclosure requirements related to going concern assessments.
PwC 24-11
ASC 205-40-55-1
The following flowchart depicts the decision process to follow for evaluating
whether there is substantial doubt about an entity’s ability to continue as a going
concern and determining the related disclosure requirements.
Start
Are the criteria met

for the liquidation basis Yes Apply the liquidation basis of accounting.
of accounting? (Subtopic 205-30)
(Subtopic 205-30)
No
Are there
conditions or
events, considered in
the aggregate, that
raise substantial doubt about an No disclosures are required specific to going
entity’s ability to continue as a going No concern uncertainties under Subtopic 205-40.
concern within one year after the date See Topics 275 and 450 for other disclosures
the financial statements are issued about risks, uncertainties,
(or available to be issued)? and contingencies, as applicable.
(paragraphs 205-40-50-01
through 50-5)
Yes
Consider management’s
plans intended to
An entity shall disclose
mitigate the adverse
information to help users
conditions or events.
understand the following
(paragraphs 205-40-50-6
when substantial doubt is
through 50-11)
alleviated by management’s
plans:
1. Principal conditions or
Is it events that raised
Is it probable that substantial doubt, before
probable that management’s plans consideration of
management’s plans will Yes will mitigate the relevant Yes management’s plans
be effectively implemented? conditions or events that
(paragraphs 205-40-50-7 2. Management’s evaluation
raise substantial doubt? of the significance of
through 50-8) (paragraph 205-40- those conditions or
50-10) events
3. Management’s plans that
alleviated substantial
No doubt.
(paragraph 205-40-50-12)
No
An entity shall disclose information to help users understand the following when
substantial doubt is not alleviated:
1. Principal conditions or events that raise substantial doubt
2. Management’s evaluation of the significance of those conditions or events
3. Management’s plans that are intended to mitigate the conditions or events
that raise substantial doubt.
The entity also should include in the notes to financial statements a statement
indicating that there is substantial doubt about the entity’s ability to continue as a
going concern within one year after the date that the financial statements are
issued (or available to be issued).
(paragraph 205-40-50-13)
24-12 PwC
24.5.2 Disclosure threshold: Substantial doubt
Under ASC 205-40, the emergence of substantial doubt about a reporting entity’s
ability to continue as a going concern is the trigger for providing footnote
disclosure. For each annual and interim reporting period, management should
evaluate whether there are conditions that give rise to substantial doubt within
one year from the financial statement issuance date (or the date the financial
statements are available to be issued), and if so, provide related disclosures. The
board adopted the auditing standard’s concept of substantial doubt and provided
a definition to reduce the diversity in its interpretation in practice.
The guidance indicates that conditions that give rise to substantial doubt
ordinarily relate to a reporting entity’s ability to meet its obligations as they
become due. The ASC Master Glossary defines substantial doubt as follows:
Definition of Substantial Doubt from ASC Master Glossary

Substantial doubt about an entity’s ability to continue as a going concern exists
when conditions and events, considered in the aggregate, indicate that it is
probable that the entity will be unable to meet its obligations as they become due
within one year after the date that the financial statements are issued (or within
one year after the date that the financial statements are available to be issued
when applicable).
The likelihood threshold of probable is defined as “the future event or events are
likely to occur,” which is consistent with how the term is used in US GAAP
applicable to loss contingencies.
Management’s assessment should be based on the relevant conditions that are

“known and reasonably knowable” at the issuance date (or the date the financial
statements are available to be issued), rather than at the balance sheet date. This
means that the assessment should consider the most current information
available before the financial statements are issued (or available to be issued),
requiring companies to consider all relevant subsequent events after the balance
sheet date. The term “reasonably knowable” was introduced to emphasize that a
reporting entity should make a reasonable effort to identify conditions that it may
not readily know, but that could be identified without undue cost and effort.
PwC 24-13
Figure 24-1
Look-forward period
The definition of substantial doubt is principally based on likelihood. The

guidance indicates that both quantitative and qualitative information should be
considered in the assessment. The assessment of a reporting entity’s ability to
meet its obligations is inherently judgmental. The guidance indicates that a
reporting entity should assess relevant conditions in the aggregate, and weigh the
likelihood and magnitude of their potential impact on the reporting entity’s
ability to meet obligations within the assessment period. Management should
consider information about the following conditions, among others, as of the
financial statement issuance date:
□ The reporting entity’s current financial condition, including its current liquid
resources (e.g., available cash and available access to credit)
□ Conditional and unconditional obligations due or anticipated in the next year
(whether or not they are recognized in the financial statements)
□ Funds necessary to maintain operations considering the reporting entity’s
current financial condition, obligations, and other expected cash flows in the
next year
□ Other conditions that could adversely affect the reporting entity’s ability to
meet its obligations in the next year (when considered in conjunction with
the above).
ASC 205-400-55-2 provides several examples of other conditions to consider.

c. Negative financial trends, for example, recurring operating losses, working
capital deficiencies, negative cash flows from operating activities, and other
adverse key financial ratios
d. Other indications of possible financial difficulties, for example, default on
loans or similar agreements, arrearages in dividends, denial of usual trade
credit from suppliers, a need to restructure debt to avoid default,
noncompliance with statutory capital requirements, and a need to seek new
sources or methods of financing or to dispose of substantial assets
24-14 PwC
e. Internal matters, for example, work stoppages or other labor difficulties,

substantial dependence on the success of a particular project, uneconomic
long-term commitments, and a need to significantly revise operations
f. External matters, for example, legal proceedings, legislation, or similar

matters that might jeopardize the entity’s ability to operate; loss of a key
franchise, license, or patent; loss of a principal customer or supplier; and an
uninsured or underinsured catastrophe such as a hurricane, tornado,
earthquake, or flood.
24.5.3 Consideration of management’s plans
If conditions give rise to substantial doubt in the initial assessment, the guidance
requires management to consider its plans and their mitigating impact. In doing
so, management should assess whether its plans to mitigate the adverse
conditions, when implemented, will alleviate substantial doubt. Whether an
initially-identified substantial doubt is alleviated or not will determine the nature
of required disclosures.
The guidance sets a high bar for a reporting entity to be able to take credit for the
mitigating impact of management’s plans. Management’s plans should be
considered only to the extent that information available as of the issuance date
indicates both of the following:
□ It is probable that the plans will be effectively implemented within the

assessment period
□ It is probable that management’s plans, when implemented, will mitigate the

conditions that give rise to substantial doubt within the assessment period
In assessing effective implementation, management should evaluate the

feasibility of the plans in light of the reporting entity’s specific facts and
circumstances. Management’s ability to successfully implement the plans is
important in this evaluation. Generally, to be considered probable of being
effectively implemented, management (or others with the appropriate authority,
such as the board of directors) must have approved the plan before the issuance
date.
Management should further assess its plans to determine whether it is probable

that those plans will mitigate the conditions that give rise to substantial doubt. In
this assessment, management should consider the expected magnitude and
timing of the mitigating effect of its plans (e.g., the amount and timing of cash
proceeds from the planned sale of a building) in relation to the magnitude and
timing of the relevant conditions or events that those plans intend to mitigate
(e.g., the amount and timing of additional cash necessary to pay down anticipated
obligations).
If management concludes that the initially-identified substantial doubt is

alleviated by its plans, the guidance still requires certain disclosures about the
PwC 24-15
underlying conditions and management’s plans. However, such disclosures

would not express that there is substantial doubt. Only if substantial doubt
remains despite management’s plans does the guidance require an express
statement that there is substantial doubt about the reporting entity’s ability to
continue as a going concern.
The guidance provides examples of plans that management may implement to

mitigate the conditions that give rise to substantial doubt and identifies the types
of information that management should consider in evaluating their feasibility.
The examples are not intended to be all inclusive.
□ Plans to dispose of an asset or business: consider the restrictions on such

disposal, such as covenants that limit disposal, or encumbrances against the
asset. Also consider marketability of the asset
□ Plans to borrow money or restructure debt: consider the availability and

terms of new or existing debt, existing guarantees, commitments, and
subordination clauses
□ Plans to reduce or delay expenditure: consider the feasibility of plans to

reduce overhead or expenditures, to postpone research or maintenance, or to
lease rather than purchase
□ Plans to increase ownership equity: consider the feasibility of raising

additional capital from affiliates or other investors, or arrangements to
reduce current dividends
The guidance also clarifies that any mitigating effect resulting from a plan to
liquidate the reporting entity (e.g., cash infusions through liquidation of a
business) should not be considered in the assessment, even if the liquidation is
probable of occurring.
24.5.4 Required disclosures
Disclosures are only required if conditions give rise to substantial doubt, whether
or not the substantial doubt is alleviated by management’s plans. No disclosures
are required specific to going concern uncertainties if an assessment of the
conditions does not give rise to substantial doubt.
24-16 PwC
Figure 24-2
Going concern disclosures required by ASC 205-40
Required disclosures
If the initially-identified substantial If the substantial doubt is not

doubt is alleviated by management’s alleviated by management’s plans,
plans, disclose: disclose:
□ Principle conditions or events □ A statement indicating that there
that initially gave rise to is substantial doubt about the
substantial doubt reporting entity’s ability to
continue as a going concern
within one year after the issuance
date
□ Management’s evaluation of the □ Principal conditions or events

significance of those conditions or giving rise to substantial doubt
events in relation to the reporting
entity’s ability to meet its
obligations
□ Management’s plans that □ Management’s evaluation of the

alleviated substantial doubt significance of those conditions or
events in relation to the reporting
entity’s ability to meet its
obligations
□ Management’s plans that are

intended to mitigate those
conditions or events
In subsequent annual and interim periods, a reporting entity should continue to

provide the disclosures if conditions continue to give rise to substantial doubt in
those periods. Disclosures should become more extensive as additional
information becomes available about the reporting entity’s financial condition
and about management’s plans. Reporting entities should provide appropriate
context and continuity in explaining how conditions have changed between
reporting periods. In the period substantial doubt no longer exists (before or after
consideration of management’s plans), the accounting guidance indicates that
companies should disclose how the relevant conditions were resolved.
24.5.5 Example application
The following figure provides an example of application of the going concern

guidance.
PwC 24-17
Figure 24-3
Example application
Is substantial
Management's Do condi- doubt
Management’s plans to miti- tions raise alleviated by
Relevant assessment gate adverse substantial management’s
conditions results conditions doubt? plans? Disclosures
Negative financial Cash flow Cost cutting No, because it N/A No disclosures
trends forecasts measures is not prob- specific to
demonstrate the able that the going concern
No significant debt reporting entity entity will be required
coming due within
will meet its unable to
the assessment obligations within meet obliga-
period the assessment tions within
Substantial liquid period the next year
resources (cash and
line of credit)
Negative financial Cash flow Sell Division A – Yes, because it Yes Disclose
trends forecasts Plan approved by is probable conditions,
demonstrate the the board before that the entity management’s
No significant debt reporting entity the issuance date will not meet evaluation,
coming due within
will run out of and it is probable obligations and manage-
the assessment cash (and within the within the ment’s plans
period available line of assessment next year – that alleviated
Limited liquid credit) within the period that the unless it sells substantial
resources (cash and assessment plan: Division A. doubt
line of credit) period
□ will be effec-
tively imple-
mented, and
□ will mitigate
the conditions
(that is, suffi-
cient cash will
be generated
from the
transaction)
Positive financial Absent a Refinance debt Yes, because it Yes Limited

trends and positive refinancing, the is probable incremental
The plan is
working capital reporting entity that the entity disclosures:
would not be able deemed to be will not meet refer to debt
Significant debt is to meet its probable of being its obligations footnote,
coming due within implemented and
obligations within within the mention the
the next year the next year probable of next year – plan to
mitigating unless it refinance
The reporting entity With refinancing, adverse
does not have the refinances
it would meet its conditions
ability to repay all obligations
debt at maturity
The reporting entity
has a history of
refinancing debt and
nothing indicates it
cannot refinance
again
24-18 PwC
Is substantial
Management's Do condi- doubt
Management’s plans to miti- tions raise alleviated by
Relevant assessment gate adverse substantial management’s
conditions results conditions doubt? plans? Disclosures
Negative financial Absent a Refinance debt Yes, because it No Express that

trends and limited refinancing, the is probable there is sub-
Plan is not
liquidity reporting entity that the entity stantial doubt.
will not meet its probable of being will not meet Also disclose
Significant debt is obligations within implemented due its obligations conditions,
coming due within to negative
the next year within the management’s
the next year financial trends next year – evaluation,
With refinancing, and lack of unless it and manage-
The reporting entity it would meet its refinancing
does not have the refinances ment’s plans.
obligations history
ability to repay all
debt at maturity
The reporting entity
does not have a
history of refinancing
debt

ASC 205-40 and ASC 275 are applicable to both SEC registrants and private
companies. However, the different environments in which SEC registrants and
private companies operate may affect their considerations regarding the
adequacy of disclosures of risks and uncertainties. Filings of SEC registrants are
subject to review by the SEC staff and the registrants are accountable to
shareholders who must rely on publicly disclosed information. Private company
stakeholders are often lending institutions and shareholders who typically have
more access to management to obtain information that may not be disclosed in
the financial statements. While this difference may potentially influence the level
of transparency in financial statement disclosures, both types of reporting
entities should take care to provide an appropriate level of disclosure to meet
their reporting objectives.
While private companies are not subject to the guidance requiring disclosure of
revenue from a specific customer that comprises 10% or more of total revenue,
they are still subject to the general concentration disclosure requirements. In
addition, private companies may identify vulnerabilities from concentrations
more frequently. For example, it may be more likely that a private company has a
concentration of accounts receivable from one customer or has cash held at one
financial institution that exceeds FDIC limits.
PwC 24-19
Chapter 25:
Segment reporting
PwC 25-1
Segment reporting

The objective and basic principles of ASC 280 are to provide information about
the different types of business activities a reporting entity engages in and the
different economic environments in which it operates. This information is
intended to help users of the financial statements (1) better understand the
reporting entity’s performance, (2) better assess its prospects for future net cash
flows, and (3) make more informed judgments about the reporting entity as a
whole.
This chapter outlines the application of ASC 280 and includes relevant examples
and practical insights, as well as a comprehensive, illustrative example.
25.2 Scope
ASC 280 applies to public reporting entities (i.e., reporting entities that are
required to file financial statements with the SEC, provide financial statements
for the purpose of issuing any class of securities in a public market, or are conduit
bond obligors). The disclosure requirements of ASC 280 are not required for
not-for-profit organizations or private companies.
For public entities, the proper application of ASC 280 is important from both a
disclosure standpoint and for purposes of goodwill impairment testing. The
determination of operating segments is the basis for determining reporting units.
Reporting units are the unit of account used for goodwill impairment testing
purposes for all public companies and for private companies that have not elected
entity-wide goodwill impairment testing. For additional private company
segment reporting considerations, see FSP 25.8.
ASC 280 provides the following guidance with regard to scope and the definition
of a public entity:
ASC 280-10-15-3
The guidance in this Subtopic does not apply to the following entities:
a. Parent entities, subsidiaries, joint ventures, or investees accounted for by the

equity method if those entities’ separate company statements also are
consolidated or combined in a complete set of financial statements and both
the separate company statements and the consolidated or combined
statements are included in the same financial report. However, this Subtopic
does apply to those entities if they are public entities and their financial
statements are issued separately.
b. Not-for-profit entities (regardless of whether the entity meets the definition

of a public entity as defined above).
25-2 PwC
Segment reporting
c. Nonpublic entities.
ASC 280-10-20 Glossary
Public Entity
A business entity or a not-for-profit entity that meets any of the following

conditions:
a. It has issued debt or equity securities or is a conduit bond obligor for conduit
debt securities that are traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local or regional
markets).
b. It is required to file financial statements with the Securities and Exchange

Commission (SEC).
c. It provides financial statements for the purpose of issuing any class of

securities in a public market.
In certain instances, the financial statements of a private company may be

included in the filing of an SEC registrant (e.g., due to SEC rules regarding
significant equity method investments or acquired entities). Even if the private
company’s financial statements are included in an SEC registrant’s filing, the
private company is not required to include segment information in its separate
25.3 Application overview

ASC 280 utilizes the “management approach,” whereby external segment
reporting is aligned with management’s internal reporting. Segments based on a
reporting entity’s internal reporting structure are meant to provide financial
statement users with an ability to see a reporting entity “through the eyes of
management.”
There are specific steps that reporting entities should follow when applying
ASC 280:
□ Identify operating segments
□ Aggregate operating segments, if applicable, into reportable segments
□ Determine if reportable segments cover a sufficient amount of the reporting

entity’s operations
□ Determine if additional entity-wide disclosures are necessary
PwC 25-3
Segment reporting
Figure 25-1 depicts how these four steps are applied in determining reportable
segments.
Figure 25-1
Steps for determining reportable segments
25-4 PwC
Segment reporting
25.4 Identifying operating segments

ASC 280-10-50-1 defines an operating segment as follows:
ASC 280-10-50-1 [edits applicable upon adoption of ASC 606, Revenue from
Contracts with Customers]
An operating segment is a component of a public entity that has all of the
following characteristics:
a. It engages in business activities from which it may earn [recognize] revenues

and incur expenses (including revenues and expenses relating to transactions
with other components of the same public entity).
b. Its operating results are regularly reviewed by the public entity's chief
operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance.
c. Its discrete financial information is available.
Identifying operating segments continues to be a common area of comments

from the SEC staff. The proper determination of operating segments begins with
understanding:
□ the reporting entity’s organizational structure and how individuals within the
organization are compensated
□ the reporting entity’s operations, including its budgeting process
□ the individual or individuals responsible for allocating resources and

assessing performance (referred to as the chief operating decision maker, or
CODM)
□ the information regularly reviewed by the CODM to carry out this function.
25.4.1 Business activities
Business activities are ongoing economic and operating activities that create
value for a reporting entity, such as the production and sale of a product to a
customer. Identifying operating segments that engage in business activities is
usually straightforward and is primarily based on a reporting entity’s revenue
streams and its organizational structure. A business activity does not necessarily
require dedicated assets to earn revenues and incur expenses and does not
necessarily require that revenues and expenses be generated externally (i.e., the
transactions could be intercompany).
Research and development business units that do not earn revenues, but whose
results are regularly reviewed by the CODM, may be considered operating
segments. Although research and development centers do not typically earn
PwC 25-5
Segment reporting
revenues, their activities may not be incidental as they may serve as an integral
component of the reporting entity’s business.
Reporting entities may have a corporate headquarters which carries out

centralized functions such as accounting, treasury, information technology, legal,
human resources, environmental, and internal audit. As discussed in
ASC 280-10-50-4, corporate departments that do not earn revenues or earn
revenues that are only incidental to the activities of the reporting entity would not
be considered operating segments. If not considered an operating segment,
revenues and expenses of corporate departments should be reported in the
reconciliation of the segment totals to the related consolidated totals. For further
guidance on the presentation of reconciling items in segment disclosures, see
FSP 25.7.5.
Question 25-1
Can a vertically integrated operation of a reporting entity that does not have
external revenues (i.e., a component of a reporting entity that sells primarily, or
even exclusively, to other components of an entity) be considered an operating
segment?
PwC response
Generally, yes. In defining an operating segment as a portion of a business that
may earn revenues and incur expenses, the FASB recognized that not all business
activities of a reporting entity necessarily earn revenues. While, in many cases,
transfer prices are charged by one component of an entity to another, the fact
that transfer prices are not assessed would not necessarily exempt such
operations from being considered operating segments.
In some cases, a manufacturing entity is managed as an operating cost center and

does not reflect separate revenues because overall customer revenues are not
allocated to the cost centers. Provided that all the other criteria under
ASC 280-10-50-1 are met, such components would be considered operating
segments.
A reporting entity may have a disposal strategy that involves a “run-off” of

operations (i.e., it will cease accepting new business but continue to provide
service under existing contracts until they expire or are terminated). Run-off
operations should be evaluated to determine if they meet the definition of an
operating segment.
Example 25-1 provides an illustration of the segment determination for a

component that is being run off.
25-6 PwC
Segment reporting
EXAMPLE 25-1
Run-off operations or operations in liquidation
FSP Corp, an insurance reporting entity, discontinues its workers’ compensation

line of business and is no longer writing new workers’ compensation policies.
However, existing customers in that line of business can continue to renew
policies for indefinite periods under the original policies’ conditions. The run-off
operations do not meet the criteria for discontinued operations and the segment
is being maintained as a result of contractual requirements. For internal
reporting, separate financial results are maintained for the run-off operations
and are reviewed by the CODM.
Does FSP Corp’s workers’ compensation line of business meet the definition of an
operating segment?
Analysis
Because the operating component’s performance is regularly reviewed by the

CODM, it meets the definition of an operating segment. See FSP 27.5.1.6 for
further discussion of the impact of a discontinued operation on segment
reporting.
25.4.2 Determination of the CODM
Information regularly reviewed by the CODM is integral to identifying operating

segments. Proper determination of the CODM is therefore critical to the
application of ASC 280. The CODM is a function (not necessarily an individual)
that allocates the resources of the reporting entity and assesses the performance
of its segments.
Often, the CODM will be an individual who is either the chief executive officer
(CEO) or the chief operating officer (COO). Reporting entities should carefully
consider which individual is acting in this role and be able to thoroughly explain
the rationale for their conclusion. While the CEO or COO may receive input from
others within the reporting entity, decisions to assess performance and allocate
resources are usually made by one individual. In some cases, though, the
decision-making power does rest with a group and not with any specific
individual within the group. When considering whether a group is the CODM
function, it is important to evaluate how decisions are made, including in
circumstances in which not all group members agree.
In some instances, the SEC staff has questioned whether an identified individual
can act alone in the CODM function when the information the CODM is
represented to use to manage the business may not appear sufficient. In some of
these cases, an additional member or group of members of management may be
determined to be part of the CODM function.
In instances in which a group of individuals or a committee with joint decision

making is the CODM function, careful consideration should be given to the
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Segment reporting
information that the group uses to assess performance and allocate resources.
Typically, as a CODM group increases in size, the amount of information at least
someone in the group receives increases. Judgment is required to determine
whether the information received by individual members of the CODM function
should be considered part of the information that is regularly reviewed by the
CODM group.
The standard does not require the CODM to have ultimate decision-making
authority. The CODM is the individual or group of individuals evaluating the
reporting entity’s operating results to assess performance and allocate resources.
The SEC has indicated that in certain instances, key operating decisions may not
be made at the strategic or ultimate decision-maker level, such as the CEO, but
rather, might be made by someone responsible for running the day-to-day
operations of the reporting entity.
When preparing carve-out financial statements or separate financial statements

of a subsidiary, determination of appropriate segment disclosures should be
made at the carve-out entity or subsidiary level, which usually will not be the
same as the segments reported in the parent company’s consolidated financial
statements. This analysis would entail identifying the CODM at the carve-out
entity or subsidiary level and determining what information that CODM regularly
reviews to allocate resources and assess performance.
25.4.3 Information regularly reviewed by the CODM
To be a component, discrete financial information must be available. Discrete

financial information can consist of limited operating information, such as
revenue and operating expenses, and need not include balance sheet information.
Understanding all of the information the CODM regularly reviews to assess

performance and allocate resources is critical regardless of the method by which
the CODM receives the information. In many instances, the information used by
the CODM can be found in printed reports that are distributed on a regular basis.
Information could also be obtained by the CODM through the reporting entity’s
information systems. The CODM might also receive information in periodic
meetings with segment managers.
Determining what discrete financial information the CODM uses to assess

performance and allocate resources can be challenging because management
typically has access to a significant amount of readily available information
through the reporting entity’s information systems. Information received by the
CODM, regardless of how it is obtained, is generally used in some way to measure
performance and/or make resource allocation decisions.
Typically, revenues, operating expenses, and profitability measures that are

important to management’s decision making will be available for a reporting
entity’s components. However, certain components may only have limited
financial information, such as revenue-only data by product line or by customer.
For most reporting entities, revenue-only data would not be considered sufficient
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Segment reporting
financial information for decision making related to resource allocation or

performance evaluation. For instance, revenue-only information may be used to
allocate resources within a segment, but may not be sufficient to evaluate
performance. For certain businesses however, revenue-only data may serve as an
adequate surrogate for a performance measure for that component, such as when
cost of sales or services are minimal.
For all businesses, it is important to obtain a thorough understanding of how the

components operate, what financial information or financial ratios would be
considered sufficient to measure performance, and how the CODM utilizes the
full complement of information received. It is often useful to meet with the
CODM to understand what information is received and how the information is
used to manage operations.
Question 25-2
If a CODM is accountable for Sarbanes-Oxley 302 and 906 certifications for
wholly-owned subsidiaries that issue standalone financial statements, would that
indicate that each separate subsidiary should be treated as an operating segment
in the parent company’s consolidated financial statements?
PwC response
Not necessarily. The existence of Sarbanes-Oxley 302 and 906 certifications for
wholly-owned subsidiaries that issue standalone financial statements does not
necessarily cause the subsidiaries to be considered operating segments if the
consolidated reporting entity can demonstrate that resources are allocated and
performance is assessed on a different basis. This evidence may include, among
other things, the reporting entity’s organizational structure, financial information
regularly reviewed and used by the CODM, the compensation incentives for
segment management, the level of information included in capital and operating
budgets and the reporting package provided to the board of directors.
For example, if a reporting entity demonstrates that a CODM regularly receives

financial information at a more aggregated level than the subsidiary level at
which the certifications are issued, and the CODM regularly reviews this
information to assess performance and allocate resources, these more aggregated
components may be considered the reporting entity’s operating segments.
However, in this circumstance, the reporting entity should also evaluate how the
information provided to the CODM for Sarbanes-Oxley 302 or 906 certifications
is being used to ensure that this information is not being used for resource
allocation or performance assessment purposes.
25.4.3.1 Multiple sets of information received by the CODM
In some cases, the CODM may receive multiple sets of component information to
assess the performance and allocate resources of business units. For instance, in
reporting entities that are geographically dispersed and have a variety of
products, it is not uncommon for the CODM to see some form of product
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Segment reporting
information as well as operating results by geography. Another example could be

a “drill-down” of disaggregated product information within a product category. If
more than one set of segment information is used by the CODM, other factors
may identify the single set of components which comprise the operating
segments, including the nature of the business activities for each component, the
existence of segment managers for the components, and the information
presented to the board of directors.
When multiple levels of component information are reviewed, it is important to

consider the composition of the underlying business activities in the different sets
of components, as dissimilar business activities are often considered a starting
point when identifying operating segments. An entity’s business activities are
usually apparent from its external communications. Business activity discussions
in the reporting entity’s other publicly available information, such as press
releases, the reporting entity’s website, and other SEC filings, are important
considerations when assessing whether segment disclosures are representative of
how management views the business. However, external communications may
not always align with how the CODM assesses performance and allocates
resources. For example, if the CODM reviews operating results at a more
disaggregated level, this could indicate the segments are likewise at a lower level.
Many segments are managed by a segment manager who has direct

accountability to, and maintains regular contact with, the CODM. Like the
CODM, the segment manager is a function and not necessarily a manager with a
specific title. In some instances, a segment manager can manage more than one
segment, or the CODM can also be a segment manager. Segment managers who
are held accountable for the operating results of a segment usually have
compensation arrangements that incorporate the segment’s performance.
ASC 280-10-50-8 indicates that if there is only one set of components for which
segment managers are held responsible, that set of components constitutes the
operating segments. However, there are times when the CODM may assess
performance and allocate resources at a level lower than the immediate segment
managers that report to the CODM. It would be difficult to conclude that the
operating segments exist at a higher level (i.e., the level at which segment
managers are identified) in cases in which performance is assessed and resources
are managed by the CODM at a lower level.
Additionally, if multiple sets of information are reviewed by the CODM, the

information provided to the reporting entity’s board of directors could indicate
the level at which performance is assessed and resources are allocated. It would
be unusual for the board to receive information at a level below that of a
reporting entity’s operating segments. Conversely, reporting entities often have
operating segments at a level lower than the information reviewed by the board
of directors.
Examples 25-2 and 25-3 illustrate the determination of operating segments when
the CODM receives two overlapping sets of information.
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Segment reporting
EXAMPLE 25-2
Matrix form of organization
FSP Corp has identified its CEO as the CODM. In assessing performance and
deciding how to allocate resources, the CEO reviews two overlapping sets of
financial information. The first set contains disaggregated information based on
product lines, and the second set contains disaggregated information based on
geographic area. The reporting entity has vice presidents who are responsible for
each of the product lines and has other vice presidents who are responsible for
the geographic areas. All vice presidents report directly to the CEO. In addition,
both sets of information are provided to the reporting entity’s board of directors.
How should FSP Corp determine which set of financial information is most
indicative of its operating segments?
Analysis
ASC 280-10-50-9 indicates that, in situations in which a reporting entity has a

matrix form of organization, the internal reporting based on product lines would
constitute the operating segments. When two sets of information are used to
assess performance and decide how to allocate resources, the operating segments
should be based on the product lines. Absent compelling facts and circumstances
to the contrary, operating segments based on products are deemed to provide
financial statement users with the most useful information about the business
activities of the reporting entity. Therefore, in this example, the product lines
would most likely be the reporting entity’s operating segments.
EXAMPLE 25-3
Organization with overlapping sets of information
FSP Corp operates four product lines in North America and the same four
product lines in several international markets. The North American operations
comprise 90% of the reporting entity’s revenue. The CODM reviews two
overlapping sets of financial information—the first set contains information for
North America disaggregated by product lines while the second set contains
worldwide information disaggregated by location (i.e., each worldwide location,
including North America). The reporting entity has vice presidents who are
responsible for each of the four North American product lines as well as a vice
president responsible for the North American market and a vice president
responsible for the remaining international markets. All vice presidents report
directly to the CODM. In addition, both sets of information are provided to the
reporting entity’s board of directors.
How should FSP Corp determine which set of financial information is most
indicative of its segments?
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Segment reporting
Analysis
Although product lines would typically constitute the operating segments, there
could be circumstances in which a combination of the product lines and
geographic locations are identified as operating segments. In this example, each
of the four product lines in North America are most likely the operating
segments. Each of the international locations may be an operating segment,
depending on the level at which performance is reviewed and resources are
allocated by the CODM, or the international market itself may be an operating
segment.
25.4.3.2 Investments in unconsolidated entities
Reporting entities may have investments in unconsolidated entities that meet the
definition of an operating segment. The assessment is the same as when
determining all other segments (i.e., evaluate the reporting information used by
the CODM to assess performance and allocate resources).
Example 25-4 illustrates the determination of whether activities of a reporting

entity conducted through joint venture arrangements or equity method investees
are operating segments.
EXAMPLE 25-4
Joint venture arrangements and equity method investees
FSP Corp is a multinational telecommunications provider whose foreign wireless-
service businesses are jointly owned by FSP Corp and various foreign companies.
FSP Corp is not the sole shareholder of the foreign businesses due to local
restrictions on US companies having a majority ownership. FSP Corp accounts
for these joint venture arrangements using the equity method. The CODM,
however, reviews the full financial results of each joint venture for
decision-making purposes and a vice president is in charge of managing and
monitoring the foreign wireless services.
Do the joint venture operations qualify as operating segments?
Analysis
To the extent FSP Corp manages its joint venture operations separately and
conditions (a) through (c) of ASC 280-10-50-1 are met (see FSP 25.4), the joint
venture operations would qualify as operating segments. When the full financial
results of an equity method investee are reviewed by the CODM, the asset and
operating measures regularly reviewed would be disclosed.
If the financial results reviewed by the CODM are prepared on a proportionate
basis (i.e., based on FSP Corp’s proportionate ownership of the investee), the
external segment reporting of the joint venture activities should also be presented
on a proportionate basis.
Since the total of all segments’ financial amounts must be reconciled to the
corresponding amounts reported in the consolidated financial statements,
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Segment reporting
appropriate eliminations would need to be reflected to reconcile amounts

reported for segment purposes to those amounts reflected in the consolidated
financial statements. For example, since the joint ventures’ revenue information
is not included in the revenue amount reported in the consolidated financial
statements under the equity method, an elimination of the revenue amount
disclosed for the joint ventures would need to be reflected as a reconciling item.
For further guidance on the presentation of reconciling items in segment
disclosures, see FSP 25.7.5.
The analysis would be the same for an equity method investment that is not a
joint venture.
To the extent that segment disclosures are provided for separately managed joint
ventures or other equity method investees, such disclosures would not
necessarily satisfy the disclosure requirements of ASC 323. ASC 323-10-50-3(c)
requires that summarized financial information of joint ventures and other
investments accounted for under the equity method be provided, if certain
thresholds are met. Accordingly, the disclosures required by ASC 323 may need
to be provided in addition to any segment disclosures.
25.5 Aggregation
Once the operating segments of a reporting entity are determined, the guidance
permits aggregation of two or more operating segments if they exhibit similar
economic characteristics and other operating similarities.
ASC 280-10-50-11 details the criteria that must be met in order to aggregate
operating segments.

Operating segments often exhibit similar long-term financial performance if they
have similar economic characteristics. For example, similar long-term average
gross margins for two operating segments would be expected if their economic
characteristics were similar. Two or more operating segments may be aggregated
into a single operating segment if aggregation is consistent with the objective and
basic principles of this Subtopic, if the segments have similar economic
characteristics, and if the segments are similar in all of the following areas:
a. The nature of the products and services
b. The nature of the production processes
c. The type or class of customer for their products and services
d. The methods used to distribute their products or provide their services
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Segment reporting
e. If applicable, the nature of the regulatory environment, for example, banking,

insurance, or public utilities.
The FASB decided that if operating segments have characteristics so similar that
they were expected to have essentially the same future prospects, separate
reporting of segment information would not add significantly to an investor’s
understanding of the reporting entity. Therefore, aggregation of two or more
operating segments is permitted if they have similar economic characteristics
(referred to in this chapter as the quantitative aggregation criteria) and have
similarity in all of the areas identified in ASC 280-10-50-11 (referred to in this
chapter as the qualitative aggregation criteria). However, a reporting entity is not
required to aggregate operating segments even if all of the aggregation conditions
are met.
Through comment letters to registrants and its public statements, the SEC staff
has stressed that meeting the quantitative and qualitative criteria is a high hurdle
and their tolerance for differences in performance metrics and other qualitative
characteristics is relatively low when assessing whether operating segments can
be aggregated.
25.5.1 Quantitative aggregation criteria
The similarity of economic characteristics of two operating segments should be

carefully evaluated from both a historical and expected future performance
perspective. In practice, several years of historical and several years of estimated
future financial data are typically used for purposes of this evaluation. A
reporting entity should consider not only the similarity of financial performance
but also the economic conditions, exchange control regulations, and underlying
currency risks. If a reporting entity cannot demonstrate similar economic
characteristics, then aggregation is not permitted. That is, it would not be
appropriate to rely on the similarity of the qualitative aggregation criteria
provided by ASC 280-10-50-11 to aggregate operating segments if they do not
meet the quantitative criteria.
For example, assume a reporting entity sells centrally produced, identical

products to similar classes of customers in two different countries in which the
regulatory environments are the same. Operating results for each country are
separately reported internally and meet the qualitative aggregation criteria.
However, due to differences in selling price, and therefore profit margin, as well
as differences in currency risk and exchange control, it may be difficult to support
an assertion of similar economic characteristics. As a result, it may be challenging
to support aggregating the individual country segments.
Through comments to registrants, the SEC staff has questioned whether the
“similar economic characteristics” test was met when measuring the difference in
financial performance between operating segments. We believe a reporting entity
should consider the relative percentage difference of the operating measure and
not just the absolute difference. For example, when the CODM uses gross margin
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Segment reporting
to evaluate operating segment performance, the difference between a gross

margin of 55% and 50% is a 5% absolute value difference but represents a 10%
relative difference. Although there is no “bright line” when assessing similarity,
operating segments with differences between performance measures of 5% or less
likely would be considered economically similar, whereas differences in excess of
10% may not meet the economic similarity criterion for aggregation.
In some cases, a high percentage difference in the relative operating measure can
result from a relatively narrow range in the actual, or absolute, operating
measure (e.g., a reporting entity with operating segments having gross margins of
2.0% and 3.0% would differ by only 1.0% in terms of absolute value, but that 1%
would represent a 50% difference in relative values). In these circumstances, a
reporting entity may want to consider other factors in addition to the relative
operating measure to evaluate the similarity of economic characteristics,
including trends in sales growth, return on assets employed, and operating cash
flow, as well as any other performance measures regularly provided to the
CODM.
While the similarity of long-term average gross margins is a particularly

important factor and is included as an example in ASC 280-10-50-11, when a
reporting entity is determining whether the economic characteristics of its
segments are similar, other relevant factors should also be considered. For
instance, the similarity of the performance measures that are regularly provided
to the CODM, as well as other performance factors such as trends in sales growth,
returns on assets employed, and operating cash flow should also be evaluated.
Competitive and operating risks associated with each segment should be
considered as these factors could impact prospective results of the segments.
When assessing similarities and differences, the evaluation should be made
considering how wide or narrow the reporting entity’s breadth of business
activities is and the economic environment in which they operate. Two or more
operating segments considered to have similar long-term performance should be
impacted similarly by events that have significant economic consequences.
Management should document its basis for concluding that operating segments
are economically similar and should update the analysis on an annual basis, or
more frequently if conditions that affect economic similarity change. In some
circumstances, “temporary” dissimilarity (in economic characteristics) among
operating segments may not necessarily preclude aggregation of operating
segments if long-term economic similarity can still be demonstrated based on
credible projections of future operations. Accordingly, a current change in
operating performance may not necessarily result in a change to the composition
of the reportable segments.
A reporting entity should monitor and consider whether its segment

determinations are consistent with its publicly available information and
disclosures. For example, press releases, investor presentations, analyst
conference calls, and non-financial statement sections of SEC filings often
include information regarding the nature of products and services, the type and
class of customers, and how the reporting entity addresses its various market
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Segment reporting
segments. If such information is not consistent with a reporting entity’s segment

determinations, it may call into question those segment determinations.
Question 25-3
Assuming all other qualitative aggregation criteria are met, would a reporting
entity be precluded from aggregating a start-up business with mature businesses
based solely on the fact that the current economic characteristics of the start-up
business differ from those of its mature businesses?
PwC response
No. One of the objectives of requiring disclosures about segments is to help users
assess the future prospects of a reporting entity’s business. Further,
ASC 280-10-50-11 indicates that segments with similar economic characteristics
often exhibit similar long-term financial performance. Accordingly, to the extent
that the future financial performance (including the competitive and operating
risks) of the start-up business is expected to be similar to that of a reporting
entity’s mature businesses in the near term, the economic characteristics
requirement for aggregation would be satisfied.
For example, a retail chain may have mature store locations in five major cities.
In the current year, the retail chain opens additional stores in those cities. Each
store constitutes a separate operating segment because the CODM of the retail
chain reviews financial results and makes decisions on a store-by-store basis. The
retail stores meet all of the qualitative aggregation criteria. Typically, the
economic characteristics of a new store quickly match the characteristics of a
mature store. These “start-up” stores may meet the economic similarities
requirement for aggregation with mature stores if management can establish that
the financial performance of the mature and new stores are expected to converge
in the near term.
Question 25-4
Assuming all other qualitative aggregation criteria are met, would a reporting
entity be precluded from aggregating a newly acquired operating segment with its
existing operating segment if the historical economic characteristics of the
acquired operating segment are not similar?
PwC response
It depends. The differing historical results of the newly acquired operating
segment compared to the reporting entity’s existing operating segment may
indicate that the economic characteristics of the two operating segments are not
similar. However, further analysis of future performance expectations should be
considered. Since the reporting entity has limited operating results for the newly
acquired operating segment, and the seller’s historical results may not be
relevant, the reporting entity would need to evaluate the newly acquired
operating segment’s future prospects. This evaluation would include the newly
acquired operating segment’s budget and the actions that management has taken
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Segment reporting
or expects to take shortly after the acquisition. There should also be an evaluation
of the achievability of management’s proposed changes to the acquired operating
segment. If, after evaluating the future prospects, the two operating segments are
expected to be economically similar within the near term, the two operating
segments may be aggregated.
25.5.2 Qualitative aggregation criteria
Operating segments must also be similar in five qualitative areas (i.e., criteria (a)
through (e) of 280-10-50-11) to be aggregated. The qualitative criteria are equally
applicable to reporting entities with components organized based on products or
services and those organized by geographic area.
ASC 280 includes the following five qualitative areas:
The nature of products and services
Products and services are generally similar when they have the same customer
utility. For example, two operating segments that produce products that can be
substituted for each other may be considered similar.
Operating segments that represent different components of a vertically integrated

operation require judgment and typically should not be aggregated solely on the
basis that they comprise a single end product or service. This is because the
specific product or service that each of the vertically integrated segments
contributes to the end product could differ. The operations that produce each
component of the end product should be evaluated separately, particularly if
there is a separate market for each of the components.
The nature of production processes
Production processes include not only the types of machinery and facilities that
produce a specific product, but also the types of labor and raw materials used in
the production process. Production processes are often similar if segments
(which sell similar products) produce the products in a central manufacturing
facility. When operating segments source all or most of their products from
external suppliers, the production processes of the outsourced items should be
evaluated.
For reporting entities that provide services, the similarity of the service delivery
process and the training and skills of the employees delivering the services should
be evaluated.
The type or class of customer for the products and services
The type or class of customer may be distinguished by several different factors,

including the customer’s industry, use of the product and service, purchasing
power and location, and the sales and marketing approach directed to the
customer. Often, similar classes of customers will react to changes in economic
events in a similar fashion. As such, reporting entities may want to consider
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Segment reporting
whether they have similar strategies for reacting to economic events impacting
their operating segments. Differences in approach between their operating
segments may suggest that the segments are geared toward different classes of
customers.
The methods used to distribute the products or services
For a reporting entity with product sales, different methods of distribution could
be used for sales directly to end users versus those to wholesalers or distributors.
Methods of distribution to end users should further be evaluated for similarities
or differences based on whether the sales are made through the internet, by
catalog, or through retail locations.
If applicable, the nature of the regulatory environment
Many industries and services have specific regulations to which they are subject.
The regulatory environment criterion applies to those situations in which a
unique regulatory environment relating to each operating segment exists. For
example, in a situation in which a reporting entity has a banking segment and an
insurance segment, each part of the business operates in a unique regulatory
environment. In some cases, different regulatory agencies may still be considered
similar if the nature and extent of the regulation are alike.
Example 25-5 provides an illustration of the regulatory environment qualitative

criterion.
EXAMPLE 25-5
Understanding the regulatory environment criterion
FSP Corp is a liquor retailer that operates stores in the New York and Florida
regions. The state regulations for liquor retailers differ from state to state
(e.g., licensing, purchases, days of operation). However, the economic
characteristics are similar, as are the nature of the products, production process,
type of customer, and distribution methods. For internal purposes, management
prepares, and the CODM reviews, separate financial results for each region (New
York and Florida). The principal reason for preparing the results separately is to
maintain the information necessary to comply with state requirements and for
tax-return preparation purposes.
Could FSP Corp aggregate the New York and Florida segments?
Analysis
While the Florida and New York regions are each operating segments, FSP Corp
would not be precluded from combining these segments solely on the basis that
the state regulations differ. In this case, while the specific regulations may vary by
state, the nature of regulation (i.e., controlling the sale of liquor products) is the
same in New York and Florida.
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Segment reporting
25.6 Quantitative thresholds

Once a reporting entity identifies its operating segments and determines whether
aggregation is appropriate, it should determine which of those operating
segments (or aggregated operating segments) are required to be presented as
reportable segments based on the quantitative thresholds established by
ASC 280-10-50-12 (referred to in this chapter as the 10% tests and the 75%
revenue test). In addition, a reporting entity should identify any operating
segment (or aggregation of operating segments) that it will elect to present as a
reportable segment even though it is not required to be reported based on these
quantitative thresholds.
25.6.1 The 10 percent tests
The 10 percent tests established by ASC 280-10-50-12 are as follows:

A public entity shall report separately information about an operating segment
that meets any of the following quantitative thresholds:
a. Its reported revenue, including both sales to external customers and

intersegment sales or transfers, is 10 percent or more of the combined
revenue, internal and external, of all operating segments.
b. The absolute amount of its reported profit or loss is 10 percent or more of the
greater, in absolute amount, of either:
1. The combined reported profit of all operating segments that did not
report a loss
2. The combined reported loss of all operating segments that did report a
loss.
c. Its assets are 10 percent or more of the combined assets of all operating
segments.
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable, and separately disclosed, if management believes that
information about the segment would be useful to readers of the financial
statements.
The 10 percent tests are based on the reported measures of revenue, profit, and
assets that are used by the CODM to assess performance and allocate resources.
A reporting entity must separately report a segment if the operating segment (or
aggregated operating segment) meets any of the 10 percent tests.
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Segment reporting
Revenue
The revenue test should be evaluated based on the reported measure of segment
revenue, which may include or be comprised entirely of intersegment revenues. If
a segment’s reported revenue is 10 percent or more of the reporting entity’s
combined revenue, the segment is a reportable segment. Combined revenue is the
sum of all operating segment revenue, including intersegment revenue, which
may be greater than the reporting entity’s consolidated revenues.
Profit
The profit test is based on the absolute amount of the reported profit or loss for
each segment. If a segment’s absolute amount of profit or loss is 10 percent or
more of the greater of either (1) the combined loss of all operating segments that
reported a loss, or (2) the combined profit of all operating segments that reported
a profit, then the segment is a reportable segment. This test will usually yield
different results than simply comparing the operating segment’s profit or loss to
consolidated profit or loss. An example is shown in Figure 25-2 below:
Figure 25-2
Example of segment profit test
(Absolute value of reported profit or loss)

/ (absolute value of the greater of Is the
combined reported profit of all segments operating
Reported that did not report a loss or combined segment a
Operating profit or reported loss of all segments that reportable
segment (loss) reported a loss) segment?
A $112 50% Yes
B $(15) 7% No
C $90 40% Yes
D $21 9% No
Consolidated
profit $208
Combined
profit of all
segments
that did not
report a loss $223
Combined
loss of all
segments
that reported
a loss $(15)
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Segment reporting
Assets
The asset test is based on segment assets reported to the CODM. If a segment’s
reported assets are 10 percent or more of the combined assets of all operating
segments, the segment is a reportable segment. This test may yield different
results than simply comparing the segment’s total assets to consolidated assets. If
a CODM does not review asset information, this test may not be applicable.
If different measures are reported by different segments, a consistent measure

should be utilized to perform the 10 percent tests. Example 25-6 provides an
illustration of how the 10 percent tests are applied when a reporting entity’s
operating segments report different measures of segment profitability and assets.
EXAMPLE 25-6
Performing the 10 percent tests when profitability and asset measures are not the
same for all segments
FSP Corp has three operating segments, none of which can be combined under
the aggregation criteria. The following is reported to the CODM:
□ Segment 1 measures profitability based on operating income, with pension

expenses reported on the cash basis. Segment 1 is the only segment for which
pension expense is reported (i.e., while the other segments do provide
pension benefits, they are not allocated any pension expense). Asset
information is limited to the presentation of accounts receivable.
□ Segment 2 measures profitability based on pretax income, which includes an

internal cost-of-capital amount charged by “corporate” only to Segment 2.
Asset information is limited to the presentation of accounts receivable and
fixed assets.
□ Segment 3 measures profitability based on after-tax income. Asset

information is limited to the presentation of accounts receivable.
All segments of the reporting entity are profitable.
How should FSP Corp evaluate the operating segments using the 10 percent
tests?
Analysis
If segments are evaluated based on different measures of profit or loss, the

criterion of ASC 280-10-50-12(b) should be applied to a consistent measure of
profit or loss that is determined for each segment even if that measure is not
regularly provided to the CODM for all segments. In the above example, since
operating income is available for all segments, it may be the most consistent
measure for performing the 10 percent profit test.
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Segment reporting
Accounts receivable would be the most consistent asset measure on which to

perform the 10 percent tests, as it is the only asset measure reviewed by the
CODM. See Example 25-8 for a discussion of the 10 percent tests when no asset
information is reviewed by the CODM.
Question 25-5
Are reporting entities required to apply the 10 percent tests to their operating
segments when determining their reportable segments for each interim period?
PwC response
Generally, the composition of reportable segments does not change absent an
internal reorganization; therefore, a reporting entity need not apply the
quantitative thresholds in each interim period. However, if facts and
circumstances suggest that the application of the quantitative thresholds would
reveal additional reportable segments, those segments may need to be disclosed
as new reportable segments. For example, a segment that was previously
immaterial (i.e., did not meet the 10 percent tests) but now meets the 10 percent
tests should be disclosed if management expects the segment will continue to be
significant. A reporting entity may consider whether aggregation with other
operating segments is appropriate. The reporting entity’s prior years’ interim
segment information that is presented for comparative purposes must be revised
to reflect the new reportable segment, unless impracticable.
Question 25-6
How should the 10 percent tests be applied in determining the significance of an
operating segment that is comprised solely of an equity method investment?
PwC response
The 10 percent tests for both segment profitability and assets would be measured
using the amounts that most closely correspond to the amounts reflected in the
reporting entity’s consolidated financial statements. We believe the 10 percent
revenue test is not applicable since equity method investments are presented as a
net amount on both the balance sheet and income statement. The 10 percent
revenue test would require the reporting entity to gross up a proportionate share
of the investee’s external revenues, which is not consistent with the
measurements reflected in the reporting entity’s consolidated financial
statements.
As indicated in ASC 280-10-55-2, reporting entities are not precluded from

voluntarily disclosing those operating segments comprised solely of equity
method investments that, although not required to be reported based on the 10
percent tests, may contribute to a user’s understanding of the reporting entity.
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Segment reporting
25.6.1.1 Immaterial operating segments
Immaterial operating segments and immaterial groups of aggregated operating

segments (i.e., those that do not meet the 10 percent tests) may be combined with
other immaterial operating segments to produce a reportable segment only if all
three of the following are true:
□ The aggregation is consistent with the objective and basic principles of

ASC 280
□ The segments have similar economic characteristics
□ The operating segments share a majority of the qualitative aggregation

criteria in ASC 280-10-50-11
Question 25-7
In order to aggregate two or more operating segments that do not individually
meet the 10 percent tests, do the immaterial operating segments need to share a
majority of all of the items included in ASC 280-10-50-11, including similar
economic characteristics?
PwC response
According to ASC 280-10-50-13, immaterial operating segments must always
have similar economic characteristics and meet a majority of the remaining five
aggregation criteria included in ASC 280-10-50-11 to produce a reportable
segment. When immaterial operating segments are not aggregated because they
do not meet these criteria, the immaterial operating segments should be
combined and disclosed in an “all other” category (assuming the 75 percent
revenue test, as discussed in FSP 25.6.2, has been met). The “all other” category
is presented separately from other reconciling items in the reconciliation
required for segment disclosures. See FSP 25.7.5 for a discussion of
reconciliations.
25.6.2 The 75 percent revenue test
ASC 280-10-50-14 requires that reportable segment external revenues aggregate

to at least 75 percent of a reporting entity’s consolidated revenue. If aggregate
reported revenue is less than this threshold, additional reportable segments
should be identified, even if those additional segments do not meet the 10 percent
tests, until at least 75 percent of consolidated revenue is included in reportable
segments. While the 10 percent revenue test to identify reportable segments is
based on the measure of revenue used by the CODM to assess performance and
allocate resources, the 75 percent revenue test is based on a reporting entity’s
consolidated revenue.
ASC 280 does not provide guidance as to which otherwise non-reportable

operating segments should be selected as reportable segments to achieve the “75
percent threshold.” Accordingly, although we would expect a reporting entity to
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Segment reporting
select the most meaningful operating segments, which could be the largest in
terms of revenue, the reporting entity may choose any segment and not
necessarily the next largest. For example, while a reporting entity with five
operating segments that comprise 74 percent, 9 percent, 8 percent, 7 percent, and
2 percent of consolidated revenue, respectively, could choose to separately
disclose any one or more of the four latter segments in addition to the first
segment to achieve the 75 percent revenue test requirement, we believe the
reporting entity should consider what is most meaningful to the financial
statement users.
ASC 280-10-50-18 also indicates there may be a practical limit to the number of
reportable segments.
ASC 280-10-50-18
There may be a practical limit to the number of reportable segments that a public
entity separately discloses beyond which segment information may become
overly detailed. Although no precise limit has been determined, as the number of
segments that are reportable in accordance with paragraphs 280-10-50-12
through 50-17 increases above 10, the public entity should consider whether a
practical limit has been reached.
A reporting entity may not limit the number of reportable segments to 10

segments if it has not met the 75 percent revenue test. In particular,
ASC 280-10-50-14 states that “additional operating segments shall be identified
as reportable segments until at least 75 percent of total consolidated revenue is
included in reportable segments.” Accordingly, if a reporting entity has 20
different operating segments, all of which are the same size and none of which
meet the aggregation criteria in ASC 280-10-50-11, it would be expected to
disclose at least 15 operating segments as reportable (i.e., 15 segments each
having 5 percent of consolidated revenue).
25.6.3 “All other” category
The remaining non-reportable segments and other business activities that are not
identified as operating segments should be combined and disclosed in an “all
other” standalone category. Non-reportable segments should not be combined
with a reportable segment unless the aggregation criteria in ASC 280-10-50-11
have been met. The “all other” category should be presented alongside the
reporting entity’s reportable segments. However, the “all other” category should
not be identified as a reportable segment itself. Additionally, the “all other”
category should not include, or be a part of, the other reconciling items. See
FSP 25.7.5 for further discussion of reconciling items that are needed to bridge
the totals from reportable segments and the “all other category” to consolidated
financial statement totals.
While ASC 280 allows for combined reporting of non-reportable segments in an

“all other” category, a reporting entity is not precluded from separately
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Segment reporting
presenting an operating segment that is below the quantitative thresholds if the

reporting entity believes it is important to financial statement users.
25.7 Disclosures
Disclosures are required by ASC 280 for each period for which an income
statement is presented, except for reconciliations of balance sheet amounts
(which are required only for each year that a balance sheet is presented).
Although a suggested format is presented in ASC 280-10-55-48, the guidance
allows for flexibility. The segment disclosures follow the management approach,
meaning they show the measures used by the CODM to assess performance and
allocate resources. As such, adjustments, eliminations, and allocations that are
made in the preparation of information for use by the CODM should be included
in the reported segment information.
ASC 280 requires disclosure of certain general information related to segments.

This includes information about the factors used to identify reportable segments,
the types of products and services from which segments generate revenues, and
whether operating segments have been aggregated.
In addition, ASC 280 requires disclosure of the following:
□ Information about profit or loss and assets — This includes disclosures of the
asset and certain income statement captions, including the performance
measures regularly reviewed by the CODM.
□ Information about investments and expenditures — This includes disclosures

about investments in equity method investees and expenditures for additions
to long-lived assets.
□ Information about the measurement of segment profit or loss and assets —

This includes disclosures about transactions between segments, differences
between segments, changes from prior year measurements, and
asymmetrical segment allocations.
□ Reconciliations — This includes disclosures of reconciliations of the specific

segment information to the amounts included in the consolidated financial
statements.
□ Entity-wide information — This includes disclosures of financial and other

qualitative information categorized based on products and services,
geographic areas, and customers, if not already provided elsewhere in the
segment disclosures.
25.7.1 General information
ASC 280-10-50-21 provides the requirements for general segment information

disclosures.
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Segment reporting

A public entity shall disclose the following general information:
a. Factors used to identify the public entity’s reportable segments, including the
basis of organization (for example, whether management has chosen to
organize the public entity around differences in products and services,
geographic areas, regulatory environments, or a combination of factors and
whether operating segments have been aggregated)
b. Types of products and services from which each reportable segment derives
its revenues.
If a reporting entity combines non-reportable operating segments into an “all

other” category, the types of products and services within the “all other” category
should also be disclosed.
25.7.2 Information about profit or loss and assets
ASC 280-10-50-22 through 50-24 provides the required disclosures for segment
profit or loss and assets.

A public entity shall report a measure of profit or loss and total assets for each
reportable segment. A public entity also shall disclose all of the following about
each reportable segment if the specified amounts are included in the measure of
segment profit or loss reviewed by the chief operating decision maker or are
otherwise regularly provided to the chief operating decision maker, even if not
included in that measure of segment profit or loss:
a. Revenues from external customers
b. Revenues from transactions with other operating segments of the same

public entity
c. Interest revenue
d. Interest expense
e. Depreciation, depletion, and amortization expense
f. Unusual items as described in paragraph 225-20-45-16
g. Equity in the net income of investees accounted for by the equity method
h. Income tax expense or benefit
i. Subparagraph superseded by Accounting Standards Update No. 2015-01
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Segment reporting
j. Significant noncash items other than depreciation, depletion, and

amortization expense.
A public entity shall report interest revenue separately from interest expense for
each reportable segment unless a majority of the segment’s revenues are from
interest and the chief operating decision maker relies primarily on net interest
revenue to assess the performance of the segment and make decisions about
resources to be allocated to the segment. In that situation, a public entity may
report that segment’s interest revenue net of its interest expense and disclose that
it has done so.
ASC 280-10-50-23
Disclosure of interest revenue and interest expense included in reported segment
profit or loss is intended to provide information about the financing activities of a
segment.
ASC 280-10-50-24
If a segment is primarily a financial operation, interest revenue probably
constitutes most of segment revenues and interest expense will constitute most of
the difference between reported segment revenues and reported segment profit
or loss. If the segment has no financial operations or only immaterial financial
operations, no information about interest is required.
Any of the segment information specified in ASC 280-10-50-22 that is regularly

provided to the CODM would need to be disclosed, even if the performance
measure used by the CODM does not include such items. For example, if
operating income is the measure of segment profitability used by the CODM to
assess performance but segment interest expense is regularly reported to the
CODM, segment interest expense should be disclosed because interest expense is
one of the specific items identified for disclosure in ASC 280-10-50-22.
As noted in ASC 280, the disclosures are required at the reportable segment level.
However, a reporting entity is not precluded from disclosing this information at a
more detailed level if the more detailed presentation meets the objectives of
ASC 280. For example, a reportable segment with three different but similar
external revenue streams can choose to voluntarily provide disclosure of the
different revenue streams.
Example 25-7 provides an illustration of when a reporting entity may need to

separately report information that is not individually reported to the CODM but
included in the performance measure used by the CODM.
EXAMPLE 25-7
Disclosing depreciation and amortization expense
FSP Corp internally reports the following discrete financial information to its
CODM: revenue, operating income, total assets, volumes, and various industry
PwC 25-27
Segment reporting
statistics. Depreciation and amortization expense are components of both (1) cost
of sales and (2) selling, general, and administrative expense, none of which are
identified and reported separately to the CODM, but are included in operating
income. Operating income is the measure of segment profitability used by the
CODM to assess performance and allocate resources of the segments.
Is FSP Corp required to disclose depreciation and amortization expense for its
reportable segments?
Analysis
Yes. ASC 280-10-50-22 requires the disclosure of specified items that are
included in the measurement of segment profit or loss that is reviewed by the
CODM, notwithstanding the fact that the individual items may not be separately
identified for the CODM. Therefore, separate disclosure of depreciation and
amortization expense by reportable segment is required since depreciation and
amortization are components of operating income (i.e., the measure of profit or
loss used by the CODM).
In addition, if the measure of segment profit or loss regularly reviewed by the

CODM did not include depreciation and amortization, but depreciation and
amortization were provided separately to the CODM, then the amounts would
still need to be disclosed.
Operating segment-level asset information provided to the CODM is required to

be disclosed and included in the 10 percent asset test calculation consistent with
ASC 280-10-55-12 through 55-15, which indicates that items required by
paragraph ASC 280-10-50-22 and 50-25 that are regularly provided to the CODM
must be disclosed. In some instances, a reporting entity’s CODM may not receive
total assets information for each segment. For example, the CODM may only
receive select asset data, such as inventory and accounts receivable. In this
instance, total assets need not be disclosed for each reportable segment but,
rather, the sum of inventory and accounts receivable must be disclosed. This total
should be disclosed as “segment assets,” and the total segment assets should be
reconciled to the reporting entity’s total consolidated assets. A reporting entity
should also disclose the composition of “segment assets.”
Ratios or a combination of financial information may be regularly reviewed by

the CODM. For example, a reporting entity’s CODM may review net working
capital but not its gross components (i.e., current assets and current liabilities).
Although working capital has an asset component, the current asset component is
not what is used by the CODM to assess performance and allocate resources.
Therefore, the asset information is not required to be reported, nor is working
capital required to be disclosed. Nonetheless, a reporting entity could elect to
voluntarily report net working capital by reportable segment if it meets the
objectives and basic principles of ASC 280. If it does so, the total of all reportable
segments’ working capital should be reconciled to total consolidated working
capital.
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Segment reporting
If no asset information is disclosed for a reportable segment, the fact and reason
should be disclosed. Example 25-8 provides an illustration of segment reporting
considerations when asset information is not provided to the CODM.
EXAMPLE 25-8
Reporting considerations when asset information is not provided to the CODM
FSP Corp internally reports the following financial information to its CODM for
each of its operating segments: revenues, operating income, net income, volumes,
and various industry statistics. Asset and other balance sheet information are not
reported to the CODM.
Is FSP Corp still required to disclose asset information for its reportable
segments since that information is not reported to the CODM?
Analysis
No. Because asset information is not provided to the CODM, the reporting entity
would not be required to report segment asset information. In addition, when
identifying reportable segments, the reporting entity cannot perform the
asset-based 10 percent test. ASC 280-10-50-27 states that “only those assets that
are included in the measure of the segment’s assets that is used by the chief
operating decision maker shall be reported for that segment.” If asset information
is not reported, the fact and the reasons for not providing the information should
be disclosed.
However, the disclosure of long-lived assets by geographic area is required

pursuant to the entity-wide disclosure requirements of ASC 280-10-50-41, even if
such information is not provided to the CODM. See FSP 25.7.6.
25.7.3 Information about investments and expenditures
ASC 280-10-50-25 provides the required segment disclosures for investments in

equity method investees and expenditures for additions to long-lived assets.

A public entity shall disclose both of the following about each reportable segment
if the specified amounts are included in the determination of segment assets
reviewed by the chief operating decision maker or are otherwise regularly
provided to the chief operating decision maker, even if not included in the
determination of segment assets:
a. The amount of investment in equity method investees
b. Total expenditures for additions to long-lived assets other than any of the
following:
1. Financial instruments
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Segment reporting
2. Long-term customer relationships of a financial institution
3. Mortgage and other servicing rights
4. Deferred policy acquisition costs
5. Deferred tax assets.
ASC 280 requires these investment and expenditure disclosures because they
improve a financial statement user’s ability to estimate the cash-generating
potential and cash requirements of reportable segments.
An example disclosure is included in ASC 280-10-55-48, which illustrates a

suggested format for certain disclosures required by ASC 280-10-50-22 and
ASC 280-10-50-25.
25.7.4 Information about the measurement of segment profit or loss and

assets
ASC 280-10-50-29 provides the disclosure requirements for information about

the measurement of segment profit or loss and assets.

A public entity shall provide an explanation of the measurements of segment
profit or loss and segment assets for each reportable segment. At a minimum, a
public entity shall disclose all of the following:
a. The basis of accounting for any transactions between reportable segments.
b. The nature of any differences between the measurements of the reportable

segments’ profits or losses and the public entity’s consolidated income before
income taxes and discontinued operations (if not apparent from the
reconciliations described in paragraphs 280-10-50-30 through 50-31). Those
differences could include accounting policies and policies for allocation of
centrally incurred costs that are necessary for an understanding of the
reported segment information.
c. The nature of any differences between the measurements of the reportable

segments’ assets and the public entity’s consolidated assets (if not apparent
from the reconciliations described in paragraphs 280-10-50-30 through
50-31). Those differences could include accounting policies and policies for
allocation of jointly used assets that are necessary for an understanding of
the reported segment information.
d. The nature of any changes from prior periods in the measurement methods
used to determine reported segment profit or loss and the effect, if any, of
those changes on the measure of segment profit or loss.
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Segment reporting
e. The nature and effect of any asymmetrical allocations to segments. For

example, a public entity might allocate depreciation expense to a segment
without allocating the related depreciable assets to that segment.
In instances in which the measure of segment profitability is not consistent

across operating segments, the reporting entity should provide a description of
how segment profitability is measured for each reportable segment.
In instances in which the CODM uses more than one measure to assess
performance and allocate resources, the reporting entity should determine which
measure is most consistent with that presented in the consolidated financial
statements and disclose that measure as the reported segment profitability
measure. For example, assume the CODM of the reporting entity uses both
operating income and pretax income to assess performance and allocate
resources. Segment operating profit is determined based on the same
measurement principles that are used in the determination of consolidated
operating profit. However, segment pretax income includes certain internal
cost-of-capital charges that are eliminated in consolidation. In this situation,
segment operating profit should be the measure reported externally because
operating profit most closely aligns with the measure reported in the
consolidated financial statements. If segment pretax income was determined
based on the same measurement principles as consolidated pretax income, then
segment pretax income would be the measure reported externally as this is the
measure that is most similar to consolidated pretax income, which is the measure
ASC 280-10-50-30(b) requires to be reconciled to segment profit/loss.
In either case, disclosures should be made for interest income and expense
because that information is included in the pretax income measure provided to
the CODM (consistent with ASC 280-10-55-12 through 55-15). The disclosure
requirements specific to segment interest income and expense are discussed in
FSP 25.7.2.
Question 25-8
Because the premise of the “management” approach is that external segment
reporting should correspond to a reporting entity’s internal reporting, would
segment information need to be modified if a reporting entity’s internal reporting
is not in conformity with US GAAP?
PwC response
No. ASC 280 requires information to be reported on the same basis it is reported
internally, even if the segment information is not in conformity with US GAAP or
the accounting policies used in the consolidated financial statements. Examples
of such situations include segment information reported on a cash basis or on a
local US GAAP basis for segments comprised of foreign subsidiaries, or when
management uses EBITDA as its measure of segment profitability. The reporting
entity should disclose the nature of any differences between the segment’s
PwC 25-31
Segment reporting
measurements of profit or loss and assets and those measurements used in the
consolidated financial statements for each reportable segment as prescribed by
ASC 280-10-50-29.
25.7.5 Reconciliations
Certain information included in the segment disclosures must be reconciled to

the reporting entity’s consolidated financial measures. ASC 280-10-50-30
through 50-31 provide the requirements for these reconciliations.
Excerpt from ASC 280-10-50-30 through 50-31

A public entity shall provide reconciliations of all of the following:
a. The total of the reportable segments’ revenues to the public entity’s

consolidated revenues.
b. The total of the reportable segments’ measures of profit or loss to the public
entity’s consolidated income before income taxes and discontinued
operations. However, if a public entity allocates items such as income taxes
and extraordinary items to segments, the public entity may choose to
reconcile the total of the segments’ measures of profit or loss to consolidated
income after those items.
c. The total of the reportable segments’ assets to the public entity’s consolidated
assets.
d. The total of the reportable segments’ amounts for every other significant item
of information disclosed to the corresponding consolidated amount. For
example, a public entity may choose to disclose liabilities for its reportable
segments, in which case the public entity would reconcile the total of
reportable segments’ liabilities for each segment to the public entity’s
consolidated liabilities if the segment liabilities are significant.
All significant reconciling items shall be separately identified and described. For
example, the amount of each significant adjustment to reconcile accounting
methods used in determining segment profit or loss to the public entity’s
consolidated amounts shall be separately identified and described.
Reconciliations related to segment revenue and profit measures are required for
each year an income statement is presented, and reconciliations of balance sheet
amounts are required only for each year that a balance sheet is presented. An
example is included in ASC 280-10-55-49, which illustrates the disclosures
required by ASC 280-10-50-30(a) through (c).
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Segment reporting
Question 25-9
If a reporting entity’s measure of segment profitability is net income, should the
total of segment net income be reconciled to the total consolidated net income or
to the total consolidated pretax income?
PwC response
ASC 280-10-50-30(b) allows a reporting entity whose measure of segment
profitability is below the pretax income line (e.g., net income) to reconcile that
measure, in aggregate for its reportable segments, to the corresponding
consolidated total or the consolidated pretax total. In this case, we believe that
the more meaningful presentation would be a reconciliation of the total of
segment net income to the total consolidated net income.
ASC 280-10-50-30(b) requires that measures of segment profitability that are

above the pretax line (e.g., operating profit) be reconciled to consolidated pretax
income.
Question 25-10
Can a reporting entity reconcile a non-GAAP measure of segment profitability,
e.g., EBITDA, to a reporting entity’s consolidated EBITDA, if that measure is
further reconciled to pretax income?
PwC response
No. Although ASC 280 recognizes that a segment measure of profitability may be
a measure that is not a traditional US GAAP measure, ASC 280 does not permit
reconciliation to a consolidated non-GAAP measure. For example, the following
presentation would not be appropriate.
Reportable segment 1 EBITDA $200
Reportable segment 2 EBITDA 150
Reportable segment 3 EBITDA 100
Subtotal reportable segments 450
Unallocated corporate overhead (50)
Unallocated pension expense (20)
Consolidated EBITDA $380
Depreciation and amortization (30)
Interest (50)
Consolidated pretax income $300
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Segment reporting
It is not appropriate to present the “Consolidated EBITDA” amount (i.e., $ 380),

while it would be acceptable to present the “Subtotal reportable segments”
amount (i.e., $450).
Although Regulation S-K 10(e)(1)(ii)(C) precludes non-GAAP measures in the

financial statements or financial statement footnotes, this prohibition is not
applicable to measures of segment profitability as such measures are required to
be disclosed by US GAAP. However, this rule would preclude use of consolidated
EBITDA, as presented in the above reconciliation, because such disclosure is not
required by US GAAP.
25.7.6 Entity-wide disclosures
The guidance requires certain entity-wide disclosures, which include information

about a reporting entity’s products and services, geographic areas, and major
customers. In some cases, these requirements may already be met through other
disclosures in the standard. ASC 280 requires these entity-wide disclosures even
if this information is not reviewed by the CODM, and even if the reporting entity
operates in only one segment. The entity-wide disclosures are only required in
annual reports.
25.7.6.1 Information about products and services
ASC 280-10-50-40 requires entity-wide disclosures related to products and

services.
ASC 280-10-50-40
A public entity shall report the revenues from external customers for each
product and service or each group of similar products and services unless it is
impracticable to do so. The amounts of revenues reported shall be based on the
financial information used to produce the public entity’s general-purpose
financial statements. If providing the information is impracticable, that fact shall
be disclosed.
Reporting entities whose segment revenues are derived from a broad range of
different products and services should provide revenue information for the
entity-wide disclosures related to its products and services. This disclosure
should be made even if there is only one reportable segment in instances when
that segment has different products and services.
Missing or inadequate disclosures of revenues from external customers for each

product and service is a common area for SEC staff questions. The SEC staff may
also question entity-wide disclosures that are not consistent with how products
are described or grouped in other sections of the reporting entity’s filings
(e.g., Form 10-K, Item 1, Business) or other external communications.
When determining the level at which products and services should be reported, it
may be helpful to consider whether a majority of the characteristics described in
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Segment reporting
ASC 280-10-50-11 for determining whether segments can be aggregated are met.
For example, if all products have similar production processes, classes of
customers, and economic characteristics as evidenced by similar rates of
profitability, similar degrees of risk, and similar opportunities for growth, a
reporting entity may conclude that all of its products are similar and that no
additional disclosures by product type are necessary.
Question 25-11
If a reporting entity has two operating segments based on products and services,
and the two operating segments meet all of the criteria required for aggregation
into a single reportable segment, must the entity-wide disclosures related to
products and services be presented under ASC 280-10-50-40?
PwC response
It depends. Since the two operating segments meet the aggregation criteria, the
nature of the products and services in each operating segment could be similar,
and therefore the entity-wide disclosures related to products and services need
not be provided. However, if the two segments each sold a range of products and
services, the reporting entity would be required to present the entity-wide
products and services-related disclosures.
Question 25-12
If a reporting entity has one operating segment, and therefore one reportable
segment, must the information required for entity-wide disclosures related to
products and services be presented under ASC 280-10-50-40?
PwC response
It depends. A reporting entity may have only one operating segment (and thus
only one reportable segment) that sells a range of products and services. In this
case, the reporting entity would be required to present the entity-wide products
and services-related disclosures. However, the reporting entity may conclude the
entity-wide products and services-related disclosures are not necessary if it can
demonstrate that its products and services are essentially similar using the
aggregation criteria in ASC 280-10-50-11.
25.7.6.2 Information about geographic areas
One of the purposes of entity-wide disclosures is to provide information about

the geographic areas in which the reporting entity generates its revenues and
holds its long-lived assets. ASC 280-10-50-41 provides the entity-wide disclosure
requirements for geographic areas.

A public entity shall report the following geographic information unless it is
impracticable to do so:
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Segment reporting
a. Revenues from external customers attributed to the public entity’s country of

domicile and attributed to all foreign countries in total from which the public
entity derives revenues. If revenues from external customers attributed to an
individual foreign country are material, those revenues shall be disclosed
separately. A public entity shall disclose the basis for attributing revenues
from external customers to individual countries.
b. Long-lived assets other than financial instruments, long-term customer

relationships of a financial institution, mortgage and other servicing rights,
deferred policy acquisition costs, and deferred tax assets located in the public
entity’s country of domicile and located in all foreign countries in total in
which the public entity holds assets. If assets in an individual foreign country
are material, those assets shall be disclosed separately.
The amounts reported shall be based on the financial information that is used to
produce the general-purpose financial statements. If providing the geographic
information is impracticable, that fact shall be disclosed. A public entity may wish
to provide, in addition to the information required by the preceding paragraph,
subtotals of geographic information about groups of countries.
An example is included in ASC 280-10-55-51 that illustrates the disclosures

required by ASC 280-10-50-41. In addition to disclosure of material revenues and
long-lived assets by country, a reporting entity may wish to provide subtotals of
revenues and long-lived assets based on groups of countries in a geographic
region, such as Europe, Asia, or North America. The guidance in
ASC 280-10-55-22 allows for flexibility in determining how revenue can be
attributed to geographic areas. Reporting entities may choose to attribute
revenue on the basis of (1) the location of the customer, (2) the location to which
the product is shipped (which may differ from the location where the customer
resides), or (3) the location where the sale originated. The attribution method
should be reasonable and consistently applied, and a reporting entity must
disclose the basis it has selected for attributing revenue to geographic areas.
One of the reasons for requiring disclosure of long-lived assets (rather than total
assets) in geographic areas is that long-lived assets are potentially at greater risk
than current assets because they are difficult to move and relatively illiquid.
While ASC 280-10-50-41 explicitly excludes financial instruments, long-term
customer relationships of a financial institution, mortgage and other servicing
rights, deferred policy acquisition costs, and deferred taxes from the entity-wide
disclosure of long-lived assets, ASC 280-10-55-23 indicates that long-lived assets
implies physical assets that cannot be readily removed. Accordingly, goodwill and
other intangible assets should not be included in the entity-wide disclosure of
long-lived assets.
Example 25-9 provides an illustration of determining long-lived asset disclosures

by geographic area.
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Segment reporting
EXAMPLE 25-9
Reporting long-lived assets by geographic area
FSP Corp, a US-domiciled reporting entity with operations in 25 countries, has

determined that it has two reportable segments (US and International) and that
its long-lived assets in two individual foreign countries (England and China) are
material.
For which geographic areas should FSP Corp disclose tangible long-lived assets?
Analysis
FSP Corp should separately disclose tangible long-lived assets for the US,
England, China, and all other foreign countries combined. Although the
long-lived assets in the US may not be material, the guidance requires disclosure
related to the reporting entity’s country of domicile.
Question 25-13
If a reporting entity has reportable segments represented by the geographic areas
US, Canada, and Asia, would the reporting entity be required to disclose revenue
and long-lived asset information for each country in Asia, if material?
PwC response
Yes. Revenue and long-lived assets must be disclosed for each country in which
such balances are material. The individual country disclosures are required even
if the Asian operations are not managed on an individual country basis (i.e., even
if the CODM does not review or assess performance on an individual country
basis).
To the extent that it is impracticable to provide the individual country

information, that fact should be disclosed. These circumstances are expected to
be rare.
25.7.6.3 Information about major customers
ASC 280-10-50-42 provides the entity-wide disclosure requirements for major

customers.
PwC 25-37
Segment reporting

A public entity shall provide information about the extent of its reliance on its
major customers. If revenues from transactions with a single external customer
amount to 10 percent or more of a public entity’s revenues, the public entity shall
disclose that fact, the total amount of revenues from each such customer, and the
identity of the segment or segments reporting the revenues. The public entity
need not disclose the identity of a major customer or the amount of revenues that
each segment reports from that customer. For purposes of this Subtopic, a group
of entities known to a reporting public entity to be under common control shall
be considered as a single customer, and the federal government, a state
government, a local government (for example, a county or municipality), or a
foreign government each shall be considered as a single customer.
One of the objectives of disclosing information about major customers is to

provide a measure of the concentration of credit risk to the reporting entity.
Neither the identity of a major customer or the amount of revenues that each
segment reports from that customer is required to be disclosed.
An example is included in ASC 280-10-55-52 that illustrates the disclosures

required by ASC 280-10-50-42.
Question 25-14
Is there a threshold at which entity-wide disclosures can be considered
immaterial?
PwC response
Unlike reportable segment disclosures, there is no quantitative threshold for
determining when entity-wide disclosures are required. Assessing what is
material is a matter of judgment. Both qualitative and quantitative factors should
be considered. We believe that, when assessing entity-wide disclosures from a
quantitative perspective, it would be reasonable to apply a threshold similar to
the 10 percent tests provided in ASC 280-10-50-12. For example, a reporting
entity would disclose revenues from external customers attributed to an
individual foreign country if revenues from that country are greater than 10
percent of consolidated revenues. However, qualitative factors may indicate that
information is material even if it does not exceed 10 percent of the consolidated
total.
25.7.7 Interim period information
Reduced disclosures may be presented in condensed financial statements of

interim periods. If a complete set of financial statements is presented in an
interim period, then the full disclosure requirements of ASC 280 apply.
ASC 280-10-50-32 through 50-33 provides the disclosure requirements for

condensed financial statements of interim periods.
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Segment reporting
ASC 280-10-50-32 through 50-33

A public entity shall disclose all of the following about each reportable segment in
condensed financial statements of interim periods:
a. Revenues from external customers
b. Intersegment revenues
c. A measure of segment profit or loss
d. Total assets for which there has been a material change from the amount
disclosed in the last annual report
e. A description of differences from the last annual report in the basis of

segmentation or in the basis of measurement of segment profit or loss
f. A reconciliation of the total of the reportable segments’ measures of profit or

loss to the public entity’s consolidated income before income taxes and
discontinued operations. However, if a public entity allocates items such as
income taxes to segments, the public entity may choose to reconcile the total
of the segments’ measures of profit or loss to consolidated income after those
items. Significant reconciling items shall be separately identified and
described in that reconciliation.
Interim disclosures are required for the current quarter and year-to-date
amounts. Paragraph 270-10-50-1 states that when summarized financial data are
regularly reported on a quarterly basis, the information in the previous paragraph
with respect to the current quarter and the current year-to-date or the last 12
months to date should be furnished together with comparable data for the
preceding year.
Entity-wide disclosures, including disclosures about major customers, are not

required in interim periods. However, if a reporting entity were to transact a
significant amount of business with a new (or previously insignificant) customer
during an interim period that was expected to continue in future periods,
management should consider providing the disclosures required by
ASC 280-10-50-42.
25.7.8 Revision of information for changes in segments
When reporting entities change the structure of their internal organization, the
information regularly reviewed by the CODM may change. This could result in
changes in operating segments and changes in the determination of reportable
segments. If the reportable segments change in the current period, corresponding
information for earlier periods should be revised, including information for
interim periods, so that all segment disclosures are comparable. This
requirement applies to all disclosures unless it is impracticable to do so. A change
in reportable segments should be accompanied by disclosure of the reasons for
PwC 25-39
Segment reporting
the change and, when appropriate, that the change has been reflected through
retroactive revision of prior period segment information.
ASC 280 does not specify how to analyze organization changes to determine
when a change in operating or reportable segments is necessary. However, the
determination of operating segments is based on the information regularly
reviewed by the CODM. As a result, if there are changes in how the CODM
allocates resources and assesses performance, or there are changes to how the
information is presented to the CODM, a reporting entity will likely need to
reassess its segment reporting.
When determining whether there has been a change that could impact the
determination of its operating segments, the reporting entity may consider
whether there has been a change in the following:
□ The CODM
□ The information regularly reviewed by the CODM
□ The organizational structure
□ The individuals who regularly meet with the CODM
□ The budgeting process or level at which budgets are reviewed by the CODM
□ The information regularly reported to the board of directors
□ The information the reporting entity communicates to external parties such

as investors, creditors, and customers
ASC 280 requires prior period segment information to be revised (unless

impracticable) when there has been a change in the composition of the segments
resulting from changes in the structure of a reporting entity’s internal
organization. If a reporting entity changes a segment measure (e.g., begins using
EBITDA instead of operating income as its measure of profit or loss), a revision is
not required. However as illustrated in FSP 25.7.11, a reporting entity may elect
to revise the disclosures for a change in segment measure.
ASC 280 also requires revision of prior period segment information (unless
impracticable) when a previously insignificant operating segment becomes
significant (i.e., the operating segment meets the 10 percent tests).
Example 25-10 illustrates an analysis of segments when their relative significance

changes year over year.
25-40 PwC
Segment reporting
EXAMPLE 25-10
Change in segment significance
FSP Corp has eight operating segments, none of which qualify for aggregation.
Five of the segments were disclosed as reportable segments in 20X5, based on the
10 percent tests. The aggregate external revenues of these segments exceeded 75
percent of FSP Corp’s consolidated revenues. The remaining three segments were
combined in an “all other” category. In 20X6, one of the three segments that was
included in the “all other” category in 20X5 became quantitatively material
(i.e., it exceeded the threshold for the 10 percent tests). Also in 20X6, one of the
five reportable segments was no longer quantitatively material.
How should FSP Corp reflect these changes in its segment disclosures?
Analysis
The segment that is now material should be presented as a reportable segment.

Pursuant to ASC 280-10-50-17, when FSP Corp presents prior period segment
data in the 20X6 financial statements, segment data for all prior periods must be
revised to reflect the new reportable segment as a separate segment, unless it
would be impracticable to do so.
For the segment that no longer meets the quantitative thresholds (assuming the
segment is not considered to be of continuing significance), disclosure of its
individual results need not be made in 20X6. In this case, prior period segment
disclosures could also be revised to conform to the current period presentation
(provided the threshold for the 75 percent revenue test is met for all periods). If
management views the 20X6 segment to be of continuing significance, that
segment’s disclosures should continue to be made.
While the entity-wide disclosure provisions of ASC 280 do not discuss the
revision of entity-wide disclosures, we believe that the entity-wide information
from period to period should be comparable. Accordingly, we believe that the
guidance contained in ASC 280-10-50-16 through 50-17, as well as the revision
provisions of ASC 280-10-50-34 through 50-35, should be applied to entity-wide
disclosures.
Example 25-11 provides an illustration of factors to consider in assessing whether

to revise previous periods’ segment information when a reporting entity has an
internal reorganization of financial reporting without changing its organizational
structure.
EXAMPLE 25-11
Consideration of changes in internal financial reporting within operating
segments
FSP Corp has four operating segments. It has decided to move one of its product
lines from one operating segment (Segment X) to another (Segment Z) for
PwC 25-41
Segment reporting
internal reporting purposes. FSP Corp did not change its management structure,
and has determined that it still has the same four operating segments. The only
change to the CODM package as a result of the internal reorganization change is
the inclusion of the respective product line information within Segment Z
reporting and its removal from Segment X reporting as of the date of the change.
How should this change in internal financial reporting be considered in FSP

Corp’s segment assessment?
Analysis
If the changes to the segment assets and operating results as a result of

reclassifying the assets, liabilities, and results of operations materially affect the
trend in asset balances and/or the reported results, FSP Corp should consider
revising its previously reported segment disclosure information. If, however, the
segment information does not materially change the segments’ financial
information, generally a reporting entity is not expected to revise the previously
reported segment information.
In determining whether the change to the Segment X and Z financial information

is material, FSP Corp might consider, among other things, whether the CODM
package (or other information regularly reviewed by the CODM) has been
adjusted retrospectively or whether the product line is considered a separate
asset group (as defined in ASC 360). If the product line is a separate asset group,
this may indicate that the composition of the segments has changed significantly
and prior period segment information should be revised.
25.7.8.1 When to reflect changes in segment reporting
Changes in reportable segments as a result of changes in organization, the

information regularly reviewed by the CODM, the significance of an operating
segment (from immaterial to material), or the aggregation of operating segments
should only be reflected when the financial statements include the period in
which the change occurred. Changes in segments arising after a reporting entity’s
period-end but before the issuance of the reporting entity’s financial statements
should be treated as an unrecognized (i.e., “Type II”) subsequent event. However,
the reporting entity should disclose in the current period financial statements
that the change in reportable segments will occur in subsequent periods and the
reasons for the change.
Examples 25-12 and 25-13 provide illustrations of when segment reporting

changes should be reflected in a reporting entity’s financial statements.
EXAMPLE 25-12
Change in segment structure subsequent to year end
In the fourth quarter of 20X5, FSP Corp’s management determined that it will
change the way it manages and operates the reporting entity and is in the process
of modifying FSP Corp’s information system to produce financial information to
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Segment reporting
support the new structure. The changes will require FSP Corp to revise its
segment reporting. It is anticipated that the modification to the system will be
completed in the first quarter of 20X6, at which point management will
reorganize its operations and reporting structure and begin to manage its
operations under its new segment structure.
How should this planned change affect FSP Corp’s 20X5 segment disclosures?
Analysis
FSP Corp should present its 20X5 segment disclosure information under the
reporting structure in place during 20X5. It should not revise its segment
disclosure using the new reporting structure until the first quarter of 20X6,
which is the period in which management will change the way it manages and
operates the business.
EXAMPLE 25-13
Changing operating segments for financial reporting purposes prior to changing
the CODM package
FSP Corp manufactures watches in three product lines: low-, medium-, and
high-end. Each of these product lines has two distinct watch types (sport and
formal). FSP Corp identified each product line as an operating segment. Each of
the product lines has a vice president who reports to the CEO, who is the CODM.
Monthly meetings are held between the vice presidents of the three product lines
and the CODM to discuss the results for each product line. The CODM package
and information reviewed at the monthly meetings consists of revenue and
expenses by product line.
During FY 20X5, the existing CEO retired and the new CEO became the new
CODM. The new CODM changed certain aspects of FSP Corp’s internal reporting
roles and marketing strategy and began meeting with the product managers to
assess performance of each of the watch types (sport and formal) within each
product line in order to gain better insight into how the business is operating. In
addition, the CODM implemented a new marketing campaign which focused on
the sport and formal type watches versus the previous marketing campaign,
which focused only on the three distinct product lines. The new CODM began
allocating resources at the watch-type level (sport and formal) rather than at the
product-line level (low-, medium-, and high-end). Although no changes have yet
been made to the CODM reporting package, the CODM is now regularly receiving
watch-type operating profitability information through regular meetings with the
six product managers. The product managers oversee the financial results of each
watch type and provide additional reports to the CODM. In the first quarter of
20X6, FSP Corp intends to change the formal CODM package to reflect the
information on the six distinct businesses that the new CEO is reviewing, rather
than just the three that the previous CEO reviewed.
What impact should the change in information being reviewed by the CODM
have on FSP Corp’s determination of operating segments?
PwC 25-43
Segment reporting
Analysis
Although the CODM package had not yet been updated, FSP Corp should likely
reflect the six watch types as operating segments for the 20X5 year-end financial
statements, but a careful evaluation of all relevant factors is required.
The change in the CODM warrants a review of the operating segments given the
new CODM’s different management style and regular review of new or different
information when assessing performance and allocating resources. In order to
support a change in operating segments prior to a formal change in the CODM
package, FSP Corp would need to demonstrate that significant changes have been
made in how the CODM is managing the business.
In this example, FSP Corp changed the manner in which operating results are
regularly reviewed by the CODM in 20X5. In addition to meeting with the vice
presidents of the three distinct product lines, the new CODM now also meets with
the product managers of the six individual watch types. Additionally, FSP Corp
changed the way that it markets its products, and the CODM is using more
disaggregated financial information to manage the business. FSP Corp does not
view these changes as temporary and intends to make the change to the CODM
package in the near future to reflect the way the new CODM views the business.
Based on these factors, it would appear appropriate to conclude that FSP Corp
had a change in its operating segments during 20X5. It is paramount to
understand when this change has occurred to determine if FSP Corp has been
operating, and is being managed, based on the new operating segments during
the financial reporting period that is to be presented.
25.7.9 Revision of prior period segment information is impracticable
ASC 280-10-50-35 provides guidance for additional disclosures in situations

where retroactive revision of segment information is impracticable.
ASC 280-10-50-35
If a public entity has changed the structure of its internal organization in a
manner that causes the composition of its reportable segments to change and if
segment information for earlier periods, including interim periods, is not restated
to reflect the change, the public entity shall disclose in the year in which the
change occurs segment information for the current period under both the old
basis and the new basis of segmentation unless it is impracticable to do so.
ASC 280-10-50-17 states that “information is impracticable to present if the

necessary information is not available and the cost to develop it would be
excessive.” We expect such situations to be rare as it is usually possible to obtain
the necessary prior period information. The SEC staff has been skeptical that
revising prior periods is impracticable.
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Segment reporting
Similar to changes to reportable segments made during annual periods, if prior

year interim segment information is not revised, then the current period segment
disclosures should be presented on both the old basis and new basis, unless it
would prove impracticable to do so.
25.7.10 Changes of reportable segments during an interim period
A reporting entity may change its organizational structure, or a previously

immaterial segment may become material, during an interim period. If that
change results in a change in reportable segment information in the interim
period, the financial statements should be prepared on the basis of the new
segments that were created during the current interim period. The previously
filed interim reports are not required to be amended. However, the interim
information for those previously filed quarters will need to be revised (unless it is
immaterial or impracticable) when the quarters are presented for comparative
purposes in the following year’s interim filings.
Question 25-15
If changes in a reporting entity’s internal management reporting structure
changes its basis for segment reporting during an interim period, must full
footnote disclosure be provided in the interim period condensed financial
statements as if the revision had been reported in a complete set of annual
financial statements included in the Form 10-K?
PwC response
No. Full footnote disclosures are not required. However, ASC 280-10-50-34
through 50-35 requires that the limited interim period information be revised
and provided in the quarterly report. ASC 280-10-50-32(e) also requires the
interim financial statements to describe differences in the basis of segmentation
or in the basis of measurement of segment profit or loss from the last annual
report. Certain line items required for the annual footnote disclosure as provided
in ASC 280-10-50-22 and ASC 280-10-50-25 may be omitted from the condensed
financial statements included in the interim period quarterly report.
25.7.11 Changes in segment performance measures
Reporting entities may choose to change their measure of segment profit and loss
(e.g., from operating income to EBITDA). In contrast to an organizational change
that causes a change to segment reporting, a change in a segment performance
measure may not require revision to previously reported segment disclosures.
Additional disclosures are required if prior years’ information is not revised, as
described in ASC 280-10-50-36.
PwC 25-45
Segment reporting
ASC 280-10-50-36
Although restatement is not required to reflect a change in measurement of
segment profit and loss, it is preferable to show all segment information on a
comparable basis to the extent it is practicable to do so. If prior years’
information is not restated, paragraph 280-10-50-29(d) nonetheless requires
disclosure of the nature of any changes from prior periods in the measurement
methods used to determine reported segment profit or loss and the effect, if any,
of those changes on the measure of segment profit or loss.
Example 25-14 provides an illustration of a change in segment performance

measures.
EXAMPLE 25-14
Change in segment performance measures
FSP Corp has five operating segments, which are also its reportable segments.
Historically, the internal reporting package reviewed by the CODM included
certain unallocated items, such as interest income/expense and pension costs.
These unallocated items were disclosed in FSP Corp’s footnotes as part of its
reconciliation of total segment profits/losses to consolidated net income. The
CODM recently requested that pension costs be allocated to the five operating
segments based on employee head count as the CODM believes pension cost
should be considered in assessing segment performance and in making resource
allocation decisions. The internal reporting package reflected this change as of
December 31, 20X5.
How should FSP Corp reflect this in its segment disclosures?
Analysis
The change in allocation represents a change in the measure of segment

performance. FSP Corp should reflect this new segment measure in the period
the change occurred. Because this is not a change in the identified reportable
segments, FSP Corp would not be required to revise prior periods to reflect this
change, but may elect to do so. In either case, FSP Corp should disclose the
nature of the change in the segment performance measure and the effect the
change has on the measure of segment profit or loss as required by
ASC 280-10-50-29(d).
25.7.12 Case study — applying ASC 280
Example 25-15 is a case study in how to apply the provisions of ASC 280. It also
provides example disclosures based on the outcome of the case study.
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Segment reporting
EXAMPLE 25-15
Illustrative application of ASC 280 and related disclosures
The following example provides general background information relating to FSP

Corp, a fictitious consumer products reporting entity. The general background is
followed by an analysis regarding the determination of FSP Corp’s CODM, its
operating segments, the operating segments that qualify for aggregation, and
which operating segments or aggregated operating segments are reportable
segments. An example footnote is also provided.
General background
FSP Corp’s operations include manufacturing, marketing, and distribution of

luggage and related accessories. The products consist of four types of branded
luggage, as well as handbags, briefcases, sports bags, and storage cases. FSP Corp
is a global organization with sales in Europe, Asia, and the Americas. FSP Corp is
organized as 12 marketing units, each with its own Vice President who is
accountable for sales and performance of his/her unit. These marketing units are
grouped into three divisions, and the Vice Presidents of the 12 marketing units
report to their respective Division President. Approximately 50% of sales are
from the four marketing units that compose the “Luggage Americas Division.”
Approximately 30% of sales come from the four marketing units that comprise
the “International Division.” The remaining 20% of sales are from the four
marketing units that compose the “Other Accessories Americas Division.”
FSP Corp produces its luggage products through a network of six owned
manufacturing facilities. The handbags, briefcases, sports bags, and storage cases
(“Other Accessories”) are produced by various independent suppliers. Other
Accessories Americas Division is primarily a domestic operation, although the
accessories are also sold internationally through the International Division’s
marketing units. FSP Corp’s product lines are sold primarily to retailers who, in
turn, sell the items to individual customers. FSP Corp also owns eight handbag
retail locations in the US that sell handbag products directly to end customers
(handbags are also sold through third party retailers). The results of these
locations are included in the handbag marketing unit.
FSP Corp does not have any investments accounted for under the equity method
and has a December 31 year-end.
PwC 25-47
Segment reporting
The following is an organization chart for FSP Corp:
FSP Corp organization chart
The CEO allocates resources and assesses the performance of FSP Corp primarily
based on the results of each marketing unit. The CEO regularly receives
information from the three Division Presidents, as well as the Corporate Officers
(Chief Financial Officer, General Counsel, and Vice President of Human
Resources) who report directly to the CEO.
Information reported to the CODM
Each marketing unit prepares a monthly “Operating Report” which is sent to the
applicable Division President. It reflects the marketing unit’s current-month and
year-to-date sales; gross margin; EBITDA; and working capital. EBITDA is the
single most important measurement used by the marketing unit Vice Presidents,
Divisional Presidents, and CEO to assess performance of the marketing units,
divisions, and FSP Corp as a whole. Most incentive compensation is based on
EBITDA at the marketing unit level.
The monthly Operating Reports are reviewed by the Division Presidents.

Divisional results are prepared for each division and sent to the Division
Presidents and CEO. The Operating Reports are also made available to the CEO,
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Segment reporting
who may not review these reports in as much detail as the Division Presidents,
but finds it useful to have the disaggregated information available to analyze
specific performance questions.
Additionally, the CEO is apprised of each marketing unit’s performance by:
□ A monthly all-day meeting with the Division Presidents and marketing unit
Vice Presidents that is devoted to a discussion of recent operating results.
The marketing unit Operating Reports and the consolidated division level
reports are typically used as information sources during these meetings.
□ Frequent phone calls with the Division Presidents
□ Quarterly strategy meetings with marketing unit Vice Presidents, at which

forecasts, business issues, opportunities, and competitors are discussed.
Each quarter, the board of directors is provided with a report that summarizes
sales, operating income, EBITDA, and working capital for each of the Divisions.
The following tables represent information reported in the Operating Reports.
LUGGAGE AMERICAS DIVISION

Information reported as of and for the year ended December 31, 20X5
($ in thousands)
Brand A Brand B Brand C Brand D Division total
Sales $420 $220 $180 $100 $920
Gross
margin $126 $69 $57 $32 $284
Percentage
of sales 30% 31% 32% 32%
EBITDA $80 $40 $32 $18 $170
EBITDA
margin 19% 18% 18% 18%
Working
capital $200 $200 $150 $60 $610
PwC 25-49
Segment reporting
OTHER ACCESSORIES AMERICAS DIVISION

($ in thousands)
Sports Storage Division

Handbags Briefcases bags cases total
Sales $100 $80 $75 $75 $330
Gross
margin $41 $31 $29 $19 $120
Percentage
of sales 41% 39% 39% 25%
EBITDA $25 $20 $20 $15 $80
EBITDA
margin 25% 25% 27% 20%
Working
capital $20 $20 $15 $15 $70
INTERNATIONAL DIVISION
($ in thousands)
Other
Brand A Luggage Other Division
Europe Europe Europe Asia total
Sales $300 $160 $100 $50 $610
Gross
margin $93 $51 $20 $7 $171
Percentage
of sales 31% 32% 20% 14%
EBITDA $60 $33 $15 $6 $114
EBITDA
margin 20% 21% 15% 12%
Working
capital $150 $60 $20 $10 $240
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Segment reporting
CONSOLIDATED
($ in thousands)
Total divisions
before eliminations Eliminations Consolidated
Sales $1,860 $(60) $1,800
Gross margin $575 $(10) $565
Percentage of
sales 31% 17% 31%
EBITDA $364 $(10) $354
Working capital $920 $920
Segment Analysis
Determination of the CODM
The CODM of FSP Corp is the CEO. The CEO makes the overall decisions about
FSP Corp’s resource allocation and assesses the performance of its segments.
Although the Division Presidents and Corporate Officers also assist in the
decision-making process, the CEO has historically made and will continue to
make the overall decisions for FSP Corp.
Determination and identification of operating segments
FSP Corp’s operating segments are its 12 marketing units. Based on the preceding
tables that reflect FSP Corp’s internal reporting, each marketing unit earns
revenue, incurs expenses, and has discrete financial information readily
available. In addition, the monthly Operating Reports are provided to and
reviewed by the CODM. The CEO uses the information related to all 12 marketing
units as the basis for assessing the marketing units’ performance and deciding
what resources are to be allocated to them.
Determination of reportable segments
Assessing which operating segments meet all of the aggregation criteria
Since FSP Corp aligns its business by division, management first considered
whether the marketing units within each division met all of the required
aggregation criteria. Management prepared a long-term economic analysis for
each marketing unit using gross margin, EBITDA, sales growth, and operating
cash flows for the last three years plus forecasted results for the next three years.
PwC 25-51
Segment reporting
The impacts of foreign currency were also considered for the international
operating segments.
Based on the analysis of past, current, and future expected results considering the
guidance outlined in FSP 25.5.1, management concluded the operating segments
representing the marketing units (Brands A, B, C, and D) of the Luggage
Americas Division were quantitatively similar. Management assessed the
similarly of the qualitative characteristics as follows.
□ The nature of the products and services — All of these operating

segments market luggage and, in many cases, the same types of soft shell
luggage (the points of difference tend to be the price of the products, style,
and external material).
□ The nature of the production processes — The nature of the production

processes is similar across all four operating segments. The production of the
different brands uses common machinery and equipment in FSP Corp’s
owned US facilities. In many cases, raw materials are sourced from the same
suppliers and used across brands, and some piece parts are produced
centrally for different operating segments in the same manufacturing facility.
There are no significant technology differences in the production processes
across brands.
□ The type or class of customer for their products and services —

Each brand shares similar classes of customers, which are primarily US retail
department stores. US retail department stores usually carry many of FSP
Corp’s brands.
□ The methods used to distribute their products or provide their

services — Each brand shares similar distribution methods, which primarily
involve shipments to retail department stores by common carriers directly
from FSP Corp’s manufacturing facilities.
□ The nature of the regulatory environment — There are no specific

differences in the regulatory environment for any of the four operating
segments.
Management determined the operating segments met all of the qualitative

aggregation criteria. FSP Corp will aggregate the four operating segments in the
Luggage Americas Division to produce a reportable segment called “Luggage
Americas.”
guidance outlined in FSP 25.5.1, management concluded the Brand A Europe and
the Other Luggage Europe marketing units of the International Division were
quantitatively similar. Management assessed the similarly of the qualitative
characteristics as follows.
□ The nature of the products and services — These operating segments

market luggage and, in many cases, the same types of soft shell luggage (the
25-52 PwC
Segment reporting
points of difference tend to be the price of the products, style, and external
material).
□ The nature of the production processes — The nature of the

production processes is similar for both segments. The luggage is
manufactured in the same US plants as those described in the “Luggage”
reportable segment.

Each brand shares similar classes of customers, which are primarily
European retail department stores.

involve shipments to retail department stores by common carriers directly
from FSP Corp’s manufacturing facilities.
□ The nature of the regulatory environment — Although the marketing

units operate in different countries, there are no significant differences in the
regulatory environment.
Management determined these operating segments met all of the qualitative

aggregation criteria. FSP Corp will aggregate the Brand A Europe and the Other
Luggage Europe operating segments to produce a reportable segment called
“Luggage Europe.”
Although some of the other marketing units shared similar economic

characteristics with each other, none of the other marketing units met all of the
aggregation criteria listed in ASC 280-10-50-11. Therefore, no other operating
segments were aggregated with each other.
Quantitative thresholds
FSP Corp next performed the quantitative assessments necessary to determine

which of its operating segments or aggregated operating segments are required to
be presented separately as reportable segments in its segment disclosures. The
quantitative threshold tests should be based on the combined total of FSP Corp’s
operating segments. In this example, the total is not adjusted for intersegment
items that are otherwise eliminated in consolidation, since the operating
segments’ results are reported to the CODM inclusive of such items (i.e., segment
performance measures used to assess marketing unit performance include
intercompany transactions).
PwC 25-53
Segment reporting
Assessments of the 10 percent tests are as follows:
A. 10 percent test – revenue
Luggage Luggage Sports Storage Other

($ in thousands) Americas Europe Handbags Briefcases bags cases Europe Asia Total
External sales $860 $460 $100 $80 $75 $75 $100 $50 $1,800
Total sales,
excluding
eliminations $920 $460 $100 $80 $75 $75 $100 $50 $1,860
Percentages
External sales 48% 26% 5.5% 4% 4% 4% 5.5% 3% 100%
Total sales,
excluding
eliminations 49% 25% 5.5% 4% 4% 4% 5.5% 3% 100%
Only the Luggage Americas and Luggage Europe reportable segments meet the 10
percent revenue test that requires separate presentation in FSP Corp’s segment
disclosures.
B. 10 percent test - profit (EBITDA)
Luggage Luggage Sports Storage Other

($ in thousands) Americas Europe Handbags Briefcases bags cases Europe Asia Total
EBITDA $170 $93 $25 $20 $20 $15 $15 $6 $364
Percentage 47% 26% 7% 5% 5% 4% 4% 2% 100%
The Luggage Americas and the Luggage Europe reportable segments are the only
segments that meet the 10% segment profit test requiring separate presentation
in FSP Corp’s segment disclosures.
C. 10% test - assets
Because an asset measure of operating or reportable segment assets is not

reported to FSP Corp’s CODM, the 10% asset test is not applicable.
Immaterial operating segments which meet the majority of the aggregation

criteria
Following aggregation of operating segments that met all of the aggregation

criteria in ASC 280-10-50-11 and the application of the 10 percent tests, FSP Corp
determined which remaining immaterial operating segments shared similar
long-term economic characteristics and met the majority of the qualitative
criteria in ASC 280-10-50-11.
guidance outlined in FSP 25.5.1, management concluded Handbags, Briefcases,
and Sports Bags marketing units have similar long-term economic characteristics
and assessed the similarly of the qualitative characteristics as follows.
□ The nature of the products and services — The Handbags, Briefcases,

and Sports Bags operating segments all represent a similar type of product
25-54 PwC
Segment reporting
(personal accessories) and the points of difference tend to be the type and
style of accessory.
□ The nature of the production processes — The nature of the production

processes across the operating segments is dissimilar. Handbags are sourced
from several independent suppliers. The majority of the Handbags are
produced in factories; however, several lines of handbags are entirely
handmade. The production process for Sports Bags is primarily through an
external supplier factory. The raw materials for Sports Bags primarily consist
of synthetic fabrics and zippers. Briefcases are entirely handmade by a
number of different independent family businesses. The raw materials for
handbags primarily consist of leather, silver, and brass, all of which have had
significant price fluctuations in recent years.

Each of the operating segments shares similar classes of customers, which
are primarily retail department stores. The Handbag segment, however, does
operate some retail locations which sell products directly to the end
customers.

involve shipments to retail department stores by common carriers.
□ The nature of the regulatory environment — There are no significant

differences in the regulatory environment for any of these operating
segments.
Management determined the operating segments met a majority of the

aggregation criteria. Based on this analysis, FSP Corp will aggregate the
Handbags, Briefcases, and Sport Bags segments to produce a reportable segment
“Other Accessories.”
D. The 75% revenue test
Because the Luggage Americas reportable segment represents 48% of

consolidated sales, the Luggage Europe reportable segment represents 26% of
consolidated sales, and the Other Accessories reportable segment represents an
additional 14% of external sales, total revenues of all identified reportable
segments exceeds the 75% threshold. No further reportable segments are
required to be disclosed. If the 75% threshold was not reached, FSP Corp would
have needed to identify which of the operating segments that would otherwise be
included in the “All Other” category would be presented as a separate reportable
segment until the 75% threshold was achieved.
All Other
Management analyzed the remaining operating segments (Storage Cases, Other

Europe, and Asia) and concluded that none of these segments warranted separate
presentation as a reportable segment as they would not provide additional useful
PwC 25-55
Segment reporting
information to the readers of the financial statements. Therefore, the remaining

segments were aggregated into an “All Other” category.
Accordingly, FSP Corp has three reportable segments (Luggage Americas,

Luggage Europe, and Other Accessories) and an additional All Other category,
which account for 100 percent of FSP Corp’s total consolidated revenues.
Measurement
FSP Corp’s measure of segment profitability that is most relied upon by

management is EBITDA. Thus, EBITDA will be reported as the measure of
segment profit in the segment disclosure. In accordance with ASC 280-10-50-30,
it must reconcile aggregate EBITDA for the reportable segments to consolidated
income before income taxes.
Information about profit or loss and assets
EBITDA is the primary measure of segment profitability regularly reviewed by

the CODM. No segment-level disclosure is required of interest expense,
depreciation and amortization, unusual charges, income tax expense/benefit, and
extraordinary items since these amounts are not included in EBITDA nor
separately provided to the CODM. Further, FSP Corp does not have any
investments accounted for under the equity method.
Since asset information by operating or reportable segment is not reported to the

CODM, the individual asset disclosures described in ASC 280-10-50-22 are not
applicable to FSP Corp.
Entity-wide disclosures
A. Information about products and services
The CODM has access to and regularly reviews internal financial reporting by
marketing unit, which are primarily organized by product. Furthermore,
operating segments have been aggregated into reportable segments based on
similar products. Therefore, entity-wide disclosures of information about
products and services would not be required.
B. Information about geographic areas
Outside the US, Germany, and Italy, no other country would be sufficiently
significant to require separate disclosure. FSP Corp will disclose revenues and
long-lived assets from its United States and foreign operations. For this
disclosure, FSP Corp has determined that foreign sales will be reported by the
country in which the legal subsidiary is domiciled.
C. Information about major customers
FSP Corp has no single customer representing greater than 10% of its
consolidated revenues, and therefore this disclosure is not required.
25-56 PwC
Segment reporting
Example Footnote
Segment Information1
FSP Corp is organized primarily on the basis of products and operates 3 divisions
which comprise 12 separate marketing units. These 12 marketing units are our
operating segments, and each of these segments is led by a Vice President.
Resources are allocated and performance is assessed by our CEO, whom we have
determined to be our Chief Operating Decision Maker (CODM).
Certain of our operating segments have been aggregated as they contain similar
products managed within the same division, are economically similar, and share
similar types of customers, production, and distribution. Four of our marketing
units have been aggregated to form the “Luggage Americas” reportable segment,
and two of our marketing units have been aggregated to form the “Luggage
Europe” reportable segment. Three of our otherwise non-reportable marketing
units have been aggregated to form the “Other Accessories” reportable segment,
and the remaining three marketing units have been combined and included in an
“All Other” category. The following is a brief description of our reportable
segments and a description of business activities conducted by All Other.
Luggage Americas — Segment operations consist of product design,

manufacturing, marketing, and sales of soft shell luggage in the US
Luggage Europe — Segment operations consist of manufacturing, marketing,

and sales of soft shell luggage in Europe.
Other Accessories — Segment operations consist of product design, marketing,

and sales of handbags, briefcases, and sports bags, primarily in the US
All Other — Operations consist of marketing and sales of luggage and

accessories in certain international markets and the design, marketing, and sales
of storage cases.
The accounting policies of the segments are the same as those described in the
“Summary of Significant Accounting Policies” for FSP Corp. FSP Corp evaluates
the performance of its segments and allocates resources to them based on
earnings before interest, taxes, depreciation, and amortization (EBITDA).
Segment EBITDA includes intersegment revenues, as well as a charge allocating
all corporate headquarters costs.
1Note: For this illustrative example, only two years of segment results are presented. SEC registrants
typically require the presentation of three years of segment results.
PwC 25-57
Segment reporting
The table below presents information about reported segments for the years
ending December 31:
20X5
($ in thousands)
Luggage Luggage All

Americas Europe Other accessories other Total
Sales $920 $460 $255 $225 $1,860
EBITDA $170 $93 $65 $36 $364
20X4
($ in thousands)
Luggage Luggage All
Americas Europe Other accessories other Total
Sales $885 $425 $230 $202 $1,742
EBITDA $164 $86 $58 $32 $340
A reconciliation of total segment sales to total consolidated sales and of total

segment EBITDA to total consolidated income before income taxes, for the years
ended December 31, 20X5 and 20X4, is as follows:
Sales
($ in thousands) 20X5 20X4
Total segment sales $1,860 $1,742
Elimination of intersegment revenue (60) (40)
Consolidated sales $1,800 $1,702
EBITDA 20X5 20X4
Total segment EBITDA $364 $340
Depreciation and amortization (50) (45)
Intersegment profit
(15) (11)
Interest
(80) (70)
Consolidated income before income taxes $219 $214
25-58 PwC
Segment reporting
The following tables present sales and long-lived asset information by geographic
area for the years ended December 31, 20X5 and 20X4. Asset information by
segment is not reported internally or otherwise regularly reviewed by the CODM.
Sales
United States $1,260 $1,191
Germany 177 170
Italy 180 175
All Other Foreign 183 166
$1,800 $1,702
Long-lived Assets
United States $1,090 $1,035
Foreign 260 245
$1,350 $1,280
Foreign revenue is based on the country in which the legal subsidiary is

domiciled.

For public companies, the proper application of the framework in ASC 280 is
important because operating segments are the starting point for the identification
of reporting units (the unit of account for goodwill impairment testing purposes).
This is also true for private companies that have not elected to apply the goodwill
accounting alternative in ASC 350-20, Intangibles-Goodwill and Other, or that
have elected to apply the alternative but still test goodwill impairment at the
reporting unit level.
If a private company elects to apply the goodwill accounting alternative in

ASC 350-20 and further elects to test goodwill for impairment at the entity level
(rather than at a reporting unit level), the application of ASC 280 (to identify
operating segments as a starting point for determining reporting units) would not
be applicable.
While the disclosures of ASC 280 are not required for private companies, some
private companies believe these elective disclosures are meaningful to the
financial statement users, particularly those that anticipate an initial public
offering in the near term. A private company that chooses to disclose segment
information need not apply the disclosure requirements of ASC 280 in their
entirety.
PwC 25-59
Chapter 26:
Related parties
Related parties

Transactions with parties related to a reporting entity are relatively common.
Transactions involving related parties cannot be presumed to be carried out on an
arm’s-length basis. As such, when related party relationships and transactions are
identified and disclosed, users of financial statements can better evaluate their impact
to the financial statements. ASC 850, Related Party Disclosures, is the primary
accounting guidance on this topic, coupled with certain SEC guidance. This chapter
describes the relevant presentation and disclosure requirements and provides
examples of common related party relationships and transactions.
26.2 Scope
ASC 850 covers transactions and relationships with related parties. It applies to all
reporting entities, including the separate financial statements of a subsidiary, as noted
in ASC 850-10-15-2. Identifying related party relationships and transactions requires
a reporting entity to first determine whether a party meets the definition of a “related
party.”
ASC 850-10-20
Related parties include:
a. Affiliates of the entity
b. Entities for which investments in their equity securities would be required, absent
the election of the fair value option under the Fair Value Option Subsection of
Section 825-10-15, to be accounted for by the equity method by the investing
entity
c. Trusts for the benefit of employees, such as pension and profit-sharing trusts that
are managed by or under the trusteeship of management
d. Principal owners of the entity and members of their immediate families
e. Management of the entity and members of their immediate families
f. Other parties with which the entity may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests
g. Other parties that can significantly influence the management or operating

policies of the transacting parties or that have an ownership interest in one of the
transacting parties and can significantly influence the other to an extent that one
or more of the transacting parties might be prevented from fully pursuing its own
separate interests
Additionally, ASC 850 provides definitions for certain ancillary terms that are
inherent in the definition of a “related party.”
26-2 PwC
Related parties
Definitions from ASC 850-10-20

Affiliate: A party that, directly or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with an entity.
Control: The possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of an entity through ownership, by contract,
or otherwise.
Immediate family: Family members who might control or influence a principal owner
or a member of management, or who might be controlled or influenced by a principal
owner or a member of management, because of the family relationship.
Management: Persons who are responsible for achieving the objectives of the entity
and who have the authority to establish policies and make decisions by which those
objectives are to be pursued. Management normally includes members of the board of
directors, the chief executive officer, chief operating officer, vice presidents in charge
of principal business functions (such as sales, administration, or finance), and other
persons who perform similar policy making functions. Persons without formal titles
also may be members of management.
Principal owners: Owners of record or known beneficial owners of more than 10% of
the voting interests of the entity.
Question 26-1
Do any of the rules and regulations addressing related parties that have been issued by
the SEC impact the ASC 850 definition of a related party?
PwC response
No. For purposes of the financial statements, S-X 1-02 refers to the definition of
related parties in US GAAP. Other SEC rules (e.g., S-K 404) contain interpretations or
definitions of certain terms that, while similar to those used in ASC 850, only apply to
the term as used in those specific rules and, therefore, do not impact how a related
party is defined in ASC 850.
The SEC believes, as discussed in SEC FRM 9610.3, that reporting entities should
consider whether to disclose information about parties that fall outside the definition
of a related party, but with whom a relationship exists that enables the parties to
negotiate terms of material transactions that may not be available for other, more
clearly independent, parties on an arm’s-length basis. This could include, for example,
doing business with former management. The SEC believes that reporting entities
should disclose such circumstances when a user of the financial statements may not
be able to understand the reporting entity’s results of operations without a clear
explanation of these arrangements and relationships.
PwC 26-3
Related parties
Question 26-2
If an individual is a member of the board of directors for both Entity A and Entity B,
should Entity A and Entity B be considered related parties?
PwC response
Generally, Entity A and Entity B would not be considered related parties to one
another based solely on the fact that they have a common board member. The board
member would meet the definition of a related party for Entity A and Entity B.
However, we believe that a member of the board of directors of two separate reporting
entities—taking into account both the rights conveyed to directors via their board seat
as well as their fiduciary responsibilities to shareholders—would generally not have
the ability to significantly influence the management or operating policies of either
entity to an extent that one or both of the entities might be prevented from fully
pursuing their own separate interests. However, additional analysis should be
performed to determine if the entities meet any of the other aspects of the definition
of a related party. For example, further consideration would generally be needed if the
board member, through other relationships, rights, or interests, can control or
significantly influence the management or operating policies of one or both entities.
Question 26-3
Does ASC 850 specify who should be considered an immediate family member of a
member of management or a principal owner?
PwC response
No. ASC 850-10-20 provides a broad definition of the term “immediate family,” but
the definition is not prescriptive. Therefore, judgment should be applied in evaluating
whether an immediate family member might control or influence a principal owner or
a member of management or whether an immediate family member might be
controlled or influenced by a principal owner or a member of management.
The SEC has defined the term “immediate family” in S-X 2-02 and 9-03 and S-K 404.
Each of these definitions are more prescriptive than the ASC 850 definition. We
believe that these definitions may influence a reporting entity’s process for identifying
related parties; however, given that the definition in ASC 850 is not explicit and allows
for judgment to be exercised, we do not necessarily believe that all individuals
included in the SEC definitions are required to be designated as related parties of the
reporting entity to comply with ASC 850. However, SEC registrants are required to
utilize the relevant definitions of immediate family within Regulations S-X and S-K for
all specific SEC reporting requirements, where applicable.
26-4 PwC
Related parties
Question 26-4
Does ASC 850 specify which individuals should be considered to be members of
management?
PwC response
No. ASC 850-10-20 defines the term management; however, this definition is not
prescriptive and allows for judgment to be exercised in determining which members
within a reporting entity constitute members of management.
The following factors, which are not meant to be all inclusive, are helpful to consider
when evaluating which individuals constitute management for purposes of applying
ASC 850:
□ The structure of the reporting entity
Similar to segment reporting, understanding the structure of the reporting entity

is important to ensure the appropriate identification of those individuals who may
constitute management. For instance, a reporting entity with a flat structure
generally will have more individuals who are considered management compared
to a reporting entity with a tall structure. There are no bright lines with regard to
the minimum or maximum position an individual holds within a reporting entity
to be considered management.Rather, identifying members of management is
predicated on identifying those individuals who are responsible for achieving the
objectives of the reporting entity and who have the authority to establish policies
and make decisions by which those objectives are to be pursued.
□ Management over principal owners
The management of principal owners should be considered, as well as any other

relationships identified at a level above the reporting entity, such as parties that
control or significantly influence the reporting entity. For example, individuals at
the private equity fund level may participate in the policy making and key
decisions of portfolio companies and should be considered as potential members
of management at the portfolio company.
□ The board of directors
Although members of the board of directors are typically independent from

management, in context of ASC 850, members of the board of directors are
considered to be management.
26.3 Related party presentation matters

S-X 4-08(k) requires reporting entities to identify material related party transactions
on the face of the balance sheet, income statement, or statement of cash flows to draw
attention to their existence. SEC guidance also specifically requires disclosure of
receivables due from related parties, securities of related parties, and indebtedness of
related parties on the face of the balance sheet.
PwC 26-5
Related parties
In addition, certain US GAAP topics also require separate identification of material

items on the face of the financial statements, including receivables (ASC 310),
investments (ASC 323), payables (ASC 405), and equity (ASC 505).
For example, a reporting entity should separately identify amounts of revenue earned
from or expenses incurred to a related party on the face of its income statement. ASC
850 also specifies that a reporting entity should separately identify notes or accounts
receivable from officers, employees, or affiliated entities on its balance sheet and not
include such items under a general heading such as notes receivable or accounts
receivable.
26.3.1 Common control transactions
Some related party transactions involve transactions between entities under common
control, such as a transfer of a business or a combination of businesses. These
transactions could result in a change in the reporting entity. For more on the
presentation and disclosure requirements associated with a change in reporting
entity, refer to FSP 30.
Question 26-5
In conjunction with a spin-off transaction, should expenses incurred by a parent on
behalf of its subsidiary be disclosed as a related party transaction?
PwC response
Yes. Prior to the completion of a spin-off transaction, all transactions entered into
between the parent and its subsidiary, including the allocation of any expenses
incurred by the parent on behalf of its subsidiary (as required by SAB Topic 1.B),
should be considered related party transactions because the two entities meet the
definition of affiliates. The treatment of such transactions is consistent with the
guidance in ASC 850-10-05-4, which specifically identifies intra-entity billings based
on allocations of common costs as a common related party transaction. Additionally,
SAB Topic 1.B requires footnote disclosure, when practicable, of management’s
estimate of what the expenses (other than income taxes and interest) would have been
on a stand-alone basis (i.e., if the subsidiary had operated as an unaffiliated entity).
26.4 Related party required disclosures

The disclosure provisions of ASC 850 are intended to enable users of financial
statements to evaluate the nature and financial effects of related party relationships
and transactions. In general, the disclosures outlined below are required when the
financial statements include material related party transactions. However, related
party transactions are subject to these disclosure requirements even if they are not
given accounting recognition in the financial statements.
Related party transactions that occur in the ordinary course of business, such as
compensation arrangements, expense allowances, and other similar items, may not
require the same extent of disclosure. For example, a private company whose only
employees are its owners may not need to provide detail about compensation
26-6 PwC
Related parties
arrangements beyond their existence even though compensation is being paid to

related parties. In some situations, the relationship’s effect on the financial statements
may be pervasive enough that disclosing the relationship alone is sufficient.
Regardless, SEC registrants need to include sufficient disclosure to address SEC
requirements, including S-X 4-08(k).
It may be appropriate to aggregate similar transactions by type of related party. Before

aggregating, the reporting entity should consider whether disclosure of the name of a
related party is necessary for a user to understand the relationship.
Related party transactions eliminated in the preparation of consolidated or combined

financial statements are not required to be disclosed in those statements.
ASC 850 provides guidance on related party disclosures.

The disclosures shall include:
a. The nature of the relationship(s) involved
b. A description of the transactions, including transactions to which no amounts or

nominal amounts were ascribed, for each of the periods for which income
statements are presented, and such other information deemed necessary to an
understanding of the effects of the transactions on the financial statements
c. The dollar amounts of transactions for each of the periods for which income
statements are presented and the effects of any change in the method of
establishing the terms from that used in the preceding period
d. Amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement
e. The information required by paragraph 740-10-50-17
ASC 740-10-50-17
An entity that is a member of a group that files a consolidated tax return shall disclose
in its separately issued financial statements:
a. The aggregate amount of current and deferred tax expense for each statement of
earnings presented and the amount of any tax-related balances due to or from
affiliates as of the date of each statement of financial position presented
b. The principal provisions of the method by which the consolidated amount of

current and deferred tax expense is allocated to members of the group and the
nature and effect of any changes in that method (and in determining related
balances to or from affiliates) during the years for which the above disclosures are
presented
The above disclosures are incremental to identification of related party transactions

on the face of the financial statements.
PwC 26-7
Related parties
26.4.1 Disclosures about common control relationships
A reporting entity may also need to consider whether to disclose common control
ownership or common management even though there may not have been any
transactions with the reporting entity.
ASC 850-10-50-6
If the reporting entity and one or more other entities are under common ownership or
management control and the existence of that control could result in operating results
or financial position of the reporting entity significantly different from those that
would have been obtained if the entities were autonomous, the nature of the control
relationship shall be disclosed even though there are no transactions between the
entities.
26.4.2 Disclosures about arm’s-length basis of transactions
Transactions involving related parties cannot be presumed to be at arm’s length. As

discussed in ASC 850-10-50-5, a reporting entity should only disclose that a
transaction was at arm’s length when it can substantiate such a representation.
For example, a reporting entity may want to disclose that a loan arrangement between
the reporting entity and a related party is at arm’s length. Such disclosure would only
be appropriate if the reporting entity is able to substantiate that the terms of the loan
are equivalent to terms it would have obtained with an unrelated lender. Similarly, a
reporting entity may sell services to third parties and related parties at the same rate.
In this situation, the reporting entity may be able to substantiate that the transactions
occur at arm’s length.
26.5 Common related party transactions

In order to comply with the related party disclosure requirements, a reporting entity
must identify all of its transactions with related parties. This section includes
examples of common transactions with related parties. Once a related party
transaction is identified, a reporting entity should determine the appropriate
presentation and disclosure based on the requirements in ASC 850, SEC guidance (if
applicable), and other relevant guidance, if any. Reporting entities should consider the
substance of the related party transaction, which could be different than the legal form
of the arrangement, when determining the appropriate presentation and disclosure.
ASC 850 provides examples of common transactions with related parties.
ASC 850-10-05-4
Transactions between related parties commonly occur in the normal course of
business. Examples of common transactions with related parties are:
a. Sales, purchases, and transfers of real and personal property
26-8 PwC
Related parties
b. Services received or furnished, such as accounting, management, engineering, and

legal services
c. Use of property and equipment by lease or otherwise
d. Borrowings, lendings, and guarantees
e. Maintenance of compensating bank balances for the benefit of a related party
f. Intra-entity billings based on allocations of common costs
g. Filings of consolidated tax returns.
26.5.1 Investments, including equity method investments and investments in

joint ventures
Equity method investees are, by definition, related parties. A reporting entity could
hold investments in other related parties, including partnerships or joint ventures. In
addition to the disclosures in FSP 26.4, refer to FSP 10 for information about
disclosures for such investments.
EXAMPLE 26-1
Transactions between equity method investees
FSP Corp owns 20% of Investee A, a manufacturer, and 30% of Investee B, a retailer.
Both Investee A and Investee B are unrelated entities. Investee A sells finished goods
to Investee B in the ordinary course of business.
Should FSP Corp disclose the transactions between Investee A and Investee B as
related party transactions it its consolidated financial statements?
Analysis
No. Investee A and Investee B are related parties to FSP Corp; however, Investee A
and Investee B would not be considered related parties to one another as the
relationship between these entities does not meet the definition of a related party in
ASC 850-10-20. FSP Corp has an ownership interest in both entities and can
significantly influence the management and operating policies of both entities;
however, FSP Corp does not control either entity and, therefore, is unable to prevent
one or both of the entities from fully pursuing its own separate interests. Accordingly,
any transactions between Investee A and Investee B would not be reflected as related
party transactions in FSP Corp’s consolidated financials.
26.5.2 Leasing arrangements
Use of a reporting entity’s property and equipment by a related party, or use of a

related party’s property and equipment by the reporting entity, is often subject to the
terms of a lease. In addition to the disclosures in FSP 26.4, refer to FSP 14 for
disclosures related to leases.
PwC 26-9
Related parties
A reporting entity also needs to include certain VIE disclosures discussed in FSP 18 if
the related party lease arrangement results in the existence of a variable interest. A
private company lessee may also elect the PCC alternative for common control leasing
arrangements, as discussed in FSP 26.6.1.
26.5.3 Debt
Financial structures may result in borrowing and lending relationships among related
parties. Common examples include lending relationships between parents and
subsidiaries, among subsidiaries, between advisors and funds they advise, and
between shareholders and the companies in which they invest, among others. A
reporting entity should disclose the terms of related party lending relationships upon
issuance and while the debt remains outstanding, consistent with the disclosures
As discussed in ASC 470-50-40-2, upon modification or extinguishment of related

party debt, a reporting entity should consider whether the modification or
extinguishment transaction is, in substance, a capital transaction. Refer to FG 3.3.5
for further discussion. If the reporting entity concludes that it is a capital transaction,
it should provide the disclosures discussed in FSP 5.
If affiliates’ securities constitute a substantial portion of the collateral for any class of
an SEC-registered (or to be registered) reporting entity’s securities, the reporting
entity may need to include the affiliates’ separate financial statements in certain SEC
filings, as required by S-X 3-16.
Question 26-6
Are there disclosures that a reporting entity should consider with regard to related
party debt arrangements that are incremental to the debt disclosures required by ASC
470?
PwC response
Because related party debt may not be issued in an arm’s-length transaction, a
reporting entity should consider disclosure of certain information in addition to the
lending terms required to be disclosed by ASC 470—for example, commitment fees or
fees incurred to structure the debt. A reporting entity should also consider disclosing
circumstances in which unused commitments for long-term financing arrangements
may be withdrawn. For example, an investor may lend to an equity method investee
but limit the capacity of the loan to the amount that it has available on its line of credit
with a third-party lender.
26.5.4 Guarantees
A reporting entity may make guarantees for the benefit of related parties. In those
cases, the guarantor is required to comply with the disclosure requirements discussed
in FSP 26.4, as well as several other US GAAP topics (as applicable): guarantees (refer
to FSP 23), equity method investments (refer to FSP 10), and VIEs (refer to FSP 18).
26-10 PwC
Related parties
Under the US securities laws, a guarantee (whether registered or to be registered) of a

security that is registered or to be registered is considered to be a security separate
and apart from the security it guarantees. Reporting entities with these circumstances
should consider the guidance in S-X 3-10 and FSP 12.
26.5.5 Equity
Related party arrangements are common between a reporting entity and its
shareholders. Securities held by related parties may be different classes of common or
preferred equity, or have different rights such as liquidation preferences, voting rights,
or dividend rights. These special terms may need to be disclosed as related party
transactions.
The SEC requires certain disclosures when a reporting entity is restricted in its ability
to transfer or dividend assets (cash or other assets) from its subsidiaries. SEC
registrants should comply with the disclosure requirements in S-X 4-08(e).
26.5.6 Advances to and receivables from related parties
Related party receivables from the sale of equity have specific presentation and
disclosure requirements. Refer to FSP 5 for further discussion.
A reporting entity may enter into arrangements that result in advances to, or
receivables from, shareholders that could have presentation or disclosure
implications. Refer to FG 5.5 for further discussion.
26.5.7 Business combinations
A business combination may include the settlement of a preexisting relationship such

as between a vendor and customer, licensor and licensee, or plaintiff and defendant. If
the counterparty in the preexisting relationship was a related party before the
business combination, a reporting entity should consider appropriate disclosure in
accordance with the principles underlying ASC 850. For disclosures related to
business combinations, including those related to the settlement of a preexisting
relationship, refer to FSP 17.
26.5.8 Deconsolidation of a subsidiary
ASC 810 provides guidance for deconsolidation of a subsidiary and derecognition of a

group of assets on a prospective basis as a result of an event. In the period that either
a subsidiary is deconsolidated or a group of assets is derecognized, it requires the
reporting entity to disclose: (i) whether the transaction that resulted in the
deconsolidation or derecognition was with a related party and (ii) whether the former
subsidiary or entity acquiring the assets will be a related party after deconsolidation.
26.5.9 Compensation arrangements
Compensation arrangements among related parties can take many forms, including
royalty arrangements or payments made or received for various services, such as
accounting, management, engineering, marketing, and legal services. They can
PwC 26-11
Related parties
include payments of cash, other assets, or equity. These arrangements can result in
compensation at levels that are not commensurate with market rates.
In addition to the disclosures described in FSP 26.4, SEC guidance (SEC FRM 7220.1)
also specifically requires a reporting entity to provide quantified disclosure of
significant related party compensation arrangements that resulted in below market
compensation expense.
As noted in ASC 850-10-50-1 (and discussed in FSP 26.4), certain compensatory

arrangements between related parties may occur in the ordinary course of business,
such as compensation arrangements, expense allowances, and other similar items,
and may not meet the requirement for disclosure.
26.5.10 Franchisors
A franchise arrangement may constitute a related party relationship. For example, a

franchisor may own outlets that it also operates, or significantly influence the
management or operating policies of the franchisee such that the franchisee might be
prevented from fully pursuing its own separate interests. ASC 952-605-45 requires
franchisors to distinguish revenue and costs related to franchisor-owned outlets from
revenue and costs related to franchised outlets where practicable. ASC 952-605-50-3
also requires disclosures about significant changes in franchisor-owned outlets.

The guidance in ASC 850 applies equally to public and private companies. SEC
requirements discussed in this chapter apply only to SEC registrants. Figure 26-1
summarizes the SEC requirements discussed in this chapter.
Figure 26-1
Disclose certain information about parties

that fall outside of the definition of a
related party SEC FRM 9610.3 26.2
Identify the related party transaction on

the face of the financial statements1 S-X 4-08(k) 26.3
Include a related party’s separate financial

statements in certain SEC filings if a
related party’s securities constitute a
substantial portion of the collateral for any
class of an SEC-registered reporting
entity’s securities S-X 3-16 26.5.3
Include the financial statements of a

guarantor who guarantees a registered
security S-X 3-10 26.5.4
26-12 PwC
Related parties
Disclose certain information when a

reporting entity is restricted in its ability to
transfer or dividend assets from its
subsidiaries S-X 4-08(e) 26.5.5
Include quantified disclosure of significant

compensation arrangements with related
parties that result in below market
compensation expense SEC FRM 7220.1 26.5.9
1 Other areas ofUS GAAP may require disclosure of related party transactions on the face of the financial
statements for both public and private companies. Refer to FSP 26.3.
26.6.1 Private company alternative—common control leasing
ASC 810-10, Consolidation, exempts private companies from the requirement to apply
the consolidation guidance for variable interest entities to lessor entities under
common control when certain criteria are met.
A private company that adopts this alternative will not consolidate the lessor entity or
be required to make the related VIE disclosures. However, the private company is
required to disclose arrangements that expose it to providing financial support to the
lessor entity. This could include: (1) the amount and key terms of liabilities recognized
by the lessor entity (such as debt, environmental liabilities, and asset retirement
obligations) or (2) a qualitative description of arrangements not recognized in the
lessor entity’s financial statements (such as commitments or contingencies).
The above disclosures are required in addition to the disclosure requirements for
related parties, leases (as discussed in FSP 14), and guarantees (as discussed in
FSP 23).
PwC 26-13
Chapter 27:
Discontinued
operations
PwC 27-1
Discontinued operations

US GAAP requires separate presentation of discontinued operations in financial
statements in certain circumstances. The objective of separately identifying
discontinued operations is to provide users of financial statements the ability to
clearly understand the portion of a reporting entity’s operations that will not
continue in the future and to provide comparability of historical financial results
with a company’s continuing operations.
This chapter provides guidance on evaluating whether a component of an entity

meets the criteria for discontinued operations reporting, and the presentation
and disclosure requirements for reporting discontinued operations.
The guidance on presenting discontinued operations in the statement of cash

flows is addressed in FSP 6 and the impact on earnings per share is addressed in
FSP 7.
27.2 Scope
A reporting entity that disposes of a component or has a component that qualifies
as held for sale may meet the criteria for presentation as a discontinued operation
in accordance with ASC 205-20, Presentation of financial statements—
Discontinued operations. The guidance applies to all business entities, as well as
not-for-profit entities. However, oil and gas properties that are accounted for
using the full-cost method of accounting as prescribed by the SEC are excluded
from the scope of the guidance.
27.3 Criteria for reporting discontinued

operations
For a reporting entity’s component to qualify as a discontinued operation at the
balance sheet date, it must either be disposed of (e.g., through sale,
abandonment, or spin-off) or meet the held-for-sale criteria of ASC 360-10-45-9
(refer to BCG 10.4.2 for held for sale guidance), and meet the additional criteria
of ASC 205-20. ASC 205-20-20 defines a component of an entity.
ASC 205-20-20
Component of an Entity: A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. A component of an entity may be a
reportable segment or an operating segment, a reporting unit, a subsidiary, or an
asset group.
We do not believe that a component can be at a lower level than an asset group.
Long-lived assets may be disposed of individually or as part of a disposal group.

The guidance defines a disposal group as follows.
27-2 PwC
ASC 205-20-20
Disposal group: A disposal group for a long-lived asset or assets to be disposed
of by sale or otherwise represents assets to be disposed of together as a group in a
single transaction and liabilities directly associated with those assets that will be
transferred in the transaction. A disposal group may include a discontinued
operation along with other assets and liabilities that are not part of the
discontinued operation.
Question 27-1
Can a reporting entity that sells an operation but retains certain assets associated
with the operation (e.g., working capital or a facility) consider the operation a
component of the reporting entity?
PwC response
Although the retained assets would not be part of the disposal group, the
operations and cash flows associated with the assets to be sold may still
constitute a component of a reporting entity as defined in ASC 205-20-20. In that
situation, the results of operations of the component would be classified as
discontinued operations provided the conditions of ASC 205-20 are met.
A reporting entity’s assessment of whether a component qualifies for

discontinued operations reporting should occur when the component initially
meets the criteria to be classified as held for sale. For abandonments, spin-offs,
and exchanges, the assessment should take place when the component is
disposed of. If a reporting entity has a disposal strategy that involves the
“run-off” of operations (e.g., the reporting entity will cease accepting new
business but will continue to provide services under existing contracts until they
expire or terminate), discontinued operations should not be reported until
substantially all operations, including run-off operations, cease.
A disposal group should be classified as held for sale in the period in which all of
the conditions in ASC 360-10-45-9 are met. These conditions must be met at the
balance sheet date for the disposal group to be classified as held for sale on that
date. New information resulting from a change in circumstances that occurred
after the balance sheet date, but prior to issuance of the financial statements,
should not be considered in evaluating whether the disposal group in question
would be classified as held for sale at the balance sheet date.
The following sections provide guidance on how to determine when a component

meets the conditions in ASC 205-20 to be reported as a discontinued operation.
PwC 27-3
27.3.1 Conditions required for reporting discontinued operations
A component (or a group of components) of a reporting entity that is disposed of

or meets the criteria to be classified as held for sale should be reported in
discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results.
ASC 205-20-45 provides examples of what may qualify as a strategic shift.
Excerpt from ASC 205-20-45-1C

Examples of a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results could include a disposal of a major geographical
area, a major line of business, a major equity method investment, or other major
parts of an entity.
The assessment of what qualifies as a strategic shift is intended to be based on

qualitative and quantitative facts and circumstances specific to each reporting
entity and disposal. For example, a reporting entity that only operates in the
Northeast region of the US may conclude that each state represents a major
geographical area. In contrast, a large multinational reporting entity may
conclude that each continent represents a major geographical area.
A component, by definition, may be a reportable segment or operating segment, a

reporting unit, a subsidiary, or an asset group. Disposing of an entire reportable
segment is a strong qualitative factor supporting that a strategic shift has
occurred. A reporting entity should carefully consider all relevant factors,
including the extent to which the component’s performance was previously
presented or discussed in MD&A, earnings releases, and other communications
in determining whether the disposal represents a strategic shift.
Once a reporting entity determines that a disposal constitutes a strategic shift, it

must also determine whether the disposal has had or will have a major effect on
the reporting entity’s operations and financial results for the disposal to be
considered a discontinued operation. The disposal of a business may represent a
strategic shift, but if the disposal does not or will not have a major effect on the
reporting entity’s operations and financial results, it would not be treated as a
discontinued operation. A reporting entity should consider key financial metrics
when evaluating the quantitative impact of a disposal, including assets, net
assets, revenues, operating income, pretax income, net income, operating cash
flows, and key non-GAAP measures. In terms of the evaluation period, we believe
the greatest emphasis should be placed on the most recently completed, current,
and next annual reporting periods.
27-4 PwC
The guidance does not provide any “bright lines” on what qualifies as a major
effect. However, it does include five examples of strategic shifts that have or will
have a major effect on a reporting entity’s operations and financial results. Those
examples relate to the following:
□ The sale of a product line that represents 15% of a reporting entity’s total
revenues
□ The sale of a geographical area that represents 20% of a reporting entity’s

total assets
□ The sale of all of a reporting entity’s stores in one of its two types of store
formats that historically provided 30 to 40% of the reporting entity’s net
income and 15% of current period net income
□ The sale of a component that is an equity method investment that represents

20% of the reporting entity’s total assets
□ The sale of 80% of a product line that accounts for 40% of total revenue, but
the seller retains 20% of its ownership interest
While significant continuing involvement with or continuing cash flows related to

a disposed component does not preclude a reporting entity from presenting those
components as discontinued operations, reporting entities should still consider
the nature and extent of continuing involvement in order to evaluate whether
there has been a strategic shift that has (or will have) a major effect on their
operations and financial results.
A reporting entity’s assessment of whether a disposal of a component represents

a strategic shift that has (or will have) a major effect on its operations and
financial results should be a comprehensive assessment that considers all
relevant quantitative and qualitative factors. No single factor is determinative in
concluding whether a disposal of a component has a major effect on the reporting
entity’s operations and financial results. As such, the less significant a component
is from a quantitative perspective, the more persuasive the qualitative evidence
should be to support discontinued operations reporting.
A discontinued operation may consist of a single component or a group of

components. When a reporting entity disposes of multiple components, each
component should generally be evaluated individually, and only components that
meet the criteria for discontinued operations treatment should be reported as
discontinued operations. However, there may be circumstances when a group of
components should be evaluated together to determine whether the criteria for
discontinued operations have been met. Such circumstances may include
instances when multiple components are being sold under a single disposal plan,
in a single transaction, or to a single buyer.
PwC 27-5
EXAMPLE 27-1
Evaluating group of components in a single plan of disposal
FSP Corp’s board of directors approved the sale of a major business line, which
consists of two components under ASC 205-20-20 (Component A and
Component B), during the first quarter of 20X6. The business line to be sold
represents one of FSP Corp’s three reportable segments. FSP Corp announced the
disposal plan to investors as a single plan but will sell Component A and
Component B in two separate transaction to different buyers. While neither
Component A nor Component B would meet the criteria for discontinued
operations individually, together they represent a strategic shift that has (or will
have) a major effect on FSP Corp’s operations and financial results. Based on the
held-for-sale criteria in ASC 360-10-45-9, Component A was classified
as held-for-sale at March 31, 20X6, while Component B was classified as
held-for-sale at June 30, 20X6.
Should Component A and Component B be presented as discontinued operations

and, if so, in which period is classification as discontinued operations
appropriate?
Analysis
As Component A and Component B were part of a single plan of disposal and

both met the held-for-sale criteria within a short period of time, we believe FSP
Corp should present Component A and Component B as discontinued operation
as of June 30, 20X6, as this is the date on which both components comprising the
disposal plan were considered held for sale and therefore met the criteria to be
classified as discontinued operations.
If a plan of disposal involves one component to be disposed of through multiple

disposal transactions, discontinued operations is only appropriate at the
point-in-time that the entire component meets the criteria for discontinued
operations. If significant time passes between the disposals of portions of the
component (e.g., a year or more), it may be difficult to conclude that the disposals
are part of a single component.
Reporting entities that prepare subsidiary-level financial statements should

separately evaluate whether a strategic shift has occurred and whether it has
(or will have) a major effect on the reporting entity’s operations and financial
results at each level. A subsidiary may reach a different conclusion than its
parent.
27.3.1.1 Acquired business that qualifies as held for sale upon acquisition
Any business or nonprofit activity that upon acquisition meets the held for sale
criteria is required to be presented as a discontinued operation regardless of
whether it represents a strategic shift that has (or will have) a major effect on a
reporting entity’s operations and financial results. The held-for-sale criteria in
27-6 PwC
ASC 360-10-45-9(d) is the only criteria required to be met at the acquisition date,
and the remaining criteria should be probable of being met within a short period
of time following the acquisition date, which is usually within three months.
Refer to FSP 8.7 for additional information on the held for sale criteria.
The objective of this requirement is to include in discontinued operations those

businesses that will never be considered part of a reporting entity’s continuing
operations.
27.4 Presentation
This following section provides guidance on the presentation requirements in a
reporting entity’s financial statements when reporting discontinued operations.
The balance sheet and income statement are addressed below. The statement of
stockholders’ equity is not impacted by discontinued operations reporting. For
reporting on the statement of cash flows refer to FSP 6.
27.4.1 Balance sheet
A component of a reporting entity that meets the criteria for discontinued

operations reporting and held-for-sale classification should follow the balance
sheet presentation requirements in ASC 360-10-45-14. Refer to FSP 8.7 for
further information about presenting assets held for sale on the balance sheet
including current and non-current classification.
ASC 205-20-45-10 includes guidance on the presentation of discontinued

operations in the statement of financial position.

In the period(s) that a discontinued operation is classified as held for sale and for
all prior periods presented, the assets and liabilities of the discontinued operation
shall be presented separately in the asset and liability sections, respectively, of
the statement of financial position.
Even if a discontinued operation is disposed of by sale before the end of a

reporting period and therefore there are no assets and liabilities held for sale to
be presented at the current balance sheet date, the assets and liabilities of the
discontinued operation must be presented separately as held for sale in the prior
period balance sheet. Refer to FSP 8.7 for guidance on the balance sheet
classification of assets held for sale. Assets and liabilities for disposal groups
classified as held for sale that do not qualify as discontinued operations are not
required to be reclassified in prior periods.
Reporting entities must disclose separately, either in the balance sheet or in the
footnotes, the major classes of assets and liabilities of a discontinued operation
classified as held for sale for all periods presented. While the guidance does not
specify how to determine which classes of assets and liabilities held for sale
should be considered major, an example included in the guidance included cash,
PwC 27-7
trade receivables, inventories, property, plant and equipment, trade payables,

and short-term borrowings.
If the major classes of assets and liabilities of a discontinued operation classified

as held for sale are disclosed in the footnotes, reporting entities must reconcile
the disclosure to the total assets and total liabilities of the disposal group
classified as held for sale presented on the face of the balance sheet for all periods
presented. If the disposal group includes assets and liabilities that are not part of
the discontinued operation, the reconciliation should show them separately from
the assets and liabilities of the discontinued operation.
In a spin-off transaction that qualifies as a discontinued operation, it is

acceptable to retrospectively separate the assets and liabilities of the entity being
spun off (similar to if the entity had been held for sale) in the prior period balance
sheets. However, because the assets disposed of through a spin-off transaction
are required to remain classified as held and used until the spin-off has occurred,
reclassification of the prior year balance sheet would not be appropriate until the
spin-off is completed.
27.4.2 Income statement
A reporting entity with a component that meets the conditions for discontinued
operations should report the results of operations of the component, less
applicable income taxes (benefit), as a separate component of income before
cumulative effect of change in accounting principles (if applicable). A reporting
entity should separately present the gain or loss recognized on the discontinued
operation either on the face of the income statement or in the footnotes. Figure
27-1 illustrates an income statement when a reporting entity reports a
discontinued operation:
Figure 27-1
Income statement presentation of discontinued operations
Amount
Income from continuing operations, net $xxx,xxx
Discontinued operations:
Loss from operations of discontinued Component X
(including loss on disposal of $xxx,xxx) (xxx,xxx)
Income tax benefit xxx,xxx
Loss on discontinued operations (xxx,xxx)
Net income $xxx,xxx
27-8 PwC
Costs associated with an exit or disposal of a discontinued operation are required

by ASC 420-10-45-2 to be included in the results of discontinued operations.
Additionally, impairment losses (as measured under the held for sale model) that
directly involve a discontinued operation should be included in the results of
The expenses that qualify for inclusion in discontinued operations are the direct
operating expenses incurred by the disposed component that may be reasonably
segregated from costs of the ongoing reporting entity. Indirect expenses, such as
allocated corporate overhead, should not be included in discontinued operations
based on ASC 205-20-45-9. Generally, costs and expenses that are expected to
continue in the ongoing reporting entity after the disposal date should not be
allocated to discontinued operations and instead should be included in the results
of continuing operations.
Depending on facts and circumstances, examples of direct costs that may be

reported in discontinued operations include:
□ Personnel expenses for employees employed by the disposed component
□ Intangible asset amortization associated with intangible assets disposed of in

the transaction
□ Lease-related costs for facilities that were used by the disposed component
□ Interest expense associated with debt to be assumed by the buyer or repaid in

conjunction with the disposal (see FSP 27.4.2.4)
□ Third-party transaction costs associated with the disposal
Although usually an allocation, income tax amounts associated with the

component being disposed should be reported in discontinued operations. Refer
to TX 12 for additional information on the intraperiod allocation of income tax
amounts to discontinued operations.
The following example illustrates the evaluation of whether rent expense and
lease termination costs should be presented in discontinued operations or
continuing operations.
EXAMPLE 27-2
Presentation of rent expense and lease termination costs associated with a
disposed component
FSP Corp sells one of its businesses, Component X, to Company B during 20X6.
Component X’s operations have taken place on three floors (out of ten) of an
office building leased by FSP Corp. The lease has a remaining term of five years.
Upon sale of Component X, FSP Corp permanently exits these three floors but
will continue to operate in the remaining office space within the leased facility.
The exited floors are considered functionally independent assets (i.e., could be
PwC 27-9
fully utilized by another party because they have separate entrances, access to
restrooms, etc.) and, therefore, FSP Corp recognizes a liability for the fair value of
the remaining rents, reduced by estimated sublease rentals, as of the date it
exited the space (i.e., cease-use date) in accordance with ASC 420-10-30-8.
Assuming Component X’s operations meet the criteria for discontinued

operations, should FSP Corp present the related rent expense and lease
termination costs in discontinued operations within its income statement?
Analysis
Because the three floors being permanently exited were used by Component X
and were functionally independent from the remaining facility, the lease-related
costs for this space are considered to be directly related to the component and
therefore should be classified within discontinued operations.
Given a different fact pattern, such as if the three floors were not functionally
independent and the lease was not terminated, there would be no lease
termination charge recorded as the criteria in ASC 420-10-30-8 would not have
been met and rent expense incurred for these three floors would be classified
within continuing operations. Other costs (e.g., moving, cleaning,
reconfiguration, etc.) associated with the leased space are not directly related to
the disposal of Component X and also would not qualify for discontinued
operations reporting.
If sales have been made to the discontinued operation by a consolidated affiliate

and have been eliminated in consolidation, it would be appropriate to recast
these sales (and the related costs) in continuing operations for periods prior to
the disposal or held-for-sale date only if these sales will be made to third parties
(e.g., the disposed component that is now a third party) subsequent to the
disposition.
The following example illustrates the income statement presentation of an

intercompany transaction with a disposed component that will continue after the
disposal.
EXAMPLE 27-3
Presentation of intercompany transactions with a disposed component
FSP Corp enters into a sale agreement with Buyer to sell FSP Corp’s
wholly-owned subsidiary (Subsidiary X). Subsidiary X historically performed
certain services for FSP Corp. Subsidiary X’s fee for the services is $100 and the
cost to deliver those services is $80. This intercompany transaction, determined
to be at fair value, is eliminated in consolidation. Subsequent to disposal, the
services are expected to continue between Subsidiary X and FSP Corp for
approximately two years pursuant to a contractual agreement with Buyer.
Through review of the guidance in ASC 205, FSP Corp concludes that Subsidiary
27-10 PwC
X is a component and that it meets all of the criteria to be classified as held for
sale and reported as a discontinued operation.
How should FSP Corp present this transaction before and after Subsidiary X is
classified as held for sale?
Analysis
We believe FSP Corp may present the intercompany transaction as a gross-up in

its pre-disposal income statement by reporting the $100 service fee charged by
Subsidiary X as an operating expense in continuing operations and reporting the
fee revenue of $100 and related costs of $80 (net $20 profit) as a component of
discontinued operations of Subsidiary X. This presentation provides consistent
reporting of results from continuing operations since FSP Corp will continue to
pay—and record in continuing operations—the service fees to Subsidiary X after
the disposition pursuant to the two-year contractual agreement with Buyer.
Situations arise where the working capital of the disposed component is retained
by the reporting entity. These working capital accounts would therefore not be
presented as assets held for sale on the reporting entity’s balance sheet. However,
the results of operations of the disposed component, which would include the
prior revenues and expenses related to the working capital accounts retained by
the ongoing reporting entity, would be reported in discontinued operations on
the income statement for the current and prior periods in accordance with
ASC 205-20-45-3. The following example illustrates a situation where the
working capital of the disposed component is retained by a reporting entity.
EXAMPLE 27-4
Working capital of disposed component retained
On March 1, 20X6, FSP Corp executes a definitive agreement to sell Component

X. Assets to be sold include equipment, customer relationships, and other
intangible assets. As part of the sale, FSP Corp retains working capital of
Component X, which includes trade and non-trade accounts receivable, and
certain accrued expenses arising from operations before closing. All retained
working capital is short-term and expected to liquidate within a few months after
the closing.
While the sale of certain assets of Component X will not close until April 30,
20X6, they meet the held-for-sale criteria under ASC 360-10-45-9 as of the
quarter ended March 31, 20X6. Component X meets the definition of a
component under ASC 360-10-20, and also meets both of the discontinued
operations criteria.
What effect should the disposal of Component X have on FSP Corp’s balance
sheet and income statement in its March 31, 20X6 financial statements?
PwC 27-11
Analysis
The working capital that is retained by FSP Corp should not be presented as held
for sale on the balance sheet. While retained working capital was part of
Component X, which constituted the discontinued operations, it is not a part of
the disposal group. The assets and liabilities of Component X that will be sold are
presented as held for sale at March 31, 20X6. The results of operations of
Component X (which include prior revenues and expenses related to the above
working capital items) should be reported in discontinued operations on the
income statement of FSP Corp for the current period and prior periods.
27.4.2.1 Gain or loss on disposal
The gain or loss on a disposed component is calculated as the consideration

received from the disposal of the component less its carrying value and, if
applicable, costs incurred to sell the component. In addition, any adjustments to
the disposal group to record it at the lower of its carrying amount or fair value
less cost to sell would be included in the gain or loss on disposal. Refer to
BCG 10.4.2 for discussion of the types of costs that may be included in costs to
sell a disposal group.
When a portion of a reporting unit that constitutes a business (as defined in

ASC 805-10-20) is to be disposed of, goodwill associated with that business
should be included in the carrying amount of the business in determining the
gain or loss on disposal in accordance with ASC 350-20-40-2. In situations where
a portion of a reporting unit’s goodwill is allocated in determining the gain or
loss, we believe it may also be appropriate to allocate a portion of any prior year
goodwill impairment charge related to the reporting unit to discontinued
operations.
27.4.2.2 Earnings per share
Refer to FSP 7 for guidance on the calculation and presentation of earnings per
share when a reporting entity presents a discontinued operation.
27.4.2.3 Transition service agreements
Revenues and costs associated with transition services provided by an ongoing

reporting entity to a disposed component after a disposition should not be
reflected in the discontinued operations line item, but rather in continuing
operations of the ongoing reporting entity. Each reporting entity must use
judgment to determine appropriate classification of the revenues and costs
(i.e., which income statement line item to include them in) within continuing
operations. Revenue recognized from transition services should be recorded in
other income (which might be included in operating income) if the services
provided do not relate to the business in which the entity operates. Any related
expenses should be in recorded in their natural expense classification. Disclosure
of the amount, nature, and classification of the cash flows should also be
considered. See FSP 27.5.
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27.4.2.4 Debt-related items
If debt of a discontinued operation is to be assumed by the buyer or is required to

be repaid as a result of the disposal transaction, interest related to such debt
should be allocated to the discontinued operation. The allocation to discontinued
operations of other consolidated interest that is not directly attributable to or
related to other operations of the reporting entity is permitted but not required.
Other consolidated interest that cannot be directly attributed to other operations
of the reporting entity is allocated based on the following ratio:
Net assets of discontinued operation
Less: Debt required to be paid off as part of disposal transaction

Divided by
Net assets of consolidated reporting entity
Plus: Consolidated debt
Less: Debt of the discontinued operation that will be assumed by

buyer
Less: Debt required to be paid off as part of the disposal transaction
Less: Debt that is directly attributed to other operations

This allocation assumes a uniform ratio of consolidated debt to equity for all
operations (unless the assets to be sold are atypical — for example, a finance
company — in which case a normal debt to equity ratio for that type of business
may be used). If allocation based on net assets would not provide meaningful
results, then the reporting entity should allocate interest to the discontinued
operations based on debt that can be identified as specifically attributed to those
operations.
The method used to allocate interest is considered an accounting policy election

which should be applied consistently to all discontinued operations.
The SEC staff expects registrants to disclose their accounting policy for allocating
interest to a discontinued operation, which should include the method of
allocation. The amount of interest allocated to discontinued operations should
also be disclosed for all periods presented. Similar disclosures would be
appropriate for nonregistrants.
The following is an example of how to allocate interest to discontinued operations

that is not directly attributable to or related to other operations of a reporting
entity.
PwC 27-13
EXAMPLE 27-5
Allocation of interest to discontinued operations
FSP Corp sells Component Y on June 30, 20X6 and determines that it should
report Component Y’s operations as discontinued operations in its consolidated
financial statements for the year ended December 31, 20X6. FSP Corp’s
borrowing arrangement requires that a portion of the proceeds of the sale of
Component Y be used to repay FSP Corp’s consolidated debt, and FSP Corp
allocates interest expense for the repaid debt to discontinued operations in
accordance with ASC 205-20-45-6. FSP Corp also makes an accounting policy
decision to allocate interest on other consolidated debt not directly attributable to
its other operations to discontinued operations as permitted by ASC 205-20-45-7.
For purposes of determining the amount of interest to allocate, assume a uniform

ratio of consolidated debt to equity for all operations and:
For FSP Corp:
□ Net assets: $50,000
□ Consolidated debt: $15,000—comprised of $1,000 at 8% interest (required to

be repaid from proceeds of sale of Component Y) and $14,000 at 6% interest
□ Portion of consolidated debt directly attributable to other operations of FSP

Corp: $8,000 at 6% interest
For Component Y:
□ Gross assets: $13,000 (after considering any impairment)
□ Debt to be assumed by the buyer: $2,000 at 6% interest
□ Net assets to be sold: $11,000 (gross assets less debt to be assumed by the
buyer)
□ Debt required to be repaid from sale proceeds: $1,000 at 8% interest
How should FSP Corp allocate interest expense to discontinued operations?
Analysis
FSP Corp should allocate interest expense of $122 to discontinued operations.
27-14 PwC
This is calculated as follows:
Part I: Calculate interest on debt to be assumed and debt required to be repaid:
Interest on debt to be assumed by the buyer:

$2,000 x 6% x 6 / 12 months
$60
Interest on debt required to be repaid:

$1,000 x 8% x 6 / 12 months 40
$100 (A)
Part II: Calculate interest on other consolidated debt that is not directly
attributable to other operations of FSP Corp.
Step 1: Calculate the percentage of interest on other consolidated debt that is not
directly attributable to other operations of FSP Corp to be allocated to
Component Y.
Net assets sold (after recognizing any impairment) less debt required to be repaid
from sale proceeds: $11,000 — $1,000 = $10,000 (B)
—t0—
Net assets of FSP Corp: $50,000
Plus: Consolidated debt 15,000
Less: Debt to be assumed by the buyer (2,000)
Debt required to be repaid from sale proceeds (1,000)
Debt that is directly attributed to other operations of FSP

Corp (8,000)
$54,000 (C)
(B) ÷ (C) = $10,000 ÷ $54,000 = 18.5% (D)
Step 2: Calculate interest on other consolidated debt that is not directly
attributable to other operations of FSP Corp.
Consolidated debt $15,000
Debt to be assumed by the buyer (2,000)
Debt required to be repaid from sale proceeds (1,000)
Debt that is directly attributed to other operations of FSP Corp (8,000)
Debt not directly attributable to other operations of FSP Corp $4,000 (E)
PwC 27-15
(D) x (E) x interest rate x months / 12 = 18.5% x $4,000 x 6% x 6 / 12 = $22

(F)
Step 3: Calculate total interest expense to be allocated to discontinued operations

= (A) + (F) = $100 + $22 = $122
Gains or losses from the extinguishment of corporate-level debt obligations (i.e.,

those that are not specific to the disposed component) in connection with the sale
transaction should not be included in discontinued operations. Even when the
debt is required to be extinguished in connection with a sale, gains or losses from
the extinguishment of corporate-level debt is not considered to be directly
associated with the disposed component. In addition, such debt would not be
classified within the held-for-sale category of the balance sheet as it is not part of
the disposal group. However, amortization of discounts, premiums, or debt
issuance costs, and prepayment penalties incurred on debt that is directly related
to the disposed component should be reported in discontinued operations.
27.4.2.5 Pension settlements and curtailments
The impact of a settlement or curtailment that is directly related to the disposal

transaction should be recognized in discontinued operations. The settlement of a
pension benefit obligation is considered directly related to the disposal
transaction if there is a demonstrated cause-and-effect relationship between the
two events and if the settlement occurs no later than one year following the
disposal transaction.
If a settlement has occurred as a result of the disposal transaction (e.g., there is a

transfer of a pension benefit obligation to the buyer), the reporting entity should
recognize in discontinued operations the net gain or loss included in accumulated
other comprehensive income associated with the plan, plus any transition asset
remaining in accumulated other comprehensive income from the initial
application of ASC 715-30. If only part of the projected benefit obligation is
settled, the reporting entity should recognize a pro rata portion of the settlement
equal to the percentage reduction in the projected benefit obligation.
A reporting entity will recognize in discontinued operations the prior service cost
included in accumulated other comprehensive income associated with the years
of service no longer expected to be rendered as a result of a curtailment, and any
decrease (a gain) or increase (a loss) in the projected benefit obligation associated
with the plan. Additionally, if an employer disposes of a component that results
in a termination of some employees’ services earlier than expected, but does not
significantly reduce the expected years of future service of present employees
covered by the pension plan, measuring the effects of the reduction in the work
force in the same manner as a curtailment is appropriate for purposes of
determining the gain or loss on the disposal.
27-16 PwC
27.4.2.6 Income tax allocation and adjustments
Discontinued operations have certain income tax accounting implications that

must be considered. Such implications must be considered both in the year of the
discontinued operation, and potentially in periods afterward. Refer to TX 12
(intraperiod tax allocation) and TX 16.9.1 (backwards tracing) for further
discussion of tax considerations for discontinued operations.
27.4.2.7 Derivatives
The following sections provide guidance on the classification between continuing

operations and discontinued operations of gains and/or losses related to cash
flow hedges and foreign currency forward contracts.
Cash flow hedges
If a reporting entity had cash flow hedges related to the operations of a

component that is being disposed of, management should consider the hedge
documentation in determining whether the effects of the derivative instruments
should be reclassified into discontinued operations. If the hedged cash flows
specifically relate to the group of assets and liabilities being disposed, gains
and/or losses resulting from the cash flow hedges in prior periods should be
classified as part of discontinued operations. This assessment should be
performed even if the derivative instruments are not included in the disposal
group to be sold by the reporting entity.
Foreign currency forward contracts
A reporting entity may enter into a foreign currency forward contract to mitigate
exchange rate risks from the sale of a component transacted in a currency other
than the reporting entity’s functional currency. Any gains or losses on these
forward contracts should be reported in continuing operations as these amounts
do not qualify as direct operating expenses incurred by the disposed component
under the guidance in ASC 205-20.
27.4.2.8 Noncontrolling interest
When a reporting entity disposes of a majority-owned consolidated subsidiary

that is classified as discontinued operations, it needs to consider the impact when
presenting the controlling and noncontrolling interests’ operating results. Refer
to FSP 18 for additional details on presentation matters related to noncontrolling
interest.
27.4.2.9 Cumulative effect of changes in accounting principles
Generally, the cumulative effect of changes in accounting principles is not

allocated between continuing and discontinued operations and should be
presented as a single line item, net of the related income tax effects. No portion of
this item is required to be reclassified into discontinued operations. This
treatment is based on the view that an accounting change is not part of a
PwC 27-17
reporting entity’s normal operations. Therefore, its effect need not be allocated
between those operations that are continuing and those that have been
discontinued.
27.4.2.10 Predecessor financial statements
When a reporting entity is a successor to a predecessor entity, questions arise as

to whether a discontinued operation of the successor should be presented as a
discontinued operation in the predecessor’s income statement. An example of an
event that gives rise to a predecessor/successor reporting scenario is the
push-down of the parent’s basis as a result of the acquisition of the successor
company, or the application of fresh-start reporting by a reporting entity upon
emergence from bankruptcy. Since the successor entity is considered a new
reporting entity for accounting purposes, one might conclude that the
predecessor financial statements should not be retrospectively adjusted to reflect
the successor’s discontinued operations.
As discussed in SEC FRM 13210.2, predecessor financial statements are required

to be retrospectively adjusted to reflect the impact of a successor’s discontinued
operations. ASC 205 does not provide any exceptions to retrospectively adjusting
all periods presented to reflect the impact of a discontinued operation. This view
achieves comparability for the discontinued operation for all fiscal periods
presented, which the SEC staff believes is an important and useful factor for
readers to assess trend information in financial statements. However, the SEC
staff noted that SEC registrants should contact the SEC staff if unusual facts and
circumstances may inhibit a reporting entity from reclassifying a discontinued
operation in predecessor fiscal periods. This guidance is specific to SEC
registrants. However, based on limited authoritative guidance, we believe private
companies should consider applying the underlying concept of comparability
between periods as well.
Notwithstanding the SEC staff’s views expressed above, we generally do not

believe that other successor changes in accounting policies (e.g., a change from
the LIFO method of inventory costing to FIFO) should be reflected in predecessor
27.4.3 Other presentation matters
The following subsections cover the presentation of spin-off transactions and

considerations for presenting discontinued operations when a reporting entity
reissues financial statements.
Refer to FSP 27.5.1.8 for disclosure requirements of individually significant

disposals that do not qualify for discontinued operations reporting.
27.4.3.1 Presentation of spin-off transactions
When a reporting entity completes a spin-off transaction, a question arises

whether it is appropriate for the parent company to view the spin-off of the
subsidiary as a change in the reporting entity, or present the spun-off entity in
27-18 PwC
discontinued operations if it meets the discontinued operations criteria. If

presented as a change in reporting entity, the parent’s historical financial
statements would be retrospectively adjusted as if the reporting entity never had
an investment in the subsidiary. Refer to FSP 30.6 for further discussion of
presenting a change in reporting entity.
The guidance in ASC 360-10 provides support for presenting the reporting entity
being spun-off as a disposal. Specifically, ASC 360-10-40-4 indicates that if a
long-lived asset is to be disposed of in an exchange or a distribution to owners in
a spin-off, and if that exchange or distribution is to be accounted for based on the
recorded amount of the nonmonetary asset relinquished, the asset should
continue to be accounted for as held and used until it is exchanged or distributed.
If the disposal group qualifies as a component of the contributing reporting
entity, it should be assessed for discontinued operations reporting on the
exchange or distribution date.
The SEC generally will not allow a parent reporting entity to retrospectively
adjust its financial statements to reflect a spin-off as a change in the reporting
entity (i.e., sometimes referred to as a “de-pooling”). If the parent reporting
entity was required to file periodic reports under the 1933 Exchange Act within
one year prior to the spin-off, the SEC staff believes the reporting entity should
reflect the disposition as held for sale in conformity with ASC 360 as this
presentation most fairly and completely depicts for investors the effects of the
previous and current organization of the reporting entity. However, in limited
circumstances involving the initial registration of a reporting entity under the
Exchange Act or Securities Act, the SEC staff has not objected to financial
statements that retrospectively reflect the reorganization of the business as a
change in the reporting entity if the spin-off transaction occurs prior to
effectiveness of the registration statement. The criteria the SEC staff considers
when determining whether a “de-pooling” is acceptable in an initial registration
as found in SAB Topic 5.Z, Accounting and Disclosure Regarding Discontinued
Operations, are that the reporting entity and subsidiary:
□ Are in dissimilar businesses
□ Have been managed and financed historically as if they were autonomous
□ Have no more than incidental common facilities and costs
□ Will be operated and financed autonomously after the spin-off
□ Will not have material financial commitments, guarantees, or contingent

liabilities to each other after the spin-off
All of the criteria listed above should be met to “de-pool” a transferred business
retroactively from its historical financial reporting periods. This guidance is
specific to SEC registrants involved in a spin-off transaction. Based on limited
authoritative guidance, we believe private companies should consider applying
these underlying concepts as well.
PwC 27-19
The following example illustrates the presentation in the income statement of a

spin-off transaction.
EXAMPLE 27-6
Spin-off presentation
FSP Corp is comprised of two-wholly owned operating subsidiaries, Subsidiary X

and Subsidiary Y. In July 20X6, Subsidiary Y spins off one of its legal entities,
Entity Z, to parent FSP Corp by distributing the stock of Entity Z to its sole
shareholder, FSP Corp. Entity Z is a component under ASC 360-10-20, as its
operations and cash flows can be clearly distinguished from Subsidiary Y, both
operationally and for financial reporting purposes. Both Subsidiary Y and Entity
Z have similar businesses. Entity Z meets the criteria for discontinued operations
presentation. The following is a diagram of the organizational structure of FSP
Corp before and after the spin-off.
How should Subsidiary Y present the spin-off of Entity Z in its standalone

financial statements?
Analysis
Generally, Subsidiary Y should account for the spin-off by presenting the

operations of Entity Z as discontinued operations upon successful completion of
the spin-off. Retrospectively adjusting Subsidiary Y’s financial statements to
reflect the spin-off of Entity Z as a change in reporting entity (i.e., de-pooling)
would not be appropriate since they operate in similar businesses.
Spin-off costs
Generally, costs that are incurred to accomplish a spin-off should be classified as

part of discontinued operations once the spin-off is completed. Such costs are
similar to transaction costs incurred in connection with a sale, which are
classified as discontinued operations. However, bonuses paid by the reporting
entity to the reporting entity’s employees (not employees of the spun-off entity)
27-20 PwC
for the successful completion of the spin-off transaction should be reflected in

continuing operations. Such payments are not considered “costs to sell” under
ASC 360-10-35-38 and, therefore, would not be reported in discontinued
operations.
27.4.3.2 Reissuance of financial statements
When previously released financial statements are reissued (e.g., in connection

with a new or amended registration statement or proxy/information statement),
the SEC staff’s view is that the reclassification to reflect a discontinued operation
should not be made in the historical financial statements until the financial
statements are issued for the period in which the event triggering discontinued
operations occurred. However, pro forma financial information might be
required at an earlier point in time as discussed in SEC 4560.
For SEC registrants, financial statements are “issued” when complete financial
statements are first issued to the public for general use and reliance in a format
that conforms with US GAAP (with an audit report in the case of annual financial
statements). Issuance can occur when the financial statements appear in a
shareholder’s report, a proxy statement, or a filing with the SEC. The issuance of
an earnings release does not constitute financial statement issuance. Refer to
ASC 855-10-S99-2 for a complete discussion of the “issuance date” of financial
statements.
The following example highlights the requirements for presenting discontinued

operations when financial statements are reissued.
EXAMPLE 27-7
Discontinued operations presentation in reissued financial statements
FSP Corp is a calendar year-end SEC registrant that intends to reissue its
financial statements in connection with a public registration of securities on
October 10, 20X6. Further, on September 29, 20X6, FSP Corp decides to sell a
component of its business, but had not yet released its financial statements for
the period ended September 30, 20X6.
Should FSP Corp reflect the discontinued operations in its reissued financial
statements for periods prior to September 30, 20X6?
Analysis
No. Although the event which will trigger discontinued operations treatment has
occurred at the time the registration statement will be filed, the financial
statements have not been filed for the period in which the trigger to present the
component as a discontinued operation occurred (i.e., the Form 10-Q for the
period ended September 30, 20X6). As such, the annual financial statements
included in the October 10, 20X6 registration statement should not include
discontinued operations presentation for the component. Any financial
statements issued or reissued after the financial statements for the period ended
PwC 27-21
September 30, 20X6 have been issued should give retrospective effect to the
27.5 Disclosure
The minimum disclosure requirements for discontinued operations are
prescribed by ASC 205-20-50.
27.5.1 Financial statement disclosures
Disclosures required in periods in which disposal groups have been sold or are
classified as held for sale that qualify as a discontinued operation are described
below:
ASC 205-20-50-1
The following shall be disclosed in the notes to financial statements that cover
the period in which a discontinued operation either has been disposed of or is
classified as held for sale under the requirements of paragraph 205-20-45-1E:
a. A description of both of the following:
1. The facts and circumstances leading to the disposal or expected

disposal.
2. The expected manner and timing of that disposal.
b. If not separately presented on the face of the statement where net income
is reported (or statement of activities for a not-for-profit entity) as part of
discontinued operations (see paragraph 205-20-45-3B), the gain or loss
recognized in accordance with paragraph 205-20-45-3C.
c. Subparagraph superseded by Accounting Standards Update No. 2014-08.
d. If applicable, the segment(s) in which the discontinued operation is
reported under Topic 280 on segment reporting.
When a business or nonprofit activity is classified as held for sale upon

acquisition and therefore is reported as a discontinued operation, no additional
disclosures are required beyond those described above. A reporting entity that
disposes of an equity method investment that qualifies as a discontinued
operation should consider the additional disclosures in FSP 27.5.1.1. A reporting
entity with component(s) that result in discontinued operations for any other
reason should make the following disclosures to the extent the information is not
presented on the face of its financial statements:
27-22 PwC
ASC 205-20-50-5B
An entity shall disclose, to the extent not presented on the face of the financial
statements as part of discontinued operations, all of the following in the notes to
financial statements:
a. The pretax profit or loss (or change in net assets for a not-for-profit entity) of
the discontinued operation for the periods in which the results of operations
of the discontinued operation are presented in the statement where net
income is reported (or statement of activities for a not-for-profit entity).
b. The major classes of line items constituting the pretax profit or loss (or
change in net assets for a not-for-profit entity) of the discontinued operation
(for example, revenue, cost of sales, depreciation and amortization, and
interest expense) for the periods in which the results of operations of the
discontinued operation are presented in the statement where net income is
reported (or statement of activities for a not-for-profit entity).
Reporting entities must reconcile both (1) pretax profit or loss and (2) the major
line items constituting pretax profit or loss to the after-tax profit or loss from
discontinued operations that is presented on the face of the income statement.
The reconciliation must be provided for all periods in which the results of the
discontinued operation are presented. The example reconciliation provided in
ASC 205-20-55-103 includes the line items of revenue, cost of sales, selling,
general and administrative expenses, and interest expense.
A reporting entity may not have owned the entire discontinued operation prior to
its disposal. If the discontinued operation includes a noncontrolling interest, the
pretax profit or loss attributable to the parent should be separately disclosed for
each of the periods that an income statement is presented.
27.5.1.1 Equity method investment discontinued operations disposals
When a reporting entity disposes of an equity method investment that qualifies to

be presented as a discontinued operation, the reporting entity should disclose
summarized information about the assets, liabilities, and results of operations of
the investee if that information was disclosed in financial reporting periods
before the disposal based on ASC 323-10-50-3(c), as further discussed in FSP 10.
27.5.1.2 Changes to a plan of disposal
A reporting entity may change its plan of sale of a component that was previously
classified as a discontinued operation. In the period in which the decision is made
to change the plan for disposing of the component, a reporting entity should
determine if the revised plan impacts the component’s classification as a
discontinued operation. If as a result of the revised plan the component no longer
qualifies as a discontinued operation, the reporting entity should disclose a
description of the facts and circumstances leading to the decision to change the
plan. It should also disclose the change’s effect on the results of operations for the
period and any prior periods presented. Disclosures required when a reporting
PwC 27-23
entity retains significant continuing involvement are discussed in the following

subsections.
27.5.1.3 Continuing cash flows and continuation of activities
A reporting entity is required to disclose information about its significant

continuing involvement with a discontinued operation after the disposal date. It
must continue to make these disclosures until the results of operations of the
discontinued operation in which the reporting entity retains significant
continuing involvement are no longer presented separately as discontinued
operations in the income statement.
Excerpt from ASC 205-20-50-4B

An entity shall disclose the following in the notes to financial statements for
each discontinued operation in which the entity retains significant continuing
involvement after the disposal date:
a. A description of the nature of the activities that give rise to the continuing
involvement.
b. The period of time during which the involvement is expected to continue.
c. For all periods presented, both of the following:
1. The amount of any cash inflows or outflows from or to the discontinued

operation after the disposal transaction
2. Revenues or expenses presented, if any, in continuing operations after

the disposal transaction that before the disposal transaction were
eliminated in consolidated financial statements as intra-entity
transactions.
A reporting entity may retain a noncontrolling investment in a disposed

component and account for the component under the equity method
prospectively. In those situations, there are additional disclosures required
related to the equity method investment retained:
Excerpt from ASC 205-20-50-4B
d. For a discontinued operation in which an entity retains an equity method

investment after the disposal (the investee), information that enables users
of financial statements to compare the financial performance of the entity
from period to period assuming that the entity held the same equity
method investment in all periods presented in the statement where net
income is reported (or statement of activities for a not-for-profit entity).
The disclosure shall include all of the following until the discontinued
operation is no longer reported separately in discontinued operations:
27-24 PwC
1. For each period presented in the statement where net income is

reported (or statement of activities for a not-for-profit entity) after the
period in which the discontinued operation was disposed of, the pretax
income of the investee in which the entity retains an equity method
investment
2. The entity’s ownership interest in the discontinued operation before

the disposal transaction
3. The entity’s ownership interest in the investee after the disposal

transaction
4. The entity’s share of the income or loss of the investee in the period(s)
after the disposal transaction and the line item in the statement where
net income is reported (or statement of activities for a not-for-profit
entity) that includes the income or loss.
27.5.1.4 Discontinued operations subsequently retained
When a reporting entity has a component that is held for sale and meets the
criteria for discontinued operations reporting, there may be circumstances that
arise that result in a reporting entity deciding not to sell the component. The
results of operations of the component previously reported in discontinued
operations are to be reclassified and included in income from continuing
operations for all periods presented, and any loss on measurement at the
reclassification date should also be reported in continuing operations in the
period of reclassification. A loss, if any, that was recognized when the component
was first classified as held for sale should not be adjusted in the prior period
financial statements. Additionally, the reporting entity should describe the facts
and circumstances leading to the decision to change the plan of sale and its effect
on the income statement for each of the periods presented should be disclosed in
the period when that decision occurs. Refer to FSP 8.7 for the disclosure
requirements of disposal groups that no longer meet the held for sale criteria.
27.5.1.5 Allocation of interest to discontinued operations
SEC registrants should disclose their accounting policy for allocating interest to a
discontinued operation, which should include the method of allocation. The
amount of interest allocated to discontinued operations should also be disclosed
for all periods presented.
27.5.1.6 Segment disclosures
As discussed in ASC 280-10-55-7, a reporting entity is not required to disclose the

information required by ASC 280, Segment Reporting, for a reportable segment
that qualifies for discontinued operations reporting. In addition, segment
information for periods prior to the disposal of the reportable segment is not
required to be restated in the comparative periods.
PwC 27-25
A discontinued operation that is part of a reportable segment would not be

included in the segment disclosures in the period it is classified as a discontinued
operation. Furthermore, prior periods would need to be restated for comparative
purposes.
27.5.1.7 Adjustments to amounts reported in discontinued operations
Certain adjustments to amounts previously reported in discontinued operations

should also be classified in discontinued operations in accordance with
ASC 205-20-45-4 through 45-5 and ASC 205-20-50-5. The nature and amount of
such adjustments should be disclosed. Circumstances that could give rise to
presenting amounts as discontinued operations in subsequent periods include:
□ Resolution of contingencies related to the disposal transaction, such as the

resolution of the purchase price and indemnification agreements
□ Resolution of the disposed component’s contingencies such as environmental

and product warranty obligations retained by the seller
□ Settlement of employee benefit obligations directly related to the disposal

transaction
This guidance also applies to amounts not previously reported in discontinued

operations that are directly related to the disposal component. Developments
subsequent to the disposal date that are not directly related to the disposal of the
component, or the operations of the component, prior to the disposal are not
“directly related to the disposal” as contemplated by ASC 205-20-45-4. Such
amounts are reported within continuing operations. For example, subsequent
changes in the carrying value of assets received upon disposition of a component
do not affect the determination of gain or loss at the disposal date, but represent
the consequences of management’s subsequent decisions to hold or sell those
assets. Gains and losses, dividend and interest income, and portfolio
management expenses associated with assets received as consideration for
discontinued operations should be reported within continuing operations.
27.5.1.8 Individually significant disposal not eligible for discontinued

operations
ASC 205-20-50 requires disclosures about pretax profit or loss for an individually
significant component of a reporting entity that has been disposed of or is
classified as held for sale but does not qualify as a discontinued operation. If an
individually significant component includes a noncontrolling interest, the pretax
profit or loss attributable to the parent must be disclosed. Reporting entities must
also disclose the gain or loss recognized on a disposal group that is either
classified as held for sale or disposed of.
All reporting entities must provide the disclosures for the initial period in which
an individually significant component is sold or classified as held for sale. An
individually significant component that is held for sale should continue to
provide the disclosures in each reporting period that it remains held for sale.
27-26 PwC
Public business entities and certain not-for-profit entities must also include
comparative disclosures for all prior periods presented in the income statement
as well.
Guidance is not provided about how to evaluate whether an individual

component is significant, or whether to consider the gain or loss on disposal
when determining significance. Reporting entities must exercise judgment in
assessing significance and should consider both quantitative and qualitative
factors about the effect of the disposal on their balance sheet, income statement,
and statement of cash flows. Reporting entities should also consider whether
disclosure should be provided when multiple disposals of individually
insignificant components occur in the same reporting period.

The requirements of ASC 205-20 apply equally to SEC registrants and private
companies. However, certain items discussed in this chapter are incremental
presentation and disclosure requirements prescribed by the SEC for SEC
registrants. Although this guidance is specific to SEC registrants, based on
limited authoritative guidance, we believe private companies should consider
applying these concepts as well. Those requirements are summarized in Figure
27-2.
Figure 27-2
Presentation and disclosures required for public business entities, that should be
considered by private companies
Application of discontinued operations to SEC FRM 27.4.2.10

predecessor’s financial statements for 13210.2
successor’s disposal activity
Depooling the results of a spun-off SAB Topic 5.Z 27.4.3.1

component
ASC 360-10-50-3A specifies the periods required to be disclosed for individually

significant disposals and is an incremental presentation and disclosure
requirement for public business entities and certain not-for-profit entities. For
additional information, refer to FSP 27.5.1.8.
PwC 27-27
Chapter 28:
Subsequent events
Subsequent events

This chapter describes what subsequent events are and the types of subsequent
events. It explains the distinction between recognized and nonrecognized
subsequent events and describes the disclosure requirements for subsequent
events in financial statements and reissued financial statements. Finally,
included within this chapter are a number of common examples of each type of
subsequent event. The examples are not all-inclusive, but are intended to provide
a framework for evaluating and categorizing subsequent events as recognized or
nonrecognized, which can require significant judgment.
28.2 Scope
The scope of ASC 855, Subsequent Events, is broad and encompasses all
subsequent events that are not addressed in other parts of US GAAP. For
example, US GAAP specifically addresses the presentation and disclosure of
subsequent events for income taxes (740-10-25-15), EPS (260-10-55-12), and
gain contingencies (450-30-25-1). Industry specific guidance also exists, such as
ASC 926-855, which addresses the treatment of a specific subsequent event in the
film industry.
In addition to the FASB guidance, SEC registrants are required to evaluate the
guidance within the following SAB Topics:
SAB Topic 4.C Change in Capital Structure
SAB Topic 5.M Other Than Temporary Impairment of Certain

Investments in Equity Securities
New guidance
Changes in the accounting for equity securities when ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities, is adopted will
render the guidance in SAB Topic 5.M on other-than-temporary impairments
obsolete. In addition, ASU 2016-01 will contain guidance to address the
accounting for the subsequent identification of an observable price for an equity
security accounted for using the alternative measurement method.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments, amended

certain aspects of ASC 855. As ASU 2016-13 moves away from the prior “incurred
loss” model and into a current “expected loss” model for purposes of estimating
credit losses, certain clarifications were necessary to ASC 855. Specifically, a
change in estimated credit losses is now listed as an example of a nonrecognized
subsequent event. In addition, ASU 2016-13 removed the example previously in
ASC 855 in which a bankruptcy of a reporting entity’s debtor that occurs
subsequent to the balance sheet date is deemed a recognized subsequent event.
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Subsequent events
28.3 Evaluation of subsequent events

The date through which a reporting entity evaluates subsequent events differs
depending on whether the entity is (1) an SEC filer or a conduit bond obligor or
(2) a non-SEC filer. For a reporting entity that is an SEC filer, as discussed in FSP
28.3.1, or a conduit bond obligor, as discussed in FSP 28.3.2, subsequent events
are events or transactions that occur after the balance sheet date but before the
reporting entity issues financial statements. The SEC staff has provided its view
as to when financial statements are considered “issued” in ASC 855-10-S99-2.
Excerpt from ASC 855-10-S99-2

... Generally, the staff believes that financial statements are “issued” as of the date
they are distributed for general use and reliance in a form and format that
complies with generally accepted accounting principles (GAAP) and, in the case
of annual financial statements, that contain an audit report that indicates that the
auditors have complied with generally accepted auditing standards (GAAS) in
completing their audit. Issuance of financial statements then would generally be
the earlier of when the annual or quarterly financial statements are widely
distributed to all shareholders and other financial statement users or filed with
the Commission. Furthermore, the issuance of an earnings release does not
constitute issuance of financial statements because the earnings release would
not be in a form and format that complies with GAAP and GAAS.
For non-SEC filers, subsequent events are events that occur after the balance
sheet date but before the reporting entity’s financial statements are available to
be issued. Financial statements are “available to be issued” when they are
prepared in accordance with US GAAP and the reporting entity has obtained all
necessary approvals (e.g., from management and the board of directors) to issue
them.
28.3.1 SEC filer
ASC 855 defines an SEC filer.
Partial definition from ASC 855-10-20

An entity that is required to file or furnish its financial statements with either of
the following:
a. The Securities and Exchange Commission (SEC)
b. With respect to an entity subject to Section 12(i) of the Securities Exchange

Act of 1934, as amended, the appropriate agency under that Section.
This definition specifically excludes financial statements of other reporting

entities that are included in SEC filings. For example, financial statements of
acquired businesses or equity investees that are not otherwise SEC filers should
PwC 28-3
Subsequent events
evaluate subsequent events through the date the financials are available for
issuance, rather than up to the date the financial statements are issued.
When a reporting entity has no registered securities but voluntarily files financial
statements with the SEC, the filings should comply with all of the SEC’s
requirements. A voluntary filer cannot choose which regulations to comply with
in its filings.
Question 28-1
Under ASC 855, does a reporting entity that files financial statements with the
SEC in an IPO qualify as an “SEC filer”?
PwC response
No. An entity that files an IPO does not become an SEC filer until its registration
statement goes effective. As a result, a reporting entity that had previously
reached the cut-off for recognizing subsequent events does not reopen and extend
its subsequent event period.
28.3.2 Conduit bond obligor
ASC 825 defines conduit debt securities. A conduit bond obligor is an entity that
issues such securities.
Partial definition from ASC 825-10-20

Conduit Debt Securities: Certain limited-obligation revenue bonds, certificates of
participation, or similar debt instruments issued by a state or local governmental
entity for the express purpose of providing financing for a specific third party (the
conduit bond obligor) that is not a part of the state or local government’s
financial reporting entity.
If a reporting entity is a conduit bond obligor for conduit debt securities that are
traded in a public market, the reporting entity is required to evaluate subsequent
events through the date the financial statements are issued, similar to an SEC
filer.
28.4 Types of subsequent events

There are two types of subsequent events:
□ Recognized subsequent events (commonly referred to as Type I)
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Subsequent events

… subsequent events that provide additional evidence about conditions that
existed at the date of the balance sheet, including the estimates inherent in the
process of preparing financial statements.
Recognized subsequent events are pushed backed and recorded in the financial
statements to be issued. Examples include the realization of a loss on the sale of
inventory or property held for sale when the subsequent act of sale confirms a
previously existing unrecognized loss. See FSP 28.5.1 for other examples.
□ Nonrecognized subsequent events (commonly referred to as Type II)

… subsequent events that provide evidence about conditions that did not exist at
the date of the balance sheet but arose after the balance sheet date but before the
financial statements are issued or are available to be issued.
Nonrecognized subsequent events are considered for disclosure based on their

nature to keep the financial statements from being misleading. An example is a
natural disaster that destroys a facility after the balance sheet date. See FSP
28.6.3 and 855-10-55-2 for other examples.
28.5 Recognized subsequent events

Recognized subsequent events are reflected in the financial results of the
reporting entity. The reporting entity should also evaluate the events for
additional disclosure considerations based on the applicable standards governing
the events.
28.5.1 Examples of recognized subsequent events
The following are some examples of subsequent events that reporting entities
should evaluate to determine whether they need to be recognized in the financial
statements.
□ Settlements of litigation related to events giving rise to a claim that took place
prior to the balance sheet date (see FSP 28.5.1.1)
□ Change in capital structure (stock dividends, splits, or reverse splits) (see FSP
28.5.1.2)
□ Changes in lower of cost or market considerations related to inventory

valuation (see FSP 28.5.1.3)
□ Other postretirement benefit costs (see FSP 28.5.1.4)
PwC 28-5
Subsequent events
□ Covenant violations occurring or anticipated after the balance sheet date (see
FSP 12.3.3.5)
□ Refinancing short-term borrowings (see FSP 12.3.4)
an active project on debt classification that may affect the ability to present debt
that is refinanced after the balance sheet date as noncurrent. Financial statement
preparers and other users of this publication are therefore encouraged to monitor
the status of the project, and if finalized, evaluate the effective date of the new
guidance and the implications on presentation and disclosure.
28.5.1.1 Litigation settlements
Loss contingencies
A settlement of litigation resulting in a loss related to events that took place prior
to the balance sheet date is typically considered a recognized subsequent event.
Gain contingencies
A reporting entity may have a settlement resulting from a claim that existed at
the balance sheet date that results in a gain. The gain and related receivable are
typically not reflected as a recognized subsequent event. Rather, gain
contingencies are recognized in the period the asset is realized or realizable.
Therefore, the reporting entity would not adjust the financial statements for a
gain contingency related to litigation, although disclosure may be appropriate.
28.5.1.2 Change in capital structure
SAB Topic 4.C indicates that a change in a registrant’s capital structure due to a
stock dividend, stock split, or reverse split occurring after the date of the latest
reported balance sheet, but before the issuance of the financial statements or the
effective date of the registration statement, whichever is later, should be given
retroactive effect in the balance sheet. Historically, the SEC has not objected to
utilizing either approach (i.e., retrospective adjustment or recording the change
in the period consummated). However, in an IPO, the reporting entity should
give retrospective effect in the balance sheet.
If a reporting entity retroactively reflects a change in capital structure, it should

disclose the retroactive treatment, explain the change made, and state the date
the change became effective in a footnote. If a reporting entity records the change
in capital structure in the period consummated, it should consider disclosing the
change.
28-6 PwC
Subsequent events
28.5.1.3 Changes in lower of cost or net realizable value related to inventory

valuation
ASC 330-10-35 establishes the guidance related to losses from the subsequent
measurement of inventory. A loss may be required, for example, due to damage,
physical deterioration, obsolescence, changes in price levels, or other causes.
The financial reporting process often requires assumptions about future events.
For example, the carrying amount of inventory is based on assumptions
regarding future demand for product.
Sales of inventory or other events after the balance sheet date may provide
additional evidence about conditions that existed at the balance sheet date that
could impact the valuation of inventory at the lower of cost or market (before
adoption of ASU 2015-11, discussed below) and at the lower of cost and net
realizable value (after adoption of ASU 2015-11).
Determining the net realizable value (NRV) at the balance sheet date is a matter
of judgment. Reporting entities should consider all data available, including
subsequent changes in product prices. However, increases in selling prices
subsequent to the balance sheet date, but prior to the issuance date or the date
the financial statements are available for issuance, would likely demonstrate that
a decline in selling prices at the balance sheet date was temporary, which may
indicate that a lesser or no write-down is required.
New guidance
ASU 2015-11, Simplifying the Measurement of Inventory, changes the

subsequent measurement guidance by replacing the concept of “lower of cost or
market” with “lower of cost and net realizable value” for all inventory except
those measured using Last-in-First-out (LIFO) or the Retail Inventory Method
(RIM). This change affects the subsequent measurement of inventory, but was
not intended to affect related disclosures.
ASU 2015-11 is effective for public business entities for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. For
all other entities, ASU 2015-11 is effective for fiscal years beginning after
December 15, 2016, and interim periods within fiscal years beginning after
December 15, 2017. Earlier application is permitted as of the beginning of an
interim or annual reporting period.
28.5.1.4 Other postemployment benefit costs
ASC 712 prescribes the accounting for the estimated cost of other
postemployment benefits provided by an employer to former or inactive
employees after employment but before retirement. These benefits include salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits (including workers’ compensation), job training and
counseling, and the continuation of benefits, such as health care benefits and life
PwC 28-7
Subsequent events
insurance coverage. These benefits are generally viewed as part of the

compensation provided to employees in exchange for service.
If a post-balance sheet date event confirms that, at the balance sheet date,
payment of a benefit, such as a benefit covered by ASC 712, was probable, a
reporting entity should record a reasonable estimate of the amount as of the
balance sheet date at the balance sheet date. The estimate should take into
account all information available as of the date the financial statements are
issued, to the extent the information reflects facts that existed at the balance
sheet date.
Conversely, if the post-balance sheet date event indicates that the payment of
benefits became probable only after the balance sheet date, and all other evidence
similarly supports that the payment of benefits was not probable at the balance
sheet date, the post-balance sheet date event should not be reflected in an accrual
at the balance sheet date. Reporting entities should exercise judgment and
consider their specific facts and circumstances to determine whether the payment
of benefits is probable at the balance sheet date.
EXAMPLE 28-1
FSP Corp, a calendar year-end company, has a severance plan under which
benefits do not accumulate or vest. The plan provides $5,000 to each employee
who is involuntarily terminated without cause. At December 31, 20X6, FSP Corp
determined that it was not probable that severance benefits under the plan would
be paid.
On January 13, 20X7, one of FSP Corp's facilities was destroyed by a tornado.
On February 5, 20X7, FSP Corp’s board of directors decided not to rebuild the
facility and management decided to terminate the 5,000 employees that worked
at the site. The company intends to file its 20X6 Form 10-K on February 15,
20X7.
Should FSP Corp record the liability to pay severance benefits in its 20X6
financial statements?
Analysis
No. The facts indicate that the payment of severance benefits was not probable at
the balance sheet date (December 31, 20X6). Accordingly, the appropriate period
in which to record the liability is the first quarter of 20X7. If the amount of
severance benefits (and the impact of the tornado damage) is material, the 20X6
financial statements should disclose the matter.
28.6 Nonrecognized subsequent events

ASC 855 does not provide any bright line tests for determining which subsequent
events require disclosure; it is a decision based on specific facts and
circumstances that requires judgment.
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Subsequent events
Consider the following examples:
□ A regular quarterly cash dividend declared subsequent to the balance sheet

date at the same rate per share as dividends declared during the period being
reported on might not be worthy of disclosure. However, if a reporting entity
that had paid dividends regularly for several years decided to eliminate cash
dividends subsequent to the balance sheet date, disclosure may be warranted.
□ Cancellation of a sales contract subsequent to the balance sheet date may not
need to be disclosed unless it is reasonably certain that the financial effect
will be significant. For example, if the reporting entity reasonably anticipates
replacement of the customer or additional sales to present customers, it may
not need to disclose the cancellation. However, disclosure may be
appropriate if reduced income appeared certain, a major factory were to be
closed, or other significant changes in operations were expected to result.
Generally, in order for a subsequent event to require disclosure (1) the event
should have a determinable significant effect on the balance sheet at the time of
occurrence or on the future operations of the reporting entity and (2) without
disclosure of it, the financial statements would be misleading.
28.6.1 Disclosure requirements for nonrecognized subsequent events
If a reporting entity determines that disclosure is necessary, it should include:
□ the nature of the event, and
□ an estimate of the impact on the financial statements or an assertion that an

estimate cannot be made.
The guidance within ASC 855 does not require a reporting entity to present all
required subsequent events disclosures in one footnote. Rather, management
may determine where to include the disclosures within the financial statements.
28.6.2 Pro forma financial data
Depending on the nature and magnitude of the nonrecognized subsequent event,

a reporting entity may include pro forma financial data in the footnotes.
Alternatively, in certain more significant situations, the reporting entity may
include a pro forma column on the historical balance sheet that reflects the
transaction as if it occurred on the balance sheet date. For example, a reporting
entity that is undergoing an IPO will often include pro forma financial data on the
balance sheet to reflect the conversion of preferred stock to common stock.
28.6.3 Examples of nonrecognized subsequent events
The following are some examples of events that occur after the balance sheet date
but before the financial statements are issued or available to be issued. Because
the events generally do not relate to conditions existing at the balance sheet date,
they are not recognized in the financial statements. However, depending on the
PwC 28-9
Subsequent events
nature of the event, reporting entities should consider footnote disclosure. A key
determinant is whether the financial statements would be misleading without
disclosure of the event.
□ Business combinations (see FSP 28.6.3.1)
□ Exercise of a call option on debt (see FSP 28.6.3.2)
□ Debt extinguishments (see FSP 28.6.3.3)
□ Changes in the classification of long-lived assets (see FSP 28.6.3.4)
□ Changes in the conditions of contingently redeemable instruments (see FSP

28.6.3.5)
□ Acceptance by an employee of special termination benefits after the balance

sheet date (see FSP 28.6.3.6)
□ Subsequent events impacting construction-type or production-type revenue

contracts (FSP 28.6.3.7)
□ Bankruptcy filing (see FSP 28.6.3.8)
□ Changes in ownership interest (see FSP 28.6.3.9)
□ Sales of securities at a loss (see FSP 28.6.3.10)
□ Litigation settlements resulting in a gain (see FSP 28.5.1.1)
□ Changes in capital structure (see FSP 28.5.1.2 for instances when an event
should be considered a recognized subsequent event; other events should be
considered for disclosure)
□ Changes in segments (see FSP 25.7.8)
□ Settlements of litigation related to events giving rise to a claim that took place
after the balance sheet date
□ Changes in the fair value of assets or liabilities (financial or nonfinancial) or

foreign exchange rates
□ Issuance of new notes, bonds, or other indebtedness
□ Damage from fire, flood, or other casualty
□ Adoption of welfare, pension, compensation, or stock option plans
ASC 805 requires a reporting entity to disclose information that enables users of
its financial statements to evaluate the nature and financial effect of a business
28-10 PwC
Subsequent events
combination. The guidance is applicable to business combinations that occur

either in the current reporting period or after the balance sheet date, but before
the financial statements are issued or available to be issued. However, disclosure
is not required for the specific aspects (e.g., purchase price allocation) of a
business combination in which the accounting is incomplete. The reporting entity
should include all other disclosure requirements, such as the nature of the
acquisition, consideration, etc. For aspects of a business combination that are not
disclosed, the reporting entity should indicate which disclosures could not be
made and why. See FSP 17.4 on disclosures in a business combination.
28.6.3.2 Exercise of a call option on debt
The announcement and execution of a call option by the creditor after the balance
sheet date with no violation of covenants at the balance sheet date does not
impact the debt’s classification at the balance sheet date. For further discussion,
see FSP 12.3.1.
Although there is no effect on the debt’s balance sheet classification, the

reporting entity may need to disclose the exercise of the call option subsequent to
the balance sheet date as a nonrecognized subsequent event.
28.6.3.3 Debt extinguishments
A reporting entity should not recognize a debt extinguishment occurring

subsequent to the end of the fiscal year but prior to the issuance date or the date
the financial statements are available for issuance. Any gain or loss associated
with the debt extinguishment should be recorded in the period in which the debt
is considered extinguished (see FG 3.7).
A reporting entity should consider disclosing the likely effect of a planned

extinguishment in the footnotes.
28.6.3.4 Changes in the classification of long-lived assets
ASC 360-10-45-13 does not permit a reporting entity to consider new information
resulting from a change in circumstances that occurred after the balance sheet
date in evaluating whether long-lived assets held for use should be classified as
held for sale at the balance sheet date.
If subsequent to the balance sheet date, but prior to the issuance date or the date
the financial statements are available for issuance, the criteria for classification of
the assets as held for sale are met, a reporting entity should consider providing
disclosures similar to those set out in ASC 205-20-50-1:
□ a description of the facts and circumstances leading to the expected disposal
□ the expected manner and timing of the disposal
□ the carrying amount(s) of the major classes of assets and liabilities included
as part of a disposal group
PwC 28-11
Subsequent events
In performing the required reassessment, for a period of up to one year after the
original assessment, of whether the held for sale criteria continue to be met, a
significant event or change in circumstance may occur causing the reporting
entity to no longer expect the assets to meet the held for sale criteria in ASC 205-
20-45-1. In that case, the assets should be reclassified as held for use, the
reporting entity should cease to present the component’s operations as
discontinued operations, and consider disclosing in the footnotes the facts and
circumstances that led to the change.
28.6.3.5 Changes in the conditions of contingently redeemable instruments
A reporting entity may receive information after the balance sheet date, but prior
to the issuance date or the date the financial statements are available for
issuance, that indicates a contingently redeemable instrument has become
unconditionally redeemable. The issue is whether the instrument should be
reclassified as of the balance sheet date. We believe this matter should be treated
the same as any other subsequent event.
If the information received indicates the instrument was unconditionally

redeemable on the balance sheet date, the reporting entity should adjust the
financial statements to reflect that the instrument has been reclassified as a
liability.
If the information received indicates that the event satisfying the condition, and
thus causing the instrument to become unconditionally redeemable, occurred
after the balance sheet date, the reporting entity should not adjust the financial
statements, but should instead consider appropriate disclosures.
28.6.3.6 Acceptance by an employee of special termination benefits after the

balance sheet date
Special termination benefits arise when the employer offers, for a short period of
time, to provide certain additional benefits to employees electing voluntary
termination, including early retirement. There may be situations when a special
termination benefits offer extends beyond the balance sheet date. Reporting
entities should record irrevocable acceptances at the balance sheet date as a
termination liability and disclose as nonrecognized subsequent events offers still
outstanding at that date that have not yet been irrevocably accepted.
28.6.3.7 Subsequent events impacting construction-type or production-type

revenue contracts
For construction-type or production-type revenue contracts, ASC 605-35-50-10

requires a reporting entity to disclose events occurring after the date of the
financial statements that are outside the normal exposure and risk aspects of a
contract. The guidance explicitly precludes a reporting entity from recognizing
these as refinements of the estimating process of the prior period.
28-12 PwC
Subsequent events
New guidance
ASC 606, Revenue from Contracts with Customers, supersedes ASC 605-35-50-
10. ASC 606 does not provide specific subsequent events guidance. As a result,
the general subsequent events principles will apply equally to all types of revenue
contracts. For information on the effective date of ASC 606, see RR 13.
28.6.3.8 Bankruptcy filing
If the filing date of a reporting entity’s bankruptcy occurs after the balance sheet
date, but prior to the issuance date or the date the financial statements are
available for issuance, the reporting entity should treat the filing as a
nonrecognized subsequent event. In that case, the financial statements would not
reflect any accounting under ASC 852-10, Reorganizations, nor would they
include the debtor-in-possession label, as discussed in BLG 3.2. The reporting
entity should assess whether disclosures, including pro forma disclosures, are
appropriate to keep the financial statements from being misleading.
28.6.3.9 Changes in ownership interest
There may be a change of ownership interest during the period between the date
the financial statements of an equity investee or a subsidiary and the
consolidated financial statements are prepared. The change of ownership interest
may occur as a result of:
□ Transactions in which control is maintained, gained, or lost
□ Transactions involving equity investees, or
□ A complete disposition of all holdings by a parent.
When the reporting period of the subsidiary financial statements precede the
reporting period of the parent, questions may arise as to the period in which the
change in ownership should be recorded. Generally, the transaction should be
recorded in the period of occurrence in the consolidated financial statements,
irrespective of any differences between the dates of the financial statements of
the equity investee or subsidiary and the consolidated financial statements.
Further, the consolidated reporting entity should consider disclosing the change
in ownership.
28.6.3.10 Sales of securities at a loss
When a reporting entity sells a debt or equity security at a loss subsequent to the
balance sheet date but prior to the issuance date or the date the financial
statements are available for issuance, it should assess (1) whether an other-than-
temporary impairment may have existed at the balance sheet date and (2) if a
debt security, whether the entity’s assertions as to whether or not it had the
“intent to sell” the security were accurate as of the balance sheet date.
PwC 28-13
Subsequent events
New guidance
ASU 2016-01 requires that equity securities be measured at fair value with
changes in fair value recorded in income, thus eliminating any potential impact of
subsequent sales or changes in value. In addition, ASU 2016-13 introduced new
impairment models for both debt securities classified as available-for-sale and as
held to maturity. These new models will be based on current market values and
current expectations of credit losses, and therefore, also consider subsequent
events in measuring losses. For further discussion of these impairment models,
refer to LI 8.2 and 7.
28.7 Parent/subsidiary financial statements

A question often arises as to how a reporting entity that is a subsidiary of another
entity should determine the date to be used when evaluating subsequent events
in its standalone financial statements. That is, should the reporting entity utilize
(1) the issuance date of the parent company consolidated financial statements,
(2) the date the standalone financial statements are issued, or (3) the date the
standalone financial statements are available for issuance?
Generally, our view is that when the parent company has issued financial
statements or the financial statements are available to be issued, it is acceptable
for the subsidiary reporting entity to utilize the issuance date of the parent
company consolidated financial statements in determining the date through
which to evaluate subsequent events for adjustment to the financial statements.
EXAMPLE 28-2
Impact of subsequent events on subsidiary financial statements
Parent Co consolidates a non-SEC filer subsidiary, Sub Co, into its consolidated
audited financial statements filed with the SEC. The consolidated Parent Co’s
calendar year-end financial statements were issued on March 10, 20x6.
Following the issuance of the Parent Co’s financial statements, Sub Co was
required to issue audited Sub Co financial statements (Sub Co financial
statements had not been previously prepared). On May 1, 20x6, litigation brought
against Sub Co was settled for a material amount in excess of the liability
recorded in the parent company consolidated financial statements. The calendar
year-end financial statements of Sub Co were available to be issued on May 15,
20x6.
How should this subsequent event impact the financial statements of the parent
and the subsidiary?
Analysis
Parent Co’s financial statements are not affected as the subsequent event
occurred after Parent Co’s financial statements were issued on March 10, 20x6.
28-14 PwC
Subsequent events
We believe an acceptable view is to consider Sub Co’s financial statements as

issued when the parent company statements were issued. Following that view,
Sub Co should consider the issuance of its financial statements to constitute a
reissuance and, therefore, evaluate subsequent events for disclosure only. Sub Co
would consider disclosing the settlement of the litigation in its financial
statements as a nonrecognized subsequent event.
28.8 Reissuance of financial statements

ASC 855 defines revised financial statements as statements that are revised for
either the correction of an error or the retrospective application of US GAAP. A
reporting entity may need to revise and reissue financial statements in reports
filed with the SEC, other regulatory agencies, or other stakeholders.
This typically leads to the question of whether an updated evaluation of

subsequent events is required after the original issuance of the financial
statements. A reporting entity should consider whether subsequent events have
occurred that warrant disclosure. However, ASC 855-10-25-4 prohibits a
reporting entity from recognizing additional subsequent events unless the
adjustment is required by US GAAP or regulatory requirements. For example, the
retrospective application of an accounting standard such as discontinued
operations or a segment change would be reflected in the financial statements.
However, the subsequent settlement of a lawsuit at a loss greater than reflected in
the financial statements as originally issued would not be recognized in the
reissued financial statements; rather, it would be disclosed.

The majority of the requirements of ASC 855 apply equally to public and private
companies. In addition, ASC 855 requires non-SEC filers to include additional
disclosures.
28.9.1 Disclosures not required for private companies
The following disclosures are required only for SEC filers.
Description Authoritative reference Section
Change in registrant’s capital

structure SAB Topic 4.C 28.5.1.2
Assessment of other-than-
temporary impairment SAB Topic 5.M 28.2
PwC 28-15
Subsequent events
28.9.2 Additional disclosure requirements for private companies
ASC 855 requires the following additional disclosures for reporting entities that
are not SEC filers:
□ The date through which subsequent events were evaluated
□ Whether the disclosed date is the date the financial statements were issued or
the date the financial statements were available to be issued (as discussed in
FSP 28.3)
□ The date through which subsequent events were evaluated in revised

(reissued) financial statements
28-16 PwC
Chapter 29:
Interim financial
reporting
PwC 29-1
Interim financial reporting

Presentation and disclosure requirements are often applicable for both interim
and annual financial statements. However, in some instances, interim financial
statements may include condensed presentation and fewer disclosures. This
chapter provides guidance on the financial statement presentation and disclosure
requirements for interim reporting periods. The chapter distinguishes between
general recurring disclosure requirements and transaction-specific disclosure
requirements, and indicates instances in which interim disclosure requirements
are identical to the annual requirements. In situations in which the interim
disclosure requirements are different than those required in annual reporting
periods, the specific interim requirements are discussed.
29.2 Scope
Interim financial information is intended to provide users with timely
information about a reporting entity. Because each interim period is an integral
part of the annual period, interim financial statements are generally prepared
based on the expectation that users will read the annual financial statements in
conjunction with the interim financial statements. In general, interim financial
information is not expected to repeat annual financial information but, rather,
provide an update from the prior year-end. Therefore, interim financial
information may be condensed and include limited footnote disclosures.
ASC 270, Interim Reporting, and Article 10 of Regulation S-X (“Article 10”) are
the two primary sources for presentation and disclosure requirements for interim
financial reporting. ASC 270 provides minimum disclosure requirements for all
reporting entities that prepare interim financial statements. Article 10 provides
reporting requirements for SEC registrants, including the financial statements
that should be presented and the periods that should be covered by each
respective financial statement.
Certain other guidance includes considerations for interim financial reporting;

the more significant guidance is discussed in this chapter.
New guidance issued but not yet effective

Liabilities, was issued in January 2016 and included several targeted
amendments to ASC 270. ASU 2016-01 is effective for public business entities for
fiscal years beginning after December 15, 2017 (including interim periods) and
one year later for all other entities.
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29.3 Presentation of interim financial

information
US GAAP includes minimal presentation requirements for interim financial
reporting. As such, many reporting entities follow the requirements of Article 10,
although that guidance is only required for SEC registrants. Interim period
financial statements may, at the option of the reporting entity, be either of the
following:
□ A complete set of financial statements with either full footnote disclosures or

only limited footnote disclosures that update the most recently audited
footnotes for significant changes
□ Condensed financial statements with limited footnote disclosures
Reporting entities qualifying for smaller reporting company status (as defined by
S-K 10(f)) may follow the requirements of S-X 8-03 rather than Article 10.
If Article 10 is followed, the interim financial statements are usually labeled as

“condensed.” This is because the financial statement line items are not shown in
the same level of detail and/or there are fewer footnotes as compared to annual
If certain line item captions are required to be presented separately, but were
permitted to be combined in prior interim financial statements (e.g., due to
immateriality), the comparative periods must be retroactively reclassified to
conform to the current period presentation.
SEC regulations do not require interim financial statements to be audited.

However, S-X 3-03(d) and S-X 10-01(b)(8) prescribe that if the interim financial
statements are unaudited, there should be disclosure that all adjustments
necessary for a fair statement of the results for the periods presented have been
included and that such adjustments are of a normal recurring nature.
Alternatively, if applicable, the reporting entity should describe any other-than-
normal recurring adjustments. Reporting entities should also clearly disclose that
certain information was derived from the prior annual audited financial
statements. Example 29-1 provides an example of this disclosure.
EXAMPLE 29-1
Example disclosure—unaudited interim financial statements
Note X
In the opinion of the Company, the accompanying unaudited condensed

consolidated financial statements contain all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of its financial
position as of September 30, 20X6, and its results of operations for the three
months and nine months ended September 30, 20X6, and 20X5, and cash flows
for the nine months ended September 30, 20X6, and 20X5. The condensed
PwC 29-3
consolidated balance sheet at December 31, 20X5, was derived from audited
annual financial statements but does not contain all of the footnote disclosures
from the annual financial statements.
Although there are no requirements as to the placement in the footnotes of the

language used in the example disclosure, we suggest such disclosure be included
as a separate section in the accounting policy footnote or in a separate footnote
immediately preceding the accounting policy footnote.
The use of the words “fair statement” rather than “fair presentation” in the
example disclosure is intentional. Unless the interim financial statements are
accompanied by complete footnote disclosures, the phrase “fairly presented”
should not be used as that wording is only appropriate in the context of full
US GAAP financial statements and footnotes.
29.3.1 Presentation requirements—balance sheet
Article 10 requires interim financial information to include balance sheets as of

the end of the most recent quarter and the preceding fiscal year. An interim
balance sheet for the comparable prior year quarter does not need to be included
unless it is necessary to understand seasonal fluctuations.
Article 10 allows certain balance sheet line items to be condensed, as described in

the following excerpt:
S-X 10-01(a)(2)
Interim balance sheets shall include only major captions (i.e., numbered
captions) prescribed by the applicable sections of this Regulation with the
exception of inventories. Data as to raw materials, work in process and finished
goods inventories shall be included either on the face of the balance sheet or in
the notes to the financial statements, if applicable. Where any major balance
sheet caption is less than 10% of total assets, and the amount in the caption has
not increased or decreased by more than 25% since the end of the preceding fiscal
year, the caption may be combined with others.
In practice, many reporting entities start with their annual balance sheet and
identify line items that can be combined with other line items using the
thresholds outlined in Article 10 (i.e., 10% of total assets, 25% change since
preceding fiscal year). However, as discussed in the excerpt above, reporting
entities are required to disclose the components of inventory on an interim basis
even if the change from the annual reporting period is not significant.
29.3.2 Presentation requirements—income statement
Article 10 requires interim financial information to include income statements for

the most recent quarter, the corresponding quarter in the preceding year, and the
year-to-date periods for both years. The reporting entity may also present an
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income statement for the cumulative 12-month period ended during the most
recent fiscal quarter and for the corresponding preceding period if that
information would be meaningful to financial statement users.
Article 10 allows the income statement to include condensed line items as

compared to the annual period as described below.
S-X 10-01(a)(3)
Interim statements of income shall also include major captions prescribed by the
applicable sections of this Regulation. When any major income statement caption
is less than 15% of average net income attributable to the registrant for the most
recent three fiscal years and the amount in the caption has not increased or
decreased by more than 20% as compared to the corresponding interim period of
the preceding fiscal year, the caption may be combined with others. In calculating
average net income, loss years should be excluded. If losses were incurred in each
of the most recent three years, the average loss shall be used for purposes of this
test. Notwithstanding these tests, Rule 4-02 of Regulation S-X [“Items not
material”] applies and de minimis amounts therefore need not be shown
separately, except that registrants reporting under Article 9 shall show
investment securities gains or losses separately regardless of size.
In addition to the SEC requirements, ASC 270 requires publicly traded reporting
entities to report sales or gross revenues, provision for income taxes, net income,
and comprehensive income.
If EPS is required to be presented, Article 10 indicates such amount should be

shown on the face of the income statement. A computation of per share earnings
(on both a basic and diluted basis) should be disclosed unless the computation
can be clearly determined from the information contained in the financial
statements. Disclosure of dividends declared per common share is also required
on the face of the income statement.
29.3.3 Presentation requirements—comprehensive income
ASC 220, Comprehensive Income, requires a reporting entity to report a total for
comprehensive income in condensed financial statements of interim periods,
either as a single continuous statement with the income statement or as two
separate consecutive statements. There is no requirement to disclose the
components of comprehensive income. However, if there is a significant
difference in the components of comprehensive income from the prior year end
or a significant difference in comprehensive income compared with net income,
the major components should be disclosed.
Reporting entities should also present the changes in the components of

accumulated other comprehensive income (AOCI) for the current period. They
are required to present separately the amount of the change that is due to
reclassifications and the amount that is due to current period other
comprehensive income. These changes could be shown either before or net of tax
PwC 29-5
and displayed either on the face of the financial statements or in the footnotes.
Although ASC 220 indicates that the information should be presented for the
current period, we believe that providing comparative information is also useful
to financial statement users.
ASC 220 also requires that reporting entities present (either in a single footnote
or parenthetically on the face of the financial statements) the effect of significant
amounts reclassified from each component of AOCI based on its source (e.g.,
related to cash flow hedges from interest rate contracts) and the income
statement line items affected by the reclassification (e.g., interest income or
interest expense). If a component is not required to be reclassified to net income
in its entirety (e.g., net periodic pension cost), reporting entities should instead
cross reference to the related footnote for additional information (e.g., the
pension footnote).
Question 29-1
Is an SEC registrant required to disclose the change in each component of AOCI
as noted in ASC 220-10-45-14A on both a quarter-to-date and year-to-date basis?
PwC response
As discussed in FSP 29.3.5, Article 10 does not require a statement of changes in
stockholders’ equity, but it does require a balance sheet as of the end of the most
recent quarter and the preceding fiscal year end. As such, the disclosure
requirements of ASC 220-10-45-14A should be provided on a year-to-date basis
at a minimum. However, a reporting entity can report such data on a quarter-to-
date basis as well. If a reporting entity decides to add quarter-to-date data, such
presentation and disclosure should be applied consistently by presenting the
information for the comparative prior period as well.
Further, while this information can be presented in a footnote, it is more typical

to include a statement of changes in stockholders’ equity.
Question 29-2
Is an SEC registrant required to disclose amounts that were reclassified out of
AOCI on both a quarter-to-date and year-to-date basis?
PwC response
ASC 220-10-45-17 through 17B requires the disclosure of amounts that were
reclassified out of AOCI during the current reporting period. Therefore, this
disclosure requirement is essentially an income statement disclosure. As such, a
reporting entity is required to disclose amounts that were reclassified out of AOCI
on both a quarter-to-date and year-to-date basis.
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Question 29-3
ASC 220 requires reporting entities to present net income and other
comprehensive income in either a single continuous statement of comprehensive
income or in two separate, but consecutive, statements of net income and other
Can a reporting entity use a different format for interim reporting than in its
annual financial statements?
PwC response
Yes, a reporting entity can use a format for its interim reporting that differs from
the format in its annual financial statements. For example, electing a one-
statement format for interim reporting purposes would not prevent an entity
from using the two-statement format in its annual financial statements. Both
formats provide the same information.
Reporting entities that elect to provide only the minimum information required
for interim reporting—that is, only present total comprehensive income—would
only have a single line in their second statement under the two-statement format.
Therefore, they may prefer to use the one-statement format for interim reporting
and add the total comprehensive line to that statement.
29.3.4 Presentation requirements—cash flow statement
Article 10 requires the statement of cash flows to be presented for the year-to-
date period and for the corresponding period of the prior year. The reporting
entity may also present a statement of cash flows for the cumulative 12-month
period ended during the most recent fiscal quarter and for the corresponding
preceding period if that information would be meaningful to financial statement
users.
Similar to the balance sheet and income statement, the statement of cash flows
may also be presented on a condensed basis as described below.
S-X 10-01(a)(4)
The statement of cash flows may be abbreviated starting with a single figure of
net cash flows from operating activities and showing cash changes from investing
and financing activities individually only when they exceed 10% of the average of
net cash flows from operating activities for the most recent three years.
Notwithstanding this test, Rule 4-02 applies and de minimis amounts therefore
need not be shown separately.
Interim cash flow statements do not require separate disclosure of the amounts
of cash interest and taxes paid during the interim periods. While Article 10 allows
the statement of cash flows to start with a single figure for cash flows from
operating activities, reporting entities may want to consider whether stakeholders
PwC 29-7
would benefit from expanded cash flows from operating activities, similar to
annual presentations, rather than the abbreviated presentation.
29.3.5 Presentation requirements—statement of changes in stockholders’

equity
Article 10 does not require reporting entities to present a statement of changes in

stockholders’ equity or disclosures of changes in equity in the footnotes unless
there are significant changes in equity accounts subsequent to the most recent
year end. If there are significant changes, those changes should be disclosed
either in a separate statement of changes in stockholders’ equity or in the
footnotes.
Notwithstanding the Article 10 guidance, ASC 810, Consolidation, requires a

reporting entity with one or more less-than-wholly-owned subsidiaries to
reconcile the beginning and end of period carrying amounts of total equity, equity
attributable to the parent, and equity attributable to the noncontrolling interest
for each reporting period.
As such, we believe a reporting entity should include (either in a statement of

changes in stockholders’ equity or in the footnotes) an equity reconciliation from
the beginning of the current fiscal year to the balance sheet date, as well as for the
comparative year-to-date period presented in the quarterly filing.
ASC 505, Equity, also requires reporting entities to summarize the rights and
privileges of the various securities outstanding, and the number of shares issued
upon conversion, exercise, or satisfaction of required conditions.
29.4 Interim footnote disclosures

Since interim periods are an integral part of an annual period, reporting entities
can assume stakeholders have access to the annual financial information and can
prepare most of their disclosures in the context of an update to the most recently
filed annual financial statements. ASC 270 also acknowledges the balance
between timely interim financial reporting and the amount of detail disclosed,
and therefore provides more limited disclosure requirements for interim
financial information as compared to annual financial statements.
As such, interim reporting generally should not simply repeat information

disclosed in the previous annual financial statements (e.g., significant accounting
policies or details of account balances that have not changed significantly).
Disclosures should typically focus on items that have changed significantly since
year end or events that occurred subsequent to the annual financial statements
(e.g., new borrowings, business combinations or dispositions, debt or equity
issuances, etc.).
There may be circumstances in which information is not significant in the context

of the annual results of operations but is material in the context of the interim
results. This information should be discussed in the interim report.
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Although the interim footnote disclosures should be prepared using this

overarching guidance, there are certain specific interim reporting requirements,
discussed later in this section.
Certain disclosures may also be necessary to ensure comparability with prior

periods.
ASC 270-10-45-8b
Some costs and expenses incurred in an interim period, however, cannot be
readily identified with the activities or benefits of other interim periods and shall
be charged to the interim period in which incurred. Disclosure shall be made as
to the nature and amount of such costs unless items of a comparable nature are
included in both the current interim period and in the corresponding interim
period of the preceding year.
The following subsections discuss certain interim footnote disclosures required

by ASC 270 and Article 10. FSP 29.4.1 through 29.4.6 includes general recurring
interim disclosure requirements. FSP 29.4.7 includes disclosure requirements for
certain transactions. If the required interim disclosures are identical to the
annual disclosure requirements, the topic is listed in a chart that references
where more information on the annual disclosure requirements can be found.
Otherwise, if the annual and interim disclosure requirements differ, the interim
requirements are discussed.
29.4.1 General recurring interim reporting requirements that are identical

to annual reporting requirements
Figure 29-1 lists accounting topics that have identical interim and annual
reporting requirements and references discussion of the annual disclosure
requirements.
Figure 29-1
General recurring topics with identical interim and annual disclosure
requirements
Topic Reference
Commitments and contingencies* FSP 23
Debt and equity securities FSP 9
Derivatives and hedging FSP 19
EPS FSP 29.3.2 and FSP 7
Financial instruments FSP 20
PwC 29-9
Topic Reference
Guarantees, including product FSP 11 and FSP 23

warranties
Joint and several arrangements FSP 23
Registered guarantors/guarantees Regulation S-X 3-10, FSP 12, and FSP 31
Related parties FSP 26
Taxes collected from customers FSP 3

and remitted to government
authorities
Variable interest entities FSP 18
*With respect to contingencies, reporting entities are required to disclose

material contingencies whether or not there has been a change since the last
annual reporting period. Disclosures should be repeated or updated as applicable
in all reporting periods until the contingencies have been removed, resolved, or
have become immaterial. However, since interim financial statements include
year-to-date information, contingencies resolved during one quarter of a fiscal
year should continue to be disclosed in the subsequent quarterly financial
statements of the same fiscal year.
ASC 270 also indicates that contingencies and other uncertainties that could
affect the fairness of presentation of interim financial data should be disclosed in
interim reports in the same manner as required for annual reports. When
assessing whether a transaction or uncertainty is material for purposes of
disclosure, materiality should be assessed in relation to the annual financial
statements.
29.4.2 Defined benefit pension plans and other postemployment benefits
The following interim disclosures should be provided for defined benefit pension
plans and other defined benefit postretirement benefit plans of publicly traded
reporting entities in interim periods.
Excerpt from ASC 270-10-50-1(j)

1. The amount of net periodic benefit cost recognized, for each period for which
a statement of income is presented, showing separately the service cost
component, the interest cost component, the expected return on plan assets
for the period, the gain or loss component, the prior service cost or credit
component, the transition asset or obligation component, and the gain or loss
recognized due to a settlement or curtailment
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2. The total amount of the employer’s contributions paid, and expected to be

paid, during the current fiscal year, if significantly different from amounts
previously disclosed. . . . Estimated contributions may be presented in the
aggregate combining all of the following:
i. Contributions required by funding regulations or laws
ii. Discretionary contributions
ii. Noncash contributions.
The disclosures should be provided for all periods presented. The amounts
should reflect the actual expense recorded and should not be changed to reflect
“normalized” expense for the year.
Reporting entities must also disclose certain information about Medicare subsidy
effects on its postretirement health care benefit plan. See FSP 13 for further
information on these disclosures.
29.4.3 Equity method investees
Article 10 requires certain disclosure for equity method investees.
S-X 10-01(b)(1)
(1) Summarized income statement information shall be given separately as to
each subsidiary not consolidated or 50 percent or less owned persons or as to
each group of such subsidiaries or fifty percent or less owned persons for which
separate individual or group statements would otherwise be required for annual
periods. Such summarized information, however, need not be furnished for any
such unconsolidated subsidiary or person which would not be required pursuant
to Rule 13a-13 or 15d-13 to file quarterly financial information with the
Commission if it were a registrant.
While income statement information is required, it is not necessary to provide

balance sheet information of equity method investees. See FSP 10 for further
information on disclosures required for equity method investments in interim
periods.
29.4.4 Financing receivables and allowances for credit losses
ASC 270 requires reporting entities to disclose the following information about
the credit quality of financing receivables and the allowance for credit losses:
□ Nonaccrual and past due financing receivables
□ Allowance for credit losses related to financing receivables
□ Impaired loans
PwC 29-11
□ Credit-quality information related to financing receivables
□ Modifications of financing receivables
29.4.5 Reportable operating segments
Reduced segment disclosures may be presented when condensed financial

statements of interim periods are issued. If a complete set of financial statements
is presented in an interim period, then the full disclosure requirements of ASC
280 apply. Refer to FSP 25.7.7 for discussion of presentation and disclosure
requirements for segments in interim periods.
29.4.6 Seasonal revenue, costs, or expenses
Certain reporting entities are subject to seasonal variations, which could cause
interim results to not be indicative of the estimated results for the full fiscal year.
Reporting entities subject to material seasonal variations should disclose the
seasonal nature of their activities. They should also consider supplementing
interim financial information with information from the 12-month period ended
as of the most recent interim date along with comparative data from the
corresponding 12-month period of the prior year.
For example, as noted in Article 10, certain agricultural reporting entities may
present rolling 12-month interim financial information in lieu of year-to-date
information if management believes it is more appropriate and necessary for an
understanding of the impact of seasonal fluctuations.
Some SEC registrants may also elect to present balance sheets as of the end of the
prior year quarter as supplemental disclosure for comparative purposes.
29.4.7 Other interim reporting requirements for certain transactions
To the extent applicable, additional reporting may be necessary as a result of

events or transactions that occur in the interim period. The following subsections
discuss several of these situations.
29.4.7.1 Other interim reporting requirements for certain non-recurring

transactions that are identical to annual reporting requirements
Figure 29-2 lists accounting topics that are non-recurring in nature that have
identical interim and annual reporting requirements, and references discussion
of the annual disclosure requirements.
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Figure 29-2
Non-recurring topics with identical interim and annual disclosure requirements
Topic Reference
Collaborative arrangements** FSP 3
Early warning and changes to risks and uncertainties FSP 24
Going concern FSP 24
Issuance of equity FSP 5
New debt arrangements FSP 12
Restructuring FSP 11
Share-lending arrangements FSP 12
Subsequent events FSP 28
**Collaborative arrangement disclosures are only necessary in the period in which the arrangement
commences and all annual periods thereafter.

The disclosure requirements of ASC 805, Business Combinations, are applicable
for business combinations that occur either during the current reporting period,
or after the reporting date but before the financial statements are issued.
Therefore, the required disclosures should be included in interim financial
statements, as applicable.
S-X 10-01(b)(4) requires certain pro forma financial information to be provided
for material business combinations that have occurred during the period.
S-X 10-01(b)(4)
Where a material business combination has occurred during the current fiscal
year, pro forma disclosure shall be made of the results of operations for the
current year up to the date of the most recent interim balance sheet provided
(and for the corresponding period in the preceding year) as though the
companies had combined at the beginning of the period being reported on. This
pro forma information shall, at a minimum, show revenue, income before
extraordinary1 items and the cumulative effect of accounting changes, including
such income on a per share basis, and net income, net income attributable to the
registrant, and net income per share.
1As of the publication date of this guide, the SEC had not yet updated S-X 5-03 to reflect the issuance
of ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), by the
FASB, which eliminates the concept of extraordinary items. ASU 2015-01 is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2015. As such, the S-X
disclosures related to extraordinary items are not required.
PwC 29-13
Though the intent of this Article 10 guidance is to require pro forma information
in interim financial statements that is consistent with the pro forma information
required by the accounting standards, certain differences exist. Refer to FSP 17
for further discussion of disclosures associated with business combinations and
SEC 4560 for discussion of SEC pro forma requirements associated with business
combinations.
If the transaction is reflected as a combination of entities under common control,

S-X 10-01(b)(3) requires supplemental disclosure of the results of the entities
combined for all periods presented. See FSP 30 for further discussion regarding
entities under common control or change in reporting entities.
29.4.7.3 Changes in accounting principles or estimates
Reporting entities may make a change in accounting principle (e.g., adopt a new
accounting standard or acknowledge the impact of a change for a standard not
yet adopted), a change in estimate, or identify an error during an interim
reporting period. FSP 30 discusses the presentation and disclosure requirements
for each of these events.
The SEC staff requires companies that adopt a new accounting standard during
an interim period to include all required annual disclosures in any interim
financial statements that are prepared until the next annual financial statements
are filed. This is true even if the disclosure requirements of new accounting
standards are only applicable for annual periods.
29.4.7.4 Discontinued operations
Reporting entities may meet the requirements to report discontinued operations

during an interim reporting period. The disclosure requirements of
ASC 205-20-50-1 through 7, as discussed in FSP 27, should be followed for
interim reporting periods.
Article 10 also requires disclosure of the amount and earnings per share impact of
a discontinued operation on revenue and net income for each period presented.
29.4.7.5 Disposal of a component of a reporting entity and unusual or

infrequently occurring items
Material effects of disposals of a component of a reporting entity and unusual and

infrequently occurring transactions and events should be reported separately.
If discontinued operations are reported net of tax in the annual financial

statements, they should be similarly reported in interim financial statements.
29.4.7.6 Significant changes in estimates or provisions for income taxes
Reporting entities should make their best estimate of the effective tax rate
expected to be applicable for the full fiscal year for interim reporting purposes
and disclose any significant changes in such estimates from period to period. If a
29-14 PwC
reporting entity determines that it is unable to reliably estimate its annual

effective tax rate, the discrete-period computation method may be used. The
reporting entity’s assertion that it cannot reliably estimate its annual effective tax
rate should be disclosed so that financial statement users can understand the
manner in which the interim tax provision was determined.
When a reporting entity applies the requirements of ASC 740, Income Taxes, in
interim periods, a significant variation in the customary relationship between
income tax expense and pretax income may result. Unless apparent from the
financial statements or the nature of the reporting entity’s business, the reasons
for significant variations in the customary relationship between income tax
expense and pretax accounting income should be disclosed.
In addition, if important developments occur during the year or if the tax

amounts reported for the interim periods do not adequately reflect events that
the reporting entity expects to occur, disclosure of these matters should be
considered. Interim period disclosures related to income taxes often include:
□ Tax effects of significant unusual or infrequent items that are recorded

separately or items that are reported net of their related tax effect
□ Significant changes in estimates or provisions for income taxes (e.g., changes

in the assessment of the need for a valuation allowance that occur during the
period)
□ Material changes to (1) uncertain tax benefits, (2) amounts of uncertain tax
benefits that if realized would affect the estimated annual effective tax rate,
(3) total amounts of interest and penalties recognized in the balance sheet,
(4) positions for which it is reasonably possible that the total amount of
uncertain tax benefits will significantly increase or decrease within the next
12 months, and (5) the description of tax years that remain open by major tax
jurisdiction
Material changes in unrecognized tax benefits that occur during an interim

period should be disclosed during the interim period. A reporting entity should
not delay disclosure of material changes until the end of the annual reporting
period.
29.5 Fourth quarter considerations

SEC registrants are required to report interim financial information for the first
three quarters of each fiscal year on a Form 10-Q. A Form 10-Q does not need to
be filed for the fourth quarter of any fiscal year; however, S-K 302 requires
disclosure of certain interim information within the annual report (but not
necessarily as part of the audited financial statements) for most public reporting
entities (exceptions are noted in S-K 302(a)(5)).
If a fourth quarter statement is separately issued, it should follow the format and
content of earlier quarterly statements.
PwC 29-15
If a public reporting entity has not prepared a separate fourth quarter statement,
nor disclosed the results of that quarter in a separate section of the annual report,
and it is not subject to the requirements of Regulation S-K, ASC 270-10-50-2
nonetheless requires the following to be disclosed in a footnote to the annual
financial statements:
□ Unusual or infrequently occurring items recognized during the fourth quarter
□ Disposal of a component(s) during the fourth quarter
□ Aggregate effect of year-end adjustments that are material to that fourth

quarter
□ Changes to accounting principles made during the fourth quarter

The primary guidance for the form and content of condensed interim financial
information is Article 10, which applies to SEC registrants. Private companies
that provide interim information should comply with the provisions of ASC 270
that are applicable to nonpublic companies. In addition, they may also consider
complying with the provisions of ASC 270 that are applicable to publicly traded
entities, as well as the form and content guidance of Article 10. Private company
interim financial information should include a footnote advising that the
financial information should be read in conjunction with the latest annual
Private company interim financial reporting is often driven by bank covenants or

private equity reporting requirements. Not-for-profit entities are often subject to
continuing disclosure agreements in connection with tax-exempt financing,
which may require the provision of interim financial information. While being
mindful of the interim reporting requirements of Article 10 and ASC 270, private
and not-for-profit entities should follow the specific financial reporting
requirements as mandated by their bank, investor, or continuing disclosure
agreements.
The following subsections discuss specific differences in disclosure requirements

for private entities as compared with public entities.
29.6.1 Accumulated other comprehensive income
Private companies are not required to present, either parenthetically on the face
of the financial statements or in a single footnote, amounts reclassified out of
each component of AOCI on an interim basis. However, private companies are
required to follow the reporting requirements related to AOCI during interim
periods.
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29.6.2 Defined benefit pension plans and other postemployment benefits
Private companies are not required to provide all of the interim disclosures about
defined benefit pension plans and other defined benefit postretirement benefit
plans described in FSP 29.4.2. Private company disclosure requirements are as
follows:
ASC 715-20-50-7
A nonpublic entity shall disclose in interim periods for which a complete set of
financial statements is presented the total amount of the employer’s
contributions paid, and expected to be paid, during the current fiscal year, if
significantly different from amounts previously disclosed. . . . Estimated
contributions may be presented in the aggregate combining all of the following:
a. Contributions required by funding regulations or laws
b. Discretionary contributions
c. Noncash contributions.
29.6.3 Financial instruments not measured at fair value
Interim disclosures for financial instruments not measured at fair value

(discussed in FSP 20), but for which fair value is disclosed, are not required for
entities that do not meet the Master Glossary’s definition of a publicly traded
company.

Publicly Traded Company: A business entity that has any of the following
characteristics:
a. Whose securities are traded in a public market on a domestic stock exchange

or in the domestic over-the-counter market (including securities quoted only
locally or regionally)
b. That is a conduit bond obligor for conduit debt securities that are traded in a
public market (a domestic or foreign stock exchange or an over-the-counter
market, including local or regional markets)
c. Whose financial statements are filed with a regulatory agency in preparation

for the sale of any class of securities in a domestic market
PwC 29-17
Chapter 30:
Accounting changes
PwC 30-1
Accounting changes

An accounting change is generally the result of one of three scenarios: a change in
accounting principle, a change in estimate, or a correction of an error.
Distinguishing between each scenario can sometimes be difficult, but the
distinction is critical to applying the appropriate reporting framework.
This chapter provides guidance on how to distinguish between a change in

accounting principle, change in estimate, or error correction, and addresses the
applicable presentation and disclosure considerations for each. It also discusses
the presentation and disclosure related to changes in the reporting entity.
30.2 Scope
ASC 250, Accounting Changes and Error Corrections, is the primary guidance
governing accounting changes, though other provisions of US GAAP and SEC
guidance also impact specific aspects of accounting changes. The US GAAP
guidance is applicable to all reporting entities, including not-for-profit and
private companies. Although the SEC guidance is only required to be applied by
reporting entities whose financial statements are filed with the SEC, private
companies are encouraged to consider the SEC guidance as well.
30.3 Differentiating between a change in

accounting principle, a change in estimate,
or a correction of an error
Determining whether a change in accounting represents the application of a new
(different) accounting principle, a change in estimate, or a correction of an error
can often be difficult and may require judgment.
In several areas of US GAAP, reporting entities can elect from more than one
acceptable accounting principle. A change in accounting principle is a change
from one acceptable method to another. Examples include changing pension
accounting methods related to actuarial gains and losses and a change in the
composition of the elements of inventory costing.
In contrast, a change in estimate results from incorporating new information or

modifying the estimating techniques affecting the carrying amount of assets or
liabilities as of the date the change is made. Changing inputs for estimating
uncollectible receivables based on new information is an example of a change in
the estimating technique.
The distinction between a change in accounting principle and a change in

estimate is important because a change in accounting principle is generally
applied retrospectively (by recasting prior periods), while a change in estimate is
prospective, affecting only current and future periods. In addition, reporting
entities cannot change accounting principles unless the new method is
“preferable.”
30-2 PwC
Accounting changes
Distinguishing a change in estimate from an error is also important. While a

change in estimate results from new information or developments, an error
reflects the misapplication of facts or information that was available at a previous
financial statement reporting date. If the “new” information was known, or could
have been known, as of the prior period, it is generally indicative of an error in
the previous accounting.
Reporting entities should consider the following questions to help differentiate

among a change in accounting principle, change in estimate, or a correction of an
error:
□ What was the rationale for the accounting change?
□ Did the estimation model change, or just the inputs?
□ Why did the inputs to the estimation model change and when was a change
in inputs supportable?
□ Is the reporting entity applying the accounting principle to a new business,

new balances, or new transaction streams, or is the accounting principle
applicable to balances and transaction streams to which it should have been
applied in the past?
□ If the accounting results have changed significantly, can the changes be

substantiated by developments in the business?
30.4 Change in accounting principle

A change in accounting principle is a change from one acceptable method to
another. It can be required by newly issued guidance or as the result of a decision
by the reporting entity to adopt a different accounting principle on the basis that
it is preferable.
New accounting guidance generally provides specific transition requirements

(e.g., prospective application or cumulative catch up adjustment). Accordingly,
the provisions of ASC 250 do not apply when a reporting entity is adopting a new
accounting pronouncement that specifies the manner of adopting the change.
However, if transition requirements are not provided, a change in accounting
principle must be reported in accordance with ASC 250.
The adoption of accounting principles in the following situations are outside the
scope of ASC 250:
PwC 30-3
Accounting changes

Neither of the following is considered to be a change in accounting principle:
a. Initial adoption of an accounting principle in recognition of events or
transactions occurring for the first time or that previously were immaterial in
their effect
b. Adoption or modification of an accounting principle necessitated by

transactions or events that are clearly different in substance from those
previously occurring.
Note that, generally, accounting principles that are not material are not disclosed
in the footnotes. Therefore, it would be unusual for an accounting principle that
is disclosed in previously issued financial statements to be deemed immaterial for
the purposes of considering ASC 250-10-45-1a.
30.4.1 Justification for a change in accounting principle
Once an accounting principle is adopted, it should be applied consistently when

accounting for similar events and transactions. A reporting entity that wants to
change an accounting principle must justify that the allowable alternative
accounting principle is preferable.
Preferability may vary depending upon the circumstances of the reporting entity.
For example, one reporting entity may deem the LIFO inventory method to be
preferable due to the nature of its inventory costs, while for others, FIFO may be
most appropriate. The disclosure should include an explanation of why the newly
adopted change is preferable. SAB Topic 6.G.2.b, Reporting Requirements for
Accounting Changes, provides guidance on assessing the justification for a
change in accounting principle. It includes considerations such as whether an
authoritative body has deemed one accounting principle preferable to another,
how the change impacts business judgment and planning, and whether the
change results in improved financial reporting.
30.4.2 Preferability letters
While preferability must be established for all accounting changes, not all
changes require the issuance of a preferability letter. Emphasis of certain changes
are required in the auditor’s report for all reporting entities, and preferability
letters are required for material accounting changes made by public reporting
entities.
If there has been a change in an accounting principle or in the method of its

application that has a material effect on the comparability of the reporting
entity’s financial statements, the auditor is required to discuss the change in an
explanatory paragraph in the auditor’s report that identifies the nature of the
change and refers to the footnote in the financial statements that discusses the
change.
30-4 PwC
Accounting changes
For public reporting entities (except for Foreign Private Issuers) that make
material accounting changes, a registrant’s independent accountant is required to
provide a letter (commonly known as a “preferability letter”) indicating whether
or not the reporting entity’s change to an alternative principle is, in the
accountant’s judgment, preferable under the circumstances. SEC 3140.4 and
3130.17 provide guidance on the form and content of preferability letters.
30.4.3 Presentation and disclosure considerations
ASC 250 requires that a change in accounting principle be reported through

retrospective application to all prior periods, unless impracticable. Retrospective
application requires the following:
□ The cumulative effect of the change to the new accounting principle on

periods prior to those presented should be reflected in the carrying amounts
of assets and liabilities as of the beginning of the first period presented.
□ The effect, if any, must be reflected in the opening balance of retained

earnings (or other appropriate components of equity or net assets) for the
earliest period presented.
□ Financial statements for each individual prior period presented should be

adjusted to reflect the period-specific effects of applying the new accounting
principle.
SAB Topic 5.F, Accounting Changes Not Retroactively Applied Due to

Immateriality, provides the SEC staff’s view on instances when an accounting
change that is required to be adopted by retrospective application is considered
to be immaterial to prior period financial statements. The SEC staff believes that
the amount should be reflected in the results of operations for the period in
which the change is made unless the cumulative effect is material to current
operations or to the trend of the reported results of operations. In this case, the
individual income statements of the earlier years should be retrospectively
adjusted. See SAB 99, Materiality, for evaluating materiality.
ASC 250 also requires specific financial statement disclosures with respect to a
change in accounting principle, as outlined in ASC 250-10-50-1.

An entity shall disclose all of the following in the fiscal period in which a change
in accounting principle is made:
a. The nature of and reason for the change in accounting principle, including an
explanation of why the newly adopted accounting principle is preferable.
b. The method of applying the change, including all of the following:
1. A description of the prior-period information that has been

retrospectively adjusted, if any.
PwC 30-5
Accounting changes
2. The effect of the change on income from continuing operations, net

income (or other appropriate captions of changes in the applicable net
assets or performance indicator), any other affected financial statement
line item, and any affected per-share amounts for the current period and
any prior periods retrospectively adjusted. Presentation of the effect on
financial statement subtotals and totals other than income from
continuing operations and net income (or other appropriate captions of
changes in the applicable net assets or performance indicator) is not
required.
3. The cumulative effect of the change on retained earnings or other
components of equity or net assets in the statement of financial position
as of the beginning of the earliest period presented.
…Financial statements of subsequent periods need not repeat the disclosures

required by this paragraph. If a change in accounting principle has no material
effect in the period of change but is reasonably certain to have a material effect in
later periods, the disclosures required by (a) shall be provided whenever the
financial statements of the period of change are presented.
The guidance above indicates that the disclosure generally does not need to be
repeated in subsequent period financial statements. However, when an
accounting change occurs and prior periods are not retrospectively adjusted due
to impracticability, the disclosures should be included in subsequent periods
until all periods are prepared using the new principle.
SAB Topic 6.I.3, Net of Tax Presentation, clarifies that when items are reported
on a net of tax basis, additional disclosures of the nature of the tax component
should be provided. This is accomplished by reconciling the tax component
associated with the item to the applicable statutory income tax rate. This
guidance is applicable to cumulative effect adjustments related to changes in
accounting principle, which are presented net of tax.
Question 30-1
Do the columns on the primary financial statements need to be labelled “As
restated” when there has been a retrospective change in accounting principle?
PwC response
No. However, the reporting entity should include clear disclosure in the footnotes
about the effect of the change on the affected financial statement line items and
any per-share amounts are required by ASC 250-10-50-1. See FSP 7 for
discussion of per-share considerations.
30-6 PwC
Accounting changes
30.4.3.1 The impracticability exception
Sometimes it is not practical for reporting entities to calculate the retrospective

impact of an accounting change due to lack of available information. The
guidance acknowledges this complication, and provides criteria that a reporting
entity must meet to deem retrospective application impracticable.
ASC 250-10-45-9
It shall be deemed impracticable to apply the effects of a change in accounting
principle retrospectively only if any of the following conditions exist:
a. After making every reasonable effort to do so, the entity is unable to apply the
requirement.
b. Retrospective application requires assumptions about management’s intent

in a prior period that cannot be independently substantiated.
c. Retrospective application requires significant estimates of amounts, and it is

impossible to distinguish objectively information about those estimates that
both:
1. Provides evidence of circumstances that existed on the date(s) at which those

amounts would be recognized, measured, or disclosed under retrospective
application
2. Would have been available when the financial statements for that prior
period were issued.
Sometimes it may be impracticable to determine the period-specific effects of a

change on prior annual or interim periods even when the cumulative effect can be
determined. For example, it may be possible to determine the impact for annual
periods but not interim periods. In these situations, carrying amounts of assets
and liabilities as of the earliest period should be adjusted for the cumulative effect
of the change to the new accounting principle. Any offsetting adjustment should
be made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position).
If it is impracticable to determine the cumulative effect of applying a change in

accounting principle, then the new accounting principle should be applied
prospectively as of the earliest date practicable. Note that the disclosure
provisions discussed in FSP 30.4.3 would still apply.
30.4.3.2 Indirect effects of a change in accounting principle
ASC 250 indicates that retrospective application should include only the direct
effects of a change in accounting principle, including any related income tax
effects. Indirect effects that would have been recognized if the newly adopted
accounting principle had been followed in prior periods should not be included in
PwC 30-7
Accounting changes
the retrospective application. If indirect effects are actually incurred, they should
be reported in the period in which the accounting change is made. Specific
disclosures are outlined in ASC 250-10-50-1(c).
ASC 250-10-50-1(c)
If indirect effects of a change in accounting principle are recognized both of the
following shall be disclosed:
1. A description of the indirect effects of a change in accounting principle,

including the amounts that have been recognized in the current period, and
the related per-share amounts, if applicable
2. Unless impracticable, the amount of the total recognized indirect effects of

the accounting change and the related per-share amounts, if applicable, that
are attributable to each prior period presented. Compliance with this
disclosure requirement is practicable unless an entity cannot comply with it
after making every reasonable effort to do so.
Example 30-1 demonstrates the concept of an indirect effect of an accounting

change.
EXAMPLE 30-1
Indirect effect of an accounting change
FSP Corp changes to a preferable accounting principle in 20X6. The retrospective

application of the change results in an increase in reported net income for 20X5.
FSP Corp’s bonus plan is tied to reported net income, and the 20X5 bonus
payment would have been higher if the new accounting principle had actually
been adopted in 20X5. Though not required to do so under the bonus plan, FSP
Corp elects to pay the incremental bonus amount in 20X6.
Should FSP Corp report the incremental bonus payment in the retrospective
application of the change in accounting principle?
Analysis
No. The incremental bonus payment is an indirect effect of the accounting change
and would not be included in the retrospective application in 20X5. Rather, the
additional bonus expense should be reported in 20X6. Had FSP Corp chosen not
to pay the incremental bonus, there would be no impact on 20X5 or 20X6.
30.4.3.3 Disclosure of the impact that recently issued accounting standards

will have on the financial statements
SAB 74, Disclosure of the Impact That Recently Issued Accounting Standards
Will Have on the Financial Statements of the Registrant When Adopted in a
Future Period, discusses the SEC staff’s view regarding required disclosures
30-8 PwC
Accounting changes
when a new accounting standard has been issued but is not yet effective. The SEC
staff emphasizes that reporting entities should provide meaningful (non-
boilerplate) disclosure based on known information. Financial statement and
nonfinancial statement disclosures should not be duplicative because their
objectives are different. Although there will be exceptions, the SEC staff's view
suggests a general principle that the retrospective effects of a new accounting
standard would most likely be disclosed in the financial statements while the
future/prospective effects would most likely be discussed in MD&A.
Often, a reporting entity will initially disclose that it is assessing the impact of a
new standard and begin to provide more detailed disclosures as the information
is available. SAB Topic 74 describes the disclosures to be made.
Excerpt from SAB Topic 74

• A brief description of the new standard, the date that adoption is required
and the date that the registrant plans to adopt, if earlier.
• A discussion of the methods of adoption allowed by the standard and the

method expected to be utilized by the registrant, if determined.
• A discussion of the impact that adoption of the standard is expected to have

on the financial statements of the registrant, unless not known or reasonably
estimable. In that case, a statement to that effect may be made.
• Disclosure of the potential impact of other significant matters that the

registrant believes might result from the adoption of the standard (such as
technical violations of debt covenant agreements, planned or intended
changes in business practices, etc.) is encouraged.
Each new accounting standard must be analyzed to determine the appropriate

disclosure. The level of information available may differ based on the nature of
the standard and from one reporting entity to another.
If a recently issued standard will impact the presentation of, but not materially
affect, the financial statements, SAB 74 encourages the reporting entity to
disclose that a standard has been issued and that its adoption will not have a
material effect on its financial position or results of operations.
30.5 Change in accounting estimate

A change in estimate results from new information or modifications to the
estimating techniques affecting the carrying amount of assets or liabilities.
ASC 250 indicates that changes in accounting estimates should not be accounted
for by restating or retrospectively adjusting the amounts reported in the financial
statements of prior periods or by reporting pro forma amounts. A change in
accounting estimate should be accounted for in the period of change and
prospective periods, if applicable.
PwC 30-9
Accounting changes
It is important for reporting entities to maintain sufficient documentation to

support revisions to estimates and the timing of such revisions. A revision to an
estimate should be based on events, facts, or circumstances that occurred during
the period in which the estimate was revised.
ASC 250 requires specific financial statement disclosures with respect to changes
in accounting estimates.
ASC 250-10-50-4
The effect on income from continuing operations, net income (or other
appropriate captions of changes in the applicable net assets or performance
indicator), and any related per-share amounts of the current period shall be
disclosed for a change in estimate that affects several future periods, such as a
change in service lives of depreciable assets. Disclosure of those effects is not
necessary for estimates made each period in the ordinary course of accounting for
items such as uncollectible accounts or inventory obsolescence; however,
disclosure is required if the effect of a change in the estimate is material. When
an entity effects a change in estimate by changing an accounting principle, the
disclosures required by paragraphs 250-10-50-1 through 50-3 also are required.
If a change in estimate does not have a material effect in the period of change but
is reasonably certain to have a material effect in later periods, a description of
that change in estimate shall be disclosed whenever the financial statements of
the period of change are presented.
At times, a change in estimate can result from a change in accounting principle. A

common example is a change in the method of depreciation applied to fixed
assets, which is effectively a change in the estimate of the future benefit or
pattern of consumption. In such cases, the effect of the change in accounting
principle, or the method of applying it, may be inseparable from the effect of the
change in accounting estimate. Such changes should be accounted for as a change
in estimate. As with changes in accounting principles, this type of change may
only be made if it is preferable. Other changes in estimate do not require an
assessment of preferability.
30.6 Change in the reporting entity and

common control transactions
A change in reporting entity is a change that results in financial statements that,
in effect, are those of a different reporting entity. Examples include changing
subsidiaries within a consolidated group or changing the entities included in a set
of combined financial statements. Business combinations accounted for by the
acquisition method and consolidation of variable interest entities pursuant to
Topic 810, Consolidation, are not considered changes in the reporting entity.
30-10 PwC
Accounting changes

When there has been a change in the reporting entity, the financial statements of
the period of the change shall describe the nature of the change and the reason
for it. In addition, the effect of the change on income from continuing operations,
net income (or other appropriate captions of changes in the applicable net assets
or performance indicator), other comprehensive income, and any related per-
share amounts shall be disclosed for all periods presented. Financial statements
of subsequent periods need not repeat the disclosures required by this paragraph.
If a change in reporting entity does not have a material effect in the period of
change but is reasonably certain to have a material effect in later periods, the
nature of and reason for the change shall be disclosed whenever the financial
statements of the period of change are presented.
Combinations between entities that are under common control are included
within the Transactions Between Entities Under Common Control subsections of
ASC 805-50. Common control transactions occur frequently, particularly in the
context of reorganizations, spin-offs, and initial public offerings.
Refer to BCG 10 for details on assessing whether common control exists, and
BCG 8 for additional guidance on accounting for combinations between entities
or businesses under common control.
30.7 Correction of an error

When a reporting entity identifies an error in previously issued financial
statements, its first step is to determine whether it is material to any previously
issued financial statements. If not, they must then evaluate whether the
correction of the error in the current period would result in a material
misstatement of the current period’s financial statements. For SEC registrants
(and a best practice for all reporting entities), SAB 99 requires both a qualitative
and quantitative assessment of materiality.
Figure 30-1 depicts the materiality framework for evaluating errors in previously
issued financial statements.
PwC 30-11
Accounting changes
Figure 30-1
Framework for evaluating errors in previously issued financial statements
* The materiality evaluation requires significant professional judgment and should consider all
relevant qualitative and quantitative factors. The evaluation may need to include factors that are not
specifically mentioned in SAB 99.
** The “rollover” method is used to evaluate whether previously issued financial statements are
materially misstated. The “rollover method” involves an analysis of the error(s) on all of the financial
statements. The “iron curtain” error analysis does not impact the decision regarding whether or not
previously issued financial statements are materially misstated.
Materiality analyses require significant judgment. A materiality analysis must

consider all relevant qualitative and quantitative factors (including
company/industry-specific factors).
Errors in financial statements filed with the SEC must be evaluated using both
the “iron curtain” method (for the current period) and the “rollover” method (for
prior periods) to determine whether they are quantitatively significant.
□ The “rollover” method quantifies income statement errors based on the

amount by which the income statement for the period is actually misstated—
including the reversing effect of any prior period errors. Identified
misstatements in the previous period that were not corrected need to be
considered to determine any “carryover effects.”
30-12 PwC
Accounting changes
□ The “iron curtain” method quantifies income statement errors based on the
amount by which the income statement would be misstated if the
accumulated amount of the errors that remain in the balance sheet at the end
of the period were corrected through the income statement during that
period.
Many reporting entities whose financial statements are not filed with the SEC
also evaluate errors using both of these methods. The use of both methods is
commonly referred to as the “dual” method of evaluating errors.
30.7.1 Restatements
Upon determination that the previously issued financial statements are

materially misstated, they should be corrected promptly.
□ For an SEC registrant, the correction of a material misstatement is ordinarily

accomplished by performing both of the following:
o Filing an Item 4.02 Form 8-K to indicate that the previously issued financial
statements should no longer be relied upon
o Amending prior filings (e.g., filing Form 10-K/A and/or Form 10-Q/A, or, in
limited circumstances, a Form 10-K when filing of the subsequent year’s
Form 10-K is imminent)
□ For a private company, the correction of a material misstatement is

ordinarily accomplished by the company issuing corrected financial
statements that indicate that they have been restated and include its auditor’s
reissued audit report. Alternatively, it is permissible to reflect the
restatement in the soon-to-be issued comparative financial statements.
Where the restatement is to be reflected in the soon-to-be issued comparative
financial statements, the financial statements and auditor’s report would
indicate that the prior periods have been restated. Users of the previously
issued financial statements also must be notified that they should no longer
rely on those financial statements.

Restatement requires all of the following:
a. The cumulative effect of the error on periods prior to those presented shall be
reflected in the carrying amounts of assets and liabilities as of the beginning
of the first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of

retained earnings (or other appropriate components of equity or net assets in
the statement of financial position) for that period.
c. Financial statements for each individual prior period presented shall be

adjusted to reflect correction of the period-specific effects of the error.
PwC 30-13
Accounting changes
When only a single period is presented, the cumulative effect of the error should
be recorded as an adjustment to beginning retained earnings.
Further, ASC 250 requires specific financial statement disclosures with respect to
a correction of an error.
ASC 250-10-50-7
When financial statements are restated to correct an error, the entity shall
disclose that its previously issued financial statements have been restated, along
with a description of the nature of the error. The entity also shall disclose both of
the following:
a. The effect of the correction on each financial statement line item and any per-
share amounts affected for each prior period presented
b. The cumulative effect of the change on retained earnings or other appropriate

components of equity or net assets in the statement of financial position, as
of the beginning of the earliest period presented.
ASC 250-10-50-8
When prior period adjustments are recorded, the resulting effects (both gross
and net of applicable income tax) on the net income of prior periods shall be
disclosed in the annual report for the year in which the adjustments are made
and in interim reports issued during that year after the date of recording the
adjustments.
ASC 250-10-50-9
When financial statements for a single period only are presented, this disclosure
shall indicate the effects of such restatement on the balance of retained earnings
at the beginning of the period and on the net income of the immediately
preceding period. When financial statements for more than one period are
presented, which is ordinarily the preferable procedure, the disclosure shall
include the effects for each of the periods included in the statements. (See Section
205-10-45 and paragraph 205-10-50-1.) Such disclosures shall include the
amounts of income tax applicable to the prior period adjustments. Disclosure of
restatements in annual reports issued after the first such post-revision disclosure
would ordinarily not be required.
The above disclosures are required in the interim (if applicable) and annual
period of the change, but do not need to be repeated when the annual financial
statements of the subsequent period are issued.
While including only narrative disclosure is not prohibited, a tabular format,

supplemented with a narrative discussion, is generally clearer given the amount
of information that usually needs to be disclosed. Consistent with current
practice, we recommend prominent placement of the restatement disclosure in
30-14 PwC
Accounting changes
the footnotes to ensure that readers understand the impact of the changes on the
financial statements and any related footnotes.
30.7.2 Revisions and out-of-period adjustments
If the previously issued financial statements are not materially misstated, then
the error may be corrected prospectively. While ASC 250 only contemplates
reporting the correction of an error by restating the previously issued financial
statements, many identified errors do not result in a material misstatement to
previously issued financial statements. In that case, the error may be corrected in
one of two ways:
□ Recording an out-of-period adjustment, with appropriate disclosure, in the

current period, assuming that such correction does not create a material
misstatement in the current period
□ Revising the prior period financial statements the next time they are
presented
When the correcting amounts are material to current operations or trends for
operating results, reporting entities should revise the previously issued financial
statements the next time they are issued. Correcting prior year financial
statements for immaterial errors would not require previously issued auditor
reports to be corrected as users can continue to rely on those previously issued
A revision disclosure is similar to a restatement disclosure. When financial

statements are revised, the audit opinion is not modified, nor are the financial
statement columns labeled “as restated.”
EXAMPLE 30-2
Practical example of the error evaluation process
FSP Corp is a calendar year-end SEC registrant. In early April 20X6, FSP Corp
identified a long-term incentive compensation obligation for one of its
salespeople which it had inadvertently neglected to record since 20X2. If FSP
Corp had properly accounted for the bonus, it would have recorded an additional
$30 of compensation expense in each of the years 20X2 through 20X5.
□ FSP Corp’s reported income in each of the years 20X2 through 20X5 was
$1,000.
□ FSP Corp projects its 20X6 income will be $1,000.
Note: Income tax effects are ignored for purposes of this example. Additionally,
this example assumes that there are no other errors affecting any of the years. If
there were additional errors (whether unadjusted or recorded as “out-of-period”
adjustments), those errors would also need to be considered in the materiality
analysis.
PwC 30-15
Accounting changes
What analysis should FSP Corp perform to determine if the errors are material?
Analysis
Quantifying the errors in the previously issued financial statements
FSP Corp has quantified the errors under both the “rollover” and the “iron
curtain” methods as follows:
Iron curtain
Year Reported income Rollover method method
20X2 $1,000 $30 (3%) N/A
20X3 $1,000 $30 (3%) N/A
20X4 $1,000 $30 (3%) N/A
20X5 $1,000 $30 (3%) N/A
20X6 $1,000 (Projected) N/A $120 (12%)
Evaluating whether the affected financial statements are materially misstated
FSP Corp should consider whether the errors quantified under the “rollover”
method (i.e., $30 or 3% of income per year) are material to the financial
statements for any of the years 20X2 through 20X5. In making this analysis, FSP
Corp should consider all relevant qualitative and quantitative factors.
Note: The above analysis focuses on the effects of the errors on the income
statement. However, the analysis must also consider the impact of the error on
the full financial statements, including disclosures (e.g., segment reporting).
Determining how to correct the errors
If FSP Corp determines that any of the years 20X2 through 20X5 are materially
misstated when the errors are evaluated under the “rollover” method, then those
years must be promptly corrected (as discussed in FSP 30.7.1).
If FSP Corp determines that none of the years 20X2 through 20X5 (or quarters
for 20X5) are materially misstated when the errors are quantified under the
“rollover” method, then the errors can be corrected prospectively in current or
future filings (as discussed in FSP 30.7.2). Prospective correction may be
accomplished in one of two ways (depending on the circumstances):
□ FSP Corp may correct the errors as an “out-of-period” adjustment in its first
quarter 20X6 interim financial statements if the correction would not result
in a material misstatement of the estimated fiscal year 20X6 earnings
($1,000) or to the trend in earnings. This is true even if the “out-of-period”
adjustment is material to the first quarter 20X6 interim financial statements.
If the “out-of-period” adjustment is material to the first quarter 20X6 interim
30-16 PwC
Accounting changes
financial statements (but not material with respect to the estimated income
for the full fiscal year 20X6 or to the trend of earnings), then the correction
may still be recorded in the first quarter, but should be separately disclosed
(in accordance with ASC 250-10-45-27).
□ If FSP Corp cannot correct the errors as an “out-of-period” adjustment

without causing a material misstatement of the estimated fiscal year 20X6
earnings ($1,000) or to the trend in earnings, then the errors must be
corrected by revising the previously issued financial statements the next time
they are filed (e.g., for comparative purposes). For instance, the quarterly
financial statements for the first quarter of 20X5 and the December 31, 20X5
balance sheet presented in FSP Corp’s March 31, 20X6 Form 10-Q should be
revised to correct the error. The revised financial statements should include
transparent disclosure regarding the nature and amount of each error being
corrected. The disclosure should provide insight into how the errors affect all
relevant periods (including those that will be revised in subsequent filings).
30.7.3 Reclassifications
Sometimes it is necessary for reporting entities to reclassify an amount from a

prior year from one financial statement caption to another for comparability
purposes due to changes in the business. For example, if a balance becomes large
enough to require a separate line item in the current year, then the balance in the
prior year should also be shown on the same line item for comparability. In these
circumstances, the basis of presentation note should include disclosure to
indicate that the change in the prior year was made to conform to the current
year presentation and explain the nature and magnitude of the change.
Misclassifications
A change in classification to correct an error should be evaluated using the

framework discussed in FSP 30.7 and should be clearly disclosed as an error.
30.8 Interim reporting considerations

Accounting changes and changes in estimates may occur at any time during the
year. This section discusses the disclosure requirements when changes occur
during an interim period.
30.8.1 Changes in accounting principle
Interim financial statements should disclose any changes in accounting principle

made during the period from the accounting principles applied in any of the
following periods:
□ The comparable interim period of the prior annual period

□ The preceding interim periods in the current annual period
□ The prior annual report
PwC 30-17
Accounting changes
See FSP 30.4.3.1 for further information on the impracticability exception of

retrospective application when a reporting entity changes an accounting
principle.
Whenever possible and permitted by the applicable guidance, reporting entities

should adopt accounting changes during the first interim period of a fiscal year.
The materiality of changes in accounting principle should be assessed in relation
to the estimated full fiscal year income rather than interim income. Changes that
are only material to the interim period of adoption but not to the estimated full
year financial results should be separately disclosed in the interim period.
An accounting change that affects only interim periods (such as in the method of
recognizing advertising expenses in interim periods) is acceptable only if it is
preferable in the circumstances. Such a change does not require any reference in
the auditor’s report on the annual financial statements (as there is no effect on
the annual financial statements).
If a change is made in other than the first interim period, the impracticability
exception, discussed in FSP 30.4.3.1, may not be applied to prior interim periods
of the fiscal year in which the change is made. Therefore, if the retrospective
application to pre-change interim periods is impracticable, the change may only
be made as of the beginning of a subsequent fiscal year.
30.8.2 Recently adopted standards
Interim financial statements should include disclosures required by a recently

adopted standard similar to those required to be included in annual financial
statements. These disclosures should continue to be provided in subsequent
interim financial statements until the accounting change is reflected in the
annual financial statements. Refer to FSP 30.4.3.3 for disclosure requirements
for accounting standards that have been recently issued but not yet adopted.
When a reporting entity adopts a new accounting standard in an interim period,

both annual and interim period financial statement disclosures prescribed by the
new accounting standard are expected in each interim report in the year of
adoption, to the extent not duplicative of other disclosures.
30.8.3 Change in estimates
The effect of a change in estimate, including a change in the estimated annual

effective tax rate, should be accounted for in the period in which the change in
estimate is made. Prior interim periods should not be restated. However, the
effect on earnings of a change in estimate in a current interim period should be
reported in both the current period and subsequent interim periods, if material to
any period presented. The change should also be disclosed in the interim periods
for the subsequent year to avoid misleading comparisons.
30-18 PwC
Accounting changes
30.8.4 Adjustments related to prior interim periods
Errors related to prior interim periods should be assessed using the framework
discussed in FSP 30.7. When an error is identified during an interim period and it
has been determined that prior periods are not materially misstated, for the
purpose of determining how to correct the error, amounts should be compared to
the estimated income for the quarter and the full fiscal year.
As discussed in FSP 30.7.2 and shown in Figure 30-1, corrections that are
material with respect to an interim period, but not material with respect to the
estimated income for the full fiscal year or to the trend of earnings, can be
corrected as an out-of-period adjustment and separately disclosed in the interim
period. Alternatively, the previously issued financial statements may be revised
the next time they are issued.
Previously reported interim financial data should not be restated because of year-
end adjustments made in the normal course of the year-end close process, unless
such process identifies errors related to prior interim periods. The effect of
significant year-end adjustments, such as changes in provisions for doubtful
accounts, that are not error corrections should be included in fourth quarter
income.
30.9 Other matters

Accounting changes may arise as part of a spin-off, sale, or business combination.
Presentation and disclosure considerations vary depending on the circumstances.
30.9.1 Spin-off or sale of a subsidiary of an SEC-registered reporting entity
Reporting entities sometimes sell or spin-off divisions or subsidiaries. A spin-off

is a transaction where a portion of a reporting entity becomes a new, separate
reporting entity and the shareholders of the original reporting entity receive a pro
rata ownership in the spun-off reporting entity.
When a division or subsidiary is preparing its financial statements to facilitate a

sale or spin-off, the division or subsidiary usually follows the accounting
principles of its parent. When a subsidiary is spun-off, it can change to an
accounting principle different from that used by its parent provided that the
change is preferable. Such change should be retrospectively applied in the
The spun-off subsidiary must disclose the nature of the change in accounting
principle and explain why the newly adopted accounting principle is preferable.
A subsidiary cannot, however, retrospectively reflect changes in estimate. Such

changes should be reflected in the period in which they occur in both the
consolidated and subsidiary financial statements.
PwC 30-19
Accounting changes
30.9.2 Conforming accounting policies of acquired entities
The need to conform the accounting policies of an entity acquired in a business

combination to those of the acquiring reporting entity is discussed in BC 2.12.

There are no specific considerations for private companies. The guidance in
ASC 250 is equally applicable to private and public reporting entities.
30-20 PwC
Chapter 31:
Parent company
PwC 31-1
Parent company financial statements

This chapter discusses circumstances under which presentation of parent
company financial statements may be appropriate or required. In addition to
covering presentation and disclosure requirements, the chapter also outlines
methodologies to be applied in presenting parent company financial statements,
and other preparation considerations.
The primary sources of guidance on parent company financial statements

include:
□ ASC 810-10, Consolidation—Overall
□ S-X 3-10, Financial statements of guarantors and issuers of guaranteed

securities registered or being registered
□ S-X 5-04, What schedules are to be filed
□ S-X 12-04, Condensed financial information of registrant
□ SEC FRM 2810, Parent-only Financial Statements (Condensed)
□ SEC FRM 2500, Guarantors of Securities
31.2 Scope
Consolidated financial statements are the general-purpose financial statements of
a parent that has one or more subsidiaries. In certain circumstances, parent-only
financial statements may be required in addition to consolidated financial
statements. The existence of preferred stockholders, loan or other agreements, or
other special requirements (e.g., reporting requirements for not-for-profit
entities such as healthcare providers and statutory reporting requirements for
downstream noninsurance holding companies) may necessitate the preparation
of financial statements for the parent company alone.
Parent company financial statements should not be used as a substitute for

consolidated financial statements. ASC 810-10-45-11 permits presentation of
parent company financial statements as a supplement to the consolidated
financial statements when such a presentation is the most effective means of
presenting pertinent information. Parent company financial statements should
generally be presented in the same report with the reporting entity’s consolidated
financial statements (e.g., SEC filings).
S-X 5-04 requires parent company financial statements (Schedule I) when the
restricted net assets of consolidated subsidiaries exceed 25% of consolidated net
assets as of the most recent fiscal year end. When the significance threshold is
met, SEC registrants should present condensed financial information for the
parent company in Schedule I as of the same dates and for the same periods as
the consolidated financial statements (as prescribed by S-X 12-04). SEC FRM
31-2 PwC
2810.1 stipulates that “registrants should present the information required by S-

X 12-04 as an S-X schedule, except bank holding companies, which must present
the S-X 12-04 information in the financial statement footnotes.” Irrespective of
the presentation alternative, the parent company-only financial statements
should be audited. Refer to SEC 4510.3 and FRM 2810 for additional guidance.
31.3 Presentation requirements for parent

company financial statements
There is no prescribed format for preparing parent company financial statements
other than as described in S-X 12-04. SEC registrants preparing parent company
financial statements should follow these requirements unless another format is
specified by a legal agreement or other special requirement.
31.3.1 Format of parent company financial statements
S-X 12-04 specifies that parent company financial statements should be

presented in the format prescribed for condensed statements by S-X 10-01 as it
relates to the balance sheet, income statement, and statement of cash flows. The
presentation of earnings per share, while permitted, is not required in parent
company financial statements. The condensed financial information should also
include a total for comprehensive income presented in either a single continuous
statement or in two separate but consecutive statements.
31.3.2 Footnote disclosures
Parent company financial statements should include a statement in the footnotes

explaining the fact that they are not the general-purpose financial statements of
the reporting entity. In rare instances where parent company financial
statements are presented without accompanying consolidated financial
statements (e.g., prepared for limited distribution in accordance with
requirements of a contractual agreement), the footnotes should indicate that the
financial statements are not presented in accordance with US GAAP.
If parent company financial statements are included within the same SEC filing
as the consolidated financial statements, the footnotes may cross-reference to the
consolidated financial statements for required disclosures of material
contingencies, significant provisions of long-term obligations, mandatory
dividend or redemption requirements of redeemable stocks, and guarantees of
the parent, including the five-year schedule of debt maturities. The following
example illustrates this.
EXAMPLE 31-1
Example—basis of presentation
Basis of Presentation. The parent company financial statements [information]

should be read in conjunction with the Company’s consolidated financial
statements and the accompanying notes thereto. For purposes of these [this]
condensed financial statements [information], the Company’s wholly owned and
PwC 31-3
majority owned subsidiaries are recorded based upon its proportionate share of
the subsidiaries’ net assets (similar to presenting them on the equity method).
Additional footnotes to parent company information may be required to

supplement the disclosures in the consolidated financial statements. In addition,
S-X 12-04 requires SEC registrants to disclose separately the amounts of cash
dividends paid to the parent for each of the last three fiscal years by consolidated
subsidiaries, unconsolidated subsidiaries, and 50% or less owned persons
accounted for by the equity method. The disclosure of dividends paid may be
made either within the footnotes or on the face of the statement of cash flows, if
clearly labeled.
Parent company financial statements should include disclosure of any guarantees

issued between a parent and their subsidiaries (e.g., parent guarantees debt
between sister entities) under ASC 460. In addition, if a subsidiary guarantees
the parent’s third party debt, or if the parent guarantees a subsidiaries’ third
party debt, the guarantee should be disclosed in the parent company financial
statements. Refer to Example 23-2 in FSP 23 for an intercompany guarantee
disclosure example.
31.4 Presenting subsidiaries and investees in

parent company financial statements
In parent company financial statements, investments in noncontrolled entities
are presented differently from investments in consolidated subsidiaries.
31.4.1 Investments in noncontrolled entities
A parent company’s investment in a noncontrolled entity is accounted for on the

same basis applied in preparing the consolidated financial statements. Therefore,
investments accounted for under the cost method, equity method, or by applying
the fair value option in the consolidated financial statements should be accounted
for in a similar manner in the parent company financial statements. As a result,
the carrying amount of the investment is the same in the consolidated and parent
company financial statements.
31.4.2 Investments in consolidated subsidiaries
Reporting entities prepare condensed consolidating financial information to meet

prerequirements for guarantors and issuers of guaranteed securities. S-X 3-
10(i)(3) specifies that the parent company column of the consolidating financial
information should present investments in subsidiaries based upon the parent’s
proportionate share of the subsidiaries’ net assets (similar to the equity method
of accounting). Similarly, parent company financial statements should present
investments in consolidated subsidiaries based on the guidance in S-X 3-10.
In consolidated financial statements, the net carrying amount of a subsidiary

includes the carrying amounts of the subsidiary’s specific assets and liabilities
measured using the parent’s basis (and noncontrolling interest account, if
31-4 PwC
applicable) plus the parent’s share of earnings less its share of dividends since the
date of acquisition. In parent company financial statements, the net total of these
amounts should equal the amount reported in the balance sheet as the parent
company’s equity in the underlying net assets of the subsidiary, as required by
S-X 3-10. In addition, total stockholders’ equity, net income, and comprehensive
income amounts (attributable to the parent company) presented in the parent
company financial statements should be equal to the corresponding consolidated
amounts.
Although the guidance in S-X 3-10 is similar to the equity method guidance
prescribed by ASC 323, Investments—Equity Method and Joint Ventures, it may
not yield the same result because certain items are handled differently under ASC
323 than they are in consolidation. In other words, application of the guidance in
S-X 3-10 does not result in presentation of the parent company’s investment as if
the consolidated subsidiary were accounted for under the equity method. A few
examples of potential differences are outlined in Figure 31-1 below.
Figure 31-1
Selected differences in application of the guidance in S-X 3-10 and the equity
method of accounting
Equity method Consolidated subsidiary

investment in accordance presented in accordance
Transaction with ASC 323 with S-X 3-10
Impairment Recognize if the investment’s Recognize proportionate

losses carrying amount exceeds its share of the consolidated
fair value and the decline in subsidiary’s impairment
fair value is deemed to be losses.
other-than-temporary.
Acquisition Include in consideration In a business combination,

costs transferred to acquire an expense and do not include as
equity method investment part of the consideration
and capitalize as a component transferred.
of the cost of the assets
acquired.
Capitalized Capitalize interest on the As long as qualifying assets

interest on investment only to the extent and interest cost exist within
investee’s that the investee has the consolidated group,
qualifying qualifying activities as record proportionate share of
assets described in ASC 835-20. the consolidated subsidiary’s
capitalized interest.
Losses in Discontinue recording losses Continue recording losses, as

excess of when the investment (and net discontinuation would result
investment advances) is reduced to zero in the carrying amount of the
unless the investor has investment not equaling the
committed to provide further parent company’s share of the
financial support to the subsidiary’s net assets.
investee.
PwC 31-5
Equity method Consolidated subsidiary

investment in accordance presented in accordance
Transaction with ASC 323 with S-X 3-10
Change in If control is acquired, treat as Treat a change in interest

previously a step acquisition and (not constituting a change in
held equity remeasure to fair value with control) as an equity
interest any difference from the transaction. If the
carrying value recognized as a consolidated subsidiary
gain or loss in the income represents an entire foreign
statement. If the investment entity, none of the CTA
represents an entire foreign balance is reclassified unless
entity, the entire cumulative the parent company ceases to
translation adjustment (CTA) have a controlling financial
balance related to the foreign interest.
entity is reclassified into
earnings.
31.4.3 Special situations requiring cost method accounting
Investments accounted for under the equity method or consolidation method are
accounted for under the cost method in the parent company financial statements
in two special situations:
□ When the cost method is prescribed by a regulatory agency solely for filing
with that agency (see PCAOB AS 3305, Special Reports, paragraphs .08
through .10)
□ When the cost method is prescribed by a loan or other agreement for filing
with the lender or other specified party (see PCAOB AS 3305 paragraphs .27
through.30)
These two special situations are not applicable to financial statements or

information prepared in accordance with US GAAP and/or SEC reporting
requirements.
31.5 Other considerations

A number of items should be considered when preparing parent company
financial statements. The following discussion covers certain of these
considerations, but is not intended to be all-inclusive.
31.5.1 Accounts and adjustments recorded at the parent company level
Some reporting entities maintain certain accounts related to subsidiaries in the

parent company’s books and records. The parent company’s presentation of these
amounts should be the same as if the accounts or adjustments had been recorded
directly in the books and records of the subsidiary entity. This is particularly
important for subsidiaries that are foreign entities due to the impact of foreign
currency translation.
31-6 PwC
Examples of accounts often recorded at the parent company level include

reserves for income tax or environmental exposures, deferred income taxes,
goodwill, intangible assets, and purchase accounting adjustments. Additionally,
some reporting entities record audit adjustments or other post-closing
adjustments at the parent level without pushing them down to the accounting
records of the foreign entity. The functional currency equivalent of such amounts,
based upon historical exchange rates, should be assumed to be “pushed down” to
the financial statements of the foreign entity for purposes of foreign currency
translation.
31.5.2 Accounting changes
Any amounts reported by a subsidiary as a cumulative effect of a change in

accounting principle should be reflected in the income statement of the parent
company as its share of that cumulative effect as if the parent had made the
change directly.
31.5.3 Discontinued operations
ASC 205-20 requires a disposal to be reported in discontinued operations if it

represents a strategic shift that has (or will have) a major effect on a reporting
entity’s operations and financial results. Disposals of equity method investments
may meet this criteria. Therefore, if a parent company reports its subsidiary
similar to the equity method of accounting in its standalone parent company
financial statements, and that subsidiary reports a discontinued operation, the
parent company should consider whether the subsidiary’s disposition would also
qualify as a discontinued operation from the parent’s perspective under the ASU
2014-08 criteria. If these criteria are met, discontinued operations reporting
would also be required by the parent. If these criteria are not met at the parent
level, the parent company would report its share of the subsidiary’s discontinued
operations in the income statement line used for its share of the investee’s
earnings or losses.
31.5.4 Cash dividends received from subsidiaries
As discussed in FSP 31.4.2, in parent company financial statements (including

the statement of cash flows), the parent’s subsidiaries are treated similarly to
equity method investments. Cash dividends received from subsidiaries should be
classified within operating activities unless they represent a return of investment,
in which case the appropriate classification would be within investing activities.
Refer to FSP 6 for further discussion of the presentation of dividends received in

There are no special presentation or disclosure considerations for private
companies. Private companies that are required to prepare parent company
financial statements should follow the format that is specifically prescribed by the
entity or agreement requiring the statements. However, private companies may
look to SEC guidance for additional considerations.
PwC 31-7
Chapter 32:
Limited liability
companies, general
partnerships, and
limited partnerships
PwC 32-1
Limited liability companies, general partnerships, and limited partnerships

The presentation and disclosure guidance in this chapter applies to limited
liability companies (LLCs), general partnerships, limited partnerships (LPs) and
other partnerships as noted in the chapter. The guidance also applies to LLCs
that elect to be treated as partnerships unless otherwise indicated in this chapter.
It does not apply to reporting entities that have investments in partnerships
(such investments are included in FSP 9 and FSP 18 for variable interest entities).
Master Limited Partnerships (MLPs) should apply the presentation and
disclosure requirements of LPs, unless otherwise indicated in this chapter.
Many of the SEC’s presentation and disclosure requirements for partnerships

also apply to LLCs. Due to the nature of a partnership (i.e., owned by partners as
opposed to stockholders), there are incremental and different presentation and
disclosure requirements versus those of a corporation. This chapter focuses on
the incremental requirements in Regulation S-X for both LLCs and partnerships.
The primary differences between the financial statements of these various legal
entities are the presentation of owners’ equity and the reconciliation of US GAAP
to other bases of accounting, as applicable. Depending on the legal structure of
the entity, the term “owners’ equity” may be replaced, for example, by the term
“members’ equity” for LLCs. We use the term “owner” and “member”
interchangeably in this chapter unless specific requirements apply to one legal
structure and not another, in which case we will explicitly indicate the
appropriate terminology.
This chapter also addresses the calculation of earnings per unit (EPU) for master
limited partnerships and the presentation and disclosure requirements of a
newly-formed partnership.
32.2 Scope
Limited partnership accounting records are often maintained consistent with
applicable provisions of the Internal Revenue Code and support the preparation
of income-tax basis financial statements. Such financial statements are prepared
primarily for the purpose of providing income tax data to the limited partners.
However, partnerships that are SEC registrants should comply with
Regulation S-X and clearly disclose equity and income data for the general
partners on a US GAAP basis.
Limited liability companies often elect to be treated as partnerships for federal

tax purposes. ASC 272, Limited Liability Entities, states that in order to be
classified as a partnership for federal income tax purposes, an LLC should lack at
least two of the four characteristics present in a corporation. These
characteristics are: (1) limited liability, (2) free transferability of interests,
(3) centralized management, and (4) continuity of life.
LLCs that are subject to income taxes are also subject to ASC 740.
32-2 PwC
Other relevant guidance in this chapter for partnerships and for LLCs that report
as partnerships and are SEC registrants includes:
□ SAB Topic 4.E, Receivables from sale of stock
□ FRP 405
□ Rule 502(b) of Regulation D
□ SEC FRM 3410.1-3410.4
□ S-X Article 8, Financial statements of smaller reporting companies
□ Section 15(d) of the Securities Exchange Act of 1934
LLCs often have many of the characteristics of both corporations and

partnerships, and significant judgment may be required to determine the
appropriate presentation model (ASC 205 or ASC 272).
32.3 Presentation
Once a reporting entity has determined its identity as an LP or LLC, it should
adhere to the applicable presentation and disclosure requirements.
Basis of accounting — LPs and LLCs that are partnerships
The SEC staff has indicated in FRP 405 that LPs (or LLCs that report as
partnerships) that are SEC registrants should present US GAAP-basis financial
statements as their primary financial statements using Form 10-K, except in
certain circumstances as specified by Rule 502(b) of Regulation D. This is even if
their accounting records are maintained under a separate basis of accounting.
ASC 205-10-45-1A indicates that a full set of financial statements includes:

balance sheet, income statement, statement of comprehensive income, statement
of cash flows, and statement of changes in owners’ equity (see FSP 32.3.4).
If a reporting entity that does not present US GAAP-basis financial statements

wishes to issue securities under Regulation D, an exception under Rule 502(b) of
that regulation may apply. Although it would be unusual, an LP may be permitted
to prepare financial statements on a federal income tax basis if it cannot obtain
US GAAP financial statements without unreasonable expense or effort.
Basis of accounting — LLCs that are not partnerships
LLCs that do not report as partnerships should provide a complete set of financial
statements including a balance sheet, income statement, statement of cash flows,
statement of changes in members’ equity (may be an individual statement,
combined with the income statement, or in the footnotes), and footnotes.
PwC 32-3
An LLC’s financial statements should clearly indicate that the financial

statements presented are those of an LLC in the heading of each statement.
Although ASC 272 does not explicitly include a statement of comprehensive
income, practice indicates that reporting entities include the statement consistent
with the requirements of ASC 205. Based on ASC 205, we believe it should be
presented to comply with US GAAP.
Comparative financial statements
LLCs and partnerships that are SEC registrants are subject to the comparative
financial statement requirements of S-X 3-01(a) (discussed in FSP 1.2.2).
Presentation of comparative financial statements is encouraged for LLCs and
partnerships that are not subject to SEC regulations, but not required.
Owners’/Members’ equity
The presentation of equity of an LLC and a partnership is similar given the

parallels in the structure, principally the multiple owners (known as members
and partners) in the reporting entity. The equity section of the balance sheet
should be titled members’ equity (LLCs) or owners’ equity (partnerships) in
contrast to shareholders’ or stockholders’ equity for a corporation.
Similar to reporting entities that have multiple classes of common or preferred

stock (refer to FSP 5), LLCs and partnerships report the amounts of each class of
members’ equity separately, either on the face of the balance sheet within the
equity section or within the footnotes. Each member class’ rights, preferences,
and privileges should be included in the disclosure to distinguish them.
SAB Topic 4.F clarifies the presentation of members’ equity.
SAB Topic 4.F

Facts: There exist a number of publicly held partnerships having one or more
corporate or individual general partners and a relatively larger number of limited
partners. There are no specific requirements or guidelines relating to the
presentation of the partnership equity accounts in the financial statements. In
addition, there are many approaches to the parallel problem of relating the
results of operations to the two classes of partnership equity interests.
Question: How should the financial statements of limited partnerships be

presented so that the two ownership classes can readily determine their relative
participations in both the net assets of the partnership and in the results of its
operations?
Interpretive Response: The equity section of a partnership balance sheet should

distinguish between amounts ascribed to each ownership class. The equity
attributed to the general partners should be stated separately from the equity of
the limited partners, and changes in the number of equity units authorized and
outstanding should be shown for each ownership class. A statement of changes in
32-4 PwC
partnership equity for each ownership class should be furnished for each period
for which an income statement is included.
The income statements of partnerships should be presented in a manner which

clearly shows the aggregate amount of net income (loss) allocated to the general
partners and the aggregate amount allocated to the limited partners. The
statement of income should also state the results of operations on a per unit
basis.
If the LP maintains separate accounts for varying components within an

individual members’ equity account, it should present the balance within each
component on the face of the balance sheet or in the footnotes. Examples of such
components are undistributed earnings, earnings available for withdrawal, and
unallocated capital.
Despite the limited economic risk for a participating member inherent in an LLC
because of its legal structure, the results of the LLC’s operations could cause
some members to have a liability balance. The LLC should report this deficit.
Further, the LLC should disclose the legal limitations on liabilities for each
member, whether in a net deficit position or not.
32.3.4.1 Capital contributions
After an LLC’s formation, members may make contributions to the LLC to grow
the business or to infuse additional cash into a business facing liquidity issues.
When a member makes a cash contribution, it is classified in members’ equity on
the balance sheet.
Often, a member will issue a note to an LLC as a promise to contribute additional

capital. The transaction may be a sale of capital stock or a contribution to paid-in
capital. ASC 505-10-45-2 generally does not permit this note receivable to be
presented as an asset, except in very limited circumstances.

[The receivable may be recorded as an asset when] … there is substantial
evidence of ability and intent to pay within a reasonably short period of time….
such notes may be recorded as an asset if collected in cash before the financial
statements are issued or available to be issued…
SAB Topic 4.E provides similar guidance. The SEC staff notes that a receivable
may be considered an asset when cash is received before the financial statements
are issued.
PwC 32-5
Excerpt from SAB Topic 4.E

The staff will not suggest that a receivable from an officer or director be deducted
from stockholders’ equity if the receivable was paid in cash prior to the
publication of the financial statements and the payment date is stated in a note to
Other presentation considerations
The partnership should also present actual cash distributions per partnership
unit.
32.4 Disclosure
There are some specific disclosures requirements for LLCs and partnerships, and
some general requirements that are especially pertinent for them.
Reconciliation between statements prepared on different bases
For SEC registrants, FRP 405 indicates that it may be desirable to include
financial data on the tax basis of accounting within the US GAAP-basis financial
statements. Ordinarily, LPs distribute tax basis information to their partners
after the balance sheet date because of the limited partners’ personal tax
reporting responsibilities. Then, the LP distributes the annual report including
audited US GAAP-basis financial statements later.
We encourage presentation in the footnotes of a reconciliation to the

US GAAP-basis financial statements if the LP includes audited tax-basis
statements in an SEC filing as additional information to the audited
US GAAP-basis financial statements. A note or some similar reference in the
tax-basis statements, if filed, should state that US GAAP-basis financials are
included elsewhere in the filing.
If provided, the reconciliation of US GAAP- to tax-basis information should

include, at a minimum:
□ net income/loss on the US GAAP-basis to the tax-basis balance (frequently

described as excess/deficit of revenue collected over/under expenses
disbursed)
□ total assets on the US GAAP basis to total assets on the tax basis, and
□ partners’ capital/deficit on the US GAAP basis to partners’ capital/deficit on

the tax basis.
Income tax matters
Designation of tax status is considered to be a tax position under ASC 740.

Partnerships (and LLCs that are treated as partnerships) are generally not
32-6 PwC
taxpayers; instead, the general and limited partners (or LLC members) pay taxes
on their shares of the profits. The partnership should monitor its continued
qualification as a non-tax-paying entity, with disclosure of any developments in
the entity or in legislation that might subject it to corporate taxation.
US GAAP-basis financial statements of an LP should include a footnote

indicating that the partnership itself is not subject to federal income tax. The
following figure is a sample disclosure of a partnership’s tax matters.
Figure 32-1
Sample disclosure — partnership tax matters
Note X — Income taxes
No provision for federal income taxes is necessary in the financial statements of

the partnership because, as a partnership, it is not subject to federal income tax
and the tax effect of its activities accrues to the partners.
In certain circumstances, partnerships may be held to be associations taxable as

corporations. The IRS has issued regulations specifying circumstances under
current law when such a finding may be made, and management has obtained an
opinion of counsel based on those regulations that the partnership is not an
association taxable as a corporation. A finding that the partnership is an
association taxable as a corporation could have a material adverse effect on the
financial position and results of operations of the partnership.
LLCs that are subject to income taxes are also subject to ASC 740. Refer to
FSP 16.
32.4.2.1 Change in tax status
The tax implications of a change from (1) a partnership to a corporation or (2) a

corporation to a partnership are subject to the recognition requirements of
ASC 740. ASC 740 also applies for recording deferred tax assets and liabilities for
temporary differences on the day the tax status changes. See FSP 16.
In SEC FRM 3410.1-3410.4, the SEC also has incremental guidance for
conversions of a partnership or similar tax-exempt entity to a corporation.
Historical financial statements need to include pro forma information for tax and
EPS on the face of the financial statements. If taxes are the only adjustments as a
result of the formation of the corporation, the reporting entity is required to
include pro forma EPS for only the latest fiscal year-end and current stub period.
Also, reporting entities are encouraged, but not required, to include pro forma
information for all periods presented. If other adjustments in addition to taxes
are required, the reporting entity should show only the latest fiscal year and
interim period. The reporting entity should continue to include such pro forma
presentation in subsequent years until the year of conversion is no longer
presented in the comparative financial statements. Undistributed earnings or
losses of partnerships should be reclassified to paid-in capital in the pro forma
PwC 32-7
statements, as if a distribution had been made to the owners with a subsequent

contribution to equity within the new structure. Following the conversion,
partnerships that pay distributions to owners from equity issuance proceeds (not
from retained earnings) should present pro forma EPS for the latest year and
interim period giving effect to the conversion (but not the offering) if the
conversion will result in a material reduction to EPS (excluding the effects of the
offering). Refer to FSP 32.7 for further information on conversion to
partnerships.
Related parties
As noted in FSP 26, ASC 850 requires disclosure of all material related party
transactions and agreements. In the context of partnerships, related party
disclosures include:
□ the relationship of the general partner to the partnership
□ the extent of the general partner’s equity interest
□ the nature of any management contract between the partnership and the
general partner or other party, and
□ any relationship between the general partner and other related parties
LLCs would be expected to include similar disclosures for transactions between

its members.
FRP 405 promotes US GAAP-basis financial statements as the best available

financial data. Following US GAAP would require inclusion on the face of the
primary financial statements any related party amounts and disclosure of all
related party transactions in the footnotes, particularly regarding the relationship
and transactions between a general partner and other related parties.
Common related party transactions for MLPs include human resource and supply
arrangements. Presentation and disclosure of related party transactions in
general is addressed in FSP 26.
Finite life of the entity
If there is a finite life of the entity, it should disclose the date it will cease to exist.
Variable interest entities
If the partnership is a variable interest entity (VIE), include the required

disclosures for VIEs. See FSP 18.4.2.
32-8 PwC
32.5 General partnership financial statement

disclosures
General partnership financial statements should include disclosure of any
unusual commitments undertaken by the general partner or sponsor. In addition,
GP financial statements should disclose any contingencies relating to guarantees
or potential liability stemming from being the general partner. If the general
partner/sponsoring entity retains an equity interest in the partnership and
accounts for that interest on the equity method, it should follow the guidance for
disclosure of equity method investments. See FSP 10.6.
32.6 Calculating earnings per unit (EPU) for

MLPs
MLPs should present earnings per partnership unit (EPU) on the face of the
income statement under ASC 260-10-55-102 through 55-110, Earnings Per Unit,
for those units that are publicly held.
Publicly traded MLPs often issue multiple classes of securities that may
participate in partnership distributions according to a formula specified in the
partnership agreement. A typical MLP is generally formed by the general partner
contributing mature assets with stable cash flows to the partnership in exchange
for its general partner interest (the GP Interest) and incentive distribution rights
(the IDRs). The MLP then issues publicly-traded common units held by limited
partners (the Common Units).
Generally, the IDRs are viewed as being a return on the GP’s investment, whereby
the GP has an additional mechanism to participate in the performance of the
partnership and represent a separate class of nonvoting limited partner interest
(LP interest). However, some arrangements are structured such that the IDRs are
not a separate LP interest, but are embedded within the GP Interest. When the
IDRs are a separate LP interest, then the holder of the IDRs (which is initially the
GP) may transfer or sell the IDRs, subject to the consent of the limited partners
(LPs) prior to a specified date.
When the IDRs are embedded within the GP Interest, the IDRs cannot be
detached and transferred. Except for the GP Interest, the IDR holder does not
have a separate residual ownership interest in the partnership. MLPs are
predominately utilized in the energy industry and, more specifically, in the
pipeline business because of the stable income generated by those businesses.
As a result of this capital structure, MLPs are required to apply the two-class
method to calculate EPU. When applying the two-class method to the interests of
the GP and LPs in MLPs, questions have arisen about the effect of IDRs on the
computation of EPU.
PwC 32-9
IDRs that are participating securities
IDRs that are a separate class of LP interest are participating securities because
they have a right to participate in earnings with common equity holders.
Therefore, to calculate EPU, current period earnings are allocated to the GP, LP,
and IDR holder using the two-class method in ASC 260. When calculating EPU
under the two-class method, the MLP would reduce (or increase) net income
(or loss) for the current reporting period by the amount of available cash that has
been or will be distributed to the GP, LPs, and IDR holder for that reporting
period.
The partnership agreement may contractually limit the amount of distributions

to holders of the IDRs. Therefore, the MLP should allocate the undistributed
earnings, if any, to the GP, LPs, and IDR holder, utilizing the distribution
waterfall (that is, a schedule included in the partnership agreement that
prescribes distributions to the various interest holders at each threshold). The
undistributed earnings should be allocated to the IDR holder based on the
contractual participation rights of the IDR to share in current period earnings.
Therefore, if the partnership agreement includes a “specified threshold” as
described in ASC 260-10-55-30, an MLP should not allocate undistributed
earnings to the IDR holder once the specified threshold has been met. If the
partnership agreement includes a “specified threshold,” that threshold would
generally recognize that a legal mechanism exists that allows the partnership to
make a distribution to the LP interests outside the distribution waterfall.
The MLP should allocate any excess of distributions over earnings to the GP and
LPs based on their respective sharing of losses specified in the partnership
agreement (that is, the provisions for allocation of losses to the partners’ capital
accounts for the period presented). If the IDR holders do not share in losses, the
MLP would not allocate the excess of distributions over earnings to the IDR
holders. However, if the IDR holders have a contractual obligation to share in the
losses of the MLP on a basis that is objectively determinable (as described in
ASC 260-10-45-67), the MLP should allocate the excess of distributions over
earnings to the GP, LPs, and IDR holders based on their respective sharing of
losses specified in the partnership agreement for the period presented.
IDRs that are not participating securities
IDRs that are embedded in the GP interest are not separate participating
securities. However, because the GP and LP interests are separate classes of
equity, the MLP would apply the two-class method in computing EPU for the GP
and LP interests.
For purposes of the EPU calculation, in some cases, the MLP would reduce
(or increase) net income (or loss) for the current reporting period by the amount
of available cash that will be, but has not yet been, distributed to the GP
(including the distribution rights of the embedded IDRs) and LPs for that
reporting period. The following example illustrates application of the two-class
method of computing EPU.
32-10 PwC
Question 32-1
An MLP has multiple classes of stock. However, only one of the classes is
registered with the SEC. Does the entity report EPU for each class?
PwC response
No. EPU is only required for registered securities, although the MLP is not
precluded from calculating EPU for all classes. This is similar to reporting entities
with both common and preferred stock, whereby entities are only required to
report EPS for common stock but are not precluded from reporting EPS for
preferred stock.
EXAMPLE 32-1
Two-class method of computing EPU
Assume a partnership agreement requires the GP to distribute available cash

within 60 days following the end of each fiscal quarter. The MLP is required to
file financial statements with a regulatory agency within 45 days following the
end of each fiscal quarter.
How should the MLP compute EPU for the first quarter?
Analysis
To compute EPU for the first quarter, the GP should determine the amount of
available cash that will be distributed to the GP and LPs for the quarter.
The MLP should reduce (or increase) net income (or loss) by that amount in
computing undistributed earnings that will be allocated to the GP (including the
distribution rights of the embedded IDRs) and LPs.
New guidance — EPU: common control transaction
When assets and liabilities comprising a business are transferred between

reporting entities under common control, ASC 805-50-45-2 through 45-5
requires that financial statements of the receiving entity be presented as though
the transfer occurred at the beginning of the period. Financial statements for
prior years must also be retrospectively adjusted to furnish comparative
information.
Diversity in practice existed in the application of the two-class method when

MLPs were formed through a "drop-down" of assets and liabilities from an entity
that is under common control. As a result, in April 2015, the FASB issued
ASU 2015-06, Effects on Historical Earnings per Unit of Master Limited
Partnership Dropdown Transactions. This guidance requires allocation of all the
earnings related to the transferred assets and liabilities for periods prior to the
drop-down to the general partner. This guidance is effective for fiscal years
beginning after December 15, 2015 and early application is permitted. Disclosure
PwC 32-11
of how the rights to the earnings differ for purposes of the EPS calculation before
and after the drop-down occurred is required.
32.7 Conversion of a corporation into a

partnership
A partnership may be formed from an existing operation and may be the result of
one of the following:
□ Conversion or reorganization
An existing corporation transfers substantially all of its business into a

partnership and liquidates the corporation. Existing shareholders exchange
their shares for units in the partnership.
□ Spin-off or roll out
An existing corporation places assets into a limited partnership and

distributes the partnership units to the shareholders.
□ Carve-out or drop-down
An existing corporation carves out a portion of its operations and places them
in a partnership. Some or substantially all of the partnership units are sold to
new investors.
Some transactions may include features of both a spin-off and a carve-out.
□ Rollup
Formation of a partnership could also be in the form of a rollup. A rollup

does not involve the conversion of a corporation to a partnership. It is the
merger of several existing limited partnerships, or limited partnership
interests, into one larger limited partnership. Generally, a rollup is done for
efficiency or liquidity purposes.
There may be situations when rollup transactions qualify as a business

combination that will require a new basis of accounting for the acquired
assets and liabilities. Examples include a rollup in which the general partner
of the new MLP was also the general partner of all of the predecessor limited
partnerships and no cash was involved in the transaction; or a transaction in
which the general partner of the new MLP was the general partner of some,
but not all, of the predecessor limited partnerships.
The basis of accounting for a new LP will generally depend on the structure of the
transaction. Once the partnership is formed, it should adhere to the financial
statement reporting requirements for partnerships. Comparative financial
statements for prior periods are the financial statements of the predecessor
company. The new LP may present pro forma information for prior periods (as
32-12 PwC
though the reporting entity had operated in partnership form - required in the
initial registration statement for partnership units) as supplementary
information, but that information cannot replace the predecessor entity’s
financial statements as the principal comparative financial information. The
presentation in the footnotes of the supplemental information should be
sufficient and clear to prevent any information from being misleading if users
were to rely solely on the comparative statements.
Newly-formed LLCs that are not partnerships and that constitute a new reporting
entity would fall within the scope of an accounting change and are subject to
ASC 250. ASC 250 requires retrospective application for all years presented
following the presentation of the new LLC reporting entity. For further detail on
accounting changes, see FSP 30.
Tax considerations of the new entity
Taxes payable (currently or deferred) generally will not appear on the opening
balance sheet of a carved-out or spun-off entity as such taxes remain the liability
of the general partner/sponsor.
If, in a conversion, the new reporting entity will not be deemed an association
taxable as a corporation, it should eliminate deferred tax balances in the first
financial statements following conversion to partnership form. As noted in
TX 8.3, a deferred tax liability or asset should be eliminated at the date the entity
ceases to be taxable by including the reversal in income from continuing
operations as a current provision for income taxes.
The reporting entity may continue to need some provision for current taxes. In
addition to tax liabilities that arise (e.g., recapture or capital gains) on
partnership formation, some jurisdictions assess taxes on a partnership as if the
entity were a corporation. Under current tax law, Congress allowed MLPs to
annually elect to retain their partnership tax status in exchange for a 3.5% gross
revenue tax. The MLP should consider appropriate presentation and disclosure of
the gross revenue tax in its financial statements. This would include
(1) recognition as current tax expense and (2) a description as to the nature of the
tax (its qualifications under the current tax law).
32.8 Smaller reporting companies that are LPs

Smaller reporting companies (SRCs) are subject to S-X Article 8. If an LP is an
SRC, it should include the balance sheet of the general partners within its
financial statements in the following circumstances:
□ If the general partner of the SRC is a corporation, it should disclose the

audited balance sheet of that corporation as of the end of its most recently
completed fiscal year. The SRC should deduct receivables, other than trade
receivables, from affiliates of the general partner from the equity of the
general partner. When an affiliate has committed to increase or maintain the
general partner’s capital, the SRC should also present the audited balance
sheet of that affiliate.
PwC 32-13
□ If the general partner of the SRC is a partnership itself, it should file an

audited balance sheet of that partnership as of the end of its most recently
completed fiscal year.
□ If the general partner of the SRC is a natural person, it should include a
recent balance sheet as supplemental information, although there is no
requirement for this statement to be audited. The SRC should carry the assets
and liabilities of the general partner at estimated fair value, with provisions
for estimated income taxes on unrealized gains. The SRC should also disclose
the net worth of the person in a registration statement. If there is more than
one person as general partner, the SRC can present their net worth, as
determined from the balance sheets, individually or in the aggregate.

Private partnerships and LLCs are not subject to certain of the SEC requirements
addressed in the chapter. Differences are explained in the following sections.
Comparative financial statements
Non-SEC registrants are not subject to the guidance in Regulation S-X, which
requires multiple years of financial statements; however, ASC 272-10-45-7
encourages comparative statements for private LLCs. If the nonpublic
partnership or LLC voluntarily presents multiple years, amounts should be
comparable with the most recent year shown in accordance with ASC 205-10-45,
disclosing any exceptions to comparability.
Similarly, partnerships that are formed from corporations but do not file with the
SEC are not required to present the pro forma comparative statements.
Basis of accounting
Partnerships and LLCs that do not file with the SEC are not subject to certain
disclosure requirements. For example, financial statements prepared on a
different basis of accounting than US GAAP do not require a reconciliation of
US GAAP- to tax-basis. US GAAP-basis statements would not be needed within
the financial statements (that is a specific SEC requirement).
SEC filers that may not comply with SEC requirements
A partnership that files with the SEC in connection with the sale of a portion of its
interest to the public files an annual report on Form 10-K in the year the
registration statement becomes effective. However, in subsequent years, the
partnership may be exempt from such requirements if it meets Section 15(d) of
the Securities Exchange Act of 1934 by having fewer than 300 individuals hold
the securities of the partnership at the beginning of the fiscal year. Partnerships
in this situation should nonetheless consider providing the SEC required
disclosures even if they have no requirement to file financial statements with the
SEC.
32-14 PwC
Appendices
Appendix A: Professional
literature
The PwC guides provide in-depth accounting and financial reporting guidance for
various topics, as outlined in the preface to this guide. The PwC guides
summarize the applicable accounting literature, including relevant references to
and excerpts from the FASB’s Accounting Standards Codification (the
Codification). They also provide our insights and perspectives, interpretative and
application guidance, illustrative examples, and discussion on emerging practice
issues. The PwC guides supplement the authoritative accounting literature. This
appendix provides further information on authoritative US generally accepted
accounting principles and technical references used throughout this guide.
Professional literature
The Codification is the primary source of authoritative US financial accounting

and reporting standards (US GAAP) for nongovernmental reporting entities
(hereinafter referred to as “reporting entities”). Additionally, guidance issued by
the SEC is a source of authoritative guidance for SEC registrants.
Updates and amendments to the Codification arising out of the FASB’s standard-
setting processes are communicated through Accounting Standards Updates
(ASUs). The Codification is updated concurrent with the release of a new ASU, or
shortly thereafter. PwC has developed a FASB Accounting Standards
Codification Quick Reference Guide which is available on CFOdirect. The quick
reference guide explains the structure of the Codification, including examples of
the citation format, how new authoritative guidance will be released and
incorporated into the Codification, and where to locate other PwC information
and resources on the Codification. The quick reference guide also includes
listings of the Codification’s “Topics” and “Sections” and a list of frequently
referenced accounting standards and the corresponding Codification Topics
where they now primarily reside.
In the absence of guidance for a transaction or event within a source of

authoritative US GAAP (i.e., the Codification and SEC guidance), a reporting
entity should first consider accounting principles for similar transactions or
events within a source of authoritative US GAAP for that reporting entity and
then consider non-authoritative guidance from other sources. Sources of non-
authoritative accounting guidance and literature include:
□ FASB Concepts Statements
□ AICPA Issues Papers
□ International Financial Reporting Standards issued by the International

Accounting Standards Board
PwC A-1
Appendix A: Professional literature
□ Pronouncements of other professional associations or regulatory agencies
□ Technical Information Service Inquiries and Replies included in AICPA

Technical Practice Aids
□ PwC accounting and financial reporting guides
□ Accounting textbooks, guides, handbooks, and articles
□ Practices that are widely recognized and prevalent either generally or in the
industry
While other professional literature can be considered when the Codification does
not cover a certain type of transaction or event, we do not expect this to occur
frequently in practice.
SEC guidance
The content contained in the SEC sections of the FASB’s Codification is provided
for convenience and relates only to SEC registrants. The SEC sections do not
contain the entire population of SEC rules, regulations, interpretative releases,
and staff guidance. Also, there is typically a lag between when SEC guidance is
issued and when it is reflected in the SEC sections of the Codification. Therefore,
reference should be made to the actual documents published by the SEC and SEC
Staff when addressing matters related to public reporting entities.
A-2 PwC
Appendix B: Technical
references and
abbreviations
The following tables provide a list of the technical references and definitions for
the abbreviations and acronyms used within this guide.
Technical references
AICPA AU 420.17 Consistency of Application of Generally

Accepted Accounting Principles
AICPA Audit and Accounting Chapter 14 — Accounting and Disclosures

Guide, Valuation of Privately-
Held-Company Equity
Securities Issued as
Compensation
ASC 205 Accounting Standards Codification 205,

Presentation of Financial Statements

Balance Sheet

Comprehensive Income

Income Statement

Statement of Cash Flows

Notes to Financial Statements

Accounting Changes and Error Corrections

Earnings Per Share

Interim Reporting

Limited Liability Entities
PwC B-1
Appendix B: Technical references and abbreviations

Risks and Uncertainties

Segment Reporting

Receivables

Investments – Debt and Equity Securities1

Investments – Equity Securities

Investments – Equity Method and Joint
Venture

Inventory

Other Assets and Deferred Costs

Intangibles – Goodwill and Other

Property, Plant, and Equipment

Liabilities

Asset Retirement and Environmental
Obligations

Exit or Disposal Cost Obligations

Commitments

Contingencies

Guarantees
1 This will become ASC 320, Investments in Debt Securities, after adoption of ASU 2016-01.
B-2 PwC

Debt

Distinguishing Liabilities from Equity

Equity

Revenue Recognition – General

Revenue from Contracts with Customers

Compensation – General

Compensation – Nonretirement
Postemployment Benefits

Compensation – Retirement Benefits

Compensation – Stock Compensation

Other Expenses

Research and Development

Income Taxes

Business Combinations

Collaborative Arrangements

Consolidation

Derivatives and Hedging

Fair Value Measurements
PwC B-3

Financial Instruments

Foreign Currency Matters

Interest

Leases

Leases

Nonmonetary Transactions

Related Party Disclosures

Reorganizations

Subsequent Events

Transfers and Servicing

Contractors – Construction

Contractors – Federal Government

Financial Services – Depository and
Lending

Financial Services – Investment
Companies

Franchisors

Not-for-Profit Entities
B-4 PwC

Software
ASR 268 Accounting Series Release 268,

Presentation in Financial Statements of
“Redeemable Preferred Stocks”
ASU 2013-02 Accounting Standards Update 2013-02,

Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income

Applying Variable Interest Entities
Guidance to Common Control Leasing
Arrangements

Reporting Discontinued Operations and
Disclosures of Disposals of Components of
an Entity

Revenue from Contracts with Customers

Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going
Concern

Income Statement—Extraordinary and
Unusual Items

Practical Expedient for the Measurement
Date of an Employer’s Defined Benefit
Obligation and Plan Assets

Effects on Historical Earnings per Unit of
Master Limited Partnership Dropdown
Transactions

Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per
Share (or Its Equivalent)

Simplifying the Accounting for
Measurement-Period Adjustments
PwC B-5

Balance Sheet Classification of Deferred
Taxes

Recognition and Measurement of Financial
Assets and Financial Liabilities

Leases

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)

Recognition of Breakage for Certain
Prepaid Stored-Value Products

Simplifying the Transition to the Equity
Method of Accounting

Improvements to Employee Share-Based
Payment Accounting

Measurement of Credit Losses on Financial
Instruments

Classification of Certain Cash Receipts and
Cash Payments

Restricted Cash

Technical Corrections and Improvements

Simplifying the Test for Goodwill
Impairment
B-6 PwC

Improving the Presentation of Net Periodic
Pension Cost and Net Periodic
Postretirement Benefit Cost
CON 5 FASB Statement of Financial Accounting

Concepts No. 5, Recognition and
Measurement in Financial Statements of
Business Enterprises
CON 6 FASB Statement of Financial Accounting

Concepts No. 6, Elements of Financial
Statements
FRP 202 SEC Financial Reporting Policy 202:

Reporting Cash Flow

Redeemable Preferred Stocks

Separate Financial Statements

Limited Partnerships
PCAOB AS 3305 PCAOB Auditing Standard No. 3305,

Special Reports
PCAOB AU 341 PCAOB Interim Auditing Standard 341, The

Auditor’s Consideration of an Entity’s
Ability to Continue as a Going Concern
SAB 74 SEC Staff Accounting Bulletin 74:

Disclosure of the Impact That Recently
Issued Accounting Standards Will Have on
the Financial Statements of the Registrant
When Adopted in a Future Period
SAB 99 SEC Staff Accounting Bulletin 99:

Materiality
SAB Topic 1.B SEC Staff Accounting Bulletin Topic 1.B:

Allocation Of Expenses And Related
Disclosure In Financial Statements Of
Subsidiaries, Divisions Or Lesser Business
Components Of Another Entity
SAB Topic 3.A SEC Staff Accounting Bulletin Topic 3.A:

Convertible Securities
PwC B-7
SAB Topic 3.C SEC Staff Accounting Bulletin Topic 3.C:

Redeemable Preferred Stock

Change in Capital Structure
SAB Topic 4.E SEC Staff Accounting Bulletin Topic 4.E:

Receivables from Sale of Stock
SAB Topic 4.F SEC Staff Accounting Bulletin Topic 4.F:

Limited Partnerships
SAB Topic 4.G SEC Staff Accounting Bulletin Topic 4.G:

Notes and Other Receivables from Affiliates

Accounting Changes Not Retroactively
Applied Due to Immateriality
SAB Topic 5.M SEC Staff Accounting Bulletin Topic 5.M:

Other than Temporary Impairment of
Certain Investments in Equity Securities
SAB Topic 5.P SEC Staff Accounting Bulletin Topic 5.P:

Restructuring Charges
SAB Topic 5.Y SEC Staff Accounting Bulletin Topic 5.Y:

Accounting and Disclosures Relating to
Loss Contingencies
SAB Topic 5.Z SEC Staff Accounting Bulletin Topic 5.Z:

Accounting and Disclosure Regarding
Discontinued Operations

Income or Loss Applicable to Common
Stock
SAB Topic 6.G.2.b SEC Staff Accounting Bulletin Topic

6.G.2.b: Reporting Requirements for
Accounting Changes
SAB Topic 6.H.2 SEC Staff Accounting Bulletin Topic 6.H.2:

Classification of Short-term Obligations –
Debt Related to Long-Term Projects
SAB Topic 6.I SEC Staff Accounting Bulletin Topic 6.I:

Improved Disclosure of Income Tax
Expense
B-8 PwC
SAB Topic 6.I.2 SEC Staff Accounting Bulletin Topic 6.I.2:

Taxes of Investee Company
SAB Topic 6.I.3 SEC Staff Accounting Bulletin Topic 6.I.3:

Net of Tax Presentation

Depreciation and Depletion Excluded from
Cost of Sales

Tax Holidays
SAB Topic 11.E SEC Staff Accounting Bulletin Topic 11.E:

Chronological Ordering of Data

LIFO Liquidations
SAB Topic 13.A SEC Staff Accounting Bulletin Topic 13.A:

Selected Revenue Recognition Issues
SAB Topic 14 SEC Staff Accounting Bulletin Topic 14:

Share-Based Payment

Classification of Compensation Expense
Associated with Share-Based Payment
Arrangements
SEC FRM 2500 SEC Financial Reporting Manual 2500,

Guarantors of Securities
SEC FRM 2810 SEC Financial Reporting Manual 2810,

Parent-only Financial Statements
(Condensed)
SEC Regulation S-K SEC Regulation S-K, Nonfinancial

Statement Disclosures
S-K 302(a) Regulation S-K, Item 302(a)
SEC Regulation S-X SEC Regulation S-X, Financial Statement

Requirements
S-X 1-02 Rule 1-02: Definition of terms used in

Regulation S-X
S-X 3-01 Rule 3-01: Consolidated balance sheets
PwC B-9
S-X 3-02 Rule 3-02: Consolidated statements of

income and changes in financial position
S-X 3-04 Rule 3-04: Changes in stockholders’ equity
S-X 3-10 Rule 3-10: Financial statements of

guarantors and issuers of guaranteed
securities registered for being registered
S-X 3A-01 Rule 3A-01: Application of Rules 3A-01 to

3A-05
S-X 3A-02 Rule 3A-02: Consolidated financial

statements of the registrant and its
subsidiaries
S-X 3A-03 Rule 3A-03: Statement as to principles of

consolidation or combination followed
S-X 3A-04 Rule 3A-04: Intercompany items and

transactions
S-X 4-01 Rule 4-01: Form, order, and terminology
S-X 4-02 Rule 4-02: Items not material
S-X 4-06 Rule 4-06: Inapplicable captions and

omission of unrequired or inapplicable
S-X 4-07 Rule 4-07: Discount on shares
S-X 4-08 Rule 4-08: General notes to financial

statements
S-X 5-02 Rule 5-02: Balance sheets
S-X 5-03 Rule 5-03: Income statements
S-X 5-04 Rule 5-04:What schedules are to be filed
S-X 9-03 Rule 9-03: Balance sheets
S-X 10-01 Rule 10-01: Interim financial
S-X 11-01(d) Rule 11-01(d): Presentation requirements
S-X 12-04 Rule 12-04: Condensed financial

information of registrant
B-10 PwC
S-X Article 3 General Instructions as to financial

statements
S-X Article 4 Rules of general application
S-X Article 5 Commercial and industrial companies
S-X Article 8 Financial statements of smaller reporting

companies
Abbreviation / Acronym Definition
Accounting and Auditing Enforcement

AAERs Releases
ABO Accumulated Benefit Obligation
AFS Available for Sale
AMT Alternative Minimum Tax
AOCI Accumulated Other Comprehensive Income
Accumulated Postretirement Benefit

APBO Obligation
APIC Additional Paid in Capital
ARO Asset Retirement Obligation
ARS Auction Rate Securities
ASRs Accounting Series Releases
BCF Beneficial Conversion Features
BESP Best estimate of selling price
CCP Central Clearing Counterparty
CFE Collateralized Financing Entity
CMBS Collateralized Mortgage-Backed Securities
CME Chicago Mercantile Exchange
CODM Chief Operating Decision Maker
PwC B-11
CPI Consumer Price Index
CTA Cumulative Translation Adjustment
CWIP Construction work in progress
DAC Deferred Acquisition Cost
DIG Derivatives Implementation Group
DPP Deferred Purchase Price
DTA Deferred Tax Asset
EBITDA Earnings Before Interest, Tax, Depreciation,

and Amortization
EITF Emerging Issues Task Force
EPS Earnings Per Share
EPU Earnings Per Unit
ESOPs Employee Stock Ownership Plans
ESPP Employee Stock Purchase Plan
ETF Exchange-Traded Funds
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FIFO First-in First-Out
FRM SEC Division of Corporation Finance Financial

Reporting Manual
FRRs Financial Reporting Releases
FVO Fair Value Option
GP Interest General Partner Interest
HTM Held-to-maturity
IDR Incentive Distribution Rights
IPR&D In-process Research and Development
B-12 PwC
International Swaps and Derivatives

ISDA Association
LCH London Clearing House
LCM Lower-of-Cost-or-Market
LLC Limited Liability Company
LP Limited Partnership
MAC Material Adverse Change
MAE Material Adverse Effect
MD&A Management Discussion & Analysis
MLP Master Limited Partnership
MRV Market-Related Value
NAV Net Asset Value
NCI Noncontrolling Interest
NFPs Not-for-profit Entities
NOL Net Operating Loss
NRV Net Realizable Value
OCI Other Comprehensive Income
OPEB Other Postretirement Benefits
OTTI Other-Than-Temporary Impairments
PA Price Alignment
PAI Price Alignment Interest
PBO Projected Benefit Obligation
PCC Private Company Council
PIK Paid-in-Kind
POC Percentage-of-Completion
PP&E Property, Plant, and Equipment
PwC B-13
SAB Topics Staff Accounting Bulletin Topics
SAC Subjective Accounting Clauses
SAR Stock-Appreciation Rights
SG&A Selling, General and Administrative
SRC Smaller Reporting Company
STM Settled-to-market
VIE Variable Interest Entity
VOE Voting Interest Entity
VRDO Variable Rate Demand Obligation
VSOE Vendor Specific Objective Evidence
B-14 PwC
Appendix C: Key terms
The following table provides definitions for key terms used within this guide.
Term Definition
Accounting change A change in an accounting principle, an

accounting estimate, or the reporting entity. The
correction of an error is not an accounting change.
Accumulated benefit The actuarial present value of benefits (whether

obligation vested or nonvested) attributed, generally by the
pension benefit formula, to employee service
rendered before a specified date and based on
employee service and compensation (if applicable)
before that date. The accumulated benefit
obligation differs from the projected benefit
obligation in that it does not make an assumption
about future compensation levels.
Accumulated The actuarial present value as of a particular date

postretirement benefit of all future benefits attributed to an employee’s
obligation service rendered to that date, assuming the plan
continues in effect and that all assumptions about
future events are fulfilled.
Acquisition date The date on which the acquirer obtains control of

the acquiree.
Active market A market in which transactions take place with

sufficient frequency and volume to provide pricing
information on an ongoing basis.
Actuarial gain or loss A change in the value of either the benefit

obligation (projected benefit obligation for
pension plans or accumulated postretirement
benefit obligation for other postretirement benefit
plans) or the plan assets, resulting from
experience different from that assumed or from a
change in an actuarial assumption, or the
consequence of a decision to temporarily deviate
from the other postretirement benefit substantive
plan. Gains or losses that are not recognized in net
periodic pension cost or net periodic
postretirement benefit cost when they arise are
recognized in other comprehensive income. Those
gains or losses are subsequently recognized as a
component of net periodic pension cost or net
periodic postretirement benefit cost.
Affiliate A party that, directly or indirectly through one or

more intermediaries, controls, is controlled by, or
is under common control with a reporting entity.
PwC C-1
Term Definition
Antidilution An effect which would increase the amount of

EPS, either by lowering the share count or
increasing earnings.
Asset group An asset group is the unit of accounting for a long-

lived asset(s) to be held and used, which
represents the lowest level for which identifiable
cash flows are largely independent of the cash
flows of other groups of assets and liabilities.
Asset retirement The estimated obligation related to a tangible,

obligation long-lived asset’s retirement, such as an
environmental remediation liability.
Available for sale Investments in debt securities and equity

securities that have readily determinable fair
values not classified as either trading securities or
as held-to-maturity securities.
Bank overdraft Checks honored by the bank that exceed the

amount of cash available in the reporting entity’s
account
Basic earnings per share The amount of earnings for the period available to
each share of common stock outstanding during
the reporting period.
Beneficial conversion A nondetachable conversion feature that is in-the-

feature money at the commitment date.
Beneficial interest A right to receive all or a portion of specified cash

inflows received by a trust or other entity,
including, but not limited to, all of the following:
□ Senior and subordinated shares of interest,
principal, or other cash inflows to be passed-
through or paid-through
□ Premiums due to guarantors
□ Commercial paper obligations
□ Residual interests, whether in the form of debt
or equity
Book overdraft Outstanding checks in excess of funds on deposit.
Business combination A transaction or other event in which an acquirer

obtains control of one or more businesses.
Callable obligation An obligation is callable at a given date if the

creditor has the right at that date to demand, or to
give notice of its intention to demand, repayment
of the obligation owed to it by the debtor.
C-2 PwC
Term Definition
Carryback A deduction or credit that cannot be utilized on

the tax return during a year that may be carried
back to reduce taxable income or taxes payable in
a prior year. An operating loss carryback is an
excess of tax deductions over gross income in a
year; a tax credit carryback is the amount by
which tax credits available for utilization exceed
statutory limitations.
Carryforward A deduction or credit that cannot be utilized on

the tax return during a year that may be carried
forward to reduce taxable income or taxes payable
in a future year. An operating loss carryforward is
an excess of tax deductions over gross income in a
year; a tax credit carryforward is the amount by
which tax credits available for utilization exceed
statutory limitations.
Carve-out A separate financial statement of a division or

business unit that is derived from (or carved-out)
of a larger parent entity.
Cash Cash includes currency on hand and demand

deposits with banks or other financial institutions.
Cash also includes other kinds of accounts that
have the general characteristics of demand
deposits in that the customer may deposit
additional funds at any time and also effectively
may withdraw funds at any time without prior
notice or penalty.
Cash conversion feature A feature within an instrument that permits cash

settlement.
Cash equivalent Short-term, highly liquid investments that have

both of the following characteristics:
□ Readily convertible to known amounts of cash
□ So near their maturity that they present
insignificant risk of changes in value because
of changes in interest rates
Generally, only investments with original
maturities of three months or less qualify under
that definition. Original maturity means original
maturity to the reporting entity holding the
investment.
Cash flow hedge A hedge of the exposure to variability in the cash

flows of a recognized asset or liability, or of a
forecasted transaction, that is attributable to a
particular risk.
PwC C-3
Term Definition
Change in accounting A change that has the effect of adjusting the

estimate carrying amount of an existing asset or liability or
altering the subsequent accounting for existing or
future assets or liabilities. A change in accounting
estimate is a necessary consequence of the
assessment, in conjunction with the periodic
presentation of financial statements, of the
present status and expected future benefits and
obligations associated with assets and liabilities.
Changes in accounting estimates result from new
information.
Change in accounting A change from one generally accepted accounting

principle principle to another generally accepted accounting
principle or when the accounting principle
formerly used is no longer generally accepted. A
change in the method of applying an accounting
principle is also considered a change in accounting
principle.
Chief Operating Decision The individual or individuals responsible for

Maker (CODM) allocating resources and assessing performance.
Collaborative A contractual arrangement that involves a joint

arrangement operating activity. These arrangements involve
two (or more) parties that meet both of the
following requirements:
□ They are active participants in the activity
□ They are exposed to significant risks and
rewards dependent on the commercial success
of the activity
Collateral Personal or real property in which a security

interest has been given.
Common control Reporting entities or businesses that are

controlled by the same parent entity.
Common stock A stock that is subordinate to all other stock of the

issuer. Also called common shares.
Compensating balance A minimum balance that must be maintained in

arrangement an account to offset a portion of the cost that a
lender faces when extending a loan or credit to an
individual or reporting entity.
Completed-contract An accounting method under which revenue

method recognition is postponed until a contract is
completed.
C-4 PwC
Term Definition
Component of an entity A component of a reporting entity comprises

operations and cash flows that can be clearly
distinguished, operationally and for financial
reporting purposes, from the rest of the reporting
entity. A component of a reporting entity may be a
reportable segment or an operating segment,
a reporting unit, a subsidiary, or an asset group.
Comprehensive income The change in equity (net assets) of a reporting

entity during a period from transactions and other
events and circumstances from nonowner sources.
Comprehensive income comprises both of the
following:
□ All components of net income
□ All components of other comprehensive
income
Conduit debt security Certain limited-obligation revenue bonds,

certificates of participation, or similar debt
instruments issued by a state or local
governmental entity for the express purpose of
providing financing for a specific third party (the
conduit bond obligor) that is not a part of the state
or local government’s financial reporting entity.
Contingency An existing condition, situation, or set of

circumstances involving uncertainty as to possible
gain (gain contingency) or loss (loss contingency)
to a reporting entity that will ultimately be
resolved when one or more future events occur or
fail to occur.
Contingent consideration Usually an obligation of the acquirer to transfer

additional assets or equity interests to the former
owners of an acquiree as part of the exchange for
control of the acquiree if specified future events
occur or conditions are met. However, contingent
consideration also may give the acquirer the right
to the return of previously transferred
consideration if specified conditions are met.
PwC C-5
Term Definition
Contingent rental The increases or decreases in lease payments that

result from changes occurring after lease
inception in the factors (other than the passage of
time) on which lease payments are based,
excluding any escalation of minimum lease
payments relating to increases in construction or
acquisition cost of the leased property or for
increases in some measure of cost or value during
the construction or pre-construction period. The
term “contingent rentals” contemplates an
uncertainty about future changes in the factors on
which lease payments are based.
Contingent stock An agreement to issue common stock (usually in

agreement connection with a business combination) that is
dependent on the satisfaction of certain
conditions.
Contingently convertible An instrument that has embedded conversion

instrument features that are contingently convertible or
exercisable based on either of the following:
□ A market price trigger
□ Multiple contingencies, if one of the
contingencies is a market price trigger and the
instrument can be converted or share settled
based on meeting the specified market
condition
Examples of contingently convertible instruments
include contingently convertible debt and
contingently convertible preferred stock.
Contingently issuable A share issuable for little or no cash consideration

share upon the satisfaction of certain conditions
pursuant to a contingent stock agreement. Also
called “contingently issuable stock.”
Continuing cash flow With regard to segments (ASC 280), cash inflows
(Continuing or outflows that are generated by the ongoing
involvement) reporting entity and are associated with activities
involving a disposed component.
With regard to transfers of financial assets (ASC
860), any involvement with the transferred
financial assets that permits the transferor to
receive cash flows or other benefits that arise from
the transferred financial assets or that obligates
the transferor to provide additional cash flows or
other assets to any party related to the transfer.
C-6 PwC
Term Definition
Controlling financial The portion of equity (net assets) in a subsidiary

interest which is attributable, directly or indirectly, to a
parent.
Conversion rate The ratio of the number of common shares

issuable upon conversion to a unit of a convertible
security. For example, $100 face value of debt
convertible into 5 shares of common stock would
have a conversion ratio of 5:1. Also called
“conversion ratio.”
Convertible security A security that is convertible into another security

based on a conversion rate. For example,
convertible preferred stock that is convertible into
common stock on a two-for-one basis (two shares
of common for each share of preferred).
Cost method A method of accounting for an equity investment,

when the investor does not have the ability to
exercise significant influence (typically below 20%
ownership), where companies carry their
investment at cost, recognize dividends when
received, and only recognize gains or losses after
selling the securities. The cost method may only
be used for investments in securities that are
nonmarketable or do not have readily convertible
fair values.
Credit derivative A derivative instrument that has both of the

□ One or more of its underlyings are related to
the credit risk of a specified entity (or a group
of entities) or an index based on the credit risk
of a group of entities
□ It exposes the seller to potential loss from
credit-risk-related events specified in the
contract.
Examples of credit derivatives include, but are not
limited to, credit default swaps, credit spread
options, and credit index products.
Cumulative effect of an An accounting adjustment to the carrying

accounting change amounts of assets and liabilities as of the
beginning of the first period presented due to a
change in accounting principle.
PwC C-7
Term Definition
Deferred tax asset The deferred tax consequence attributable to a

deductible temporary difference or carryforward
measured using the applicable enacted tax rate
and provisions of the enacted tax law. A deferred
tax asset is reduced by a valuation allowance if,
based on the weight of evidence available, it is
more likely than not that some portion or all of a
deferred tax asset will not be realized.
Deferred tax expense (or The change during the year in a reporting entity’s
benefit) deferred tax liabilities and assets.
Deferred tax liability The deferred tax consequence attributable to a

taxable temporary difference measured using the
applicable enacted tax rate and provisions of the
enacted tax law.
Defined benefit plan A plan that provides participants with a

determinable benefit based on a formula provided
for in the plan. Types of plans may include health
and welfare plans, pension plans, and
postretirement plans.
Defined contribution A plan that provides an individual account for

plan each participant and provides benefits that are
based on all of the following: amounts contributed
to the participant’s account by the employer or
employee; investment experience; and any
forfeitures allocated to the account, less any
administrative expenses charged to the plan.
Types of plans may include health and welfare
plans and postretirement plans.
Derivative instrument A financial instrument or other contract with all of

the following characteristics: an underlying,
notional amount, and payment provision; an
initial net investment; and net settlement.
Diluted earnings per The amount of earnings for the period available to
share each share of common stock outstanding during
the period and to each share that would have been
outstanding, assuming the issuance of common
shares for all dilutive instruments outstanding
during the reporting period.
Dilution A reduction in EPS resulting from the assumption

that convertible securities were converted, that
options or warrants were exercised, or that other
shares were issued upon the satisfaction of certain
conditions.
C-8 PwC
Term Definition
Discontinued operation Disposal of a component or group of components

that meet the requirements of ASC 205-20.
Discount (on debt The difference between the net proceeds, after
issuance) expense, received upon issuance of debt and the
amount repayable at its maturity.
Disposal group Assets to be disposed of together as a group in a

single transaction and liabilities directly
associated with those assets that will be
transferred in the transaction. May include a
discontinued operation, along with other assets
and liabilities that are not part of the discontinued
operation.
Dividends in kind Dividends paid in a form other than cash.
Economic hedge Transactions that serve to mitigate cash flow or

fair value risks, but that are not designated as
hedging transactions for financial reporting
purposes.
Effective interest rate The rate of return implicit in the loan; that is, the
contractual interest rate adjusted for any net
deferred loan fees or costs, premium, or discount
existing at the origination or acquisition of the
loan.
Effectiveness The extent to which the hedging instrument

offsets the changes in fair value or cash flows of
the hedged item.
Embedded derivative Implicit or explicit terms that affect some or all of

the cash flows or the value of other exchanges
required by a contract in a manner similar to a
derivative instrument.
Employee stock A plan that is a stock bonus plan, or combination

ownership plan stock bonus and money purchase pension plan,
designed to invest primarily in employer stock.
Employee stock purchase A plan designed to promote employee stock

plan ownership by providing employees with a
convenient means (usually through a payroll
deduction) to acquire a company’s shares.
PwC C-9
Term Definition
Equity method A method of accounting for an equity investment,

when the investor has the ability to exercise
significant influence (typically between 20
percent-50 percent), where reporting entities
adjust the investment amount each period for
changes in the investee’s net assets and record
earnings of the investee equivalent to their
percentage ownership.
Expected return on plan For defined benefit plans, the expected return on
assets plan assets is determined based on the expected
long-term rate of return on plan assets and the
market-related value of plan assets.
Expected term A requisite service period, typically associated

with stock-based compensation.
Expected volatility A variable in option pricing formula showing the

extent to which the return of the underlying asset
will fluctuate between now and the option’s
expiration.
Fair value The price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction
between market participants at the measurement
date.
Fair value hedge A hedge of the exposure to changes in the fair

value of a recognized asset or liability or an
unrecognized firm commitment that are
attributable to a particular risk.
Fair value hierarchy A three level hierarchy that distinguishes the

inputs and assumptions used in a fair value
estimate.
Financial instrument Cash, evidence of an ownership interest in an

entity, or a contract that both:
□ Imposes on one entity a contractual obligation
either to deliver cash or another financial
instrument to a second entity or to exchange
other financial instruments on potentially
unfavorable terms with the second entity
□ Conveys to that second entity a contractual
right either to receive cash or another
financial instrument from the first entity or to
exchange other financial instruments on
potentially favorable terms with the first
entity
C-10 PwC
Term Definition
Financial statements are Financial statements are considered available to

available to be issued be issued when they are complete in a form and
format that complies with GAAP and all approvals
necessary for issuance have been obtained, for
example, from management, the board of
directors, and/or significant shareholders.
Financial statements are Financial statements are considered issued when

issued they are widely distributed to shareholders and
other financial statement users for general use and
reliance in a form and format that complies with
GAAP. (SEC registrants also are required to
consider the guidance in ASC 855-10-S99-2.)
Financing receivable A financing arrangement that has both of the

□ It represents a contractual right to receive
money on demand or on a fixed or
determinable date
□ It is recognized as an asset in the reporting
entity’s statement of financial position
See ASC 310-10-55-13 through 55-15 for more
information on the definition of financing
receivable, including a list of items that are
excluded from the definition (e.g., debt securities).
Foreign currency A currency other than the functional currency of

the reporting entity being referred to.
Foreign currency The process of expressing in the reporting

translation currency of the reporting entity those amounts
that are denominated or measured in a different
currency.
Forfeiture The loss of rights to unvested stock-based

compensation awards.
Forward exchange An agreement between two parties to exchange

contract different currencies at a specified exchange rate at
an agreed-upon future date.
Freestanding contract A freestanding contract is entered into either:

□ Separate and apart from any of the reporting
entity’s other financial instruments or equity
transactions
□ In conjunction with some other transaction
and is legally detachable and separately
exercisable
PwC C-11
Term Definition
Functional currency The currency of the primary economic

environment in which the reporting entity
operates; normally, that is the currency of the
environment in which a reporting entity primarily
generates and expends cash.
Gain or loss (component The sum of the difference between the actual
of net periodic pension return on plan assets and the expected return on
cost) plan assets and the amortization of the net gain or
loss recognized in accumulated other
General partnership An association in which each partner has

unlimited liability.
Grant date The date at which an employer and an employee

reach a mutual understanding of the key terms
and conditions of a share-based payment award.
The grant date for an award of equity instruments
is the date that an employee begins to benefit
from, or be adversely affected by, subsequent
changes in the price of the employer’s equity
shares.
Gross margin The excess of sales over cost of goods sold. Gross
margin does not consider all operating expenses.
Held-for-sale A long-lived asset (disposal group) to be sold that

meets the following criteria:
□ Management commits to a plan to sell the
asset
□ The asset is available for immediate sale in its
present condition subject only to terms that
are usual and customary for sales of such
assets
□ An active program to locate a buyer and other
actions required to complete the plan to sell
the asset have been initiated
□ The sale of the asset is probable, and transfer
of the asset is expected to be completed within
one year
□ The asset is being actively marketed for sale at
a price that is reasonable in relation to its
current fair value
□ It is unlikely that significant changes to the
plan will be made or that the plan will be
withdrawn
C-12 PwC
Term Definition
Held-to-maturity A security which a reporting entity has the positive

intent and ability to hold until the instrument’s
maturity.
Highly inflationary An economy which has had cumulative inflation of

economy approximately 100% or more over three years.
Hybrid instrument A contract that embodies both an embedded

derivative and a host contract.
Income tax Domestic and foreign federal (national), state, and

local (including franchise) tax based on income.
Indefinite reinvestment An assertion on the part of a company to reinvest

foreign earnings without repatriation.
Input An assumption that market participants would use

when pricing the asset or liability, including
assumptions about risk, such as the following:
□ The risk inherent in a particular valuation
technique used to measure fair value (such as
a pricing model)
□ The risk inherent in the inputs to the
valuation technique
Interest cost (component The amount recognized in a period determined as

of net periodic pension the increase in the projected benefit obligation
cost) due to the passage of time.
In-the-money An option for which the common stock during the

period exceeds the exercise price.
Joint and several liability Where liability is joint and several, any party
deemed liable is potentially responsible for all of
the associated costs. This scheme of liability
means that any responsible party can potentially
be liable for the entire cost of a liability,
notwithstanding that the party is responsible for
only a portion of it.
PwC C-13
Term Definition
Joint venture A reporting entity owned and operated by a small

group of entities (the joint venturers) as a separate
and specific business or project for the mutual
benefit of the members of the group. The purpose
of a joint venture frequently is to share risks and
rewards in developing a new market, product, or
technology, to combine complementary
technological knowledge; or to pool resources in
developing production or other facilities. A joint
venture also usually provides an arrangement
under which each joint venturer may participate,
directly or indirectly, in the overall management
of the joint venture. Joint venturers thus have an
interest or relationship other than as passive
investors.
Level 1 input Quoted price (unadjusted) in active markets for

identical assets or liabilities that the reporting
entity can access at the measurement date.
Level 2 input An input other than quoted prices included within

Level 1 that are observable for the asset or liability,
either directly or indirectly.
Level 3 input An unobservable input for the asset or liability.
Limited partnership An association in which one or more general

partners have unlimited liability and one or more
limited partners have limited liability.
Line-of-credit An agreement that provides the borrower with the

arrangement (or option to make multiple borrowings up to a
revolving debt specified maximum amount, to repay portions of
arrangement) previous borrowings, and to then reborrow under
the same contract. May include both amounts
drawn by the debtor (a debt instrument) and a
commitment by the creditor to make additional
amounts available to the debtor under predefined
terms (a loan commitment).
Mandatorily convertible A financial instrument that requires the holder to

financial instrument exchange the instrument for a fixed number of
common shares at a specified future date.
Mandatorily redeemable Any of various financial instruments issued in the

financial instrument form of shares that embody an unconditional
obligation requiring the issuer to redeem the
instrument by transferring its assets at a specified
or determinable date (or dates) or upon an event
that is certain to occur.
C-14 PwC
Term Definition
Margin deposit Security deposit by a customer with a broker, or

the governing clearing house, for each futures or
options contract as support for fulfilling the
contract.
Marketable security A highly liquid security that can be readily

converted into cash.
Master limited A type of limited partnership that is publicly

partnership traded.
Master netting An agreement which states that a reporting entity

arrangement has the right to set off the amounts owed from its
derivatives with a counterparty that is enforceable
by law.
Measurement period (for A period of time after a business combination in

business combinations) which a reporting entity is permitted to finalize
the accounting for certain valuations.
Mezzanine equity A temporary equity classification for an

instrument that is redeemable or may become
redeemable at a fixed or determinable price on a
fixed or determinable date, at the option of the
holder, or upon the occurrence of an event that is
not solely within the control of the issuer.
Milestone method A method of recognizing revenue for long-term

contracts. It is based on the premise that a task
associated with a long-term contract, when
completed, provides management with a reliable
indicator of progress-to-completion on those
contracts.
Multi-employer plan A pension or postretirement benefit plan to which

two or more unrelated employers contribute,
usually pursuant to one or more collective-
bargaining agreements. A characteristic of multi-
employer plans is that assets contributed by one
participating employer may be used to provide
benefits to employees of other participating
employers since assets contributed by an
employer are not segregated in a separate account
or restricted to provide benefits only to employees
of that employer.
PwC C-15
Term Definition
Net periodic pension cost The amount recognized in an employer’s financial

statements as the cost of a pension plan for a
period. The term “net periodic pension cost” is
used instead of “net pension expense” because
part of the cost recognized in a period may be
capitalized with other costs as part of an asset
such as inventory.
Noncontrolling interest The portion of equity (net assets) in a subsidiary

not attributable, directly or indirectly, to a parent.
Observable input An input that is developed using market data,

such as publicly available information about
actual events or transactions, and that reflects the
assumptions that market participants would use
when pricing the asset or liability.
Operating segment A component of a public reporting entity that has

all of the following characteristics:
□ It engages in business activities from which it
may earn revenues and incur expenses
□ Its operating results are regularly reviewed by
the chief operating decision maker to make
decisions about resources to be allocated to
the segment and assess its performance
□ Its discrete financial information is available
Other comprehensive Revenues, expenses, gains, and losses that under

income GAAP are included in comprehensive income but
excluded from net income.
Other postemployment A benefit, other than special or contractual

benefit termination benefits, that is provided by an
employer to former or inactive employees after
employment but before retirement including
benefits provided to beneficiaries and covered
dependents.
Out-of-period An adjustment made in an accounting period

adjustment resulting from misstatements in a previous period.
Participating right The ability to block the actions through which a

reporting entity exercises the power to direct the
activities of a VIE that most significantly impact
the VIE’s economic performance. Alternatively,
the ability of limited partners to participate in
certain financial and operating decisions of
limited partnerships that are made in the ordinary
course of business.
C-16 PwC
Term Definition
Participating security With regard to EPS calculations, a security that

may participate in undistributed earnings with
common stock, whether that participation is
conditioned upon the occurrence of a specified
event or not. The form of such participation does
not have to be a dividend—that is, any form of
participation in undistributed earnings would
constitute participation by that security,
regardless of whether the payment to the security
holder was referred to as a dividend.
Participation right A purchaser’s right under a participating contract

to receive future dividends.
Pass-through entity A business structure that is used to reduce the

effects of double taxation in which the reporting
entity doesn’t pay income taxes at the corporate
level. Instead, corporate income is allocated
among the owners, and income taxes are only
levied at the individual owners’ level.
Penny warrant A warrant for which shares are issuable for little or
no consideration.
Percentage-of- A method under which the amount of revenue

completion method recognized (based on the sales value) at the time a
sale is recognized is measured by the relationship
of costs already incurred to the total of costs
already incurred and future costs expected to be
incurred.
Performance condition With regard to stock-based compensation, a

condition affecting the vesting, exercisability,
exercise price, or other pertinent factors used in
determining the fair value of an award that relates
to both of the following:
□ An employee’s rendering service for a
specified (either explicitly or implicitly) period
of time
□ Achieving a specified performance target that
is defined solely by reference to the employer’s
own operations (or activities)
Permanent equity Equity instruments that do not qualify for

temporary, or mezzanine, equity classification.
PwC C-17
Term Definition
Plan asset An asset—usually a stock, bond, or other

investment (except certain insurance contracts)—
that has been segregated and restricted (usually in
a trust) to be used for postretirement benefits. The
amount of plan assets includes amounts
contributed by the employer, and by plan
participants for a contributory plan, and amounts
earned from investing the contributions, less
benefits, income taxes, and other expenses
incurred.
Plan curtailment An event that significantly reduces the expected

years of future service of present employees or
eliminates for a significant number of employees
the accrual of defined benefits for some or all of
their future services.
Portfolio segment The level at which a reporting entity develops and

documents a systematic methodology to
determine its allowance for credit losses.
Preferred dividend Dividend on preferred stock usually at a specified

rate stated in dollars per share or as a percentage
of par value.
Preferred stock A security that has preferential rights compared to

common stock.
Premium (on debt The excess of the net proceeds, after expense,
issuance) received upon issuance of debt over the amount
repayable at its maturity.
Prepaid variable share A contract that requires a company to issue a

forward variable number of shares at a future stipulated
date. The number of shares to be issued is
dependent on the volume weighted average price
of the company’s stock on the stipulated date.
Primary beneficiary A reporting entity that consolidates a variable

interest entity (VIE).
Prior service cost The cost of benefit improvements attributable to

plan participants’ prior service pursuant to a plan
amendment or a plan initiation that provides
benefits in exchange for plan participants’ prior
service.
Probable Future event or events that are likely to occur.
C-18 PwC
Term Definition
Projected benefit The actuarial present value as of a date of all

obligation benefits attributed by the pension benefit formula
to employee service rendered before that date. The
projected benefit obligation is measured using
assumptions as to future compensation levels if
the pension benefit formula is based on those
future compensation levels.
Purchased call option A contract that allows the reporting entity to buy a
specified quantity of its own stock from the issuer
of the contract at a fixed price for a given period.
Push down accounting Use of the acquiring entity’s basis of accounting in

the preparation of the acquired entity’s financial
statements.
Qualifying emerging An issuer, as defined in the Securities Act and the

growth company Exchange Act, with total annual gross revenues of
less than $1 billion during its most recently
completed fiscal year.
Rabbi trust Grantor trusts generally set up to fund

compensation for a select group of management
or highly paid executives. To qualify as a rabbi
trust for income tax purposes, the terms of the
trust agreement should explicitly state that the
assets of the trust are available to satisfy the
claims of general creditors in the event of
bankruptcy of the employer.
Reasonably estimable An amount whose level of certainty will not impair

the integrity of the reporting entity’s financial
statements.
Reasonably possible The chance of the future event or events occurring

is more than remote but less than likely.
Reclassification A change in classification of an amount from a

prior period from one acceptable financial
statement caption to another acceptable caption
for comparability purposes.
Redeemable preferred An instrument that is issued in the form of shares

stock and permits the issuer to redeem the instrument
on a specified or determinable date (or dates) or
upon the occurrence of a future event.
PwC C-19
Term Definition
Related party Includes:

□ Affiliates of the reporting entity
□ Entities for which investments in their equity
securities would be required, absent the
election of the fair value option under ASC
825, to be accounted for using the equity
method
□ Trusts for the benefit of employees, such as
pension and profit-sharing trusts, that are
managed by or under the trusteeship of
management
□ Principal owners of the reporting entity and
members of their immediate families
□ Management of the reporting entity and
members of their immediate families
□ Other parties with which the reporting entity
may deal if one party controls or can
significantly influence the management or
operating policies of the other to an extent
that one of the transacting parties might be
prevented from fully pursuing its own
separate interests
□ Other parties that can significantly influence
the management or operating policies of the
transacting parties or that have an ownership
interest in one of the transacting parties and
can significantly influence the other to an
extent that one or more of the transacting
parties might be prevented from fully
pursuing its own separate interests
Remote The chance of the future event(s) occurring is

slight.
Reportable segment An operating segment reported in a reporting

entity’s financial statements.
Reporting currency The currency in which a reporting entity prepares

its financial statements.
Reporting unit The level of reporting at which goodwill is tested

for impairment. A reporting unit is an operating
segment or one level below an operating segment
(also known as a component).
C-20 PwC
Term Definition
Repurchase agreement An agreement under which the transferor

(or “repo”) (repurchase party) transfers a security to a
transferee (repurchase counterparty or reverse
party) in exchange for cash and concurrently
agrees to reacquire that security at a future date
for an amount equal to the cash exchanged plus a
stipulated interest factor. Instead of cash, other
securities or letters of credit may be exchanged.
Some repurchase agreements call for repurchase
of securities that need not be identical to the
securities transferred.
Restatement The process of revising previously-issued financial

statements to reflect the correction of an error.
Restricted stock unit Compensation offered by an employer to an

employee in the form of company stock. The
employee does not receive the stock immediately,
but instead receives it according to a vesting plan
and distribution schedule after achieving required
performance milestones or upon remaining with
the employer for a particular length of time.
Restructuring A program that is planned and controlled by

management, and materially changes either the
scope of a business undertaken by a reporting
entity, or the manner in which that business is
conducted.
Retainage Amounts that are owed between two entities in a

long term contract, but typically not paid until the
contract has been completed.
Retrospective application The application of a different accounting principle

to one or more previously-issued financial
statements, or to the balance sheet at the
beginning of the current period, as if that principle
had always been used, or a change to financial
statements of prior accounting periods to present
the financial statements of a new reporting entity
as if it had existed in those prior years.
Revised financial Financial statement revised only for either of the

statement following conditions:
□ Correction of an error
□ Retrospective application of GAAP
Revolving debt See Line-of-Credit Arrangement.
PwC C-21
Term Definition
Right of setoff A legal right, by contract or otherwise, to

discharge all or a portion of an obligation owed to
another party by applying against the obligation
an amount that the other party owes.
Securitization The process by which financial assets are

transformed into securities.
Service cost (component The actuarial present value of benefits attributed

of net periodic pension to services rendered by employees during the
cost or component of period (the portion of the expected postretirement
periodic post-retirement benefit obligation attributed to service in the
benefit) period).
Servicing asset A contract to service financial assets under which

the benefits of servicing are expected to more than
adequately compensate the servicer for
performing the servicing, either:
□ Undertaken in conjunction with selling or
securitizing the financial assets being serviced
□ Purchased or assumed separately
Servicing liability A contract to service financial assets under which

the estimated future revenues from contractually
specified servicing fees, late charges, and other
ancillary revenues (benefits of servicing) are not
expected to adequately compensate the servicer
for performing the servicing.
Share lending agreement The act of loaning a share, which requires the
borrower to put up collateral, and the title and the
ownership is also transferred to the borrower.
Smaller reporting A company with a public float of less than $75

company million as of the last business day of its second
fiscal quarter. Public float is defined as the market
value of shares of publicly-traded common stock
that are not held by management and certain large
investors.
Spin-off The transfer of assets that constitute a business by

an entity (the spinnor) into a new legal spun-off
entity (the spinnee), followed by a distribution of
the shares of the spinnee to its shareholders,
without the surrender by the shareholders of any
stock of the spinnor.
Statutory tax rate The tax rate specified by the law of a taxing
jurisdiction.
C-22 PwC
Term Definition
Stock appreciation right An award entitling employees to receive cash,

stock, or a combination of cash and stock in an
amount equivalent to any excess of the fair value
of a stated number of shares of the employer’s
stock over a stated price.
Stock dividend An issuance by a corporation of its own common

shares to its common shareholders without
consideration.
Stock option A contract that gives the holder the right, but not
the obligation, either to purchase (to call) or to sell
(to put) a certain number of shares at a
predetermined price for a specified period of time.
Stock split An issuance by a corporation of its own common

shares to its common stockholders without
consideration.
Subjective acceleration A provision in a debt agreement that states that

clause the creditor may accelerate the scheduled
maturities of the obligation under conditions that
are not objectively determinable (for example, if
the debtor fails to maintain satisfactory operations
or if a material adverse change occurs).
Subsequent event An event or transaction that occurs after the

balance sheet date but before financial statements
are issued or are available to be issued.
There are two types of subsequent events:
□ Type 1 — Events or transactions that provide
additional evidence about conditions that
existed at the date of the balance sheet,
including the estimates inherent in the
process of preparing financial statements
(that is, recognized subsequent events)
□ Type 2 — Events that provide evidence about
conditions that did not exist at the date of the
balance sheet but arose subsequent to that
date (that is, nonrecognized subsequent
events)
PwC C-23
Term Definition
Tax position A position in a previously filed tax return or a

position expected to be taken in a future tax return
that is reflected in measuring current or deferred
income tax assets and liabilities for interim or
annual periods. A tax position can result in a
permanent reduction of income taxes payable, a
deferral of income taxes otherwise currently
payable to future years, or a change in the
expected realizability of deferred tax assets. The
term “tax position” also encompasses, but is not
limited to:
□ A decision not to file a tax return
□ An allocation or a shift of income between
jurisdictions
□ The characterization of income or a decision
to exclude reporting taxable income in a tax
return
□ A decision to classify a transaction, entity, or
other position in a tax return as tax exempt
□ A reporting entity’s status, including its status
as a pass-through entity or a tax-exempt not-
for-profit entity
Temporary difference A difference between the tax basis of an asset or

liability computed for tax positions, and its
reported amount in the financial statements that
will result in taxable or deductible amounts in
future years when the reported amount of the
asset or liability is recovered or settled,
respectively.
Temporary equity See Mezzanine equity.
Trading Securities that are bought and held principally for

the purpose of selling them in the near term and
therefore held for only a short period of time.
Generally reflects active and frequent buying and
selling, and trading securities are generally used
with the objective of generating profits on short-
term differences in price.
C-24 PwC
Term Definition
Transaction gain or loss Gains or losses that result from a change in

exchange rates between the functional currency
and the currency in which a foreign currency
transaction is denominated. They represent an
increase or decrease in both of the following:
□ The actual functional currency cash flows
realized upon settlement of foreign currency
transactions
□ The expected functional currency cash flows
on unsettled foreign currency transactions
Transfer The conveyance of a noncash financial asset by

and to someone other than the issuer of that
financial asset.
A transfer includes the following:
□ Selling a receivable
□ Putting a receivable into a securitization trust
□ Posting a receivable as collateral
A transfer excludes the following:
□ The origination of a receivable
□ Settlement of a receivable
□ The restructuring of a receivable into a
security in a troubled debt restructuring
Translation adjustment An adjustment that results from the process of

translating financial statements from the
reporting entity’s functional currency into the
reporting currency.
Troubled debt A restructuring in which the creditor for economic

restructuring or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it
would not otherwise consider.
Two-class method An earnings allocation formula that determines

EPS for each class of common stock and
participating security according to dividends
declared (or accumulated) and participating rights
in undistributed earnings.
Uncertain tax position A tax position taken that may be challenged and
ultimately disallowed in whole or in part.
Unobservable input An input for which market data is not available

and that is developed using the best information
available about the assumptions that market
participants would use when pricing the asset or
liability.
PwC C-25
Term Definition
Unrecognized tax benefit The difference between a tax position taken or

expected to be taken in a tax return and the
benefit recognized.
Valuation allowance The portion of a deferred tax asset for which it is

more likely than not that a tax benefit will not be
realized.
Valuation approach The market approach, the income approach, and

the cost approach.
Valuation technique The method used in a valuation. Synonym:

valuation method.
Variable interest entity An entity that by design possesses the following

(VIE) characteristics:
□ The equity investment at risk is not sufficient
for the entity to finance its activities without
additional subordinated financial support
□ As a group, the holders of equity investment at
risk do not possess:
o The power, through voting rights or
similar rights, to direct the activities that
most significantly impact the entity’s
economic performance
o The obligation to absorb expected losses or
the right to receive the expected residual
returns of the entity
o Symmetry between voting rights and
economic interests and where
substantially all of the entity’s activities
either involve or are conducted on behalf
of an investor with disproportionately
fewer voting rights (e.g., structures with
nonsubstantive voting rights)
Variable rate demand A debt instrument that the investor can put (or
obligation demand repayment) on short notice. Upon an
investor’s exercise of a put, a remarketing agent
will resell the debt to another investor to obtain
the funds to honor the put (i.e., to repay the
investor). If the remarketing agent fails to sell the
debt, the funds to pay the investor who exercised
the put will often be obtained through a liquidity
facility issued by a financial institution.
Variation margin With regard to derivatives, an amount that is

required to be paid or received periodically as
dictated by the clearing member and/or clearing
house.
C-26 PwC
Term Definition
Vest To earn the rights to. A share-based payment

award becomes vested at the date that the
employee’s right to receive or retain shares, other
instruments, or cash under the award is no longer
contingent on satisfaction of either a service
condition or a performance condition. Market
conditions are not vesting conditions.
Warrant A security that gives the holder the right to

purchase shares of common stock in accordance
with the terms of the instrument, usually upon
payment of a specified amount.
PwC C-27
Appendix D: Summary of
significant changes
This appendix highlights the significant changes made to the Financial statement
presentation guide since its last full update in 2016.
Revisions to guide completed in May 2017
FSP 2, Balance sheet:
□ Section 2.2.1 was updated to reflect changes in the balance sheet for recent
accounting standards.
FSP 6, Statement of cash flows:
□ Chapter 6, including Figure 6-1, was updated to reflect the new guidance in
ASU 2016-18.
□ Section 6.7.1.3 was clarified and updated to reflect the new guidance in ASU
2016-01.
□ Section 6.7.1.5, including Example 6-2, was clarified and updated to reflect
new guidance stemming from a change in the legal treatment of collateral
posted with certain central clearing parties.
□ Section 6.7.2.1 was updated to clarify the guidance on discounts related to

debt with a cash conversion feature and the guidance on repayment with PIK
notes.
□ Section 6.7.2.3 was updated to clarify guidance on modifications to line of

credit and revolving debt arrangements.
FSP 8, Other assets:
□ Section 8.9.2.3 was added to reflect ASU 2017-04.
FSP 13, Pensions and other postemployment benefits:
□ Sections 13.2 and 13.3 were updated to reflect ASU 2017-07.
FSP 16, Income taxes:
□ Question 16-7 was added to supplement the guidance on the tabular

reconciliation of unrecognized tax benefits.
PwC D-1
Appendix D: Summary of significant changes
FSP 20, Fair value:
□ Figure 20-4 and Section 20.4.2.1 were updated to reflect the new disclosure
requirement for changes in valuation techniques and approaches that was
clarified in ASU 2016-19.
FSP 23, Commitments, contingencies, and guarantees:
□ Section 23.4 was updated to add content that was previously included in
ARM 5020 and 5360.
FSP 3, 6, 8, 11, 12, 13, 23, and 27 were updated to clarify the application of
SEC guidance to private companies.
D-2 PwC
PwC’s National Accounting Services Group
The Accounting Services Group (ASG) within the Firm’s National Quality
Organization leads the development of Firm perspectives and points of view used
to inform the capital markets, regulators, and policy makers. ASG assesses and
communicates the implications of technical and professional developments on
the profession, clients, investors, and policy makers. The team consults on
complex accounting and financial reporting matters and works with clients to
resolve issues raised in SEC comment letters. They work with the standard
setting and regulatory processes through communications with the FASB, SEC,
and others. The team provides market services such as quarterly technical
webcasts and external technical trainings, including our alumni events. The team
is also responsible for sharing their expert knowledge on topics through internal
and external presentations and by authoring various PwC publications. In
addition to working with the US market, ASG also has a great deal of involvement
in global issues. They have a large global team that is deeply involved in the
development of IFRS, and that has developed a strong working relationship with
the IASB. The team of experienced Partners, Directors, and Senior Managers
helps develop talking points, perspectives, and presentations for when Senior
Leadership interacts with the media, policy makers, academia, regulators, etc.
About PwC
At PwC, our purpose is to build trust in society and solve important problems.
PwC is a network of firms in 157 countries with more than 223,000 people who
are committed to delivering quality in assurance, advisory and tax services. Find
out more and tell us what matters to you by visiting us at www.pwc.com/US.
“PwC” is the brand under which member firms of PricewaterhouseCoopers

International Limited (PwCIL) operate and provide services. Together, these
firms form the PwC network. Each firm in the network is a separate legal entity
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provide any services to clients. PwCIL is not responsible or liable for the acts or
omissions of any of its member firms nor can it control the exercise of their
professional judgment or bind them in any way.
www.pwc.com
2016 Reporting
www.pwc.com
Reporting
2016
Copyright © 2017 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member ﬁrm, and may
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□ Bankruptcies and liquidations

□ Business combinations and noncontrolling interests, global edition

□ Consolidations and equity method of accounting

□ Derivative instruments and hedging activities

□ Fair value measurements, global edition

□ IFRS and US GAAP: similarities and differences

□ Loans and investments

□ Revenue from contracts with customers, global edition

□ Transfers and servicing of financial assets

□ Utilities and power companies

This guide serves as a compendium of the many presentation and disclosure

How to use this guide

□ Throughout the guide, we have used shortened versions of certain terminology,

□ In general, the content refers to consolidated financial statements, with the

□ Presentation and disclosure requirements unique to interim reporting are

□ Management Discussion and Analysis (MD&A)

□ Regulation S-K reporting

The presentation and disclosure guidance in this guide is applicable to reporting

References to US GAAP and SEC guidance

References to other chapters and sections in this guide

References to other PwC guidance

□ Bankruptcies and liquidations (BLG)

□ Business combinations and noncontrolling interests, global edition (BCG)

□ Consolidation and equity method of accounting guide (CG)

□ Derivative instruments and hedging activities (DH)

□ Fair value measurements, global edition (FV)

□ Financing transactions: debt, equity and the instruments in between (FG)

□ Income taxes (TX)

□ Loans and investments (LI)

□ Revenue from contracts with customers, global edition (RR)

□ Stock-based compensation (SC)

□ Transfers and servicing of financial assets (TS)

□ Utilities and power companies (UP)

In addition, PwC’s Accounting and reporting manual (the ARM) provides

SEC filings may be accessed on the SEC’s website at

The appendices to this guide include guidance on professional literature, a listing of

Presentation and disclosure is paramount to effective financial reporting. This guide

1.1 Chapter overview .................................................................................................. 1-2

2.1 Chapter overview .................................................................................................. 2-2

3.1 Chapter overview................................................................................................. 3-2

3.5.1 Revenues versus gains ......................................................................... 3-9

3.8.4 Gains or losses on sales of businesses ................................................ 3-29

4 Reporting comprehensive income

4.1 Chapter overview ................................................................................................ 4-2

4.5.3.1 Sample disclosure — reclassification adjustments in

5.1 Chapter overview ................................................................................................. 5-2

5.8 Treasury stock ..................................................................................................... 5-15

6 Statement of cash flows

6.1 Chapter overview ................................................................................................. 6-2

6.5.7.3 Presentation – statement of cash flows…………………………. 6-18

Preparing the statement of cash flows for a reporting entity with

7 Earnings per share (EPS)

7.1 Chapter overview ................................................................................................. 7-2

7.4.3.5 Employee stock options ...................................................... 7-28

7.6 Change in capital structure ................................................................................. 7-79

8.1 Chapter overview................................................................................................. 8-2

8.5.4 Deferred costs – capitalized advertising costs ................................... 8-17

9 Investments — debt and equity securities