FASB and IASB Convergence Efforts Agenda n Background

FASB and IASB Convergence Efforts

Agenda n Background and past developments n Current thinking of SEC n Joint Revenue Recognition Project n Joint Leasing Project © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2

Background and past developments

Accounting Convergence What is Convergence? v v Accounting standards based on the same concepts and principles © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Accounting outcome will be the same regardless whether IFRS or U. S. GAAP 4

Convergence Plan n Norwalk Agreement (September 2002) – n n FASB and IASB pledged to make their existing financial reporting standards fully compatible and coordinate future work programs to ensure compatibility is maintained Memorandum of Understanding between FASB and IASB (February 2006) – Commitment to achieve convergence – Sets guidelines on how to approach the task – Presents standard-setting goals to be accomplished by the end of 2008 Updated Memorandum of Understanding (September 2008) – Presents standard setting goals to be accomplished by the end of 2011 © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5

The 2006 Mo. U Discussions by the FASB and the IASB regarding their approach to the convergence program indicated agreement on the following guidelines: • Convergence of accounting standards can best be achieved through the development of high quality, common standards over time • Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources—instead, a new common standard should be developed that improves the financial information reported to investors • Serving the needs of investors means that the boards should seek to converge by replacing weaker standards with stronger standards Report of IASB and FASB to G 20 Finance Ministers, February 2013: • Most of the short-term projects and several of the longer-term projects have been completed or are nearing completion • In 2012 the boards made significant progress on the remaining joint projects and they continue to appreciate the importance of developing converged accounting standards © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6

Mo. U Projects and Status According to FASB/IASB Update Major Projects Reported Status Additional Information Business Combinations Completed Mostly converged standards issued 2007/2008 Consolidations Completed Not fully converged Fair Value Measurement Guidance Completed Mostly converged standards issued 2011 Reassessed as a lower priority project No longer on active agenda Completed Only with respect to reporting comprehensive income Post-retirement Benefits Completed Standards not converged in several important respects Revenue Recognition Complete Converged, but. . . Completed Similar disclosures, but derecognition models not converged Liabilities and equity distinctions Performance Reporting/Financial Statement Presentation Derecognition © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7

Mo. U Projects and Status According to FASB/IASB Update Major Projects Financial Instruments Intangible Assets Reported Status Additional Information In process IASB project completed, FASB expected to complete in 2015 but not converged Not a priority In process 2015 target, but not fully converged Insurance Contracts ED issued in July 2013 Several key differences. “Obstacles to finding a converged solution may be difficult to overcome” Investment Entities IASB issued standard 2012; FASB issued standard in 2014 “The boards’ final requirements are similar but not identical” Leases © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8

FASB-IASB Status of Higher Priority Joint Projects (Status May 2015) Areas Issues Revenue Recognition Final standard ASU 2014 -09 and IFRS 15 issued in May 2014 Originally effective 2017 with earlier application permitted only under IFRS but not US GAAP Converged, but……. Leasing Not Converged Financial Instruments Not Converged Re-exposed Q 2 2013; final standard expected in 2015 Final standard IFRS 9 issued in July 2014 -Classification and measurement -Impairment -Hedge accounting Effective 1/1/2018 with earlier application permitted © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9

SEC’s Evaluation of International Accounting Standards 1973 -2007 1973 SEC supported the involvement of the AICPA in the creation of the International Accounting Standards Committee (IASC) 1999 2000 2007 SEC took leading role in reforming the IASC SEC played leading role in the decision by IOSCO to endorse the IASC core principles for crossborder listings SEC allows Foreign Private Issuers to file IFRS financial statements © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10

Developments regarding potential U. S. move to IFRS 2010 - 2012 “The Commission has consistently promoted the development of a single set of highquality globally accepted accounting standards. I, too, support this goal…” SEC issued Work Plan to potentially incorporate IFRS into the U. S. Financial Reporting System SEC Staff Final Report on IFRS Work Plan July 2012 February 2010 © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Report to the Trustees of the IFRS Foundation Analysis of SEC Final Staff Report October 2012 11

SEC concerns in regards to potentially incorporating IFRS for domestic issuers Global Application and Enforcement Development of IFRS U. S. GAAP reference in laws, contracts etc. Conversion costs. © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12

Current thinking of SEC

SEC Strategic Plan 2014 -2018 “The SEC will continue to promote the establishment of highquality accounting standards in order to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider, among other things, whether a single set of high-quality global accounting standards is achievable. ” © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14

SEC Chair Speech May 2014 “……. . it is a priority for the Commission to position itself to make a further statement on the incorporation of IFRS in the U. S. for domestic issuers…” © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15

SEC Chief Accountant Speech December 2014 Ø Many U. S. constituents are not supportive of full adoption of IFRS for a variety of reasons, including legal issues and cost-benefit concerns Ø Continued uncertainty around IFRS in the U. S. would result in uneasiness for investors across the globe Ø Suggested a new alternative approach © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16

New Alternative Approach Ø Would permit voluntary additional IFRS financial information which could range from a complete set of IFRS financial statements to selected IFRS based financial data Ø Potential change to SEC Regulation S-K Item 10 e and Regulation G in regards to Non-GAAP measures (i. e. , no reconciliation to US GAAP financial information)? Ø Audit and/or assurance-related implications? Ø Legal and regulatory (e. g. , banking) issues? © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17

Potential approaches to incorporate IFRS into the U. S. financial reporting system considered by the SEC for domestic issuers: Full adoption of IFRS on a specified date (without any endorsement mechanism) very unlikely Full adoption of IFRS following staged transition very unlikely Retain U. S. GAAP with continued convergence/endorsement Convergence appears to end after completion of major Mo. U projects Optional adoption of IFRS for certain issuers Still possible Voluntary Disclosure of IFRS financial information Possibly proposed in 2015 © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18

IFRS in the United States Next steps and timing? Mary Jo White SEC Chairwoman © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. James Schnurr SEC Chief Accountant 19

Implementing the new revenue recognition standard

Timeline of issuance n Joint FASB/IASB revenue standard issued in May 2014 n Standard setting activities continue post issuance Converged Standard Issued 14 0 y 2 a M FASB to released proposed deferral date? FASB agrees to issue Exposure Drafts on clarifications ul J 1 20 4 TRG Meeting Oc TRG Meeting 5 5 14 0 t 2 01 n 2 Ja TRG Meeting 01 b 2 Fe Joint FASB/IASB Board Meeting © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5 1 20 r Ma Joint FASB/IASB Board Meeting 2 pr IASB expected to issue Exposure Draft? 5 01 A 0 22 15 Q TRG Meeting 21

Transition Resource Group (TRG) Who are they? How were they formed? How often do they meet? What do they do? © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 22

AICPA task force updates The AICPA Process 16 Industry Taskforces Publish industry guides Help preparers apply the standard to common fact patters © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 23

Scope of the standard

Scope of the standard Contract Goods and services Entity Customer Consideration Standard does not apply to: n Lease contracts n Insurance contracts issued by insurance entities within the scope of ASC 944 n Financial instruments and other contractual rights or obligations (e. g. , receivables, debt and equity securities, liabilities, debt, derivatives, transfers and servicing, etc. ) n Guarantees (other than product or service warranties) n Non-monetary exchanges between entities in same line of business to facilitate sales to customers © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 25

Contracts may be partially in scope Is the contract fully in the scope of other accounting guidance? Yes Apply that other guidance No Is the contract partially in the scope of other accounting guidance? Yes Does that Codification Topic/Subtopic have separation and/or initial measurement guidance that applies? No No Apply guidance in ASC Topic 606 to separate and/or initially measure the contract Apply ASC Topic 606 to the contract (or the part of the contract in its scope) © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Yes Apply that guidance to separate and/or initially measure the contract Exclude the amount initially measured under that guidance from the transaction price 26

De-recognition of non-financial assets for transactions with non-customers Single nonfinancial asset Subsidiary or group of assets Yes Does it constitute an in-substance nonfinancial asset? No Does it constitute a business or nonprofit activity? Yes Revenue guidance for contract existence, measurement and recognition Deconsolidation guidance © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. No Other U. S. GAAP 27

The five step model

The core principle and the five-step model Core Principle An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 29

Where’s the FASB today? If Proposals are Finalized, No Longer Converged with IFRS ■ FASB and IASB will issue separate exposure drafts for issues they decide to clarify ■ FASB’s proposed clarifications for licenses and performance obligations are different from the IASB’s clarifications ■ Noncash consideration ■ Collectibility Other Proposals ■ On April 1 the FASB agreed to propose a one-year deferral of the effective date of its revenue recognition standard. The FASB is expected to issue an exposure draft on the deferral during the second quarter of 2015. ■ Presentation of sales taxes ■ Shipping and handling Practical Expedients ■ Transition when a long-term contract has been modified prior to the effective date - Use of Hindsight (FASB & IASB) ■ Completed Contract expedient for retrospective approach (IASB only) ■ Impact of adopting the standard using retrospective transition Ongoing Outreach and Research ■ Gross versus net revenue presentation © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 30

Joint FASB/IASB Leases Project

Project Status* Objectives: ül Require lessees to recognize all leases on-balance sheet l Eliminate arbitrary accounting distinctions for transactions that are economically similar l Reduce complexity in lease accounting l Develop converged lease accounting requirements Project added to Boards’ agendas First Exposure Draft Issued Discussion Paper Issued Second Exposure Draft Issued Final standard expected Earliest likely effective date ? JULY 2006 MARCH 2009 AUGUST 2010 MAY 2013 H 2 2015 JANUARY 2018 * This presentation reflects the Boards’ decisions through March 31, 2015. © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 32

Lease Definition A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Definition focuses on control over the use of an identified asset. Contracts that meet the definition of a lease: Within scope n Leases of assets n Long leases of land n Sale-leasebacks n Subleases n In-substance purchases / sales n Outside scope Scope with exceptions l l Short-term leases (lease term ≤ 12 months) Small-ticket leases (IASB only) Leases of: l Intangibles (other than ROU assets) l Natural resources and exploration l Biological assets Leases of inventory © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 33

Lease Term Non-cancelable period Optional renewal periods if lessee reasonably certain to exercise Lease Term Periods after optional termination date if lessee reasonably certain not to exercise © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 34

Lease Payments PV of future lease payments over lease term – includes: Fixed payments RV guarantees Termination penalties Variable lease payments (VLPs) Purchase options Discount rate l Exercise price of purchase options included if lessee is reasonably certain to exercise l VLPs included only if based on a rate or index, or in-substance fixed l Residual value guarantees (RVGs): – Lessee includes amount expected to be payable – Lessor excludes unless represent lease payments structured as RVGs l Nonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only) © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 35

Lease Classification Test Ownership transfers at end of lease? Yes No Bargain purchase option? Yes Type A No Transfer substantially all risk and rewards of ownership? Yes No • Type B • © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Assessment criteria similar to current IAS 17 classification test Lease classification test is not applicable for lessees applying IFRS 36

Lessee Accounting

Lessees – Recognition Lessor Right to use underlying asset Lessee Lease payments ROU asset Right to use underlying asset during lease term © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Lease liability Obligation to make future lease payments 38

ROU Asset – Initial and Subsequent Measurement Initially measured as the sum of: Lease liability Initial direct costs* Prepaid lease payments Lease incentives received * Only incremental costs to obtain the lease qualify – no allocation of internal fixed costs permitted. Subsequent measurement: Type A Leases l Amortized, generally on a straight-line basis, over shorter of lease term or economic life of ROU asset Together with interest expense results in a front-loaded pattern of total expense l ASC 360 impairment testing Type B Leases (FASB only) l Amortized as a plug amount to produce straight-line total expense when combined with interest on lease liability Not amortized when straight-line total expense would be less than interest on lease liability l ASC 360 impairment testing © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 39

Reassessment Triggers Lease Payments – Reassessments (Lessees only) Construction of significant leasehold improvements Making significant modifications or customizations of the underlying asset Subleasing the underlying asset for a period beyond the exercise date of a renewal option in the lease Change in variable lease payments (VLPs) based on an index or rate (IASB only) © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 40

Lease Liability – Subsequent Measurement and Reassessments Amortized cost using the effective interest method; no fair value option Changes in carrying amount of lease liability resulting from: Reassessment of lease payments due to increase in lessee’s right-of-use Reassessment of lease payments due to decrease in lessee’s right-of-use Adjust ROU asset Recognize in P&L Discount rate is revised only when the reassessment relates to whether a lease term or purchase option is reasonably certain to be exercised © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 41

Lessor Accounting

Lessors – Type A Leases Lessor Type A Model Right to use underlying asset Lessee Lease payments Lease receivable Right to receive future lease payments Residual asset Right to return of underlying asset at end of lease term l Up-front profit recognized (if any) includes profit related to residual interest l The lessor’s lease receivable is amortized on the effective interest method l Interest income is recognized on both the residual asset and the lease receivable (i. e. , the residual asset is accreted) © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 43

Lessors – Type B Leases Lessor Type B Model Right to use underlying asset Lessee Lease payments Underlying asset No derecognition of underlying asset l Lease income recognized generally on a straight-line basis l Underlying asset remains on the lessor’s balance sheet and continues to be depreciated © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 44

Summary of Key Differences Between the FASB and IASB Proposals

Key Differences Between FASB and IASB Proposals Topic Lessee accounting FASB ■ Dual lease accounting model (Type A and Type B) – most leases treated as executory contracts in P&L ■ Most cash flows presented as operating IASB ■ Single lease accounting model (Type A only) – all leases treated as purchase of ROU asset on a financed basis (balance sheet and P&L) ■ Most cash flows presented as financing Lessor accounting ■ Recognition of selling profit spread over lease term if the lease does not qualify as Type A without involvement by third parties ■ No restriction of recognition of selling profit for Type A leases Small-ticket leases ■ No exemption for small leases ■ Exemption for small leases, even if material in aggregate Lessee reassessment of VLPs ■ Reassessment required only when lease payments are remeasured for other reasons ■ Reassessment required when there is a contractual change and when lease payments are remeasured for other reasons Subleases ■ Classification of sublease by sublessor based on the underlying asset ■ Classification of sublease by sublessor based on ROU asset © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 46

Key Differences Between FASB and IASB Proposals (Continued) Topic FASB IASB Saleleaseback transactions ■ No sale accounting if Type A leaseback ■ Sale accounting permitted for Type A leaseback ■ Gain on sale based on the entire underlying asset ■ Gain on sale restricted to residual interest in the underlying asset Related party transactions ■ Account for related party leases based on legally enforceable terms and conditions, even if different from substance ■ N/A, not addressed in its proposals Lessee Disclosures ■ List of qualitative disclosure requirements ■ No list of qualitative disclosure requirements ■ Quantitative disclosure requirements generally segregated by Type A and Type B leases ■ No specific presentation requirement for lessees’ quantitative disclosures © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. ■ Quantitative disclosure requirements link to other IFRS requirements in some cases ■ Present quantitative disclosures in a tabular format, unless another format is more appropriate 47

Key Differences Between FASB and IASB Proposals (Continued) Topic Transition FASB Lessees and lessors: IASB Lessees: l Apply a modified retrospective transition approach l l Full retrospective transition approach prohibited Lessors: © 2015 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. l Option to apply either a fully retrospective or modified retrospective transition approach Apply existing accounting for any ongoing leases at date of initial application, except for intermediate lessors in sublease 48

QUESTIONS?

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