Latest / PwC's accounting podcast / Full disclosure: Comprehensive income and stockholders' equity

Transcript

Full disclosure: Comprehensive income and stockholders' equity · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought Leadership from PWC's National Office Studios.
• 0:06
  SPEAKER_00: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_00: I'm Heather Horn.
• 0:11
  SPEAKER_00: Thanks for tuning in to the next episode in our full disclosure summer series, a show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:22
  SPEAKER_00: While this may sound like accounting 101, I guarantee you'll learn something new each episode.
• 0:28
  SPEAKER_00: Today's focus, comprehensive income, and stockholders equity.
• 0:33
  SPEAKER_03: The biggest piece of advice I could give you is making sure that you're really setting up your systems, that you've got individual details for all the items that are going to make up the statement as much as you can in your standard, you know, GL.
• 0:45
  SPEAKER_02: There's just a lot of people that you want to get in the room effectively, so to speak, to help work through what all these various disclosure requirements are, because there's an awful lot of them and it's easy to kind of get them mixed up.
• 0:59
  SPEAKER_00: Those are my two guests, Jay Celeber and Tom Barbieri, both partners in PWC's national office.
• 1:05
  SPEAKER_00: As we make our way through the financial statements, so far in this series, we've covered the balance sheet, the income statement, the statement of cash flows, and earnings per share.
• 1:15
  SPEAKER_00: So that just leaves us two statements to cover comprehensive income and stockholders equity.
• 1:20
  SPEAKER_00: We'll break down the presentation basics, talk about disclosure requirements, and debut and news segment we like to call Stump the Guest.
• 1:29
  SPEAKER_00: So let's get started.
• 1:32
  SPEAKER_00: All right, so Tom Jay, thanks so much for joining me today, which I think is a little more difficult than some of the last few podcasts we've done, which is we've been walking through the financial statements and covered balance sheet, income statement, statement cash flows.
• 1:46
  SPEAKER_00: And as Jay well knows, also talked about EPS.
• 1:50
  SPEAKER_00: But this week we're hitting two of the statements that I think are sometimes a little harder to talk about, and that would be comprehensive income and stockholders equity.
• 1:58
  SPEAKER_00: So, first of all, thought we could kick things off by explaining comprehensive income, which Val touched on briefly, but I again think it's worthwhile to talk about.
• 2:09
  SPEAKER_00: So, Tom, I feel like especially for people who are, shall I say, older accountants like us, comprehensive income does sometimes seem like an afterthought.
• 2:17
  SPEAKER_00: Uh, but what exactly are the components of comprehensive income?
• 2:20
  SPEAKER_03: Yeah, sure, Heather.
• 2:22
  SPEAKER_03: So comprehensive income sort of has an interesting definition and gap.
• 2:25
  SPEAKER_03: It really is intended to describe changes in reporting entities' equity from all sources other than like an investment or distribution to or by owners, right?
• 2:35
  SPEAKER_03: So like equity, true equity transactions amongst uh owners.
• 2:39
  SPEAKER_03: Um it would include all the components of net income or net loss, and then anything else that would be included in comprehensive income or loss or what we refer to as OCI, other comprehensive income.
• 2:51
  SPEAKER_03: And there's specific areas of gap which indicate when you would include things in this OCI area, which we'll cover in a little bit.
• 2:58
  SPEAKER_03: So keep in mind net income is always the starting point, and then you add on items on OCI, right?
• 3:04
  SPEAKER_03: So if you don't have OCI, you're really not required to present comprehensive income because it would, in effect, be the same as net income.
• 3:10
  SPEAKER_00: All right.
• 3:10
  SPEAKER_00: And if I'm trying to learn about this, where even in GAP would I go understand what comprehensive income is?
• 3:18
  SPEAKER_03: Yeah, there's there's guidance in ASC 220 that's out there that sort of describes it.
• 3:24
  SPEAKER_03: Years ago, there used to be a concept statement that got into it, right?
• 3:28
  SPEAKER_03: But it sort of gravitated a little bit away from the concept statements, but that's where you'd go, ASC 220.
• 3:32
  SPEAKER_00: All right, some light bedtime reading for our listeners.
• 3:35
  SPEAKER_00: So then so then, Tom, I know we talked about the fact it's net income plus OCI, and I I think that is the part where people may have questions.
• 3:44
  SPEAKER_00: So what types of items do we typically see when we're looking at OCI?
• 3:49
  SPEAKER_03: Yeah, so probably the biggest one that everyone knows is uh foreign currency translation adjustments or what people refer to as CTA, cumulative translation adjustments.
• 3:57
  SPEAKER_03: Um, gains and losses relating to certain hedge transactions, so cash flow hedges or hedges of a net investment in a foreign operation.
• 4:06
  SPEAKER_03: So sometimes people hedge their net investments in foreign operations.
• 4:10
  SPEAKER_03: Um, unrealized holding gains and losses on available for sale debt securities are also generally included there.
• 4:16
  SPEAKER_03: Um, certain gains and losses associated with pensions or other post-retirement benefits.
• 4:22
  SPEAKER_03: And then another one, which is um interesting, happens to deal with changes in fair value of fair value option elected liabilities that relate to a company's own credit.
• 4:33
  SPEAKER_03: So the way I like to think about this is if a company has a liability on its books and it's recorded at fair value, to the extent they've elected fair value option on that, um, any changes due to their own credit would go to OCI, um, would not go to net income.
• 4:49
  SPEAKER_03: Um, and that has to do with the fact that like during the credit crisis, the FASB sort of realized that a lot of companies had huge gains when they were effectively going bankrupt, right?
• 4:59
  SPEAKER_03: And so that was a little counterintuitive to some.
• 5:02
  SPEAKER_03: And so um that's an area where you'd you'd put this own credit adjustment through through equity.
• 5:07
  SPEAKER_03: Now keep in mind there's certain activities that occur in equity that aren't considered OCI, like I mentioned previously.
• 5:13
  SPEAKER_03: So some of those changes resulting from investments or distributions to owners.
• 5:17
  SPEAKER_03: So that would be things like uh direct adjustments to APIC or retained earnings from from um you know certain types of transactions.
• 5:27
  SPEAKER_03: So that could be employee stock ownership plans, it could be purchases and sales of non-controlling interests, as well as settling uh you know derivatives on your own stock.
• 5:38
  SPEAKER_03: So think of a warrant or something like that, generally wouldn't be included in in other comprehensive income.
• 5:43
  SPEAKER_00: All right, that's a good list.
• 5:44
  SPEAKER_00: And actually, fair value option might even be a good topic for a whole own podcast by itself, because I do think interesting topic.
• 5:51
  SPEAKER_00: So one thing then is also on OCI, just remind people, is that you actually do also have to include tax effects of your OCI items, and that would either be net on the face or um you could show the total on the face and then include the details in the footnotes.
• 6:07
  SPEAKER_00: But I think more broadly, Jay, one of the things with comprehensive income, OCI, accumulated OCI, all of these feels like there's a lot of different ways companies do this.
• 6:16
  SPEAKER_00: You know, I I could consistently know for my clients that income statement would look the same, but what they did with this often looked different.
• 6:23
  SPEAKER_00: So what are the options that companies have?
• 6:25
  SPEAKER_02: It is interesting because when you're talking about uh disclosing and reporting all of your total comprehensive income, you actually have a choice.
• 6:33
  SPEAKER_02: You have two options in the guidance.
• 6:35
  SPEAKER_02: You can either present a single integrated statement that has net income, the other comprehensive income, and therefore total comprehensive income at the bottom.
• 6:46
  SPEAKER_02: In that case, you calculate earnings per share just on the net income figure.
• 6:50
  SPEAKER_02: So you'd show that sort of right below the net income before you start getting into the other comprehensive income topics.
• 6:56
  SPEAKER_02: And then the second option would be to actually show two statements, one that's just net income and comes down to that figure, or an income statement that comes down to net income and earnings per share.
• 7:06
  SPEAKER_02: And then a second statement that starts where the other one left off with net income and then includes all of these OCI items to come down to total comprehensive income.
• 7:17
  SPEAKER_02: Now, unlike EPS, though I know we talked about at our previous podcast, Heather, that's all about net income and income from continuing operations.
• 7:25
  SPEAKER_02: You're not allowed to report or calculate a comprehensive income per share figure so as not to confuse investors.
• 7:35
  SPEAKER_02: You do have to split apart the amounts of income and total comprehensive income between the parent and the NCI.
• 7:44
  SPEAKER_02: So if you have consolidated but not 100% owned subsidiaries with minority interest or not controlling interest, you do have to show how much of the income and the comprehensive income is attributable to the NCI.
• 7:58
  SPEAKER_02: And that's true whether you present it in one statement or two statements.
• 8:03
  SPEAKER_02: The other thing that uh we see a fair bit of or another part of that needs to be in the disclosures is things that are referred to as reclassification items.
• 8:15
  SPEAKER_02: So when something is being reclassified out of effectively accumulated comprehensive income and being reclassified into net income.
• 8:24
  SPEAKER_02: So that means something that was maybe recognized in one period in the past and comprehensive income, like some of the things Tom mentioned.
• 8:32
  SPEAKER_02: But now, whatever gap they're subject to requires you as a company to report it in net income.
• 8:38
  SPEAKER_02: So you're moving out of one category to another category.
• 8:41
  SPEAKER_02: Of course, it's hitting net income for the first time, but because it was already in your comprehensive income before, the moving it from one to the other doesn't change your total comprehensive income, it just reclassifies it from one category to another.
• 8:55
  SPEAKER_02: Uh, and that could be like amortizing those deferred pension gains and losses that Tom mentioned, or selling off a foreign operation and having to recognize the CTA that was associated with it.
• 9:07
  SPEAKER_02: Those all trigger the recognition of income.
• 9:10
  SPEAKER_02: Uh, some people, except other than calling a reclassification, call that recycling of the numbers, same idea.
• 9:17
  SPEAKER_02: And here, broadly, you have to present the amount of all these reclassification items either on the face of the statements or in the footnotes.
• 9:29
  SPEAKER_02: But it's kind of interesting here that the guidance actually gets really specific about what you have to do here and it very detailed.
• 9:36
  SPEAKER_02: Uh, it makes you separate these items that are being reclassified out of OCI into two categories.
• 9:45
  SPEAKER_02: Those amounts that are being recognized immediately in income right away, like if you had hedged a sales contract and it happened, now you have to recognize it immediately, or you sold an available for sale debt security, and you have to release the amount and recognize it immediately.
• 10:01
  SPEAKER_02: That's one category.
• 10:02
  SPEAKER_02: And then you have a second category, which might be it reclassifies out of OCI, but it may not necessarily hit income immediately.
• 10:11
  SPEAKER_02: Maybe it goes into inventory, like it was a hedge of an inventory purchase, or maybe it's a pension cost, but some of the people who get pension benefits are producing inventory or a fixed asset.
• 10:21
  SPEAKER_02: So it might get capitalized and roll through costs at a later point.
• 10:25
  SPEAKER_02: So that's a second category.
• 10:27
  SPEAKER_02: For anything that's in the first category where it's recognized immediately, then back to having a choice, you have a choice, but you have to either show parenthetically on the face of the income statement for each affected line item how much is included in that line item from a reclassification item that came out of OCI, with the tax effects kind of all down the bottom and the income tax expense line parenthetical.
• 10:56
  SPEAKER_02: Or you'd have to have a very detailed and clear uh table in the footnotes that shows what all those items are and what line item in the income statement they hit.
• 11:07
  SPEAKER_02: And then for items in the second category, the ones that don't hit income immediately, you obviously can't put them parenthetically on the face of the income statement because they aren't necessarily in the income statement, but they have to be included in that table in the footnotes with a clear disclosure or cross-reference as to where there's more information about how all that accounting works effectively in some other footnote, like the pension footnote or a hedging footnote or something like that.
• 11:32
  SPEAKER_02: And you have to do it for all of this for all periods that you report an income statement.
• 11:38
  SPEAKER_02: So there's a lot of information uh that's sort of uh described in this guidance.
• 11:43
  SPEAKER_00: Right.
• 11:43
  SPEAKER_00: And I feel like these is more of those types of disclosures that are often left till the end.
• 11:48
  SPEAKER_00: So probably best to try to hit them early.
• 11:51
  SPEAKER_00: But Jay, another question for you.
• 11:52
  SPEAKER_00: So I mentioned earlier that I've kind of seen companies do a lot of different things, you know, follow each of these ways to do things.
• 11:59
  SPEAKER_00: And so if you have a case of a company that used to put it in two statements and wanted to move to one, or vice versa, is that something then that we think about from a preferability perspective?
• 12:10
  SPEAKER_00: Or is that sort of just a choice that companies can make and they can switch back and forth?
• 12:14
  SPEAKER_02: Sure.
• 12:14
  SPEAKER_02: Yeah, we we we would not view that as a change in accounting principle that you'd have to evaluate preferability for since both of these formats, one statement or two, present the same information and they're both permitted, freely permitted under the guidance.
• 12:30
  SPEAKER_02: So we we would say you don't have to view it as a preferability matter to move one from the other.
• 12:35
  SPEAKER_02: We we've even seen some companies that might use a single statement for interim reporting just to keep the numbers kind of uh briefer in in uh interim reports, but then use two statements for the full year and your report.
• 12:48
  SPEAKER_02: And again, that's fine as well because it's still all of you to present all the same information.
• 12:53
  SPEAKER_02: It's just a matter of how it's packaged.
• 12:55
  SPEAKER_00: So then before we move to stockholders equity, I have two questions.
• 12:58
  SPEAKER_00: It's gonna be new news segments stump the gust.
• 13:01
  SPEAKER_00: So I'll see if you guys know the answers to these two.
• 13:04
  SPEAKER_00: Uh the first one, you may want to defer to SEC services.
• 13:07
  SPEAKER_00: Do you see any trend towards companies using one statement versus two?
• 13:12
  SPEAKER_00: Or is that really very much um company preference?
• 13:15
  SPEAKER_00: And either of you can answer.
• 13:17
  SPEAKER_03: Uh yeah, I mean, generally what I've seen is um people don't have uh a single integrated statement, at least in the financial services space.
• 13:25
  SPEAKER_03: That's generally what I've seen.
• 13:27
  SPEAKER_02: I think I've usually seen two as well.
• 13:29
  SPEAKER_02: It's just uh a little bit cleaner to uh to show the income statement by itself.
• 13:35
  SPEAKER_02: People tend to focus, even though the FASB, I think, sort of theoretically thinks comprehensive income is a more important number because it shows all that's going on in the company economically.
• 13:46
  SPEAKER_02: People, I think, tend to focus much more so on the actual income statement.
• 13:50
  SPEAKER_02: So they like to keep that one by itself and then put the OCI items in the second statement.
• 13:55
  SPEAKER_00: So that's my experience as well.
• 13:57
  SPEAKER_00: But that's a perfect lead-in to my next question, which is do you know slash remember when the FASB first used the concept of other comprehensive income?
• 14:08
  SPEAKER_03: Uh I do not.
• 14:09
  SPEAKER_03: I know that it goes way back to the early concept statements, which probably came out in the late 70s, if I had a guess.
• 14:16
  SPEAKER_03: But as far as like what was the first area of gap that used comprehensive income, I don't.
• 14:22
  SPEAKER_03: You've stumped me.
• 14:23
  SPEAKER_02: I think I know foreign exchange, CTA has been around since FAS 52, which goes back a long ways.
• 14:29
  SPEAKER_02: And I know pension accounting, which incorporates it as well, with came out of the late 1980s or so.
• 14:35
  SPEAKER_02: So it definitely goes back a long ways.
• 14:37
  SPEAKER_02: And FAS 52 was before FAS 87 on pension.
• 14:40
  SPEAKER_02: So it goes back at least into the 80s or maybe the 70s, maybe even before.
• 14:44
  SPEAKER_00: Yeah, Jade, that was the same logic I was doing.
• 14:47
  SPEAKER_00: I'm going to have my team check on this and I will add it to our final recording.
• 14:52
  SPEAKER_00: Now I'm very curious myself.
• 14:53
  SPEAKER_00: So we, I guess we stomped all three of us.
• 14:55
  SPEAKER_00: Um, all right.
• 14:56
  SPEAKER_00: So switching gears a little bit, stockholders' equity.
• 14:59
  SPEAKER_00: So we've talked about all these other statements, but we still do have the statement of stockholders' equity.
• 15:04
  SPEAKER_00: So, Tom, what can you share with us about that?
• 15:07
  SPEAKER_03: Well, interesting enough, unlike the balance sheet and income statement, the statement of uh stockholders' equity is not a required financial statement.
• 15:14
  SPEAKER_03: Both the FASB as well as the SEC require entities to disclose changes in each account that comprises its equity when you have both a balance sheet and income statement, but they allow for it to be disclosed either in a statement or in the footnotes.
• 15:28
  SPEAKER_03: Now, that being said, you know, my experience is that almost all basically do a statement at this point.
• 15:34
  SPEAKER_03: I think it's become the common approach.
• 15:36
  SPEAKER_03: Now, you know, some of the examples of the aligned items that you're going to see presented are are things like preferred stock, common stock, you know, uh APIC, right?
• 15:45
  SPEAKER_03: Um treasury stock, if you've had any treasury stock purchases, um, receivables from the sales sales of stock.
• 15:52
  SPEAKER_03: So it's like a receivable from a shareholder from a sales stock.
• 15:54
  SPEAKER_03: Generally that's shown as a reduction contra equity uh in practice, unless there's some uh repayment before uh the financial statements are released.
• 16:04
  SPEAKER_03: You'll see retained earnings or accumulated deficits, non-controlling interest, which Jay mentioned earlier, and then obviously you're gonna have the accumulated other comprehensive income.
• 16:13
  SPEAKER_02: And maybe let's talk about the AOCI or accumulated other comprehensive income a little bit.
• 16:18
  SPEAKER_02: So we just spent a while talking about what comprehensive income is.
• 16:22
  SPEAKER_02: That's the activity during the period.
• 16:24
  SPEAKER_02: AOCI is sort of what it sounds like is the accumulated balances of all those amounts at the end of the any period.
• 16:31
  SPEAKER_02: And you are supposed to display AOCI, as you said, Tom, separately from retained earnings and APIC and any other equity accounts.
• 16:40
  SPEAKER_02: And you also have to show sort of the activity that's happened, uh, the changes in the components of AOCI, both new items that arose and the reclassification items that we talked about uh in the last segment.
• 16:52
  SPEAKER_02: Uh, those have to be presented separately either in the statement of equity or in the footnotes.
• 16:58
  SPEAKER_02: And you know, again, you have to have a relatively clear roadmap that helps people kind of be able to connect all the dots here.
• 17:04
  SPEAKER_03: Yeah, and I think that's consistent overall with the statement of changes in in equity, which is you really do have sort of a roll forward by category, right?
• 17:12
  SPEAKER_03: The statement sort of laid out that way.
• 17:14
  SPEAKER_03: And so, you know, some of the items that are gonna be included in the roll forward is gonna be you know both net and comprehensive income allocated between parents' interests and if there's any non-controlling interests as well.
• 17:26
  SPEAKER_03: Um if you've had stock issued, right, you're gonna have the stock being issued, even if that's um through a conversion as well.
• 17:34
  SPEAKER_03: Uh, you might have conversions that are shown as separate line items, stock repurchases or treasury stock transactions, you'll have dividends declared, any stock-based compensation, and and lastly any activity around your non-controlling interests.
• 17:47
  SPEAKER_03: And you know, from relative to the periods that need to be presented, you need to have something covering each balance sheet presented, but then you'd have activity for all the periods that include the income statement, right?
• 17:58
  SPEAKER_03: So if you have three years of income statement, you're gonna have the income allocated to the equity for for for each period.
• 18:04
  SPEAKER_03: And so that's required both an annual and interim statement.
• 18:06
  SPEAKER_03: So you need to show a comparative interim period roll forward of equity, even though you might not have a comparative balance sheet being presented, right?
• 18:14
  SPEAKER_03: Because oftentimes the you have the the end of the prior year for your balance sheet in a quarter, for example.
• 18:21
  SPEAKER_00: All right.
• 18:21
  SPEAKER_00: So, Tom, that's a lot of requirements.
• 18:23
  SPEAKER_00: Now I know there's also specific presentation disclosure requirements companies should be thinking about on the face of the balance sheet related to stockholders' equity.
• 18:31
  SPEAKER_00: So can you run through those?
• 18:33
  SPEAKER_03: Well, yeah, I I think um relative to how people show stockholders' equity um you know on the face of the balance sheet, yeah, there are some requirements in SEC Reg SX around um requirement to provide the dollar amount, number of shares issued, and it's outstanding on the face of the balance sheet.
• 18:52
  SPEAKER_03: And while that's not necessarily explicit in GAAP, generally most private companies generally follow that.
• 18:57
  SPEAKER_03: It's sort of become the standard industry norm, I would say.
• 19:01
  SPEAKER_03: Um if you have a class that's convertible, then you should label as such on the on the face of the balance sheet.
• 19:06
  SPEAKER_03: And when you have multiple classes, you you can aggregate them.
• 19:10
  SPEAKER_03: So think about multiple classes of common stock.
• 19:12
  SPEAKER_03: You can aggregate them to a single line item, but you would have to break out the required information for each class in a footnote if you don't present it separately in the financial statements.
• 19:20
  SPEAKER_03: Uh similarly, relative to disclosure in the footnotes or the face, uh for each class of common stock, you'd have to show sort of the title of the issuance, number of shares authorized, if it's convertible.
• 19:33
  SPEAKER_03: Uh so if you had convertible preferred stock, you'd you'd make sure the basis for conversion and any uh dollar amounts of shares subscribed but unissued, um, as well as uh any deduction of subscriptions receivable, which you know, we generally don't see a lot of that, but those are some of the requirements that that exist.
• 19:51
  SPEAKER_00: All right.
• 19:52
  SPEAKER_00: So, Tom, that's also a lot of information and very specific information.
• 19:56
  SPEAKER_00: So definitely people should be using their disclosure checklist when they they fill that out.
• 20:01
  SPEAKER_00: Um but also for preferred stock, I know there's other requirements.
• 20:06
  SPEAKER_00: So, and also um presentation may depend on the type of preferred stock.
• 20:11
  SPEAKER_00: So can you give us some highlights on that?
• 20:14
  SPEAKER_03: Yeah, preferred stock is sort of an interesting one, right?
• 20:16
  SPEAKER_03: So the first thing you need to think about when you're when you issue preferred stock is is it a liability?
• 20:21
  SPEAKER_03: And generally speaking, gap for it to be a liability, it would either have to have date certain redemption or event certain redemption.
• 20:28
  SPEAKER_03: And the only event certain that we know of is death, okay, which is a little morbid, but that's the reality of that.
• 20:34
  SPEAKER_03: So if you have that, that would be a liability, right?
• 20:36
  SPEAKER_03: Um if it's not a liability, then the second consideration, particularly for SEC clients, is whether or not the the preferred stocks considered mandatorily redeemable under the SEC guidance, which basically means is there an event outside of the issuer's control in which the issuer could be forced to redeem the preferred stock?
• 20:56
  SPEAKER_03: Okay, and if so, then that preferred stock would be reported as mezzanine, which mezzanine sort of sits between liabilities and permanent equity, right?
• 21:06
  SPEAKER_03: And it's it's labeled as preferred stock, and and you're going to be specific about um noting to the reader that it is subject to to quote unquote mandatory redemption as a result of the uh redemption rights.
• 21:19
  SPEAKER_03: And so that's difficult guidance to apply, and there's some rules around that.
• 21:23
  SPEAKER_03: Um, we definitely have some more guidance in our financing guide for people to look at if you're interested in learning more about that.
• 21:30
  SPEAKER_00: Well, and on the topic of mezzanine, when my kids were little, we went someplace, I think baseball stadium, and there was a mezzanine.
• 21:38
  SPEAKER_00: One of my kids said, Oh, what's a mezzanine?
• 21:40
  SPEAKER_00: Yeah, explaining the financial statement presentation was not helpful whatsoever to explain to them what that was.
• 21:47
  SPEAKER_03: Yeah, I'm sure that's uh instantaneously converted them to not be accountants in their future.
• 21:53
  SPEAKER_00: Pretty much.
• 21:54
  SPEAKER_00: All right.
• 21:54
  SPEAKER_00: So then, Jay, any other disclosure requirements uh that listeners should be focused on on this.
• 22:00
  SPEAKER_00: Area.
• 22:01
  SPEAKER_02: Well, do you have a little time, Heather?
• 22:03
  SPEAKER_02: There's uh unfortunately a slew of disclosure requirements that are included in the guidance.
• 22:09
  SPEAKER_02: They're in ASC 505, the equity section.
• 22:12
  SPEAKER_02: They're all trying to get at sort of what are the pertinent rights and privileges of all the different classes of securities and help people understand what those rights are.
• 22:22
  SPEAKER_02: And so there's a long list of things in there.
• 22:24
  SPEAKER_02: It's things like dividend and liquidation preferences, as well as any arrearages and cumulative dividends, which we spent time talking about with the EPS podcast uh last week as well, any participation rights, any call features, including what the price and the date of the call would be, any potential redemption provisions like Tom, you were talking about, sinking fund requirements, voting rights, especially if there's anything unusual about them, if there's any terms of contracts to issue additional shares, conversion or exercise prices if it's convertible, terms that could change the conversion or exercise prices if there are any of those.
• 23:05
  SPEAKER_02: If there actually were any changes to the conversion or exercise prices, you're supposed to report that as well.
• 23:10
  SPEAKER_02: And then if you actually converted some or some were exercised, you're supposed to disclose that as well.
• 23:16
  SPEAKER_02: And then lastly, I know this is one of your favorite topics with John Haran, Heather, about down rounds, that if a down round gets triggered, then you have to disclose that fact as well and sort of how the value of that related effect was given recognition on the financial statements.
• 23:30
  SPEAKER_00: All right, so maybe I'll have to ask Tom since I always ask uh John.
• 23:33
  SPEAKER_00: So every time John Haran mentions down rounds, I tell him he has to explain to the listeners what that is.
• 23:39
  SPEAKER_00: So can you give us that 30-second explanation?
• 23:42
  SPEAKER_03: Yeah, I I would I would call a down round the ability that an existing um holder of, say, convertible preferred stock would have the ability to have the um conversion option basically revised based upon the latest round of uh preferred stock uh or common stock that goes out there.
• 24:02
  SPEAKER_03: So it's a repricing to um provide for I'll call it additional value uh to the existing preferred stock or equity holder, if you will, based upon the latest pricing.
• 24:14
  SPEAKER_00: And then the term down round, is that because it's the last round?
• 24:18
  SPEAKER_03: Yes, it's going down.
• 24:19
  SPEAKER_03: Yes.
• 24:21
  SPEAKER_00: It's going down.
• 24:22
  SPEAKER_00: All right, very good.
• 24:23
  SPEAKER_00: Thank you for that explanation, Tomov to compare to John's explanation.
• 24:27
  SPEAKER_00: But I think they're consistent.
• 24:29
  SPEAKER_00: And then, Jay, one more question for you.
• 24:31
  SPEAKER_00: Tom mentioned mezzanine equity.
• 24:33
  SPEAKER_00: I know you and I have talked about mezzanine equity uh in the past.
• 24:37
  SPEAKER_00: Anything specific from a presentation point of view that our listeners should be focused on?
• 24:43
  SPEAKER_02: Well, maybe the the couple of things I'd add to what Tom already described about mezzanine, which means that there's the possibility that the company might have to pay cash to redeem some class of equity in the future.
• 24:55
  SPEAKER_02: And they're you're trying to highlight that by putting in a special place on the financial statements.
• 25:01
  SPEAKER_02: Um the SEC says it cannot be labeled as or included in anything that's labeled as stockholders' equity or any subtotals of stockholders' equity and other parts of the filing, let's say.
• 25:15
  SPEAKER_02: Um and and it's also, well, while Tom was alluding to it in the context of preferred stock, it actually applies more broadly, really, to any class of security a company has.
• 25:25
  SPEAKER_02: So we do see it with common stock, we see it with stock compensation awards, which I think was the topic that you and I were talking about it before.
• 25:33
  SPEAKER_02: Uh and as Tom said, it is a very complicated area, so we won't try to get through it all here.
• 25:37
  SPEAKER_02: But and while it is only an uh technically a requirement for SEC registrants for public companies, we we do suggest it and recommend it for private companies as well.
• 25:49
  SPEAKER_02: And certainly if a private company didn't reflect it that way and then subsequently goes public or gets acquired by a public company, would need to recast its financial statements to follow the SEC's rules.
• 26:01
  SPEAKER_00: All right.
• 26:01
  SPEAKER_00: Lots to think about there too.
• 26:02
  SPEAKER_00: So then now that we've gone through some of these broad requirements, let's run through a few specific requirements and pick each of these.
• 26:10
  SPEAKER_00: So, Tom, I'll start with you and Treasury stock.
• 26:13
  SPEAKER_03: Okay, treasury stock.
• 26:15
  SPEAKER_03: Um, I guess relative to some reminders for treasury stock, um, obviously if you record treasury stock, you generally show that as reduction in equity.
• 26:22
  SPEAKER_03: If you have a reissuance, keep in mind you don't have a gain or loss, that any gain or loss, quote unquote, goes goes to APIC.
• 26:29
  SPEAKER_03: Uh sometimes obviously companies retire uh their treasury stock, and so you would charge you know par value, APIC, and returned earnings for those situations.
• 26:38
  SPEAKER_03: Um for companies that have um treasury stock, there are certain disclosures that are required.
• 26:44
  SPEAKER_03: So um they're very similar to the disclosures you have for common stocks.
• 26:48
  SPEAKER_03: So things like what's the basis for which you're carrying it, how many shares do you have in treasury stock, do you have any outstanding commitments to repurchase uh capital stock?
• 26:58
  SPEAKER_03: Are there any legal restrictions around your ability to buy back stock?
• 27:03
  SPEAKER_03: Um if you acquired it, oftentimes um you're being asked to disclose the reason for the acquis acquisition if there is one.
• 27:10
  SPEAKER_03: Um and then certain times if there's an amount paid in excess of fair value, um you know, from an accounting perspective, you might have to record that.
• 27:20
  SPEAKER_03: So either PL or it might relate to the acquisition of an asset or who knows.
• 27:25
  SPEAKER_03: So if there is that sort of difference between the amount paid relative to the fair value of the stock, you should disclose how it was recorded in the financial statements.
• 27:35
  SPEAKER_00: All right.
• 27:36
  SPEAKER_00: Again, a lot to think about.
• 27:37
  SPEAKER_00: So then, Jay, my next quiz question will go to you.
• 27:40
  SPEAKER_00: And what about if a company actually pays dividends?
• 27:43
  SPEAKER_00: What are the requirements there?
• 27:45
  SPEAKER_02: Yep, and dividends, well, most people probably are familiar with them, that would include any distribution to the owners or the stockholders.
• 27:52
  SPEAKER_02: Sometimes, oftentimes they're cash, but they don't have to be.
• 27:55
  SPEAKER_02: They could be stock or dividends in kind with other assets or another class of stock, like paying common stock out as a dividend to preferred stockholders, and even a spin-off of an entire company or a piece of the company, that would also be technically considered a dividend, although that would be a carryover basis as opposed to fair value for everything else.
• 28:17
  SPEAKER_02: Normally dividends are charged to retained earnings.
• 28:21
  SPEAKER_02: But if there isn't any retained earnings, if the company doesn't have retained earnings, then we what we usually see is that they are then charged to additional paying capital, at least until that gets exhausted to zero.
• 28:32
  SPEAKER_02: And then you go start adding it to the accumulated deficit that the company might have.
• 28:38
  SPEAKER_02: You record the dividend when it's declared, so not when it's paid or not at the record date of the dividend, but when you declare it.
• 28:46
  SPEAKER_02: And then if you're if you're paying stock, then you'd record that in equity.
• 28:52
  SPEAKER_02: The sort of promise to deliver stock is viewed as equity, but really any other type of promise, either to give cash or other assets, that would be a liability after you declare it and before you pay it.
• 29:04
  SPEAKER_02: The one disclosure you have to do, separate from the presentation, is you you are required to disclose dividends per share and in the aggregate for each class of shares that you have.
• 29:17
  SPEAKER_00: I thought there were restrictions on in maybe state specific if you don't have retained earnings that you're not allowed to pay dividends.
• 29:25
  SPEAKER_00: Or is that a utility thing?
• 29:27
  SPEAKER_02: That is, I think, a complicated legal matter.
• 29:31
  SPEAKER_02: And I think it does vary by state and perhaps by industry and regular.
• 29:35
  SPEAKER_02: I can understand how regulated utilities might uh very much have other rules.
• 29:39
  SPEAKER_02: But sometimes you are allowed to pay.
• 29:41
  SPEAKER_02: I know there's things called nimble dividends, which might be you have accumulated losses, but you made money this year.
• 29:48
  SPEAKER_02: Sometimes as long as it wouldn't make you insolvent, as defined in the state laws, then you can still pay a dividend.
• 29:55
  SPEAKER_02: So you can still, uh and we do see a number of cases where a company might have at least book accumulated deficit, but still is able to declare a dividend.
• 30:05
  SPEAKER_00: All right.
• 30:06
  SPEAKER_00: That's helpful clarification, Jay.
• 30:08
  SPEAKER_00: So then let me ask you another question.
• 30:09
  SPEAKER_00: What if there's a restriction on paying dividends?
• 30:13
  SPEAKER_00: Um, so again, like maybe a restriction on retained earnings, what situations then or what types of disclosure requirements would you have?
• 30:21
  SPEAKER_02: Yeah, no, we do we do see that.
• 30:24
  SPEAKER_02: Um, you know, companies often have debt agreements that maybe limit paying of dividends or other things that are could be out there.
• 30:31
  SPEAKER_02: So if a company is materially restricted from paying dividends, then you should describe that in the footnotes.
• 30:38
  SPEAKER_02: And that would generally include things like whatever those most significant restrictions are and what's causing them and their key provisions and how long they would last, things like that.
• 30:49
  SPEAKER_02: The amount of consolidated retained earnings that represents the undistributed earnings of basically equity method investees, because you don't really control what happens to that money.
• 31:00
  SPEAKER_02: You have to wait for them to send it to you before you could ever declare it as a dividend to your investors, as well as any restrictions, maybe governmental or otherwise, on the ability of subsidiaries to be able to distribute money up to the parent and therefore the amount of any restricted net assets that might exist in a subsidiary.
• 31:23
  SPEAKER_02: Ideally, if you can quantify it, you should be disclosing the amount that would be restricted, and as well as whether there's any material restrictions on consolidated retained earnings because of actions by a subsidiary, like a debt agreement that the subsidiary has that precludes them from being able to declare dividends up the chain.
• 31:43
  SPEAKER_00: Another place for those a lot to think about.
• 31:45
  SPEAKER_00: So then, Tom, let's touch on a topic of derivatives, which I know sometimes people get a little scared away, but specifically talking about contracts that are indexed to a company's own stocks.
• 31:56
  SPEAKER_00: So things like options, warrants, forwards, what types of things should companies be thinking about in that area for presentation and disclosure?
• 32:05
  SPEAKER_03: Yeah, probably the the first thing you need to think about is are those arrangements either liabilities or assets.
• 32:12
  SPEAKER_03: In certain cases, forwards could be assets or purchase options could be assets, or are they um considered equity instruments?
• 32:19
  SPEAKER_03: And again, I'm I'm where we typically look there is we look at the sort of derivative guidance that exists in making that cut.
• 32:27
  SPEAKER_03: And I'm assuming for the sake of this discussion, we're not talking about stock compensation arrangements where there's their own set of rules.
• 32:34
  SPEAKER_03: And so this idea of trying to figure out what these derivatives are, you know, liabilities or assets that are generally marked to market or fair-valued, or equity is really complex.
• 32:44
  SPEAKER_03: Um I would suggest people take a look at our financing guide and and go through that.
• 32:49
  SPEAKER_03: And it's an ever-evolving area.
• 32:52
  SPEAKER_03: You know, certainly it's gotten a lot of um publicity recently in the SPAC space, SPAC warrants, for example, which sort of highlights some of that complexity.
• 33:00
  SPEAKER_03: But if once you're in a situation where you have those types of instruments, there are a number of required disclosures that exist.
• 33:07
  SPEAKER_03: Most of them revolve around key terms associated with those.
• 33:10
  SPEAKER_03: So think things like what are the strike prices of the options or the forward price, how many shares are involved, what are the different types of settlements that you know that could occur, who controls those settlements.
• 33:23
  SPEAKER_03: Some of the settlements can be based upon uh the company delivering stock or delivering cash, and who controls those different options and alternatives.
• 33:33
  SPEAKER_03: Probably an interesting one that's often missed is the contract's current fair value for each settlement alternative that exists, as well as how changes in the stock price would affect those amounts.
• 33:44
  SPEAKER_03: So, for example, for every dollar change or increase in stock price, how much more consideration would the issuer be required to deliver?
• 33:52
  SPEAKER_03: Um that's sort of a sleeper issue.
• 33:55
  SPEAKER_03: And lastly, um the model does require you to reassess whether something's a liability or equity each period.
• 34:02
  SPEAKER_03: And so you can actually have an instrument like a warrant that could flip between a liability and become equity or vice versa.
• 34:08
  SPEAKER_03: And so if you had that, you should describe that and you know what caused that event and um at least alerting the reader to that occurring during the reporting period.
• 34:18
  SPEAKER_00: All right, definitely something to stay on top of.
• 34:20
  SPEAKER_00: So then let's move on to sort of upcoming and recent standard setting, and specifically maybe starting with recent standard setting, and that would be talking about disclosures from the new convertible debt standard.
• 34:34
  SPEAKER_00: And I think we've probably run through some of them already, but to the extent the you know, company hasn't adopted that standard, Jay, are there any specific ones there that you would highlight?
• 34:46
  SPEAKER_02: Well, we have, as you said, talked about a lot of the kind of relevant rights and privileges disclosures for convertible instruments earlier on here, but there are a couple of new disclosures for convertible debt or convertible preferred stock in this new guidance that companies would want to look at, as well as for contracts in a company's own equity that uh Tom was talking about, because some that guidance added a couple of exceptions to the basically to the current rules around it.
• 35:15
  SPEAKER_02: And so there's some disclosure considerations around that.
• 35:18
  SPEAKER_02: A lot of these additional disclosures are around sort of how the instruments have been recorded, how their future cash flows could change, and the effects of any contingent conversion features was specifically added in this guidance.
• 35:33
  SPEAKER_02: But rather than go through all those in a lot of detail, maybe I'll just refer our listeners to an in-depth that we've put out on this standard back in August.
• 35:41
  SPEAKER_02: Uh, it's in-depth number 2020-07, and that lists out what all these incremental disclosures are.
• 35:48
  SPEAKER_00: Perfect.
• 35:48
  SPEAKER_00: I we will make sure there's some a link to that in the show notes.
• 35:52
  SPEAKER_00: So then, Jay, staying on standard setting, I also always like to kind of wrap up at the end talking about any recent standard setting on these topics.
• 36:01
  SPEAKER_00: So anything specific that you'd highlight.
• 36:04
  SPEAKER_02: Well, there was one new bit of guidance that came out on modifications of warrants, and that's referred to as ASU 2021 04, that was just issued in May.
• 36:15
  SPEAKER_02: It's effective next year, and it added a disclosure requirement for freestanding equity classified written call option that's either modified or exchanged during any of the periods presented.
• 36:30
  SPEAKER_02: If it had an effect that they had to record, then you might need to disclose what that was the nature of that modification or exchange, the amount of the effect that was recorded and how you recorded it in the financial statements, because this guidance kind of walks through a few uh some steps as to how you might think about where you presented.
• 36:51
  SPEAKER_02: And so you're supposed to disclose as part of this where you've accounted for it.
• 36:55
  SPEAKER_00: All right, that's helpful.
• 36:56
  SPEAKER_00: So then I think in particular on this podcast was very long list of detailed information that our listeners are going to need to keep track of.
• 37:06
  SPEAKER_00: So, Tom, if our listeners wanted to read more on some of these topics, where would you recommend?
• 37:12
  SPEAKER_03: Well, the first place you'd absolutely go is to our financial statement presentation guide.
• 37:16
  SPEAKER_03: And chapters four and five cover both um comprehensive income, other comprehensive income, as well as uh stockholders' equity.
• 37:24
  SPEAKER_03: So that's probably the best place to look.
• 37:26
  SPEAKER_03: Um we also did talk a little bit about mezzanine equity and the accounting evaluation around that, as well as the accounting evaluation around equity derivatives.
• 37:35
  SPEAKER_03: Um there we've got a financing guide that really summarizes the accounting models around that for making a determination of how those should be presented on the balance sheet, as well as situations in which you might have mark-to-market treatment or fair value treatment, or the accretion that you might do on mezzanine equity.
• 37:52
  SPEAKER_03: And so that those are definitely spots to look.
• 37:54
  SPEAKER_03: And then I think Jay mentioned our in-depth that we released last year, 2020, which addresses the new standard on convertible instruments and liabilities and equity issues.
• 38:05
  SPEAKER_00: And again, we'll make sure we have note uh links to all those in the show notes.
• 38:09
  SPEAKER_00: So then normally I like to wrap up and ask for an elevator speech, uh trying to summarize all of the requirements in 30 seconds, which I think may be impossible in this case.
• 38:18
  SPEAKER_00: Uh so Tom, perhaps what I'll ask you instead is if you are thinking about preparing these statements, what advice would you give to clients?
• 38:27
  SPEAKER_03: Well, I probably the biggest advice I would give is that oftentimes companies don't have a great, I'll call it like sub-ledger for equity, right?
• 38:36
  SPEAKER_03: And so, you know, if you're an early started company that hasn't really dealt with these statements before, the the biggest piece of advice I could give you is making sure that you're really setting up your systems, that you've got individual details for all the items that are going to make up the statement as much as you can in your standard, you know, GL general ledger, so that you can track it all.
• 38:58
  SPEAKER_03: The biggest area that we often see in people just not having the details is around treasury stock, believe it or not.
• 39:04
  SPEAKER_03: And really tracking treasury stock, particularly when you reissue it, trying to figure out what your your cost was associated with the treasury stock.
• 39:13
  SPEAKER_03: People just don't have great records around that.
• 39:16
  SPEAKER_03: So that's probably the biggest piece of advice I would give.
• 39:18
  SPEAKER_00: Great advice.
• 39:19
  SPEAKER_00: Jay, anything to add to that?
• 39:21
  SPEAKER_02: Well, I think it's often very disparate information.
• 39:24
  SPEAKER_02: We've talked about an awful lot of topics that really cross over a lot of different accounting areas.
• 39:29
  SPEAKER_02: And you know, OCI is often sort of the dumping spot for a lot of things that the you know that economically we want to represent on the balance sheet, but we don't want to necessarily push through the income statement.
• 39:43
  SPEAKER_02: And so it it often involves many different people in an organization.
• 39:47
  SPEAKER_02: You know, someone knows about what's going through the pension accounts, someone knows what's going through the hedging accounts, someone handles the foreign currency, consolidation matters.
• 39:55
  SPEAKER_02: And so there's a lot of different people that are mixed in with this.
• 39:58
  SPEAKER_02: And yeah, of course, treasury or legal that's involved with all the kind of the core equity and and instruments of the company.
• 40:05
  SPEAKER_02: So there's just a lot of people that you want to get in the room effectively, so to speak, to help work through what all these various disclosure requirements are, because um there's there's an awful lot of them and it's easy to kind of get them mixed up.
• 40:19
  SPEAKER_00: Yes, I think that's also great advice.
• 40:21
  SPEAKER_00: And maybe I'd add my own, especially after looking at these notes, that uh companies should not assume they know all of these or just to look at last year's, but maybe to double check the requirements, you know, each time you're preparing these statements would be mine.
• 40:36
  SPEAKER_00: So then uh maybe to wrap things up on a much lighter note, in our webcast, we asked our viewers what um the most popular flavor of ice cream in the United States.
• 40:46
  SPEAKER_00: But I'm going to instead ask you either your favorite flavor of ice cream, or you could even go to where you like to go for ice cream.
• 40:54
  SPEAKER_00: And the reason I went there with that, because I'll go first, is that when I was a kid, I was born in Madison, Wisconsin, and the University of Wisconsin has an amazing dairy.
• 41:04
  SPEAKER_00: And so it's always a huge treat.
• 41:06
  SPEAKER_00: And even now, I like to go back there and go to Babcock Hall and eat the University of Wisconsin ice cream.
• 41:12
  SPEAKER_00: Pretty much any flavor would be my favorite.
• 41:14
  SPEAKER_00: So, Jay, how about you?
• 41:16
  SPEAKER_02: Well, you know, we we love ice cream as well.
• 41:19
  SPEAKER_02: We uh tend to go get it at least once a week when after a bike ride, and we we do it um at a place that's right by the Jersey shore, uh, not too far from where I live, uh, a place that's right on the water.
• 41:32
  SPEAKER_02: And so it's a nice uh nice spot to be able to get some.
• 41:36
  SPEAKER_02: And I usually try to rotate around my flavors uh based on their list to try to mix things up a little bit.
• 41:41
  SPEAKER_02: Uh, but but being able to watch the boats go by as uh as you're reading ice cream is a pretty nice, uh, nice spot to do it.
• 41:46
  SPEAKER_00: Yes, sounds like probably a better view than what I was talking about.
• 41:50
  SPEAKER_00: But and Tom, how about you?
• 41:52
  SPEAKER_03: Yeah, so I'm gonna echo Jay a little bit.
• 41:56
  SPEAKER_03: So definitely an ice cream spot I've gone to since I was a kid that's down at the Jersey shore, um called Hoffman's, which is in Point Pleasant Beach, and it's uh really popular in New Jersey and it's been there forever.
• 42:10
  SPEAKER_03: I would highly recommend their uh coffee Oreo and their fudge mint cookie.
• 42:16
  SPEAKER_03: Excellent.
• 42:17
  SPEAKER_00: Very interesting.
• 42:18
  SPEAKER_02: Good stuff.
• 42:18
  SPEAKER_02: I'd add they have an excellent pumpkin pie special flavor around um around the fall as well.
• 42:25
  SPEAKER_02: Yep.
• 42:26
  SPEAKER_00: Wow, sounds like a good place for a road trip.
• 42:28
  SPEAKER_00: All right.
• 42:28
  SPEAKER_00: Well, gentlemen, as always, really appreciate you coming on.
• 42:32
  SPEAKER_00: I know this is a big topic to cover, so definitely appreciate all your insight.
• 42:36
  SPEAKER_00: Thank you.
• 42:37
  SPEAKER_02: Great.
• 42:37
  SPEAKER_02: Thanks.
• 42:38
  SPEAKER_02: You're welcome.
• 42:39
  SPEAKER_00: That does it for today.
• 42:41
  SPEAKER_00: If you too were stumped by my question on when the FASB first introduced comprehensive income, the answer is 1980.
• 42:48
  SPEAKER_00: Don't forget to join me back here every Tuesday and Thursday for new podcast episodes.
• 42:53
  SPEAKER_00: So that you never miss an episode, head over to wherever you listen to your podcasts and follow the PwC Accounting Podcast.
• 43:01
  SPEAKER_00: And to stay up to date on all the latest content, let's connect on LinkedIn.
• 43:06
  SPEAKER_00: For PWC's National Office Studios, I'm Heather Horn.
• 43:10
  SPEAKER_00: Thanks for tuning in.
• 43:13
  SPEAKER_01: This podcast is brought to you by PWC, all rights reserved.
• 43:17
  SPEAKER_01: PwC refers to the U.S.
• 43:19
  SPEAKER_01: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network.
• 43:25
  SPEAKER_01: Each member firm is a separate legal entity.
• 43:27
  SPEAKER_01: Please see www.pwc.com slash structure for further details.
• 43:33
  SPEAKER_01: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.