Recent FASB Developments - First Quarter 2017

Recent FASB Developments – First Quarter 2017

This article provides a comprehensive overview of important, recent developments that have changed the financial reporting environment. Our detailed breakdown covers relevant guidance and rules issued by the Financial Accounting Standards Board (FASB) over the last quarter.

Final FASB Guidance

All final FASB guidance can be accessed on the FASB website located under the Standards tab, Accounting Standards Updateshere.

Accounting Standards Update 2017-08: Premium Amortization on Purchased Callable Debt Securities

  • Issued: March 2017
  • Summary: ASU 2017-08 shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e., yield-to-earliest call amortization), rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount. The amendments apply to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based upon prepayments of the underlying loans, not because the issuer exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendments. Further, the amendments apply to all premiums on callable debt securities, regardless of how they were generated. The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date.
  • Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. For all other entities, the amendments re effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

Accounting Standards Update 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

  • Issued: March 2017
  • Summary: ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost, as follows:
    • Service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations, but in some cases may be eligible for capitalization, if certain criteria are met.
    • All other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These generally include interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other comprehensive income, and gains or losses from changes in the value of the projected benefit obligation or plan assets. If a separate line item is used to present the other components of net benefit cost, it must be appropriately described. If a separate line item is not used, an entity must disclose the line item(s) in the income statement that includes the other components of net benefit cost. The ASU clarifies that these costs are not eligible for capitalization.
  • Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those years. For other entities, the amendments are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period.

Accounting Standards Update 2017-06: Employee Benefit Plan Master Trust Reporting

  • Issued: February 2017
  • Summary: ASU 2017-06 requires an employee benefit plan within the scope of Topic 960, 962, or 965 to present its interest in a master trust and the change in its interest in that master trust as single line items in the statement of net assets available for benefits and the statement of changes in net assets available for benefits, respectively. In addition, the amendments update and align the disclosure requirements for an interest in a master trust across Topics 960, 962, and 965.
  • Effective Date: The amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.

Accounting Standards Update 2017-05: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

  • Issued: February 2017
  • Summary: ASU 2017-05 was issued to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. Moving forward, the new standard reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. Specifically, ASU 2017-05 clarifies the scope of Subtopic 610-20 by defining the term in substance nonfinancial asset. If substantially all of the fair value of the assets (recognized and unrecognized) promised to a counterparty in a contract is concentrated in nonfinancial assets, a financial asset in the same arrangement would still be considered part of an in substance nonfinancial asset. Also, nonfinancial assets may include nonfinancial assets contained within a legal entity that is transferred to a counterparty (e.g., through transfer of ownership interest). It clarifies also that derecognition of a business is not in scope of Subtopic 610-20, but rather, is governed by Topic 810. In addition, the ASU indicates an entity should identify each distinct nonfinancial asset (e.g., real estate and inventory) or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. Finally, the ASU adds guidance on accounting for partial sales of nonfinancial assets. It requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when two criteria are met: 1) the entity does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810, and 2) the entity transfers control of the asset in accordance with Topic 606.
  • Effective Date: The effective date and transition requirements for ASU 2017-05 are the same as the effective date and transition requirements of Topic 606, and must be applied at the same date that Topic 606 is initially applied. That is, the amendments are effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those periods, and for nonpublic entities for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Consistent with Topic 606, early adoption is permitted but no earlier than annual reporting periods beginning after December 15, 2016 for all entities.

Accounting Standards Update 2017-04: Simplifying the Test for Goodwill Impairment

  • Issued: January 2017
  • Summary: ASU 2017-04 eliminates Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses on goodwill cannot be reversed once recognized. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that goodwill is impaired. However, the ASU eliminates the requirement to perform a qualitative assessment for any reporting unit with zero or negative carrying amount. Therefore, the same one-step impairment assessment will apply to all reporting units. However, for a reporting unit with a zero or negative carrying amount, the ASU adds a requirement to disclose the amount of goodwill allocated to it and the reportable segment in which it is included.
  • Effective Date: The amendments have staggered effective dates as follows:
    • A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
    • A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
    • All other entities, including not-for-profit entities, should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.
  • Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

Accounting Standards Update 2017-03: Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings

  • Issued: January 2017
  • Summary: ASU 2017-03 codifies an SEC Staff Announcement made at the September 22, 2016 EITF meeting on disclosing the impact that recently issued accounting standards will have on the financial statements when adopted in a future period (SAB Topic 11.M). The SEC observer commented that if the impact of adopting the new revenue, leases, or credit loss standard is not known or reasonably estimable, that a registrant should make a statement to this effect and provide certain additional qualitative disclosures. ASU 2017-03 also conforms the language in an SEC paragraph within Topic 323 regarding accounting for tax benefits resulting from investments in qualified affordable housing projects to the language used in ASU 2014-01.
  • Effective Date: The amendments became effective immediately upon issuance.

Accounting Standards Update 2017-02: Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

  • Issued: January 2017
  • Summary: ASU 2017-02 clarifies when a not-for-profit entity (NFP) that is a general partner or a limited partner should consolidate a for-profit limited partnership or similar legal entity once the amendments in ASU 2015-02 becomes effective. ASU 2017-02 retains the consolidation guidance that was in Subtopic 810-20 for NFPs by moving it to Subtopic 958-810. Therefore, NFPs that are general partners would continue to be presumed to have control of a for-profit limited partnership, regardless of the extent of their ownership interest, unless that presumption is overcome. The presumption would be overcome if the limited partners have either substantive kick-out rights or substantive participating rights. ASU 2017-02 also adds to Subtopic 958-810 the general guidance in Subtopic 810-10 on when NFP limited partners should consolidate a limited partnership.
  • Effective Date: The amendments in ASU 2017-02 are effective for annual financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an NFP early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

Accounting Standards Update 2017-01: Clarifying the Definition of a Business

  • Issued: January 2017
  • Summary: ASU 2017-01 narrows the definition of a business, a concept fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the ASU, the revised definition of a business consists of the following key concepts:
    • A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
    • To be capable of being conducted and managed for the purposes described above, an integrated set of activities and assets requires two essential elements—inputs and a substantive process(es) applied to those inputs.
    • The ASU introduces a practical “screen” whereby, if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. The ASU also provides several industry-specific examples.
  • Effective Date: The amendments are effective prospectively for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments are effective prospectively for all other entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as follows when certain criteria are met.

Proposed FASB Guidance

The following is a summary of significant proposed guidance that was issued or was open for comment during the quarter. All proposed FASB guidance can be accessed on the FASB website located under the Exposure Documents tab, here.

Proposed Accounting Standards Update: Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

  • Issued: March 2017
  • Comment Deadline: June 5, 2017
  • Summary: The proposed amendments would simplify the accounting for nonemployee share-based payments by superseding Subtopic 505-50 and expanding the scope of Topic 718 to include payments for goods and services to nonemployees. As a result, the accounting models for nonemployee and employee share-based payments would be more closely aligned.
  • The ASU proposes six amendments. The last two apply only to nonpublic entities:
    • The proposal will allow for the measurement of the fair value of the award issued to nonemployees to be at the grant date, and removes the possibility of basing the fair value on the consideration received by the grantor.
    • The proposal generally conforms the measurement date to the grant date, consistent with the accounting for employee share-based payment transactions.
    • Expense recognition for awards with performance conditions is based on the same probability analysis as for employee awards under Topic 718, rather than the lowest aggregate value.
    • Awards remain subject to Topic 718 after the goods or services have been rendered, rather than becoming subject to other GAAP guidance, unless subsequently modified.
    • Nonpublic entities may use calculated volatility rather than having to estimate their own expected volatility.
    • Nonpublic entities may make a one-time election to use intrinsic value to measure liability awards issued to nonemployees, which is then marked-to-market until settlement date based on the intrinsic value, as opposed to using Fair Value.
  • Effective Date: The Board will determine the effective date and transition after it considers stakeholder feedback.

Proposed Accounting Standards Update: Inventory (Topic 330): Disclosure Framework—Changes to the Disclosure Requirements for Inventory

  • Issued: January 2017
  • Comment Deadline: March 13, 2017
  • Summary: As part of the FASB’s disclosure framework project, the proposed amendments would modify the disclosure requirements for inventory. The following additional disclosures would be required by Topic 330 for all entities:
  1. Inventory disaggregated by component (for example, raw materials, work-in-process, finished goods, and supplies)
  2. Inventory disaggregated by measurement basis
  3. Changes to the inventory balance that are not specifically related to the purchase, manufacture, or sale of inventory in the ordinary course of business
  4. A qualitative description of the types of costs capitalized into inventory
  5. The effect of last-in, first-out (LIFO) liquidations on income
  6. The replacement cost for LIFO inventory.
  • Additionally, entities that apply the retail inventory method would be required to provide incremental information about the critical assumptions used in applying that method. Additional disclosures would be required at the reportable segment level for entities subject to Topic 280.
  • Effective Date: The Board will determine the effective date and transition after it considers stakeholder feedback.

Proposed Accounting Standards Update: Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent)

  • Issued: January 2017
  • Comment Deadline: May 5, 2017
  • Summary: The proposed amendments would simplify the classification of debt by introducing a principle for determining whether a debt arrangement or similar instrument should be classified as a noncurrent liability as of the balance sheet date, which would replace a collection of fact-specific rules under current guidance. That principle is that an entity should classify an instrument as noncurrent if either of the following criteria is met as of the balance sheet date:
  1. The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.
  2. The entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.
  • Effective Date: The Board will determine the effective date and transition after it considers stakeholder feedback.

Other FASB Activities

The following section provides high level summaries of other relevant FASB publications and activities.

Emerging Issues Task Force
The Emerging Issues Task Force (EITF) met in March 2017. Conclusions reached by the EITF do not represent final or proposed guidance until they are ratified by the FASB.

Issue 16-C: Determining the Customer of the Operation Services in a Service Concession Arrangement

  • Status: The Task Force reached a final consensus on the following Issue. The FASB ratified on March 29, 2017. A final ASU is expected in the near term.
  • Summary: The final consensus affirmed that when applying ASC 606, an operating entity in a service concession arrangement should consider the grantor the customer of both construction and operation services it provides. Further, the operating entity should expense the cost of major maintenance as incurred because the grantor’s infrastructure is not an asset of the operating entity.
  • Effective Date: The final consensus is expected to effective for fiscal years beginning after December 15, 2017 for public companies and one year later for private companies, with early adoption permitted. Certain transition provisions will apply.

Private Company Council

  • Summary: The Private Company Council (PCC) met in April 2017. Several PCC members expressed support for the FASB’s proposed amendments to simplify hedge accounting, including provisions to allow private companies flexibility in completing the hedge documentation requirements given their limited accounting resources. Many PCC members continue to recommend that private companies under common control be exempted from applying Variable Interest Entity (VIE) guidance in Topic 810.

Additional topics discussed include the FASB’s disclosure framework project, liabilities and equity (“down round” features), and cloud computing.

A complete recap of the meeting can be found here. The PCC is scheduled to meet next on July 11, 2017.

FASB Transition Resource Groups
Credit Losses TRG 

  • Summary: The FASB established the Transition Resource Group (TRG) for Credit Losses early in 2016 to solicit, analyze, and discuss implementation issues that could arise when organizations implement ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The group did not meet during the first quarter of 2017.

Revenue Recognition TRG 

  • Summary: The TRG for Revenue Recognition was established in 2014 to solicit, analyze, and discuss stakeholder issues arising from implementation of the recently issued standard, ASU 2014-09 (Topic 606), Revenue from Contracts with Customers; to inform the FASB and IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues; and to provide a forum for stakeholders to learn about the new guidance from others involved with implementation. The group did not meet during the first quarter of 2017.

AICPA Financial Reporting Executive Committee
The Financial Reporting Executive Committee (FinREC) is the senior committee of the AICPA for financial reporting. It is authorized to make public statements on behalf of the AICPA on financial reporting matters. During the quarter, topics discussed by FinREC included:

Revenue Recognition
FinREC has issued multiple working drafts that provide industry-specific considerations and illustrative examples related to the implementation of ASU 2014-09, Revenue from Contracts with Customers. FinREC continued to issue working drafts for comment in the first quarter of 2017 affecting a variety of industry sectors. Comment periods are generally 60 days.

In January 2017, the AICPA published the first edition of its Audit and Accounting Guide: Revenue Recognition. This edition addresses general accounting considerations, general auditing considerations, and accounting implementation issues in the aerospace & defense and asset management industries. Future editions will address accounting implications of these and other industries. The AICPA plans to update the online edition as additional accounting implementation issues are finalized. At its completion, the guide will include 16 industry-specific chapters that address accounting implementation issues, and provide industry- specific illustrative examples of how to apply the new standard. It will also provide detailed coverage of audit considerations.

Complete details and additional AICPA resources are available on the AICPA website, here.

Accounting and Valuation Guide
FinREC continued deliberations on a new interpretive practice guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Firms and Other Investment Companies. Deliberations included market participant assumptions, calibration and other valuation related matters.

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