What s New from the FASB Coulter & Justus, PC November 16, 2016 Richard L. Townsend, Ph.D, CPA Associate Professor Emeritus of Accounting University of Tennessee
Overview Selected FASB ASC Updates Selected FASB Exposure Drafts Other Agenda Items 2
Selected FASB ASC Updates 3
FASB ASC Update 2015-16 (Topic 805) Simplifying the Accounting for Measurement- Period Adjustments Acquirer should recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjusted amounts are determined Acquirer should record, in the same period s statements, the effect on earnings of depreciation, amortization or other income changes as a result of the change in the provisional amounts Effects would be determined as if the accounting had been completed at the acquisition date 4
Entity should present separately, either on face of statement or notes, the portion of the amount recorded currently by line-item that would have been reported in previous periods if the provisional amounts had been recognized then Amendments should be applied prospectively to adjustments that occur after the effective date The effective date is periods beginning after 12/15/2015 for public companies For all other entities, the effective date is periods beginning after 12/15/2016 5
FASB ASC Update 2015-17 (Topic 740) Balance Sheet Classification of Deferred Taxes Deferred tax assets and liabilities should be classified as noncurrent on the balance sheet Deferred tax assets and liabilities should continue to be offset and shown as a net amount on the balance sheet Effective for public entities for statements beginning after 12/15/2016 There is a one year delay for other entities Early application is permitted Transition may be applied prospectively or retrospectively to all periods presented 6
FASB ASC 2016-01 (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities Financial assets would be classified using current FASB guidance with some exceptions Amortized cost debt investments that are intended to be held to maturity Fair value - Available-for-sale debt investments with changes in fair value recognized in OCI. Fair value Trading debt securities with changes in fair value recognized in earnings Fair value with changes reflected in net income. This includes all equity investments not accounted for by the equity method. 7
A practicability exception is available for equity investments without readily available fair values Fair value option still available Financial liabilities would be measured at amortized cost unless fair value option chosen If a financial liability is carried at fair value, any change in fair value because of a change in credit risk would be reported separately in other comprehensive income A public entity would present parenthetically on the statement s face the fair value of financial assets and financial liabilities that are carried at amortized cost A nonpublic entity would not have this requirement 8
Public companies will no longer have to disclose methods and assumptions used for fair value disclosure of financial instruments measured at amortized cost Companies may qualitatively assess for impairment equity investments that do not have readily determinable fair value Public entities should use exit value for disclosing fair value of financial instruments measured at allocated cost An entity should evaluate need for deferred tax asset allowance on available-for-sale securities in conjunction with all other deferred tax assets 9
For public entities the effective date of the amendments are fiscal years beginning after 12/15/2017 For other entities the date is 12/15/2018 Requirement to report a change in financial liabilities carried at fair value in other comprehensive income may be adopted early Nonpublics may also adopt fair value disclosure earlier Otherwise early adoption is not permitted Amendments should be applied using a cumulativeeffect adjustment as of beginning of first period adopted 10
FASB ASC Update 2016-03 (Topics 350, 805, 810, 815) Effective Date and Transition Guidance This affects all private companies within the scope of the above Topics The guidance in the PCC FASB Updates to the above topics is effective immediately as the effective dates are removed For transition, the private companies would not have to show preferability the first time they elect the accounting alternatives within the scope of this Update Any subsequent changes, however, would require justification that the change is preferable 11
FASB ASC 2016-07 (Topic 323) Simplifying the Equity Method of Accounting Update eliminates the requirement to separately account for the basis difference of equity method investments Basis difference is the difference between investment cost and investor s proportionate share of investee s net assets The new investment would be added at cost to the current basis of the previously held interest The investor adopts the equity method as of the date the investment is subject to significant influence 12
This eliminates the requirement that, as a result of increased ownership, the investor adjusts the investment account and share of earnings retroactively as if the equity method had been used in prior periods If an available-for-sale investment now qualifies for the equity method, the unrealized holding gain or loss in accumulated other comprehensive income must be recognized through earnings These amendments are effective for all entities for years beginning after 12/15/16 and applied prospectively No additional disclosures required 13
FASB ASC 2016-08 (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net) When another party is involved in providing goods or services, an entity should determine whether the promise is to provide the goods or services itself (as a principal) or to arrange for provision of the goods or services by the third party (as an agent) When acting as a principal, the satisfaction of the performance obligation should result in recognition of the gross amount expected to be received When acting as an agent, the satisfaction of the performance obligation should result in recognition of the amount of fee or commission expected to be received 14
An entity is a principal if it controls the specified good or service before the transfer to the customer Indicators of control are included in the guidance but should not be considered a checklist An entity should determine whether it is a principal or agent for each specified good or service promised For public entities, the effective date is for periods beginning after 12/15/2017. Private companies would have an additional year. 15
FASB ASC 2016-10 (Topic 606) Identifying Performance Obligations and Licensing A promise by an entity to grant a customer a license to intellectual property having significant standalone functionality does not include maintaining that property during the period of the license The promise by the entity to provide a customer with the right to use the property is satisfied at the point in time the customer is able to use and benefit from the license Functional intellectual property includes software, drug formulas and media content 16
The promise by an entity to grant a customer a license to symbolic intellectual property (it does not have significant standalone functionality) includes maintaining the property during the license period As there are two benefits to a license with symbolic intellectual property, this license is satisfied over time Examples of symbolic intellectual property are brands, trade names, logos, and franchise rights For public entities, the effective date is for periods beginning after 12/15/2017. Private companies would have an additional year. 17
FASB ASC 2016-12 (Topic 606) Narrow-scope Improvements and Practical Expedients Clarifies that the collectability objective is to decide whether the contract is valid and represents a genuine transaction on the basis of whether the customer has the ability and intent to pay the promised amount Can also recognize revenue when control of goods and services has transferred, transfer has stopped, no obligation for additional transfers and consideration received is not refundable An entity may make an accounting policy choice to exclude amounts collected from customers for all sales taxes in determining the transaction price 18
The contract inception is the measurement date for noncash consideration An entity retrospectively applying the guidance in this proposal to each prior period is not required to disclose the accounting change effect in the period of adoption The entity would be required to disclose the effect of the change on any adjusted prior periods For public entities, the effective date is for periods beginning after 12/15/2017. Private companies would have an additional year. 19
FASB ASC 2016-13 (Topic 326) Measurement of Credit Losses on Financial Instruments This approach is called the Current Expected Credit Loss model and replaces the incurred loss model. An entity at each reporting date would determine for financial assets carried at cost an allowance for credit impairment for its current estimate of expected credit losses This allowance is management s estimate of cash flows that are not expected to be collected Provides current estimate of expected lifetime credit losses on balance sheet Current deterioration reflected on income statement 20
The scope of this guidance includes financial assets not accounted for at fair value with changes reported in net income Includes loans, debt securities, trade receivables, net investments in leases, etc. that represent contractual rights to receive cash Estimate of expected credit losses would be based on relevant information about past events, current conditions, and reasonable and supportable forecasts Judgment needed in determining appropriate relevant information and estimation methods Pool financial assets with similar risk characteristics 21
For future periods beyond reasonable and supportable forecasts the entity should revert to historical credit loss experience for similar contractual terms Purchased financial assets carried at amortized cost with more than an insignificant amount of credit deterioration (PCD assets) are measured in a similar manner However, for PCDs, the beginning allowance is added to the original cost rather than being expensed Only subsequent changes in the allowance are recorded as expense Interest income for PCDs should be recognized based on the effective interest rate 22
When determining cash flows an entity should consider prepayments but not consider extensions or renewals While typically using discounted cash flow, using other methods to estimate credit losses are not prohibited Write-offs will be in the period the financial asset is considered uncollectible Not explicitly required to disclose the time period included in reasonable and supportable forecasts Not required to recognize loss if zero nonpayment risk 23
For available-for-sale debt securities, any credit losses should be reflected in an allowance for credit losses By using an allowance, the entity can now record reversals of credit losses in current period income The amount of the allowance for credit losses for available-for-sale securities is limited to the amount by which amortized cost exceeds fair value Disclosures for all securities in scope of this Update remain essentially the same However, disclosures of credit quality indicators must be separated by year of origination 24
The effective date for public entities that are SEC filers will be annual and interim years beginning after 12/15/2019 Effective date for other public entities is 12/15/2020 Effective date for all other entities is 12/15/2020 for annual and interims after 12/15/2021 Can be adopted as early as periods after 12/15/2018 Should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first year 25
FASB ASC 2016-14 (Topic 958) Presentation of Financial Statements of Not-For- Profit Entities Not-for-Profit entities (NFP) will report amounts for net assets with donor restrictions and net assets without donor restrictions Present on the face of the statement of activities the amount of change of each of the above classes of assets Present on the face of the statement of cash flows the net amount for operating cash flows using either the direct method or the indirect method If direct method used, reconciliation (indirect method) no longer needed 26
Enhanced disclosures about amounts and purposes of actions that result in self-imposed limits on the use of resources without donor-imposed restrictions More disclosures on net assets with donor restrictions at the end of the period and how this affects use of assets Qualitative disclosures on how NFP manages the liquid resources available to meet cash needs for general expenditures within one year How costs are allocated among programs and support functions 27
Enhanced disclosures on underwater endowment funds Must report investment return net of external and direct internal investment expenses Amendments are effective for annual periods beginning after 12/15/2017 and for interims within fiscal years beginning after 12/15/2018 Early application permitted This Update should be applied on a retrospective basis in the year of initial application 28
FASB ASC 2016-15 (Topic 230) Classification of Certain Cash Receipts and Cash Payments Cash paid for debt prepayment or debt extinguishment is classified as financing activities cash outflows Settlement of zero-coupon debt instruments should be separated into operating activities cash outflows if attributable to accreted interest and financing cash outflows if attributable to principal In a business combination, cash payments not made soon after the acquisition date in the amount of the contingent consideration liability recognized should be classified as financing activities Any excess of this amount should be operating activities 29
Any cash payments made soon after the acquisition date to settle a contingent consideration liability should be investing activities cash outflow Cash proceeds received from insurance settlements should be classified on the basis of the related insurance coverage (the nature of the loss) Cash proceeds received for settlement of corporateowned life insurance policies should be considered investing activities cash inflows 30
Cash receipts from payments on a transferor s beneficial interests in securitized trade receivables should be shown as investing activities inflow Cash receipts and payments having more than one class of cash flows should be determined first by GAAP If no specific GAAP guidance, determine each separate portion based on the predominant underlying cash flows Effective date for public entities is years beginning after 12/15/2017; for all other entities, 12/15/2018 31
FASB ASC 2016-16 (Topic 740) Intra-Entity Asset Transfers of Assets Other Than Inventory Update eliminates an exception in Topic 740 Reporting entity now recognizes tax expense from an intra-entity sale in seller s tax jurisdiction when the sale occurs even though pre-tax effects eliminated in the consolidation Any deferred tax asset arising in buyer s jurisdiction must also be recognized at the time of the sale This does not apply to inventory where the tax effect of its intra-entity sale will be deferred until sold to third party Effective for public entities for statements beginning after 12/15/2017. Other entities delayed one year 32
Selected FASB Exposure Drafts 33
FASB Exposure Draft (Topic 832) Disclosures by Business Entities about Government Assistance (issued November, 2015) No current explicit GAAP for governmental assistance received by businesses Proposed guidance applies to all entities but not-forprofits that have a legally enforceable agreement with a government to receive value Does not apply when the government is legally required to provide nondiscretionary assistance to a business or not-for-profits simply because the entity meets requirements broadly available without agreement Does not apply when the government is only a customer 34
Disclosure should include the type of arrangement, the accounting for the assistance and the effect on the entity s financial statements Information about the nature of assistance and the accounting for the assistance Information about line items and amounts that are affected by governmental assistance Significant terms of agreement including commitments and contingencies Any government assistance received but not directly recognized in the financial statements (if practicable) 35
FASB Exposure Draft (Topic 820) Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (issued December, 2015) An entity shall only provide material disclosures Eliminate phrases like an entity shall disclose at a minimum which are not clear Refer users to Topic 235, Notes to Financial Statements Eliminate certain fair value disclosures: - amount and reasons for transfers between Level 1 & 2 - policy for timing of transfers - valuation policies for Level 3 measurements - changes in unrealized gains and losses in earnings (private entities only) 36
Private entities no longer must reconcile opening and closing balances of recurring Level 3 measurements However they must disclose transfers in & out of Level 3 For all entities, clarify the measurement uncertainty disclosure rather than information about sensitivity analysis to changes Disclose the changes in unrealized gains and losses for the period included in OCI and NI for all levels of the hierarchy held at the end of the period (public) In Level 3, the measurements, range, weighted average and time period used for unobservable inputs (public) 37
Other Agenda Items FASB Invitation to comment August 2016 Intangible assets (including research and development) Pensions and other postretirement benefits Distinguishing liabilities from equity Reporting performance and cash flows (including income statement, segment reporting, other comprehensive income, and statement of cash flows 38