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Accounting Updates That Impact 2016 Financial Reporting

Dec. 20, 2016

Major accounting standards updates, including the changes to revenue recognition, leasing and credit loss impairment will be taking effect in the near future. In preparation for more significant updates from the Financial Accounting Standards Board (FASB), you should not overlook the accounting standards updates that will have an impact on 2016 year-end reporting. Public business entities and non-public business entities (private companies) both have several standards that are effective for their December 31, 2016 year-end.

The following are among the highlights to consider as part of your financial statement reporting.

2016 Accounting Standards Updates Affecting Both Public and Private Companies

Going concern: All calendar year-end public and private companies must be prepared for the adoption of ASU 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. Upon adoption of this standard for year-ends and interim periods ending after December 15, 2016, management is explicitly required by U.S. GAAP for the first time to analyze its ability to continue as a going concern. Going concern is evaluated based on a company's ability to meets its obligations when they come due over one year from the date the financial statements are issued or available to be issued (typically the audit report date). Entities concluding that substantial doubt exists about their ability to continue as a going concern must make disclosure of that fact and management's plans to address the substantial doubt, among other information.

Presentation of debt issuance costs: ASU 2015-03 Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs requires that all entities net the costs incurred when issuing or obtaining debt financing against the principal amount of the debt, which will result in a reduction of total assets for entities with capitalized debt issuance cost. Under previous guidance, debt issuance cost had been deferred and presented as part of an entity's assets. They will now be considered as part of an entity's liabilities. Recognition and measurement of debt issuance costs will not change from existing U.S. GAAP, so the update should not affect income statements. For balance sheet presentation, debt issuance costs are included in the principal amount of debt and amortized into interest expense. Application of the standard is retroactive, so entities will need to adjust all financial statements presented in the year of adoption.

The FASB also issued ASU 2015-15 Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which codifies an announcement made by the staff of the Securities and Exchange Commission (SEC) that entities have the choice to present debt issuance costs with line-of-credit arrangements either consistent with ASU 2015-03, net of the liability, or consistent with previous U.S. GAAP, gross as a separate asset. Private companies are expected to interpret the accounting for debt issuance costs related to line-of-credit agreements in a manner consistent with the SEC staff's statement.

Several other accounting standards took effect for both public business entities and private companies. These include:

Accounting Standards Update (ASU)

Changes from previous U.S. GAAP

ASU 2014-16 Derivatives and Hedging (Topic 815): Determining Whether a Host Contract in a Hybrid Financial Instrument Is More Akin to Debt or Equity

Issuers and investors evaluate all terms and features, both implicit and explicit, to determine the nature of the host contract of a hybrid financial instrument. It reaffirms the whole-instrument method for accounting for such instruments. Learn more.

ASU 2015-01 Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

The update will simplify the evaluation of what constitutes an extraordinary event, which has historically been time-consuming for preparers of financial statements. Entities will continue to present unusual or infrequent transactions as separate components of continuing operations or disclose those items in the notes to their financial statements. Learn more.

ASU 2015-05 Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement

To bring the accounting for cloud computing arrangements by customers in line with guidance for software vendors, entities will capitalize software they access through a hosting arrangement if they have a contractual right to take possession of the software at any time during the hosting period and the customer can either run the software on its own or contract with a party unrelated to the vendor to run the software. Otherwise, the cloud computing arrangement is treated in the same manner as a service contract. Learn more.

Other standards effective for 2016 that may impact both public business entities and private companies are:

Accounting Standards Updates Affecting Public Business Entities in 2016

Consolidation: Public business entities were required to adopt the consolidation guidance in ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis for annual periods, including interim periods within, beginning after December 15, 2015. The new guidance eliminates the deferral for entities that have variable interests in investment companies, creates a scope exception for money market funds, modifies the variable interest entity (VIE) model and how to identify the primary beneficiary of a VIE and eliminates the presumption that a general partner should consolidate a limited partnership under the voting interest model.

Several other accounting standards took effect for public business entities in the first quarter of 2016. These include:

Accounting Standards Updates Affecting Private Companies in 2016

Nonpublic business entities should also consider the available private company accounting alternatives. In March 2016, the FASB approved an accounting standard that allows private companies to forgo the preferability assessment when determining whether to elect a private company accounting alternative. ASU 2016-03 Intangibles —Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance will affect private company accounting alternatives created for the goodwill, certain interest rate swaps, common control leasing arrangements, and intangible assets in business combinations, permitting these accounting alternatives to be elected for the first time by qualifying entities in any future period without assessing preferability.

An additional standard, ASU 2014-14 Receivables- Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosureis also effective for private companies for calendar year-end December 31, 2016.Under the accounting standards update, mortgage loans will be derecognized and separate other receivables will be recognized during a foreclosure if certain conditions are met. Entities should measure the separate other receivables based on the amount of the loan balance expected to be recovered from the guarantor.

Get Familiar with the Standards

Taken separately, many of the accounting standards updates that could have an impact on financial statement preparation are minor in scope, but the cumulative effect of applying the changes could have a significant effect on your financial statement. An experienced advisor or your financial statement auditor may be able to help you understand the full impact of the changes and help you prepare for how they will change your financial statement.

For more information, please contact Mark Winiarski of the MHM Professional Standards Group. Mark can be reached at or 816.945.5614.



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