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Lay of the Accounting Landscape: Quarter 3

Author: MHM PC/Tuesday, September 13, 2016/Categories: Resources, Attest & Other Services, Derivatives & Hedge Accounting, EBP Audits, EBP Audit Publication, Financial Statement Audits, Not-for-Profit & Education, NFP Publication, Public Company & IPO, SEC Consulting, Thought Leadership & News, MHM Messenger

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Sept. 13, 2016

The biggest accounting changes coming out of the third quarter affected not-for-profit organizations, but other projects received minor updates, too. In addition, several exposure drafts have been issued, including the expected exposure draft of targeted improvements to hedge accounting.

Final Standards

Not-for-Profit Entities: Presentation of Financial Statements

Not-for-profit organizations received their first major accounting standards update to financial statements since 1993 with the release of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities: Presentation of Financial Statements.

The final accounting standards update looks slightly different from the exposure draft; feedback on the proposed ASU led the FASB to split the project into two phases. In this ASU addressing phase 1, the Board addressed those issues for which there was general agreement. The changes affect presentation of net assets, underwater endowments, liquidity and availability of resources, expense reporting, reporting of investment return and operating cash flows. One significant change from the original exposure draft is that the final standard continues to permit use of either the direct or indirect method for the cash flow statement instead of requiring the direct method. However, the final standard simplifies the cash flow statement by removing the requirement to present or disclose a reconciliation of indirect operating cash flows when using the direct method.

The standard takes effect for fiscal years ending after December 31, 2018. To prepare, entities should familiarize themselves with the changes, develop a prototype of the new financial statement and review it with external auditors to ensure everything's in place before the changes have to be implemented.

For more information on what the changes entail, please see Presenting the New Not-for-Profit Financial Statement.

Statement of Cash Flows

Earlier in 2016, the Emerging Issues Task Force (EITF) identified eight small-scale changes to be made to ASC Topic 230, Statement of Cash Flows and Other Topics. The EITF reached a consensus for agreement on the changes during the second quarter and finalized its changes with ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

Debt Prepayment and Extinguishment: The ASU will require debt prepayments and extinguishment to be presented as financing activities.

Zero Coupon Debt: Accreted interest from zero coupon debt will be presented as operating activities. The principal portion will be presented as financing, and classification guidance includes debt with insignificant interest rates.

Contingent Consideration in a Business Combination: Entities will need to separate cash payments into financing and operating activities. Any amount up to the original recognized liability will be considered financing activities. Any excess cash payments must be classified as operating activities and payments made soon after an acquisition are investing activities.

Proceeds from Insurance: Proceeds will be classified based on the nature of the loss.

Proceeds from Life Insurance: Proceeds from life insurance will depend on the type. For example, settlement proceeds will be classified as investing activities but payment of premiums may be considered operating activities, investing activities or a combination of the two.

Distributions from Equity Method Investments: Entities are permitted to use either a cumulative earnings approach or a nature of distribution approach when classifying equity method distributions received between operating and investing cash flows.

Beneficial Interests in Securitization Transactions: The transferor's beneficial interest will be presented as noncash activities and payments on a transferor's beneficial interest will be classified as investing activities.

Predominance Principle: If no specific guidance is in place, the cash flows should be classified by separately identifiable sources. Otherwise, the entity should classify by the predominant source or use of the cash flows.

The accounting standards update takes effect for public business entities for calendar years ending December 31, 2018, including interim periods. For all other entities, the effective date is December 31, 2019. Early adoption is permitted. Entities can use a retrospective approach to transition, or if impracticable, they should apply prospectively from the earliest possible date.

Exposure Drafts

Derivatives and Hedging

The highly anticipated proposal on targeted improvements to accounting for hedging activities was issued during the third quarter. The proposed changes are intended to make accounting for hedging activities to be more representative of the economic results of an entity's hedging strategy in the financial statements. To accomplish this goal, the FASB proposes simplifying the hedge accounting guidance so that it will allow hedge accounting for additional types of risk, make adopting and applying hedge accounting easier and improve disclosures. A few examples of the proposed changes include:

  • Permit the initial assessment of hedge effectiveness up to the date of the first quarterly effectiveness testing date;
  • Allow a qualitative assessment of hedge effectiveness after the initial quantitative test;
  • Enable an entity to switch to a previously designated long-haul method of hedge accounting when the shortcut method ceases to be appropriate;
  • Present the entire effect, not just the highly effective portion, of a hedging instrument in same income statement line item as the hedged item when the hedged item affects earnings;
  • Elimination of the use of a benchmark interest rate for cash flow hedges of variable-rate financial instruments;
  • Permit the use of the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as a benchmark rate for fair value hedges of interest rate risk; and
  • Disclose the cumulative basis adjustment for fair value hedges.

Comments on the exposure draft are due November 22, 2016.

Disclosure Framework

The FASB proposed additional disclosures for income taxes that include domestic and foreign tax components, how the entity was affected by recent tax law changes, changes in assertions of indefinite reinvestment of foreign earnings and aggregate foreign cash holdings and information about unrecognized tax benefits and valuation allowances for public business entities. It also clarifies requirements for income tax rate reconciliation for public business entities.

For more information on the changes, please see Proposed Changes Could Increase Disclosures for Income Taxes.

Employee Benefit Plans with Investments in Master Trusts

An exposure draft released would affect disclosures for employee benefit plan with investments in master trusts. It proposed requiring single line presentation across different plan types, among other changes. For more information, please see Increased Disclosure Requirements May be Coming to Employee Benefit Plans with Investments in Master Trusts.

Not-for-Profit: Consolidation of Limited Partnerships and Similar Entities

The release of ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, raised concerns about how the accounting standards update would affect the consolidation guidance for-profit organizations. The exposure draft clarifies that existing guidance under the voting model for limited partnerships and similar entities will be retained for not-for-profit entities.

Updates from the SEC

The SEC released two significant proposals during the third quarter. It proposed changing the definition of a smaller reporting company, which would simplify reporting requirements for companies with smaller amounts of public float. Changes were also suggested to streamline disclosures, including those related to core business information, company performance, financial information and future prospects, risk and risk management and securities of the registrant.

For More Information

If you have specific comments, questions or concerns about the third quarter developments, please contact Mike Loritz of MHM's Professional Standards Group. Mike can be reached at or 816.945.5611.


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