As we start a new year, it is important to look ahead to those upcoming accounting standards to plan for their application. Whether a company is a public company that must be prepared for first quarter interim reporting or a private company that needs to plan for its year-end financial statements, accounting standards take time to work through and implement, so it’s advisable to have a roadmap of what changes will affect financial reporting.
The continued ramifications from the COVID-19 disruption are expected to continue to impact reporting at least through the first quarter of the year. Understanding how these differences in your accounting practices are likely to intersect with your plans for adopting new accounting standards will be very important.
Lingering COVID-19 Ramifications to Watch
External events from the pandemic are likely to intermingle with accounting practices for both private and public companies alike. The ever evolving economic ramifications of the pandemic will mean that companies must continue to monitor for potential impairment triggering events. It is often most effective and efficient to be prepared to perform the test for impairment as soon as the triggering event occurs to avoid the challenges and costs associated with looking back at the end of a period at triggering events that occurred earlier in the year.
Contract modifications and new sources of financing may continue to be a high priority throughout 2021. Consider whether internal process and controls properly capture all new contracts and contract modifications and report them to the accounting personnel for evaluation and record keeping. Contract modifications may result in accounting under the general guidance for modifications for the type of asset, liability or equity instrument, or may be accounted for under simplified methods. For instance, debt modifications will generally need to be evaluated to determine if they are troubled debt restructurings, modifications or extinguishments. However, when the debt modification is written solely to address the sunsetting of the LIBOR rate, special simplified accounting may be elected. Likewise, simplified accounting under ASC Topic 848 Reference Rate Reform may be elected for other financial instruments that are modified to address the discontinuation of LIBOR and similar benchmark rates or may be applied in the event of modifications of lease agreements to address the impact of COVID-19.
Going concern will continue to be important at the point in time that financial statements are issued or made available for issuance. The two-step process for evaluating going concern may require additional care to evaluate if the economic uncertainty continues throughout 2021.
Public Companies: Accounting Standards Affecting 2021 Reporting
The following standards are newly effective at the beginning of fiscal years beginning after Dec. 15, 2020, including the interim periods within:
Income Tax Simplification
Changes in Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes will simplify generally accepted accounting principles (GAAP) through removing exceptions in ASC 740 as well as require the recognition of tax generating vehicles. Smaller public entities are not be required to adopt this standard until 2022 but may choose to adopt with larger SEC filers due to the changes in recent COVID-19 stimulus legislation that could affect income tax provisions.
Equity Security Investments and Joint Ventures
Updates in ASU 2020-01, Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) clarify the intersection between accounting for equity securities and investments under the equity method as well as how certain contracts and purchased options are treated. The update should increase the comparability between equity investments and joint ventures.
Defined Benefit Plan Disclosures
ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans, Topic 715-20 removes several disclosures for defined benefit plans and clarifies other requirements. The update will apply to all employers that sponsor defined pension plans and other retirement plans, and will include provisions with companies that sponsor multiple plans.
Other Accounting Changes
Additional accounting changes incorporate narrow scope improvements and incorporate guidance from the Securities and Exchange Commission (SEC):
Purchased Callable Debt Securities: ASU 2020-08 clarifies the accounting for purchased callable debt securities by requiring reassessment of the amortization period of premiums each reporting period.
Guarantor Financial Statements – ASU 2020-09incorporates guidance from the SEC that modifies and simplifies the requirements applicable to financial statements of guarantors and issuers of guaranteed securities that are registered or being registered.
Private Companies: Accounting Standards Affecting 2021 Reporting
The following standards are newly effective at the end of fiscal years beginning after Dec. 15, 2020, (i.e. calendar year end Dec. 31, 2021 financial statements):
Accounting for Cloud-Based Software
ASU 2018-15, Intangibles – Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract clarifies which costs in a cloud-based software arrangement should be capitalized versus expensed when incurred. The change eliminates some diversity in practice and will require all companies to capitalize certain costs related to the implementation of cloud-based software. It also specifies guidance on amortization, presentation, and disclosure. The update clarifies that the accounting for implementation costs depends on the stage of the project and the nature of the costs consistent with internal use software. It will also require most companies to track software costs by module or component.
Derivatives & Hedging
Under ASU 2017-12, Derivatives & Hedging (ASC Topic 815): Targeted Improvements to Accounting for Hedging Activities, private companies will have more streamlined guidance for elements of derivative and hedge accounting, including an expanded number of strategies that qualify for hedge accounting, changes to the measurement of a hedged item in a fair value hedge, provisions for qualitative testing of ongoing hedge effectiveness, and elimination of requirements to separately measure and reporting of hedge ineffectiveness.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities addresses challenges with related parties when applying the consolidation guidance under the variable interest entity (VIE) model. The changes include revising and replacing the existing accounting alternative available to private companies for commonly controlled leasing entities with a general accounting alternative available to entities under common control under the voting model. Entities that previously applied the accounting alternative for commonly controlled leasing entities will need to reassess whether they will continue to qualify under the new accounting alternative. In addition, the changes in this update will benefit investment management companies and sponsors the most, and was intended to reduce the cost and complexity of financial reporting associated with consolidation of variable interest entities.
Other Accounting Changes
Several other narrow scope accounting changes also will take effect in 2021 for private companies.
Collaborative Arrangements: ASU 2018-18 helps companies that are heavily invested in research and development activities, such as biotech companies, clarify how some components of the new revenue recognition standard apply to their collaborative arrangements.
Film Costs: ASU 2019-02 aligns the accounting for production costs of episodic television series with the accounting for production costs of films and clarifies the accounting for impairment.
For More Information
For more information about accounting issues to watch for in 2021, please contact Mark Winiarski of MHM’s Professional Standards Group or another member of our team.
Published on January 19, 2021