Accounting Updates that will Impact 2017 Financial Reporting

As you begin to finalize calendar year 2016 financial reporting, consider taking a moment to consider the accounting changes that are required to be adopted for financial reporting in 2017. Accounting changes required to be adopted for annual periods beginning after Dec. 15, 2016, may impact processes and controls, as well as internal and external interim and year-end reporting.

Identifying changes that impact your company and preparing now will make your year-ends a little smoother. Keeping your reporting as hassle-free as possible will be particularly important because more significant accounting update projects are on the horizon, including the changes to revenue recognition, leasing and financial instruments.

Provisions Affecting Both Public and Private Entities

As part of the Simplification Initiative, the Financial Accounting Standards Board (FASB) issued accounting standards updates (ASUs) to clarify existing U.S. generally accepted accounting principles (U.S. GAAP). The following standards apply to calendar year-end 2017 financial statements for both public and private companies. In addition, they also are required to be adopted for interim reporting during the 2017 calendar year for public business entities.

Inventory: To streamline accounting for inventory, ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory will require entities to measure inventory at the lower of cost and net realizable value instead of lower of cost or market. The update will apply to any organization that uses first-in first out (FIFO) or average cost methods for measuring inventory. Last-in, last-out (LIFO) and retail method were specifically excluded. Adoption is prospective. Companies required to use the revised model will likely have adjustments to information gathering, processes and measurement of write-downs of inventory.

Equity Method of Accounting: ASU 2016-07, Investments- Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting eliminates the requirement to retroactively apply the equity method of accounting to an equity investment that becomes eligible for the equity method of accounting. Instead, when an investment in an equity instrument that is not accounted for through consolidation or the equity method (e.g. a cost method investment) first qualifies for use of the equity method of accounting, entities should apply the equity accounting method prospectively. If the change to the equity method is caused by the purchase of additional equity interest, the cost of acquiring the additional interest in the investment is added to the basis of the investor's previously held interest. If the equity instrument was previously accounted for as an available-for-sale security, the investor recognizes the unrealized holding gain or loss that was accumulated in other comprehensive income into earnings upon application of the equity method.

Public Business Entities

Public business entities are the first adopters of most accounting changes, and they will have a number of updates to implement for the first quarter in annual periods beginning after Dec. 15, 2016.

Simplification Initiative Projects

Balance Sheet Classification of Deferred Taxes: ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes, requires entities to present deferred tax liabilities and assets as noncurrent in their financial statements. It can be adopted prospectively or retrospectively to all financial periods presented in the financial statement in the year of adoption.

Share-Based Payment Accounting: ASU 2016-09, Compensation (Topic 718): Improvements to Employee Share-Based Accounting modifies accounting for share-based payments. Accounting for income taxes upon settlement of the award, presentation of excess tax benefits, and evaluation of statutory income tax withholdings related to an award, among other items, are also updated by ASU 2016-09. Transition methods vary. Depending on the nature of the change to the financial statements, a prospective, retrospective, modified retrospective transition requiring a cumulative-effect adjustment to equity or a combination of transition methods may be required.

Derivatives Updates from the Emerging Issues Task Force

Derivative Contract Novations: ASU 2016-05 Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships clarifies that a contract novation of an instrument accounted for as a hedge under hedge accounting does not stop the instrument from using hedge accounting if the contract meets all of the other hedge accounting criteria. The update can be applied prospectively or using a modified retrospective approach. If an entity uses a modified retrospective approach, hedging relationships previously dedesignated for hedge accounting solely for contract novation must undergo the effectiveness assessment and have ineffectiveness measured for all periods since the use of hedge accounting was discontinued.

Contingent Put and Call Options in Debt Instruments: ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments clarifies the use of the four-step decision sequence that entities apply when assessing put or call options that accelerate the payment of a debt instrument's principal. The four-step process helps the entity determine whether the options are clearly and closely related to the host contract. ASU 2016-06 must be adopted using a modified retrospective transition. A reporting entity may elect a one-time option to measure the debt instrument at fair value if under the new decision-making sequence, the reporting entity determines that it doesn't need to bifurcate the embedded derivative.

Corrections and Updates

In addition to the standards discussed above, public business entities should also consider whether ASU 2016-17 Consolidation (Topic 810)- Interests Held Through Related Parties That Are Under Common Control, which updates the revised consolidation model adopted in 2016, modifies any conclusions reached. They should also consider whether any of the changes contained in ASU 2016-19, Technical Corrections and Improvementsrequire updates to accounting memos, disclosures or accounting conclusions.

Private Entities

The most significant accounting change coming to non-public business entities for calendar year-end 2017 is the adoption of the revised consolidation model. Conclusions under the variable interest entity (VIE) and voting interest consolidation models should be carefully evaluated for compliance with the various updates.

The revised guidance was issued as ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis and modifies each significant "step" in the VIE consolidation model. Modifications include changes to the scope of the VIE model, modifying the conditions that cause a decision maker or service provider arrangement to be a variable interest, the criteria for determining whether an entity is a VIE and the guidance on identifying the primary beneficiary of a VIE.

ASU 2016-17 Consolidation (Topic 810)- Interests Held Through Related Parties That Are Under Common Control clarifies the process for determining a primary beneficiary in a VIE under the revised model introduced in ASU 2015-02. Entities that have the power to direct the activities of a VIE that impact the VIE's financial performance must consider all direct variable interests in a VIE and proportional indirect interests in a VIE held through related parties.

Also impacting the VIE model is the adoption of the consolidation provisions in ASU 2014-10 Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which eliminates specialized guidance that prevented many development stage entities from being determined to be VIEs because they had insufficient equity at risk to permit them to finance activities without additional subordinated financial support.

ASU 2015-02 also modifies the voting interest model of consolidation. It eliminates the presumption that a general partner consolidates a limited partnership or similar entity and replaces it with a model based on the ability to kick-out or remove the general partner. For these types of entities, the kick-out rights are considered to effectively be the voting rights, so that a limited partner with the ability to unilaterally remove the general partner typically consolidates.

ASU 2017-02, Not-for-Profit Entities- Consolidation (Subtopic 958-10) Clarifying When a Not-for-Profit That Is a General Partner or a Limited Partner Should Consolidate a Profit Limited Partnership or Similar Entity also updates the changes made in ASU 2015-02 by exempting not-for-profit entities from the changes in the voting model of ASU 2015-02. ASU 2017-02 adds the guidance that a general partner is presumed to consolidate a limited partnership or similar entity to the not-for-profit industry-specific guidance.

When adopting the revisions to the consolidation model, entities will need to re-evaluate their existing consolidation conclusions and apply the new guidance. If decisions to consolidate are affected by the new guidance, the changes may be made either retrospectively or using a modified retrospective approach where the changes are reflected as changes to equity as of the date of adoption. For more information, see, End of 2016 Signals Beginning of Private Company Consolidation Accounting Changes.

Updates to Simplify Accounting

Practical Expedient for Defined Benefit Obligation and Plan Assets: ASU 2015-04, Compensation - Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets creates an option for defined benefit plans with year-ends that do not fall at a month's end to use the nearest calendar month end to their year-end for determining fair value. Once adopted, the expedient must be applied to all eligible plans and the reporting entity must make a related disclosure that includes the fair value measurement date used.

Measurement-Period Adjustments: ASU 2015-16 Business Combinations (Topic 805), Simplifying the Accounting for Measurement Period Adjustments requires entities to recognize business combination adjustments to provisional amounts during the measurement period in which the adjustments are made. This will require the reporting entity to calculate the cumulative effect of the change on the income statement as if the change had been in place on the date of acquisition. The cumulative effect will be recorded to the provision amounts in the period of the change. Private entities will adopt the change prospectively.

Other updates

Three additional updates that are narrow in-scope but may impact 2017 financial statements depending on the industry and nature of transactions are:

• ASU 2014-13, Consolidation (Topic 810)- Measuring the Financial Assets and the Financial Liabilities of a Consolidation Collateralized Financing Entity
• ASU 2015-17, Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (Or Its Equivalent)
• ASU 2015-09, Financial Services- Insurance (Topic 944) Disclosures about Short-Duration Contracts

For More Information

For assistance in how the accounting standards updates will affect your organization, please contact your MHM professional or Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com or 816.945.5614.