Clarity is critical for implementing new accounting standards. During the first part of 2019, the Financial Accounting Standards Board (FASB) issued a handful of proposed and final accounting standards updates to address some provisions in recently completed major projects that had proved problematic. The final and proposed standards updates may simplify implementation efforts.
Final Regs: Lessor Clarifications & Leasing Transition Guidance
The FASB continues to work through the leasing guidance in Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) to address implementation issues identified by stakeholders. In March, it released a codification update designed to help financial institution lessors with some of their accounting requirements, and correct some of the guidance on transition disclosures. Entities will adopt the changes in the codification update at the same time as they adopt ASC Topic 842.
Fair Value for Lessors: In previous leasing guidance, lessors that are not manufacturers or dealers—financial institutions or captive finance companies—had unique guidance for determining the fair value of the underlying leased asset. Instead of applying ASC Topic 820, Fair Value Measurement, financial institutions and captive finance companies would record the leased asset’s fair value as the underlying asset’s cost less any volume or trade discounts that may apply. ASU 2016-02 had eliminated this provision, and would have required these entities to apply ASC Topic 820 to the underlying leased asset. Under ASC Topic 820, financial institutions and captive finance companies would have expensed acquisition costs such as sales tax and delivery charges at the lease commencement and recognized these costs through increased interest income for sales-type and direct financing leases. In its March 2019 codification improvement, the FASB reinstated the unique guidance for determining fair value with one caveat: if significant time lapses between the acquisition of the underlying leased asset and the lease commencement, lessors that are not manufacturers or dealers will be required to apply the ASC Topic 820’s definition of exit price fair value.
Lessor Presentation of Statement of Cash Flows for Sales-Type and Direct Financing Leases: Depository and lending institutions had conflicting guidance to follow about how to present principal payments received under leases. ASC Topic 842 requires lessors to present all cash receipts from leases in operating activities, while ASC Topic 942 Financial Services—Depository and Lending requires principal payments from leases to be presented in investing activities. The March 2019 codification clarifies that depository and lending institutions within scope of ASC Topic 942 will present principal payments received from leases in their investing activities.
Transition Disclosures: Public companies are adopting the leasing standard for 2019, and stakeholders had raised concerns about some of the transition disclosure requirements for interim periods. ASC Topic 250, Accounting Changes and Error Corrections requires entities in the fiscal year in which a new accounting principle is adopted to make certain disclosures for interim periods related to the effect the accounting change had on: income from continuing operations, net income, any other affected financial statement line item, and any affected per-share amounts. The leasing standard transition guidance in the original ASU had specifically exempted entities from making disclosures about the same items for annual periods. The March codification update clarified that entities will also be exempt from making the interim disclosure requirements for those items.
Proposed Improvements: Stock Compensation & Revenue Recognition
Improvements made to ASC Topic 718, Compensation—Stock Compensation for non-employees in 2018 left some questions about the application of certain principles of the new revenue recognition standard under ASC Topic 606, Revenue from Contracts with Customers. The changes to ASC Topic 718 require share-based payments related to the selling of goods or services to be accounted for under ASC Topic 606. But ASC Topic 606 does not provide guidance on measuring share-based payments to a customer. Without guidance, share-based payments to non-employees could be accounted for as either noncash consideration measured at the contract inception (ASC Topic 606 guidance) or noncash consideration measured at the grant date (ASC Topic 718) guidance. The FASB proposed an accounting standard update in March 2019 clarifying that share-based payments to a customer should be measured at the grant date fair value and that subsequent measurement of the award will be subject to ASC Topic 718 unless the payment award is subsequently modified and the grantee is no longer a customer. Entities would apply the guidance at the same time that they adopt the changes in ASC Topic 718.
Proposed Improvements: Credit Loss Impairment
The new credit loss impairment rules are designed to simplify accounting for certain types of financial instruments. Stakeholders pointed out that in preparation for the standard taking effect, some financial statement preparers have started electing the fair value option on new financial assets even though these types of assets have historically been measured at amortized cost. This could potentially lead to a dual set of measurement methodologies, which would reduce the comparability of previous financial statements. A proposed accounting standard update would permit a one-time, irrevocable option for an entity to elect to use the fair value option for financial assets previously measured at amortized cost. Entities could use the election for financial instruments other than held-to-maturity debt securities. It would be adopted at the same time as new credit loss impairment rules.
Monitoring for More Updates
As the effective date for major accounting updates nears, more guidance from the FASB may follow. We will continue to monitor these and other updates as they become available. For specific comments, questions, or concerns, please contact Mark Winiarski of MHM’s Professional Standards Group. Mark can be reached at firstname.lastname@example.org or 816.945.5614.
Published on March 12, 2019