The long-awaited definition of a business project kicked off the first quarter of 2017. Goodwill impairment testing also received an update, and the AICPA released exposure drafts from its industry-specific task forces on revenue recognition.
Guidance released related to revenue recognition serves as a reminder that all organizations should be preparing for the effective dates of the major accounting standards updates that are on the horizon. Documenting and evaluating how processes may change will be vital to efficiently switching over to new reporting requirements.
Definition of a Business Project
In the first accounting standards update of the year, the Financial Accounting Standards Board (FASB) narrowed the definition of a business, a move that will likely result in fewer transactions being labeled as business combinations subject to ASC 805. ASU 2017-01 makes three significant changes to the definition of a business by requiring the application of a screen, narrowing the definition of output and requiring an input and substantive process that significantly contribute to creating or developing an output.
Public companies will adopt for annual and interim periods within annual periods beginning after Dec. 15, 2017 (calendar year 2018). All other entities will adopt for annual periods beginning after Dec. 15, 2018 (calendar year 2019), and interim periods beginning after Dec. 15, 2019. Early adoption is permitted for all transactions that are not included in financial statements issued or available for issuance, and the updates will be applied prospectively. Learn more»
Phase Two of the Definition of a Business project, derecognition of nonfinancial assets, was also released during the first quarter of 2017. ASU 2017-05 provides new terminology related to what is in substance a nonfinancial asset and eliminates the concept of "in substance real estate." The update aligns derecognition guidance so that transfers of nonfinancial assets are treated in a similar manner as transfers of a businesses. It takes effect the same time as the revenue recognition guidance and ASU 2017-01. Learn more»
Simplifying the Test for Goodwill Impairment
ASU 2017-04 simplifies the goodwill impairment test for all entities by eliminating the computation of implied fair value of goodwill, what was formerly "step 2" of the goodwill impairment process. It also eliminates the required qualitative test for reporting units with negative carrying value.
Under the update, the new goodwill test will begin with an optional qualitative assessment (formerly "step 0") and then entities will perform a quantitative test (formerly "step 1"). For SEC filers, the standard will take effect for fiscal years and interim periods beginning after Dec. 15, 2019. Other public business entities will adopt for fiscal years and interim periods beginning after Dec. 15, 2020. All other entities will adopt for fiscal years beginning after Dec. 5, 2021. The change does not impact the accounting under the Private Company Council accounting alternative to amortize goodwill. Private companies that previously elected the accounting alternative must establish preferability in order to switch to the revised goodwill impairment model.
Early adoption is permitted for all impairment tests performed after Jan. 1, 2017. The standard will be applied prospectively. Learn more»
Master Trust Reporting
ASU 2017-06 aligns master trust guidance for defined benefit pension plans, defined contribution plans and health and welfare benefit plans. Under the new standard, interest and changes in interest for each master trust in which the benefit plan has invested must be presented separately on the statement of net assets available for benefits and also listed separately on the statement of changes in net assets available for benefits. Reporting entities must disclose the dollar amount of interest by general types of investment and disclose other assets and liabilities of the master trusts. It removes guidance about percentage interest disclosure and the redundant disclosure of 401(h) account assets.
The master trust reporting standard is effective for fiscal years beginning after Dec. 15, 2018, and will be applied retroactively. Learn more»
Pension Cost and Postretirement Benefit Cost
FASB's ASU 2017-07 provides guidance for pension benefit plans related to presentation of service cost components. Reporting entities will present the service cost component with other compensation costs, but service costs will be the only component that is capitalizable. Interest cost, return on plan assets, amortization and gains or losses must be presented separately from service cost. Entities will also be required to present these items outside of income from operations when income from operations is presented in the income statement.
Public business entities will adopt for fiscal years and interim periods beginning after Dec. 15, 2017. All other entities will adopt for annual periods after Dec. 15, 2018. Early adoption is permitted and changes will be made retrospectively for presentation and prospectively for capitalization.
Premium Amortization on Purchased Callable Debt Securities
ASU 2017-08 specifies that premiums on callable debt securities are amortized over the period to the earliest call date. Discounts on callable debt securities will continue to be amortized until the maturity date.
Pubic business entities will adopt for annual periods and interim periods within annual periods beginning after Dec. 15, 2018. All other entities will adopt for annual periods beginning after Dec. 15, 2019. Early adoption is permitted and adoption will follow a modified retrospective approach.
Nonemployee Share-Based Payments Exposure Draft
Proposed changes would measure nonemployee share-based payments based on the fair value of the shares. For equity awards, the measurement date would be the grant date. Performance conditions would be accounted for with probability assessments, similar to how employee share-based payments account for their performance conditions. The classification of equity classified awards would continue to be subject to ASC 718 unless modified. Nonpublic entities can use calculated values in place of volatility and use intrinsic value for liability-based awards.
AICPA Task Forces on Revenue Recognitions
To assist with revenue recognition, the AICPA created industry-specific task forces to identify any potential issues entities would have with adopting ASU 2014-09. Final interpretations have been released for Aerospace & Defense companies and Asset Management companies. Other tasks forces have released exposure drafts. The discussion, explanation, and examples provided by the AICPA task forces may be beneficial during implementation for entities operating in the specified industries as well as entities operating with similar business models to the industries addressed by the task forces. Industries covered by the AICPA task forces include:
- Aerospace and Defense
- Asset Management
- Construction Contractors
- Depository Institutions
- Health Care
- Oil and Gas
- Power and Utility
More information about the AICPA Task Forces including copies of exposure documents can be found at the AICPA website.
Stay Tuned for More Information
MHM will continue to provide updated information as accounting developments and implementation guidance emerges. For specific comments, questions or concerns about any of the above accounting standards changes, 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 April 24, 2017