In 2016, the Financial Accounting Standards Board (FASB) released 20 accounting standards updates (ASUs). Among the more significant were changes to leasing, financial instruments and the not-for-profit reporting model.
Despite the completion of many significant projects, the FASB will likely remain active during 2017. Presently, it has 26 active projects, the most significant of which may be considered the proposed changes to hedge accounting originally issued in the third quarter of 2016. During the fourth quarter of 2016 and first couple weeks of 2017, the FASB issued seven accounting standards updates.
Definition of a Business
The first accounting standard update of 2017 clarified the definition of a business and should result in fewer transactions being treated as business combinations under ASC Topic 805 guidance. Three significant revisions were made to current U.S. GAAP, including the application of a "screen," changes to the definition of an output, and the evaluation of inputs and processes required for a business to exist. The changes are the first phase of three phases. Future standard setting activity will look at partial sales and transfers, as well as recognition and derecognition principles to consider and whether alignment of the guidance between transactions involving a business and those involving assets are warranted.
Revisions to the consolidation guidance were effective for the 2016 calendar year for public business entities and become effective for all other entities in 2017. After issuance of the revision, several questions arose to the application of certain components of the guidance resulting in two accounting standards updates.
The first, ASU 2016-17 Consolidation (Topic 810): Interests Held Through Related Parties That Are under Common Control, clarifies when an entity consolidates a variable interest entity (VIE). When determining the primary beneficiary of a variable interest entity (VIE), the reporting entity that is a single decision maker considers if it has an obligation to absorb losses or right receive benefits that could be significant to the VIE. After the revision in ASU 2016-17, in evaluating this condition the reporting entity only considers its proportionate interest of entities under common control. For example, say a reporting entity has a 25 percent interest in its sister entity, and the sister entity has a 40 percent interest in a VIE. The reporting entity would include a 10 percent interest in a VIE in its evaluation of its ability to absorb losses or receive benefits.
The second update, ASU 2017-02, Not-for-Profit Entities-Consolidation (Subtopic 958-810) clarifies when a not-for-profit that is a general partner or a limited partner should consolidate a for-profit limited partnership. Under the revised consolidation guidance, a not-for-profit entity that is the general partner in a limited partnership would have deconsolidated certain limited partnerships previously consolidated. ASU 2017-02 corrects this issue by retaining the presumption that a general partner should consolidate a limited partnership under the voting model guidance. The presumption can be overcome by either substantive kick-out rights or substantive participating rights held by a limited partner.
Intra Entity Transfers
ASU 2016-16 Income Taxes - Intra-Entity Transfers simplifies the accounting for transfers of assets between tax-paying components within an entity. It requires the reporting entity to recognize the tax impact of an internal asset transfer between different tax jurisdictions at the time of the transfer, excluding transfers of inventory. The accounting standard takes effect for public business entities after Dec. 15, 2017 and all other entities for annual periods beginning after Dec. 15, 2018. It will be adopted using a modified retrospective application. Early adoption is permitted.
Other FASB Projects
During the fourth quarter of 2016 the FASB also issued two accounting standards updates on its continuing project for addressing technical corrections to US GAAP. The technical corrections addressed various issues including fair value disclosures related to valuation techniques and approaches and corrections to the new guidance on revenue from contracts with customers (Topic 606).
The FASB has also made several recent proposals to improve US GAAP, including exposure drafts addressing inventory disclosures, the treatment of down round provisions when distinguishing debt from equity instruments and the simplification of the classification of debt between current and noncurrent liabilities.
The proposed changes for the classification of debt include an overarching principle to replace the existing rules based approach. The principle is that debt is classified as noncurrent in a classified balance sheet if either it is contractually due more than one year after the balance sheet date, or the reporting entity has the contractual right to defer payment for at least one year from the balance sheet date. An exception to the principle would be created to permit debt due on demand as a result of a covenant violation to be classified as noncurrent if a waiver is obtained prior to when the financial statements are issued or available for issuance and the waived debt is contractually due, or payment can contractually be deferred for, more than one year from the balance sheet date. Debt classified as noncurrent as a result of the exception would be presented separately from other debt. A significant change that would result from the proposed principle is that debt due within one year from the balance sheet date that is refinanced prior to the financial statements being issued or available for issuance would be presented as current even if the revised terms of the debt is that it is now contractually due more than one year after the balance sheet date.
On Nov. 17, 2016, the FASB released the final accounting standards update clarifying the presentation of restricted cash in the cash flow statement, which was EITF Issue. No. 16-A. The final accounting standard update resolves the presentation and disclosure requirements for restricted cash, but does not define restricted cash. Entities will be required to include restricted cash and cash equivalents in the beginning and ending cash on their cash flow statement alongside cash and cash equivalents. Disclosures will be required to describe the nature of the restriction and the amount, by balance sheet line item, of the restricted cash and restricted cash equivalents. The standard takes effect for public business entities after Dec. 15, 2017 and all other entities after Dec. 15, 2018. It must be applied retrospectively. Early adoption is permitted.
Still under consideration are EITF Issue No. 16-B: Employee Benefit Plan Master Trust Reporting and EITF Issue No. 16-C: Determining the Customer of the Operation Services in a Service Concession Arrangement.
The proposed changes under EITF Issue No. 16-C include clarifying that the grantor (governmental entity) of the operation services would be considered the customer in instances where the service being provided benefits a third party (such as operation services for an interstate tollway), so long as the arrangement met the conditions of ASC Topic 853, Service Concession Arrangements.
During its November meeting, the EITF voted to draft the accounting standards update for Issue No. 16-B, and agreed not to address whether reporting entities should supply other GAAP disclosures, including ASC Topic 820, Fair Value and ASC Topic 815, Derivatives and Hedging. The final standard is expected in the first quarter of 2017.
Other Items to Note
ASU 2014-15, Presentation of Financial Statements- Going Concern (Topic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern takes effect for the 2016 calendar year financial statements. Entities will need to evaluate their ability to continue as a going concern within one year from when the financial statement is issued or available to be issued.
The guidance also clarifies when management must disclose the existence of substantial doubt about its ability to continue as a going concern. Substantial doubt is considered to exist when conditions and events, that when taken in the aggregate, indicate it is probable that an entity will not be able to meet its obligations. When substantial doubt exists management evaluates plans for how to alleviate that doubt, whether the plans will be implemented and whether the plans will be effective in alleviating the substantial doubt about an entity's ability to continue as a going concern. The results of the evaluation process are included in the disclosures.
In addition, the FASB codified an announcement made by the staff of the Securities Exchange Commission (SEC) in ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the Sept. 22, 2016 and Nov. 17, 2016 EITF Meetings (SEC Update). In the statements, the staff clarified the requirements for registrants related to disclosure about the expected effect on the financial statements and the progress made on implementation for accounting standards not yet adopted. Specifically cited are the accounting standards updates on revenues from contracts with customers (Topic 606), Leases (Topic 842) and the Financial Instruments - Credit Losses (Topic 326).
For More Information
MHM will continue to monitor accounting standards updates and help you determine the impact the accounting changes will have on your organization. For more information on these subjects, 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 January 31, 2017