Quarterly Accounting Standards Update
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Quarterly Accounting Standards Update 2014, 3rd Quarter By Larry L. Perry, CPA CPA Firm Support Services, LLC
Learning Objectives
To understand U.S. GAAP Accounting Standards Updates (ASUs) commonly applicable to non-public, non-governmental entities
To be aware of trend-setting disclosure requirements in certain previous ASUs
To recognize differences from U.S. GAAP in the AICPA’s Financial Reporting Framework for Small- and Medium-sized Entities (Bonus Section)
Introduction
The Financial Accounting Standards Board Accounting Standards Codification™ (FASB ASC) became effective September 15, 2009. In the future, the FASB will issue Accounting Standards Updates (ASU) instead of the manner in which previous changes to accounting standards were issued.
ASUs
Are not considered to be authoritative in their own right
Serve only to update the Codification,
Provide background information about the guidance, and
Provide the bases for conclusions on the change(s) in the Codification.
Standards included in this update presentation are those which are most important and commonly applicable to financial statements and footnotes of non-public, non-governmental entities. The content also includes a presentation of certain ASUs from the preceding years that indicate disclosure trends and practices for fair presentation frameworks. A fair presentation framework includes all disclosures necessary for a user to understand and evaluate an entity’s financial position and results of operations.
Important Accounting Standards Updates
ASU No. 2010–20
1 ASU No. 2010–20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
Effective
For public entities (issuers),
The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010.
The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
Therefore, for calendar year issuers, the year end information will be presented for 2010, but activity for the year will not be presented until 1st quarter 2011.
For nonpublic entities (non issuers),
The disclosures are effective for annual reporting periods ending on or after December 15, 2011.
Comparative Disclosures
The amendments in this Update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption.
An entity should provide comparative disclosures for those reporting periods ending after initial adoption.
Who Is Affected?
Amendments in this Update apply to all entities, both public and nonpublic.
Amendments in this Update affect all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value.
The extent of the effect depends on the relative significance of financing receivables to an entity’s operations and financial position.
Example: Traditional banking-type institutions, that currently measure a large number of financing receivables at amortized cost, will be affected to a greater extent than brokers and dealers
2 in securities and investment companies that currently measure most financing receivables at fair value. For many commercial and industrial entities, whose financing receivables are primarily short- term trade accounts receivable, the impact will be less significant.
Main Provisions
This Update requires an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:
The nature of credit risk inherent in the entity’s portfolio of financing receivables
How that risk is analyzed and assessed in arriving at the allowance for credit losses
The changes and reasons for those changes in the allowance for credit losses.
To achieve the above objective, an entity should provide disclosures on a disaggregated basis. The amendments in this Update defines two levels of disaggregation—portfolio segment and class of financing receivable.
A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. See ASC 310- 10-55-21 through 55-22.
o Examples of segments:
. Type of financing receivable
. Industry sector of borrower
. Risk rates
Classes of financing receivables generally are a disaggregation of a portfolio segment and are determined on a facts and circumstances basis. See ASC 310-10-55- 22.
The Update provides additional implementation guidance to determine the appropriate level of disaggregation of information. Care must be taken to avoid providing so much disaggregation that significant information is lost in insignificant data versus aggregation at such a high level that does not distinguish significant information.
3 Existing disclosures are amended to require an entity to provide the following disclosures about its financing receivables on a disaggregated basis:
A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method
For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables
The nonaccrual status of financing receivables by class of financing receivables
Impaired financing receivables by class of financing receivables.
This Update requires an entity to provide the following additional disclosures about its financing receivables:
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables
The aging of past due financing receivables at the end of the reporting period by class of financing receivables
The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses
The nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses
Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment
ASU No. 2011–05
4 ASU 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income
Why Issued
The objective of ASU No. 2011–05 is
to improve the comparability, consistency, and transparency of financial reporting and
to increase the prominence of items reported in other comprehensive income.
To meet this objective and to facilitate convergence of U.S. GAAP and IFRS, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update.
The amendments require
o all non-owner changes in stockholders’ equity be presented either of two formats:
in a single continuous statement of comprehensive income or
in two separate but consecutive statements.
. In the two-statement approach, the first statement should present total net income and its components
. The second statement should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.
Who Is Affected
All entities that report items of other comprehensive income, in any period presented, will be affected by the changes in this Update.
Main Provisions
Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a
5 single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present:
o each component of net income along with total net income,
o each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.
Single Continuous Statement –In a single continuous statement, the entity is required to present:
o the components of net income and total net income,
o the components of other comprehensive income and
o a total for other comprehensive income, along with the total of comprehensive income in that statement.
Two–Statement Approach –In the two-statement approach, an entity is required to present
o In the statement of net income, components of net income and total net income
o The statement of other comprehensive income should immediately follow the statement of net income and include
. components of other comprehensive income and
. a total for other comprehensive income, along with a total for comprehensive income.
In either the single continuous statement or the two separate but consecutive statements presentation, the entity is required to
o present on the face of the financial statements reclassification adjustment items that are reclassified from other comprehensive income to net income in the statement(s) where the components of
6 net income and the components of other comprehensive income are presented.
The amendments in this Update do not change
o the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
o the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented.
o how earnings per share is calculated or presented.
Effective Date
The amendments in this Update should be applied retrospectively.
For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.
Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures.
EXAMPLE (Continuous Statement)
ABD Reporting Entity Statement of Comprehensive Income For the Year Ending December 31, 20XX
Revenues $240,000 Expenses1 (50,000)
7 Gain on sale of securities $ 4,000 Unrealized gain on securities reclassified from other comprehensive income1 8,000 12,000
Income from operations before income taxes 202,000 Income tax expense (51,000)
Net income $151,000
Other comprehensive income, before taxes:
Unrealized gain on securities:
Increase in unrealized gain on securities, net of amount reclassified to operating income1 $ 27,000
Defined benefit pension plan: Prior service costs arising during the year (8,000) Net gain arising during the period 1,000 Amortization of prior service cost included in net periodic pension expense1 2,000 (5,000)
Other comprehensive income, before tax 22,000
Tax on items in other comprehensive income2 (5,000) Other comprehensive income, net of tax $ 17,000
Comprehensive income $168,000
ASU 2011-07
ASU 2011-07 Health Care Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities Why Issued Health care entities may recognize revenue for which the ultimate collection of all or a certain portion of the amount billed or billable is not reasonably assured at the time the services are rendered. Stakeholders raised concerns that such accounting practices result in a gross-up of revenue for amounts that are not expected ultimately to be collected.
1 If separate statements are used for presentation of Net Income and Other Comprehensive Income, the amounts reclassified from Other Comprehensive Income must be disclosed in each statement.
2 Individual components of other comprehensive income and the related tax effects must be disclosed in a footnote if not separately presented on the Statement of Comprehensive Income. See ASC 220-10-55-8A- B.
8 Additionally, because health care entities make their own judgments regarding adjustments to revenue and bad debts, those judgments are different from one another and comparability is impaired, making analysis difficult for financial statement users. The objective of this Update is to provide financial statement users with greater transparency about a health care entity’s net revenue and allowance for doubtful accounts. This Update provides information to assist financial statement users in assessing an entity’s sources of net revenue and changes in its allowance for doubtful accounts. The amendments require health care entities to report the provision for bad debts as a reduction from revenue (net of contractual allowances and discounts) on their statement of operations. Who is Affected? The amendments affect:
Entities within the scope of Topic 954, Health Care Entities that recognize significant amounts of patient service revenue at the time services are rendered even though the entities do not assess a patient’s ability to pay.
All other entities would continue to present the provision for bad debts (including bad debts associated with patient service revenue) as an operating expense.
Main Provisions
The amendments would require:
Certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts from an operating expense to a reduction from revenue (net of contractual allowances and discounts).
Those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts.
Disclosures of revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts.
EXAMPLE
Patient Services Revenue, net of contractual discounts and allowances $75,000 Provision for uncollectible receivables (8,300) Net Patient Services Revenue 66,700 Other operating revenue 15,400 Total revenue $82,100
Effective Date
9 . For public entities, the amendments in this Update are effective for fiscal years and interim period within those fiscal years beginning after December 15, 2011. Early adoption is permitted. The amendments related to the presentation of the provision for bad debts in the statement of operations would be applied retrospectively to all prior periods presented. . For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. The disclosures required by the amendments in this Update should be provided for the period of adoption and subsequent reporting periods.
ASU 2011-08
ASU 2011-08 Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment Why Issued
Preparers of private company financial statements expressed concerns to the Board about the cost and complexity of performing the first step of the two-step goodwill impairment test required under Topic 350, Intangibles—Goodwill and Other.
Some financial statement preparers recommended, among other suggestions, that the Board allow an entity to use a qualitative approach to test goodwill for impairment.
Objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impairment by:
Permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.
The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance under Topic 350
Required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one).
10 If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any.
Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.
Who Is Affected Applies to all entities, both public and nonpublic, that have goodwill reported in their financial statements. Main Provisions Options:
An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
If an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4.
If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.
An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.
An entity may resume performing the qualitative assessment in any subsequent period.
11 Examples
This Update include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The examples of events and circumstances are not intended to be all-inclusive, and an entity may identify other relevant events or circumstances to consider in determining whether to perform the first step of the two-step impairment test.
None of the individual examples of events and circumstances are intended to represent standalone events or circumstances that necessarily would require an entity to perform the first step of the goodwill impairment test.
In reaching its conclusion about whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity should consider the extent to which each of the adverse events or circumstances identified could affect the comparison of a reporting unit’s fair value with its carrying amount.
An entity should:
o place more weight on the events and circumstances that most affect a reporting unit’s fair value or the carrying amount of its net assets.
o consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If an entity has a recent fair value calculation for a reporting unit, it also should include as a factor in its consideration the difference between the fair value and the carrying amount in deciding whether the first step of the impairment test is necessary.
The examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment test supersede the previous examples in paragraph 350-20-35-30 of
12 events and circumstances that an entity should consider when testing goodwill for impairment between annual tests.
The examples of events and circumstances also supersede the previous examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test, used to measure the amount of the loss, if any. An entity no longer is permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted by paragraph 350-20-35-29.
Effective Date Effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
ASU 2011-09
ASU 2011-09 Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80) Disclosure about an Employer’s Participation in a Multiemployer Plan
Why Issued
The FASB received comments from various constituents on the perceived lack of transparency about an employer’s participation in a multiemployer plan.
The amendments in this Update requires additional disclosures of an employer’s participation in a multiemployer postretirement plan (for example, pension or retiree healthcare).
Who is Affected
13 The amendments in this Update apply to all nongovernmental entities that participate in multiemployer plans.
The amendments in this Update do not apply to plans that do not meet the definition of a multiemployer plan as defined in the Master Glossary, including multiple-employer plans that are, in substance, aggregations of single-employer plans combined to allow participating employers to pool plan assets for investment purposes or to reduce the costs of plan administration. Those plans ordinarily do not involve collective-bargaining agreements.
Main Provisions Under the amendments in this Update, an employer would be required to provide, separately for multiemployer pension and multiemployer other postretirement benefit plans, additional quantitative and qualitative disclosures about its participation in a multiemployer plan as defined in the Master Glossary. One aspect of a multiemployer plan, among many others, is that assets contributed by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. The proposed amendments on disclosure are intended to provide information about the following:
The multiemployer plans with which the employer is involved
The employer’s participation in the multiemployer plan(s)
Any effects on the employer’s cash flows from its participation in the multiemployer plan(s). The proposed amendments would not change
The current recognition and measurement guidance for an employer’s participation in a multiemployer plan, which requires that an employer recognize as pension or other postretirement benefit cost its required contribution to the plan for the period and recognize a liability for any unpaid contributions.
The requirement that an employer apply the provisions for contingencies in Topic 450 if an obligation due to withdrawal from a multiemployer plan is either probable or reasonably possible. Effective Date
14 For public entities,
effective for annual periods for fiscal years ending after December 15, 2011.
early adoption permitted. For nonpublic entities,
effective for annual periods for fiscal years ending after December 15, 2012,
early adoption permitted.
ASU No. 2011–11
ASU No. 2011–11 Accounting Standards Update Balance Sheet (Topic 210) Offsetting was issued December 2011.
Main Proposals An entity is required to offset (that is, present as a single net amount in the statement of financial position) a recognized eligible asset and a recognized eligible liability when
it has an unconditional and legally enforceable right of setoff and
intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously (the “offsetting criteria”).
Objective of the Requirements The proposals:
clarify that the offsetting criteria would apply whether the right of setoff arises from a bilateral arrangement or from a multilateral arrangement (that is, between three or more parties).
clarify that a right of setoff must be legally enforceable in all circumstances (including default or bankruptcy of a counterparty) and that its exercisability must not be contingent on a future event.
require an entity to disclose information about offsetting and related arrangements (such as collateral agreements) to enable users of its
15 financial statements to understand the effect of those arrangements on its financial position.
The requirements establish a principle for offsetting eligible assets and eligible liabilities that ensures that a recognized eligible asset and a recognized eligible liability are offset only if:
On the basis of the rights and obligations associated with the eligible asset and eligible liability, the entity has, in effect, a right to or obligation for only the net amount (that is, the entity has, in effect, a single net eligible asset or eligible liability); and
The amount, resulting from offsetting the eligible asset and eligible liability, reflects an entity’s expected future cash flows from settling two or more separate eligible instruments. In all other circumstances, an entity’s recognized eligible assets and recognized eligible liabilities are presented in the statement of financial position separately from each other, according to their nature as assets or liabilities.
Eligible assets and eligible liabilities will be presented in the financial statements in a manner that provides information that is useful for assessing:
The entity’s ability to generate cash in the future (the prospects for future net cash flows)
The nature and amounts of the entity’s economic resources and claims against the entity
The entity’s liquidity and solvency.
Effective Date
An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
ASU 2012-02
Accounting Standards Update 2012-02 Intangibles—Goodwill and Other (Topic 350)Testing Indefinite-Lived Intangible Assets for Impairment was issued July 2012.
Why Issued
16 The objective of the amendments in this Update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.
The amendments permit:
An entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles— Goodwill and Other—General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.
Previous guidance in Subtopic 350-30 required an entity to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount.
If the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess.
In accordance with the amendments in this Update, an entity will have an option to forgo annual calculation of the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired.
Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in Update 2011-08.
Who Is Affected
The amendments in this Update apply to all entities, both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements.
17 Main Provisions
An entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.
If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.
If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30.
. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. . An entity will be able to resume performing the qualitative assessment in any subsequent period. . In conducting a qualitative assessment, an entity should:
consider the extent to which relevant events and circumstances, both individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. consider whether there have been changes to the carrying amount of the indefinite-lived intangible asset when evaluating whether it is more likely than not that the indefinite-lived intangible asset is impaired.
consider positive and mitigating events and circumstances that could affect its determination of whether it is more likely than not that the indefinite- lived intangible asset is impaired.
Refer to the examples in paragraph 350-30-35-18B(a) through (f) for guidance about the types of events and circumstances that it should consider in evaluating whether it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity has made a recent fair value calculation that indicated a difference between the fair value and the then carrying amount of an indefinite-lived intangible asset, that difference also should be included as
18 a factor in considering whether it is more likely than not that the indefinite-lived intangible asset is impaired.
The examples referred to above include:
Cost factors that may impact future cash flows and affect significant inputs for fair value measurement.
Financial performance such as negative or declining cash flows.
Legal, regulatory, contractual, political, business or other factors, including specific-asset factors used to determine fair value.
Other relevant entity-specific events (e.g., changes in management, key personnel, strategy, customers, litigation or potential bankruptcy.)
Industry and market considerations
Macro economic conditions such as deterioration of general economic conditions, limitations on accessing capital or other developments in equity or credit markets.
Effective Date
Effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
ASU No. 2012–05
Accounting Standards Update Statement of Cash Flows (Topic 230) Not- for-Profit Entities: Classification of the Sale of Donated Securities in the Statement of Cash Flows was issued October 2012.
Why Issued
19 The objective is to address the diversity in practice in classification of cash receipts arising from the sale of certain donated securities in the statement of cash flows of not-for-profit entities (NFPs).
Some NFPs classify the cash receipts arising from the sale of donated securities as investing cash inflows.
Other entities classify the cash receipts from the sale of donated securities as either operating cash inflows or financing cash inflows, consistent with their treatment of inflows arising from cash contributions. Who is Affected
The amendments would affect any entity within the scope of Topic 958, Not-for-Profit Entities, that accepts donated securities.
Main Provisions
An NFP would be required to classify cash receipts from the sale of donated securities consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated securities:
that upon receipt are directed for sale and
for which the NFP has the ability to avoid significant investment risks and rewards through near immediate conversion into cash.
Accordingly the cash receipts from the sale of those securities would be classified as cash inflows from operating activities, Alternatively, if the donor restricted the use of the contributed resources to long- term purposes, those cash receipts would be classified as cash flows from financing activities.
Otherwise, receipts from the sale of donated securities would be classified as cash flows from investing activities by the NFP.
Effective Date
20 Effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, 2013.
Retrospective application to all prior periods presented upon the date of adoption is permitted.
Early adoption from the beginning of the fiscal year of adoption is permitted.
For fiscal years beginning before October 22, 2012, early adoption is permitted only if an NFP’s financial statements for those fiscal years and interim periods within those years have not yet been made available for issuance.
ASU 2013-02 (Topic 825)
ASU 2013-02 Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income was issued February 2013
Why Issued
The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income.
For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts.
Who Is Affected
The amendments in this Update apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods.
Nonpublic entities are required to comply with all the requirements of the amendments for annual reporting periods.
Not-for-profit entities that report under the requirements of Subtopic 958-205, Not-for-Profit Entities—Presentation of
21 Financial Statements, are excluded from the scope of these amendments.
Main Provisions
The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements.
The amendments require an entity . to provide information about the amounts reclassified out of accumulated other comprehensive income by component. . to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
Effective
For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012.
For nonpublic entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013.
Early adoption is permitted.
ASU 2013-06 (Topic 958)
Accounting Standards Update 2013-06 Services Received from Personnel of an Affiliate issued April 2013.
Why Issued? The objective of this Update is to specify the guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate.
Who is Affected?
This Update applies to not-for-profit entities, including not-for-profit, business- oriented health care entities, that receive services from personnel of an affiliate that directly benefit the recipient entity and for which the affiliate does not charge.
22 Main Provisions
This Update requires a recipient not-for-profit entity to recognize all services received from personnel of an affiliate that directly benefit the entity.
Those services should be measured at the cost recognized by the affiliate.
If such cost over-states or understates the value of such services, the recipient entity may use either the cost or the fair value of the services.
Effective
This amendment is effective for fiscal years beginning after June 15, 2014.
Early adoption is permitted.
ASU No. 2013-07
ASU No. 2013-07 Presentation of Financial Statements (Topic 205) Liquidation Basis of Accounting was issued April 2013.
Main Provisions
The amendments: Require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The ASU says that liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either
. a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or . a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy).
If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting
23 only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception.
Requires financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation.
. The entity should include in its presentation of assets any items it had not previously recognized under U.S.GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks).
. An entity should recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those liabilities.
The entity:
. Should not anticipate that it will be legally released from being the primary obligor under those liabilities, either judicially or by creditor(s).
. Is required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities.
Effective
The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent.
Early adoption is permitted.
Entities that use the liquidation basis of accounting as of the effective date in accordance with other Topics (for example, terminating employee benefit plans) are not required to apply the amendments. Instead, those entities should continue to apply the guidance in those other Topics until they have completed liquidation.
24 ASU 2013-11
ASU 2013–11 Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ( a consensus of the FASB Emerging Issues Task Force)
Why Issued Topic 740, Income Taxes, before this amendment, did not include explicit guidance on the presentation in the statement of financial position of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryfoward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances.
The objective of the amendments in Update is to eliminate that diversity in practice.
Main Provisions
An unrecognized tax benefit, or a portion of an unrecognized tax benefit, would be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, except as follows:
To the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit would be presented in the statement of financial position as a liability. No new recurring disclosures would be required.
Effective
Effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.
For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.
Early adoption is permitted.
The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
25 ASU 2014-02
Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill
Why Issued
The Private Company Council (PCC) obtained feedback from private company stakeholders that the benefits of current accounting for goodwill after initial recognition did not justify the related costs of application. This ASU, therefore, focuses on user- relevance and cost-benefit considerations as justification for alternative accounting treatment.
Who is Affected
The amendments apply to all entities except for public business entities, non-profit entities and employee benefit plans. Future projects will focus on application to these other entities.
Main Provisions
A non-public entity may elect an accounting alternative to amortize goodwill on a straight-line basis over ten years, or less if another useful life is more appropriate (such as when the original reasons for acquiring goodwill change causing limits on its value and recovery).
An entity electing this alternative must also elect an accounting policy to test goodwill for impairment whenever a triggering event occurs that indicates the fair value of the reporting entity or component unit may be below its carrying amount. The qualitative method in ASU 2011-08 may be used when a triggering event occurs.
Effective
When this alternative is elected it should be applied prospectively to goodwill at the beginning of the period it is adopted and new goodwill acquired in annual periods beginning after December 15, 2015. Early application is permitted in any annual or interim period for which financial statements have not been made available for issue.
ASU 2014-03
Derivatives and Hedging (Topic 815), Accounting for Certain Receive- Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach
Why Issued
Because private companies may find it difficult to obtain fixed-rate borrowing, some enter into receive-variable, pay-fixed interest rate swaps to economically convert variable-rate borrowing into fixed-rate borrowing. Interest rate swaps are derivatives for
26 which assets and liabilities are required to be presented at fair values on an entity’s balance sheet. Hedge accounting can be elected to mitigate the volatility of income statement effects. Because of the difficulty of applying hedge accounting, many companies do not utilize the election, thereby causing income statement volatility. This amendment provides an additional hedge accounting alternative for certain types of swaps entered into for the purpose of converting variable-rate borrowing to fixed-rate borrowing.
Who is Affected
This amendment applies to all entities, except for public business entities, non-profit entities and employee benefit plans.
Main Provisions
Under this approach, interest expense will be similar to an amount from fixed-rate borrowing. An entity may assume no ineffectiveness for qualifying swaps in a hedging relationship under Topic 815. Under this simplified hedge accounting approach, a private company may elect to measure the designated swap at settlement value instead of fair value, the primary difference being non-performance risk is not considered in determining settlement value. One way of determining present value is to use a present value calculation of the swap’s estimated cash flows not adjusted for non-performance risk.
Effective
The simplified hedge accounting approach will be effective for annual periods beginning after December 15, 2014. Early adoption is permitted.
ASU 2014-07
Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
Why Issued?
The Private Company Council (PCC) added this Issue to its agenda in response to feedback from private company stakeholders indicating that the benefits of applying variable interest entities (VIE) guidance to a lessor entity under common control do not justify the related costs. Private company stakeholders stated that, generally, a common owner establishes a lessor entity separate from the private company lessee for tax, estate-planning, and legal-liability purposes—not to structure off-balance-sheet debt arrangements.
Who Is Affected?
The amendments under the heading “Accounting Alternative” apply to all entities other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.
27 What Are the Main Provisions?
The amendments permit a private company lessee (the reporting entity) to elect an alternative not to apply VIE guidance to a lessor entity if
(a) the private company lessee and the lessor entity are under common control, (b) the private company lessee has a lease arrangement with the lessor entity, (c) substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities (including supporting leasing activities) between those two entities, and (d) if the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company, then the principal amount of the obligation at inception of such guarantee or collateral arrangement does not exceed the value of the asset leased by the private company from the lessor entity.
The accounting alternative is an accounting policy election that, when elected, should be applied by a private company lessee to all current and future lessor entities under common control that meet the criteria for applying this approach.
Under the alternative, a private company lessee would not be required to provide the VIE disclosures about the lessor entity. Rather, the private company lessee would disclose
(1) the amount and key terms of liabilities recognized by the lessor entity that expose the private company lessee to providing financial support to the lessor entity and (2) a qualitative description of circumstances not recognized in the financial statements of the lessor entity that expose the private company lessee to providing financial support to the lessor entity.
Effective
If elected, the accounting alternative should be applied retrospectively to all periods presented. The alternative will be effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.
ASU 2014-08
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
Why Issued?
28 This amendment clarifies the businesses and activities that qualify for discontinued operations presentation by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations.
Who Is Affected?
The amendments in this Update affect an entity that has either of the following:
A component of an entity that either is disposed of or meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. A business or nonprofit activity that, on acquisition, meets the criteria in paragraph 205-20-45-1E to be classified as held for sale.
What Are the Main Provisions?
The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity.
A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs:
The component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. The component of an entity or group of components of an entity is disposed of by sale. The component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).
Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity (see paragraphs 205-20-55-83 through 55-101 for examples). A business or nonprofit activity that, on acquisition, meets the criteria in paragraph 205-20-45-1E to be classified as held for sale also is a discontinued operation.
A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
A nonprofit activity is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or
29 services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not- for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit entity.
The amendments in this Update require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the statement of financial position and certain additional disclosures about the pre-tax profit or loss for periods presented, information about operating and investing cash flows, profit or loss attributable to non-controlling interests and other reconciliations of disclosed amounts to financial statement classifications.
Effective
Non-public and non-profit entities should apply the amendments in this Update prospectively to both of the following:
All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015.
An entity should not apply the amendments in this Update to a component of an entity, or a business or nonprofit activity, which is classified as held for sale before the effective date even if the component of an entity, or business or nonprofit activity, is disposed of after the effective date.
Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.
ASU 2014-09 Revenue Recognition (Topic 606)--Revenue from Contracts with Customers
Why Issued
Revenue is a crucial number to users of financial statements in assessing an entity’s financial performance and position. However, revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs), and both sets of requirements need improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions.
30 Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:
. Remove inconsistencies and weaknesses in existing revenue requirements.
. Provide a more robust framework for addressing revenue issues.
. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
. Provide more useful information to users of financial statements through improved disclosure requirements.
. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
Who is Affected
The guidance in this Update
Affects any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts).
Supersedes most of the revenue recognition requirements in Topic 605 (and related guidance) in U.S. GAAP.
Supersedes IASs 11 and 18 (and related Interpretations) In IFRSs.
Amends the existing requirements for the recognition of a gain or loss on the transfer of some nonfinancial assets that are not an output of an entity’s ordinary activities (for example, property, plant, and equipment within the scope of Topic 360, IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property) to be consistent with the proposed recognition and measurement guidance in this proposed Update.
Main Provisions
31 The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity would apply all of the following steps:
Step 1: Identify the contract with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Effective Dates
Public entities—Annual and interim reporting periods beginning after December 15, 2016. Non-Public Entities—Annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018.
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
Why Issued?
The purpose of this Update is to improve financial reporting and the cost and complexity of the incremental reporting requirements for development stage entities. This Update also eliminates an exception for development stage entities in determining whether an entity is a variable interest entity.
Who is Affected?
This Update affects entities that are development stage entities under U.S. GAAP. A development stage entity is one that devotes substantially all of its efforts to establishing a new business for which principal operations have not commenced and/or operations have commenced with no significant revenues.
Main Provisions
32 This Update removes the definition of a development stage entity from the U.S. GAAP Master Glossary thereby removing its distinction from other reporting entities. In addition, the inception-to-date information and other disclosure requirements are eliminated.
Effective Dates
Public entities—annual and interim periods beginning after December 15, 2014. Non-public entities—annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015.
PROPOSED ACCOUNTING STANDARDS UPDATE LEASES (Topic 840)
SUMMARY OF TENTATIVE DECISIONS REACHED TO DATE (As of June 18, 2014) from www.fasb.org
Accounting Models
Lessee Accounting Model
The FASB decided on a dual approach for lessee accounting, with lease classification determined in accordance with the principle in existing lease requirements (that is, determining whether a lease is effectively an installment purchase by the lessee). Under this approach, a lessee would account for most existing capital/finance leases as Type A leases (that is, recognizing amortization of the right-of-use (ROU) asset separately from interest on the lease liability) and most existing operating leases as Type B leases (that is, recognizing a single total lease expense). Both Type A leases and Type B leases result in the lessee recognizing a ROU asset and a lease liability.
The IASB decided on a single approach for lessee accounting. Under that approach, a lessee would account for all leases as Type A leases (that is, recognizing amortization of the ROU asset separately from interest on the lease liability).
Lessor Accounting Model
The Boards decided that a lessor should determine lease classification (Type A versus Type B) on the basis of whether the lease is effectively a financing or a sale, rather than an operating lease (that is, on the concept underlying existing U.S. GAAP and on IFRS lessor accounting). A lessor would make that determination by assessing whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset. In addition, the FASB decided that a lessor should be precluded from recognizing selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the
33 forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.
Lessor Type A Accounting
The Boards decided to eliminate the receivable and residual approach proposed in the May 2013 Exposure Draft. Instead, a lessor will be required to apply an approach substantially equivalent to existing IFRS finance lease accounting (and U.S. GAAP sales type/direct financing lease accounting) to all Type A leases.
Scope
Definition of a Lease
The Boards directed the staff to provide them with drafting and examples for their review on the basis of the staff recommendations that demonstrate how the proposed definition would be applied.
The staff recommended the following:
1. Retain the principles in the 2013 Exposure Draft supporting the definition of a lease that require an entity to determine whether a contract contains a lease by assessing whether: a. Fulfillment of the contract depends on the use of an identified asset; and b. The contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration (that is, the customer has the ability both to direct the use of the identified asset and to derive the economic benefits from use of that asset during the period of use). 2. Clarify the following regarding whether fulfillment of the contract depends on the use of an identified asset: a. Fulfillment depends on the use of an identified asset when the supplier has no practical ability to substitute an alternative asset or the supplier would not benefit from substituting an asset; and b. A customer should presume that fulfillment of the contract depends on the use of an identified asset if it is impractical for the customer to determine either (1) whether the supplier has the practical ability to substitute an alternative asset or (2) whether the supplier would benefit from the substitution. 3. Regarding the right to control the use of an identified asset: a. Provide additional guidance on how to determine which decisions most significantly affect the economic benefits to be derived from use of the identified asset and which party to the contract has the ability to most significantly affect those economic benefits, particularly when the supplier and the customer both have decision-making rights; and b. Remove the guidance that was proposed in the 2013 Exposure Draft on assets that are incidental to the delivery of services.
34 Small-Ticket Leases
The Boards decided that the leases guidance should not include specific requirements on materiality.
The Boards also decided to permit the leases guidance to be applied at a portfolio level by lessees and lessors. The FASB decided to include the portfolio guidance in the basis for conclusions; the IASB decided to include the portfolio guidance in the application guidance.
The IASB decided to provide an explicit recognition and measurement exemption for leases of small assets for lessees.
Short-Term Leases (Lessee)
The Boards decided to retain the recognition and measurement exemption for a lessee’s short-term leases. The Boards also decided that the short-term lease threshold should remain at 12 months or less. Additionally, the Boards decided to change the definition of a short-term lease so that it is consistent with the definition of lease term.
Measurement
Lease Term and Purchase Options
The Boards decided that, when determining the lease term, an entity should consider all relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. An entity should include such an option in the lease term only if it is reasonably certain that the lessee will exercise the option having considered the relevant economic factors. Reasonably certain is a high threshold substantially the same as reasonably assured in existing U.S. GAAP. The Boards decided that a lessee should reassess the lease term only upon the occurrence of a significant event or a significant change in circumstances that are within the control of the lessee.
The Boards decided that a lessor should not be required to reassess the lease term.
The Boards decided that an entity should account for purchase options in the same way as options to extend, or not to terminate, a lease.
Variable Lease Payments
The Boards decided that only variable lease payments that depend on an index or a rate should be included in the initial measurement of lease assets and lease liabilities and that an entity should measure those payments using the index or rate at lease commencement.
The FASB decided that a lessee should reassess variable lease payments that depend on an index or a rate only when the lessee remeasures the lease liability for other reasons
35 (for example, because of a reassessment of the lease term).
The IASB decided that a lessee should reassess variable lease payments that depend on an index or a rate when the lessee remeasures the lease liability for other reasons (for example, because of a reassessment of the lease term) and when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect).
The Boards decided that a lessor should not be required to reassess variable lease payments that depend on an index or a rate.
In-Substance Fixed Payments
The Boards decided (1) to retain the principle that variable lease payments that are in- substance fixed payments should be included in the definition of lease payments and provide additional clarifying guidance and (2) to note in the Basis for Conclusions that the concept that some variable lease payments are in-substance fixed payments exists under current practice.
Discount Rate
With respect to the determination of the discount rate, the Boards decided:
1. To clarify in the implementation guidance what “value” refers to in the definition of the lessee’s incremental borrowing rate, but otherwise make no changes to the definition in the May 2013 Exposure Draft. 2. To describe the rate the lessor charges the lessee as the rate implicit in the lease, consistent with existing lessor guidance. 3. To include initial direct costs of the lessor in determining the rate implicit in the lease.
With respect to reassessment of the discount rate, the Boards decided:
1. To require a lessee to reassess the discount rate only when there is a change to either the lease term or the assessment of whether the lessee is (or is not) reasonably certain to exercise an option to purchase the underlying asset. 2. Not to require a lessor to reassess the discount rate.
Lease Modifications and Contract Combinations
The Boards decided to define a lease modification as any change to the contractual terms and conditions of a lease that was not part of the original terms and conditions of the lease and that the substance of the modification should govern over its form.
The Boards decided that both a lessee and a lessor should account for a lease modification as a new lease, separate from the original lease, when (1) the lease grants
36 the lessee an additional right-of-use not included in the original lease and (2) the additional right-of-use is priced commensurate with its standalone price (in the context of that particular contract).
For lease modifications that are not accounted for as separate new leases, the Boards decided that:
1. When a lease modification results in a change in the scope or consideration of the lease, a lessee should remeasure the lease liability using a discount rate determined at the effective date of the modification. For modifications that increase the scope of, or change the consideration paid for, the lease, the lessee should make a corresponding adjustment to the right-of-use asset. For modifications that decrease the scope of the lease, the lessee should decrease the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease and should recognize a gain or a loss on a proportionate basis to the decrease in scope. 2. A lessor should account for (a) modifications to a Type B lease as, in effect, a new lease from the effective date of the modification, considering any prepaid or accrued lease rentals relating to the original lease as part of the lease payments for the modified lease and (b) modifications to a Type A lease in accordance with IFRS 9, Financial Instruments (IFRS), or Topic 310, Receivables (U.S. GAAP).
The Boards decided to include contract combination guidance in the final leases standard, similar to that which will be included in the forthcoming revenue recognition standard, that would indicate when two or more contracts should be considered a single transaction.
Separating Lease and Nonlease Components
The Boards decided to retain guidance similar to that proposed in the 2013 Exposure Draft for both lessees and lessors on identifying separate lease components.
The Boards decided to retain guidance similar to that proposed in the 2013 Exposure Draft for lessors on separating lease components from nonlease components and allocating consideration in the contract to those components. That is, a lessor should apply the guidance in the forthcoming revenue recognition standard on allocating the transaction price to separate performance obligations. A lessor also should reallocate the consideration in a contract when there is a contract modification that is not accounted for as a separate, new contract.
The Boards decided to change the proposals in the 2013 Exposure Draft for lessees regarding separating lease components from nonlease components and allocating consideration in a contract to those components as follows:
1. A lessee should separate lease components from nonlease components unless it applies the accounting policy election discussed below.
37 2. A lessee should allocate the consideration in a contract to the lease and nonlease components on a relative standalone price basis. Activities (or costs of the lessor) that do not transfer a good or service to the lessee are not components in a contract. A lessee also should reallocate the consideration in a contract when (a) there is a reassessment of either the lease term or a lessee’s purchase option or (b) there is a contract modification that is not accounted for as a separate, new contract. 3. A lessee should use observable standalone prices, if available, and otherwise it would use estimates of the standalone price for lease and nonlease components (maximizing the use of observable information).
The Boards decided to permit a lessee, as an accounting policy election by class of underlying asset, to not separate lease components from nonlease components. Instead, a lessee should account for lease and nonlease components together as a single lease component.
Initial Direct Costs
The Boards decided that only incremental costs should qualify as initial direct costs.
The Boards decided that initial direct costs should include only incremental costs that an entity would not have incurred if the lease had not been obtained (executed) (for example, commissions or payments made to existing tenants to obtain the lease).
The Boards decided that both lessees and lessors should apply the same definition of initial direct costs.
The Boards decided the following regarding the accounting for initial direct costs:
1. A lessor in a Type A lease (except those who recognize selling profit at lease commencement) should include initial direct costs in the initial measurement of the lease receivable by taking account of those costs in determining the rate implicit in the lease. A lessor who recognizes selling profit at lease commencement should recognize initial direct costs associated with a Type A lease as an expense at lease commencement. 2. A lessor in a Type B lease should recognize initial direct costs as an expense over the lease term on the same basis as lease income. 3. A lessee should include initial direct costs in the initial measurement of the right- of-use asset and amortize those costs over the lease term.
Subleases
The Boards decided that an intermediate lessor (that is, an entity that is both a lessee and a lessor of the same underlying asset) should account for a head lease and a sublease as two separate contracts (accounting for the head lease in accordance with the lessee accounting proposals and the sublease in accordance with the lessor accounting
38 proposals), unless those contracts meet the contract combinations guidance adopted by the Boards at the April 2014 joint Board meeting.
The FASB decided that, when classifying a sublease, an intermediate lessor should determine the classification of the sublease with reference to the underlying asset (for example, the item of property, plant, and equipment that is the subject of the lease), rather than with reference to the right-of-use (ROU) asset arising from the head lease.
The IASB decided that, when classifying a sublease, an intermediate lessor should determine the classification of the sublease with reference to the ROU asset arising from the head lease.The Boards decided that an intermediate lessor should not offset lease assets and lease liabilities arising from a head lease and a sublease that do not meet the respective IFRS and GAAP financial instruments requirements for offsetting.
The Boards decided that an intermediate lessor should not offset lease income and lease expense related to a head lease and a sublease, unless it recognizes sublease income as revenue and acts as an agent (assessed in accordance with the “principal-agent” guidance in the recently published standard on revenue from contracts with customers).
Presentation
Balance Sheet Presentation
Lessee ROU Asset:
The FASB decided that a lessee should either present as separate line items on the balance sheet or disclose in the notes Type A ROU assets (which are effectively purchases of the underlying asset) and Type B ROU assets. If a lessee does not present Type A ROU assets or Type B ROU assets as separate line items on the balance sheet, the lessee should disclose in the notes which line items in the balance sheet include Type A ROU assets and Type B ROU assets. A lessee is prohibited from presenting Type A ROU assets within the same line item as Type B ROU assets.
The IASB decided that a lessee should either present as a separate line item on the balance sheet or disclose in the notes ROU assets. If a lessee does not present ROU assets as a separate line item on the balance sheet, the lessee should present ROU assets within the same line item as the corresponding underlying assets would be presented if they were owned, and disclose in the notes which line item in the balance sheet includes ROU assets.
Lessee Lease Liability:
The FASB decided that a lessee should either present as separate line items on the balance sheet or disclose in the notes Type A lease liabilities and Type B lease liabilities. If a lessee does not present Type A lease liabilities or Type B lease liabilities as separate line items on the balance sheet, the lessee should disclose in the notes which line items in
39 the balance sheet include Type A lease liabilities and Type B lease liabilities. A lessee is prohibited from presenting Type A lease liabilities within the same line item as Type B lease liabilities.
The IASB decided that a lessee should either present as a separate line item on the balance sheet or disclose in the notes lease liabilities. If a lessee does not present lease liabilities as a separate line item on the balance sheet, the lessee should disclose in the notes which line item in the balance sheet includes lease liabilities.
Cash Flow Presentation
Lessee:
The FASB decided to retain the guidance in the 2013 Exposure Draft requiring a lessee to classify:
1. Cash payments for the principal portion of the lease liability arising from Type A leases within financing activities 2. Cash payments for the Interest portion of the lease liability arising from Type A leases within operating activities 3. Cash payments arising from Type B leases within operating activities.
The IASB decided to retain the guidance in the 2013 Exposure Draft for Type A leases requiring a lessee to classify:
1. Cash payments for the principal portion of the lease liability within financing activities 2. Cash payments for the interest portion of the lease liability in accordance with the requirements relating to interest paid in IAS 7, Statement of Cash Flows.
The IASB also decided to require a lessee to disclose a single figure for lease cash outflows elsewhere in the financial statements.
Lessor:
The Boards decided to retain the guidance in the 2013 Exposure Draft requiring a lessor to classify cash receipts from leases within operating activities.
Disclosures - Lessee
Short-Term Leases
The Boards decided to require disclosure of the amount of expense related to short-term leases recognized in the reporting period as well as any qualitative disclosures the Boards decide upon for leases generally. If the short-term lease expense does not reflect the
40 lessee’s short-term lease commitments, a lessee should disclose that fact and the amount of its short-term lease commitments.
Proposed Accounting Standards Update Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Going Concern Presumption—Proposed Update as of April 1, 2014 (from fasb.org)
Decisions Reached at Last Meeting (March 26, 2014)
The Exposure Draft proposed that entities would begin disclosures of going concern uncertainties when certain early-warning disclosure criteria were met. In addition to early-warning disclosures, SEC filers would assess whether there is substantial doubt about the entity’s ability to continue as a going concern for a period of 24 months after the balance sheet date.
In light of the feedback received on the Exposure Draft, the Board decided not to require the proposed early-warning disclosures. Instead, the Board decided to pursue an approach that would require disclosures when there is substantial doubt similar to disclosures provided today under existing auditing standards.
Definition of Going Concern Presumption
The Board decided not to define the term going concern presumption, but rather to specify that the going concern basis of accounting would be used until an entity’s liquidation is imminent, which is consistent with the provisions of Subtopic 205-30 on the liquidation basis of accounting.
Substantial Doubt Definition, Assessment Period, and Frequency of Assessment
The Board decided that the definition of substantial doubt would incorporate a likelihood component defined using the term probable, as used in Topic 450 on contingencies. In addition, the Board decided that the assessment period for substantial doubt would be one year from the date the financial statements are issued (or, for nonpublic entities, the date financial statements are available for issuance). The Board affirmed the proposed Update’s requirement to assess substantial doubt at each annual and interim reporting period.
Information to Be Assessed Including Management’s Plans
The Board decided that information about conditions and events would be assessed as of the financial statement issuance date (or, for nonpublic entities, the date financial statements are available for issuance). The Board also decided that management should consider the mitigating effect of its plans to the extent it is probable that:
1. Those plans will alleviate the adverse conditions within the assessment period.
41 2. Those plans will be effectively implemented.
The Board asked that the staff draft the relevant provisions of the standard with respect to information to be assessed and management’s plans for the Board’s review before its next meeting.
Disclosures in Periods When Substantial Doubts Exist
The Board decided that when there is substantial doubt about an entity’s ability to continue as a going concern, the notes to the financial statements should disclose:
1. A statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern 2. The principal conditions and events giving rise to substantial doubt 3. Management’s evaluation of the significance of those conditions and events 4. Any mitigating conditions and events including management’s plans.
Disclosures When Substantial Doubt Is Alleviated
The Board decided to require management to disclose in the financial statements when substantial doubt about an entity’s ability to continue as a going concern has been alleviated primarily by management’s plans. Those disclosures would include the principal conditions and events that initially raised the substantial doubt, and management’s plans that alleviated the substantial doubt, unless the information is disclosed elsewhere in the financial statements.
Nonpublic Entities
The Board decided that the disclosures would apply to both public entities and nonpublic entities.
(PCC) (Excerpted from http://www.fasb.org/pcc/aboutus)
About the PCC
What are the PCC’s responsibilities?
The Private Company Council (PCC) has two principal responsibilities:
1. The PCC and the Financial Accounting Standards Board (FASB), working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. Generally Accepted Accounting Principles (GAAP) are warranted for private companies. Based on those criteria, the PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements.
42 2. The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.
How does the PCC and the FASB work together?
Operating Procedures. The PCC and the FASB, working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. GAAP are warranted for private companies. Based on those criteria, the PCC will review and propose alternatives within U.S. GAAP to address the needs of users of private company financial statements.
First, the PCC will conduct a review of existing U.S. GAAP and identify standards that require reconsideration. The PCC will vote on proposed alternatives, which must be approved by a two-thirds vote of all PCC members.
Proposed modifications or exceptions to U.S. GAAP approved by the PCC will be submitted to the FASB for a decision on endorsement. If endorsed by a simple majority of FASB members, the proposed modifications will be exposed for public comment. Following receipt of public comment, the PCC will consider changes to the original decision and take a final vote. If approved, the final decision then will be submitted to the FASB for a final decision on endorsement.
If the FASB does not endorse a proposed or final modification or exception, the FASB Chairman will provide to the PCC Chair, within a reasonable period of time, a written document describing the reason(s) for the non-endorsement. The document also will include possible changes for the PCC to consider that could result in a decision by the FASB to endorse. This document will become part of the FASB’s public record.
What are the key elements to the PCC’s operating procedures?
The complete report establishing the PCC, including background materials, key discussion issues considered by the Trustees, and PCC responsibilities and operating procedures is available in this report and in this announcement. (See link above)
History of Establishing the PCC
Background and history of the events leading up to the creation of the PCC, including the final plan, comment letters, public roundtables, and the initial FAF plan to create a private company standards council.
43 AICPA Financial Reporting for Small- and Medium-Sized Entities
The AICPA has released a new Financial Reporting Framework for Small- and Medium-sized Entities (FRF for SMEs).
FRF for SMEs is designed to be a Framework for management and other users of small– and medium–sized entities private company financial statements where U.S. GAAP financial statements are not required or necessary.
The self–contained framework may be used by small–and medium–sized entities when U.S. GAAP financial statements are not required or needed.
The framework is based on a blend of accrual income tax methods and other traditional methods of accounting (commonly referred to as other comprehensive basis of accounting or OCBOA).
FRF for SMEs:
Has been developed for smaller– to medium–sized, owner–managed, for–profit entities where:
Reliable financial statements are needed:
Internal or external users have direct access to the owner–manager
GAAP financial statements are not required May be used by owner–managers who rely on a set of financial statements:
to confirm their assessments of performance, what they own and what they owe
to understand their cash flows
Authority for FAF for SMEs:
The AICPA has no authority to require the use of the FRF for SMEs for any entity.
The FRF will have no effective date
An owner–manager can decide to use the FRF
The FRF for SMEs is not intended for use by nonprofit organizations, but those organizations are not precluded from using it.
FRF for SMEs:
44 Is a standalone, self–contained alternative framework for accounting (formerly known as other comprehensive basis of accounting) intended for use by privately held small–to medium–sized entities (SMEs) in preparing their financial statements.
Draws upon a blend of accrual income tax methods and other traditional methods of accounting.
Was developed by a working group of AICPA members and staff with years of experience serving small–to medium–sized owner–managed entities
Small – and medium –sized entities would use FRF for SMEs because: FRF for SMEs will be less complicated and a less costly system of accounting for SMEs that do not need U.S. GAAP financial statements
A cost–beneficial solution for owner–managers and others who need financial statements prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny.
Accounting principles comprising the Framework are intended to be the most appropriate for the preparation of SME financial statements based on the needs of the financial statement users and cost–benefit considerations.
Will be responsive to the well–documented issues and concerns stakeholders currently encounter when preparing financial statements for SMEs.
FRF FOR SMEs DIFFERENCES FROM U.S. GAAP
The focus in this section will be on some of the areas of differences in the FRF for SMEs from U.S. generally accepted accounting principles. For each area, brief descriptions of the disclosure requirements for the FRF for SMEs are included.
Inventories
U.S. GAAP: Inventories are valued under FIFO, LIFO and average cost methods at the lower of cost or market. While market is usually considered replacement cost it is not permitted to exceed the ceiling of net realizable value (selling price less costs of completion and disposal) or be less than the floor of net realizable value (ceiling of net realizable value less a normal profit margin).
FRF for SMEs: Inventories are valued at the lower of cost or net realizable value (selling price less estimated costs of completion and disposal). General disclosures are: Accounting policies and costing method. Carrying amounts of inventories in total and by appropriate classifications, e.g., raw materials, work-in-progress, finished goods, merchandise, supplies, etc. Costs of goods sold for periods presented.
45 Unusual or material losses resulting from costing methods. Material purchase commitments and any expected loss when the purchase price exceeds market value. Any interest costs capitalized in inventories.
Goodwill
U.S. GAAP: Goodwill is not amortized but, instead, is tested for impairment (by a qualitative or two- step quantitative method) at least annually or triggering event arises (such as going concern or other profitability issues affecting a subsidiary)
FRF for SMEs: Goodwill may be amortized using the federal income tax time period or 15 years. No tests for impairment are required for long-lived assets, tangible or intangible. General disclosures are: Aggregate carrying amounts of goodwill should be presented as a separate line item in the statement of financial position. Aggregate amortization expense for the period and the amortization period and rate used.
Intangible Assets
U.S. GAAP: Indefinite-lived intangible assets are tested for impairment with qualitative or two-step quantitative methods similar to goodwill. Definite-lived intangible assets are amortized over their useful lives and long-lived intangibles are also tested for impairment as a result of certain triggering events indicating possible impairment.
FRF for SMEs: All intangible assets will be assigned estimated useful lives and amortized over that period. No tests for impairment are required for long-lived assets, tangible or intangible. Any long-term assets no longer used are written off. Management may elect either to expense development phase intangibles or to capitalize their costs. General disclosures are: Aggregate carrying amounts of intangibles should be classified separately on the statement of financial position. Aggregate amortization expense for the period and the amortization period and rate used. Accounting policy elected for internally developed intangible assets including development costs.
Investments
U.S. GAAP:
46 Financial assets and liabilities are classified in the balance sheet based on managements intentions, i.e., to trade, hold for sale or retain until maturity. Trading securities and available-for-sale securities are valued at fair value. Unrealized appreciation or depreciation for trading securities is recorded in operating income; for available-for-sale securities such amounts are recorded in comprehensive income. Held-to-maturity securities are carried at amortized cost.
FRF for SMEs: Investments in entities over which a company has significant influence are accounted for under the equity method. All other investments are accounted for based on historical cost, except for securities held for sale which are valued at market value (changes are included income). Income from investments should be presented separately or disclosed in the footnotes. Equity method investees should follow the same method of accounting as the as the investor. An entity’s share of any discontinued operations, changes in accounting policies or corrections of errors and capital transactions of an equity method investee should be presented and disclosed separately. General disclosures are: Accounting basis for all classes of investments. Events and transactions occurring between different reporting periods for the entity and equity-method investees should be disclosed or recorded by the investor. Name, description, carrying amount and ownership percentage for each significant investment.
Fair Value Accounting
U.S. GAAP: The definition of fair value in the accounting standards is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The standards provide guidance on valuation techniques (market approach, income approach, cost approach) and the hierarchy of inputs (levels one, two, three) for determining fair value.
FRF for SMEs: The term “market value” is used instead of fair value. The definition is: “The amount of the considerations that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.” Since the FRF for SMEs uses a cost approach primarily, measurement using market values is limited to business combinations, some non-monetary transactions and marketable equity and debt securities that are available for sale.
Derivatives
U.S.GAAP: Generally, derivatives are accounted for as assets or liabilities and are measured at their fair values; changes in fair values are accounted for based on the use of the derivative. An entity is permitted to use hedge accounting.
47 FRF for SMEs: This framework requires a disclosure approach only with recognition at settlement on a cash basis. Disclosures include: The face, contract or notional principal amount (upon which payments are calculated). The nature, terms, cash requirements and credit and market risks The entity’s purposes in holding the derivatives. At the reporting date, the net settlement amounts of the derivatives. Hedge accounting is not permitted.
Lease Accounting
U.S. GAAP: Traditionally, a lessee treats leases as capital or operating leases depending on certain criteria. Capital leased assets and capital lease obligations are recorded in financial statements. Operating leases are disclosed. A lessor treats leases as sales type, direct financing or operating leases.
FRF for SMEs: Accounting approaches are generally similar to traditional U.S. GAAP. A lessee either records capital leases or discloses operating leases. A lessor either records sales type or financing leases or discloses operating leases. General disclosures include: Capital Leases—Lessees: o Cost of the leased asset, accumulated amortization and the amortization method used. o Interest rate, maturity date and the outstanding balance of the obligation. o Any security for the lease. o Interest expense related to lease obligations. o Aggregate payments in each of the five years after the reporting date.
Direct Financing and Sales-Type Leases—Lessors: o Net investment in each type of lease and implicit interest rates.
Operating Leases o Lessees—future minimum lease payments in total and for each of the five years after the reporting date. o Lessors—cost of assets held for leasing and the related accumulated amortization.
Income Tax Accounting
U.S. GAAP A deferred income tax method is use to determine the effects of temporary differences between financial and tax reporting. The standards require management to evaluate and
48 disclose uncertain tax positions for all open tax years, for all taxing jurisdictions. Any estimated liabilities for unsustainable positions should be recorded in the financial statements.
FRF for SMEs: Management may elect either an income taxes payable method or the deferred income taxes method. Uncertain tax positions are not required to be evaluated or accrued. General disclosures include: The accounting policy—income taxes payable or deferred taxes method. For the income taxes payable method: o Provision for income tax expense or benefit include in net income or loss before discontinued operations. o Explanation or reconciliation of the differences between statutory rates and the effective rate. o Unused loss or tax credit carryforwards. o Any allocation of expense or benefit to equity transactions. For the deferred taxes method: o Current and deferred income tax expense or benefit included income or loss before discontinued operations. o Any allocation of expense or benefit to equity transactions. o Total amount of unused tax losses and credits and amounts of any temporary differences for which no deferred tax asset has been recognized. o Explanation or reconciliation of the differences between statutory rates and the effective rate. o Unused loss or tax credit carryforwards. Pass-through entities will disclose they are not subject to income taxes.
Retirement and Postemployment Benefits
U.S. GAAP: Accounting standards use a projected benefit obligation model that requires accounting for the aggregate of periodic pension costs and the overfunded and underfunded status of defined benefit and post-retirement benefits plans. Defined contribution plans’ costs are accounted for as period expenses.
FRF for SMEs: Management may elect to account for plans using a current contribution payable method or one of the accrued benefit obligation methods similar to U.S. GAAP. General disclosures include: Description of the plan and the period cost recognized. Multi-employer plans description, period cost and any liability that would result from a probable withdrawal. Description of deferred compensation plans, their participants and how payments are determined.
49 For defined benefit plans: o Description, plan participants and how benefits are determined. o Funded status information including benefit obligation, market value of plan assets and the under-funded or over-funded status at the reporting date. o Under the current contribution method, the current and following years contributions. o Expected rate of return on assets and the discount rate used to determine the benefit obligation. o Any current period termination benefits.
Comprehensive Income
U.S. GAAP: Items of comprehensive income, such as the unrealized appreciation on available for sale securities and prior service costs for defined benefit pension plans, are reported in a separate statement of comprehensive income or a single statement combined with operating income.
FRF for SMEs: This framework does not recognize items of comprehensive income.
Revenue Recognition
U.S. GAAP: Revenue is recognized when it is earned or realized based on evidence of the arrangement, the occurrence of a point of sale or delivery, a fixed sales price and reasonable assurance of collectability. Contracts for production or construction are accounted for currently under the percentage of completion or completed contract methods. Future standards for recognizing revenue under the contract method will likely require revenue recognition as performance obligations are completed.
FRF for SMEs:
Revenue recognition is more principles-based and revenues will be recorded based on performance and reasonable assurance of collectability. When the risks and rewards of ownership of goods are transferred to a customer, performance of a transaction is accomplished. For services in long-term contracts, such as construction or production contracts, the percentage of completion or completed contract methods may be used. The consideration received for the service will indicate accomplishment of stages of performance of a service. General disclosures include: Revenue recognition policy for all types of transactions in Note A. Accounting policies for multi-deliverables. Explanation of why the completed contract method is used instead of the percentage-of-completion method, if applicable. Revenue and contingent assets from any contract-related claim.
50 Major categories of revenue disclosed on the statement of operations. Any unrecorded claims if claims are not recorded until received or awarded.
Stock-Based Compensation Plans
U.S. GAAP: This form of compensation may be accounted for as either a liability or equity amount, depending on management’s intentions, at fair values. Fair value will be determined based on this hierarchy: 1) a fair value accounting method when it can be reasonably determined, 2) calculated-value method if it can be reasonably estimated or 3) intrinsic value method when neither of these methods can be used.
FRF for SMEs: This framework requires only footnote disclosures for such plans. The disclosures include: The terms of awards under the plan. Vesting requirements. The maximum terms of options granted. Separate disclosures for multiple plans.
Going Concern Issues
U.S. GAAP: There currently is no requirement in the accounting standards for management to assess and disclose going concern issues and whether a going-concern basis of accounting is appropriate. Future accounting standards will likely create this responsibility for management, along with the requirement to develop and disclose plans to mitigate significant threats to the continuance of an entity. Clarified Auditing Standards for non- public entities published by the AICPA’s Auditing Standards Board, require auditors to evaluate significant threats to continued existence of an entity and to request management to provide plans for mitigating such threats.
FRF for SMEs: This framework requires management to assess whether the going concern basis of accounting is appropriate. When business or environment events or conditions create material uncertainties about business continuance, the entity should include footnote disclosures of these circumstances, along with its plans to mitigate the uncertainties.
Consolidation and Subsidiaries
U.S. GAAP: An entity having a controlling financial interest (normally more than 50% ownership) in another entity is required to consolidate the subsidiary. When the entity cannot maintain significant influence over the operation of the subsidiary, such as in the case of external events like bankruptcy, the subsidiary would not be consolidated. For investments in variable interest entities, investors that have the power to significantly influence the
51 operations of such entities will usually be deemed “primary beneficiaries.” In such circumstances, primary beneficiaries are required to consolidate variable interest entities. Either the equity method or cost method would be used otherwise.
FRF for SMEs: Management can elect to consolidate more than 50%-owned subsidiaries or account for them using the equity method (if it exercises significant influence over the entity). When significant influence is not exercised over the subsidiary, the cost method should be used to report the investment. Equity and debt securities that are available for sale, however, should be recognized at market values with changes in such values included in periodic net income. General disclosures include: Consolidation policy. When consolidated, the names of all subsidiaries, income from each and the percentage of ownership. Descriptions of the periods for subsidiaries’ financial statements that don’t coincide with the parent’s reporting date, along with any significant events or transactions in the intervening periods. When financial statements are not consolidated, method of accounting for its subsidiaries, descriptions, names, carrying amounts, income and percentage of ownership for each.
Business Combinations
U.S. GAAP: The acquisition method of accounting is required. The acquisition-date fair values of assets, liabilities, goodwill and non-controlling interests in an acquired entity are used for measurement in financial reporting.
FRF for SMEs: This framework essentially requires the acquisition method of accounting using acquisition-date market values. It permits, however, management to elect to account for an intangible asset either separately or as a part of goodwill. General disclosures similar to U.S. GAAP are required for material and immaterial business combinations.
Push-Down (New Basis) Accounting
U.S. GAAP: There is no requirement to permit new-basis accounting for acquired entities.
FRF for SMEs: When an acquirer gains more than 50% control of an entity, the assets and liabilities of the acquired entity may be comprehensively revalued in its financial statements, assuming the new values are reasonably determinable. This results in similar values being used in the acquired entity’s financial statements and the acquirer’s consolidated statements. General disclosures include: First applications:
52 o Date push-down accounting was first applied and the date of the related purchase transaction. o Description of the situation resulting in push-down accounting and the amounts of changes to major classes of assets, liabilities and equity. In addition for the following fiscal period: o Amount of the revaluation adjustment and the equity account in which it was recorded. o Amount of reclassified retained earnings and the equity account in which it was recorded.
53