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Financial Reporting Briefs, December 2020

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Financial Reporting Briefs, December 2020 In this issue: Top story ..................................... 2 Accounting update ....................... 3 Regulatory developments ............. 6 Other considerations .................... 9 Reference library ....................... 10 Financial reporting briefs What you need to know about this quarter’s accounting, financial reporting and other developments December 2020 Top story Welcome to the December Year-end considerations for effects of COVID-19 and other factors 2020 Financial reporting As entities prepare for year-end reporting, they need to carefully consider how macroeconomic and briefs. This edition highlights company-specific factors affect their accounting and disclosures. That is, management will need to the latest developments in consider how the COVID-19 pandemic, low interest rates, the market transition from the London financial reporting and alerts Interbank Offered Rate (LIBOR) and changes in business strategy affect their accounting for and you to some important disclosures about topics such as asset impairments, valuation allowances, and pension obligations and considerations for 2020. their going concern evaluation. Interested in learning about Entities also need to consider whether having employees work remotely for extended periods of time this year-end financial reporting year affected internal control over financial reporting (ICFR). As a reminder, Securities and Exchange considerations? We’ve got it Commission (SEC or Commission) filers must disclose any change that materially affects or is reasonably covered in our Top story. likely to materially affect its ICFR in the filing for the fiscal quarter in which the change occurred. Our Accounting update SEC filers also need to make sure their disclosures in management’s discussion and analysis (MD&A) section discusses proposed and their risk factor disclosures about the current and potential effects of COVID-19 and other factors changes to the new leases are tailored to their facts and circumstances and appropriately reflect any changes in those facts and standard and the guidance circumstances. Such disclosures may include a discussion of the effects of COVID-19 on revenue, production on reference rate reform, and supply chains, availability of qualified employees and other aspects of a company’s operations. among other things. As markets move away from LIBOR and other interbank offered rates, companies need to disclose the In our Regulatory status of their efforts to evaluate and mitigate the risks related to the discontinuation of these rates. developments section, we provide updates on In addition, calendar-year registrants need to consider the SEC’s recent amendments to Regulation S-K other SEC and PCAOB Items 101, 103 and 105, which are effective for periodic reports and registration statements filed on or developments and provide after 9 November 2020. The amendments streamline the disclosures registrants are required to make about business, legal proceedings and risk factors and add new requirements for disclosures about a summary of the AICPA human capital resources. Conference on Current SEC and PCAOB Developments As entities evaluate their real estate needs in light of the COVID-19 pandemic, those that plan to reduce in our Other considerations their leased real estate footprint should carefully consider the guidance on long-lived asset impairment section. and long-lived asset abandonment if they have recognized right-of-use (ROU) assets under the new leases standard. Companies should also keep in mind that, while they need to assess both negative and positive evidence to determine whether to record, maintain or reverse a valuation allowance on deferred tax assets, the Need more information? assessment may require more judgment in the current environment. Reminders about many of these topics are discussed in more detail in the Accounting update section. Check out our Reference library, where we list our recent publications on the topics discussed here and provide links to them. 2 | Financial reporting briefs December 2020 Accounting update Proposal would make targeted changes to the new leases standard The Financial Accounting Standards Board (FASB or Board) proposed three targeted amendments to the new lease standard. The proposal would exempt lessees and lessors from applying the modification guidance in Accounting Standards Codification (ASC) 842, Leases, when one or more lease components are terminated early but the economics of the remaining lease components stay the same. It would also provide lessees with an option to remeasure lease liabilities for changes in an index or rate that would affect future lease payments. Finally, it would require lessors to classify leases with lease payments that are predominantly variable and are not based on an index or rate as operating leases. Entities that have already adopted ASC 842 would apply the proposed guidance either retrospectively to the date of adoption of ASC 842 or prospectively for each of the proposed targeted changes. Entities that have not yet adopted ASC 842 as of the effective date of any final guidance would be required to apply the guidance when they adopt ASC 842 and follow the transition requirements in ASC 842. Proposal would expand the scope of guidance on reference rate reform The FASB proposed expanding the scope of its reference rate reform guidance in ASC 848, Reference Rate Reform, to allow entities to apply certain optional expedients and exceptions to all derivative instruments affected by the change in the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition), even if they do not reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform. The proposal would alleviate concerns raised by certain constituents about the accounting implications of the discounting transition for derivatives that don’t reference LIBOR or another rate expected to be discontinued and therefore aren’t currently in the scope of ASC 848. Questions had arisen about whether changes to these interest rates would result in (1) a modification of the derivative that would require a reassessment of previous accounting determinations (e.g., whether the instrument is still a derivative in its entirety or a hybrid instrument) or (2) a change in the critical terms that would require dedesignation of any hedging relationship where the affected derivative was designated as the hedging instrument. The Board stated that it wanted to avoid potential diversity in practice and that it believes reassessing the accounting conclusions for these derivatives, including any affected hedging relationships, would not provide decision-useful information to users of financial statements. The proposal also would clarify certain aspects of the guidance in ASC 848 and provide new guidance on how to address the effects of the cash compensation adjustment that is provided as part of the discounting transition on certain aspects of hedge accounting. Impairment reminders for lessees planning to reduce leased space Lessees contemplating what their business will look like after the pandemic may consider reducing their real estate footprint. Lessees that decide to reduce the amount of space they lease may determine that this decision is an indicator that would trigger an assessment of whether an asset group that includes ROU assets for leased real estate is impaired under ASC 360-10, Property, Plant, and Equipment — Overall. Assets generally should be grouped when they are used together (i.e., when they are part of the same group of assets and are used together to generate joint cash flows that are largely independent of cash flows of other assets and liabilities). Determining the appropriate grouping of long-lived assets to be evaluated for impairment requires a significant amount of judgment and consideration of the facts and circumstances, as well as an understanding of an entity’s business. Each time a lessee performs an impairment test under ASC 360-10, it should reassess whether its grouping of long-lived assets continues to be appropriate. There may also be other factors or changes in circumstances that trigger reassessment of asset groups prior to there being an indicator of impairment. Changes to a lessee’s real estate footprint might indicate that the related asset grouping may have changed. 3 | Financial reporting briefs December 2020 Accounting update This might be the case even when the ROU asset is not the primary asset in the asset group. For example, a lessee that stops using a leased asset, either immediately or at a future date (e.g., in 12 months) needs to assess whether the corresponding ROU asset is or will be abandoned. Companies must also consider whether a plan to reduce their real estate footprint presents any new or heightened financial reporting risks and whether internal controls continue to be sufficiently precise to mitigate those risks. Reminders on going concern evaluations Entities that have been negatively affected by the COVID-19 pandemic and its economic fallout need to carefully consider their facts and circumstances as part of their going concern evaluations. As a reminder, management is required to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). Disclosures in the notes to the financial statements are required if management concludes that
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