Accounting insights: Recent accounting news and insights
June 2013
Revised lease accounting exposure drafts released In the April 2011 issue of Accounting Insights, we provided an update on the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively "the Boards") exposure draft, Leases, which was originally released in August 2010. This update included various changes to the proposed standards covering accounting for leases, including clarification on lease terms, variable lease payments, short-term leases, and sale-leaseback transactions.
In May 2013, the Boards released revised exposure drafts for the proposal of new lease accounting guidance. The Boards’ revised proposals are very similar in nature and represent significant progress in the international convergence project to create more unified financial reporting for leases. The new proposals include significant changes to lease accounting from FASB’s 2010 lease proposal.
Updated Internal Control-Integrated Framework issued The Committee of Sponsoring Organizations of the Treadway Commission (COSO) today issued its updated Internal Control–Integrated Framework (Framework) and related illustrative documents. COSO’s original Framework, published in 1992, is recognized as the leading guidance for designing, implementing, and conducting internal control and assessing its effectiveness.
COSO intends the updated Framework to help organizations design and implement a system of internal control considering the many changes in business and operating environments since the issuance of the original Framework, broaden the application of internal control in addressing operations and reporting, and clarify the requirements for effective internal control.
In addition to the Framework, COSO also issued companion documents, Illustrative Tools for Assessing Effectiveness of a System of Internal Control and the Internal Control over External Financial Reporting (ICEFR): A Compendium of Approaches and Examples.
COSO believes that users should transition their applications and documentation to the updated Framework as soon as is feasible under their particular circumstances. COSO will continue to make its original Framework available during the transition period through December 15, 2014. After that date, COSO will consider the existing Framework as superseded.
Proposed alternatives within US GAAP for private companies released for exposure The Private Company Council (PCC) has voted to move forward with proposed alternatives within US GAAP designed to improve financial reporting for private companies. The PCC’s approved exposure of the proposals is the first step in a process toward endorsement by the FASB.
In its third public meeting, the PCC made tentative decisions in the following areas, including:
Providing relief from separately recognizing certain intangible assets acquired in a business combination;
Allowing for the amortization of goodwill and a simplified goodwill impairment model; and
Allowing two simpler approaches to accounting for certain types of interest rate swaps when a private company intends to economically convert the interest rate on its debt.
The PCC was established by the Financial Accounting Foundation (FAF) Board of Trustees to work with the FASB to determine whether and when to modify US GAAP for private companies.
Review of FASB Standard on Business Combinations reviewed The Financial Accounting Foundation (FAF) has announced the completion of the Post-Implementation Review (PIR) of FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141R) (codified in Accounting Standards Codification Topic 805, Business Combinations). Statement 141R basically requires an acquiring organization to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired organization at the acquisition date, measured at their fair values as of that date.
The review of Statement 141R was undertaken by an independent FAF team working under the oversight of the FAF Board of Trustees. The IASB also is conducting a post-implementation review of International Financial Reporting Standards (IFRS) No. 3 (revised 2007), Business Combinations, which was issued concurrently with Statement 141R.
The Statement 141R review team received input from investors and other financial statement users; preparers of various sizes, industries and levels of experience with the standard; auditors; academics; and financial regulators. The review team reached its conclusions using judgment, considering all the input received, and striving to be objective and balanced. Based on its research, the review team concluded that:
Statement 141R resolved some of the practice issues associated with the purchase method of accounting for business combinations. Some practice issues remain unresolved, including identifying when a new basis of accounting is appropriate and accounting for combinations between joint ventures and organizations under common control. Additionally, Statement 141R is convergent with IFRS 3 in many areas; however, some differences remain between the requirements of Statement 141R and IFRS 3.
Statement 141R’s principles and requirements are understandable and generally can be applied as the FASB intended. The requirements in Statement 141R that stakeholders had the most difficulty applying relate to measuring assets acquired and liabilities assumed using the fair value requirements in FASB Statement No. 157, Fair Value Measurements; measuring the fair value of contingent consideration; and determining whether a transaction is a business combination or an asset purchase. Preparers for medium to small organizations reported the most difficulty in applying the standard.
Investors generally find the information resulting from application of Statement 141R useful in understanding and analyzing most business combination transactions, including the measurement of the transaction at fair value. However, some review participants question the reliability or decision usefulness of the reported information for business combinations that: (a) include assets and liabilities that are difficult to measure at fair value; (b) result in a bargain purchase; or (c) in substance may be asset purchases.
The costs and complexity of applying Statement 141R are higher than the FASB anticipated. Much of the complexity relates to the application of Statement 157’s measurement requirements to certain items. The costs relate to the extensive external valuation expertise being sought by both preparers and auditors of financial statements. Smaller organizations may face additional costs for timely access to external resources.
Statement 141R achieved improvements in the relevance and completeness of business combination information. Improvements in the area of comparability, reliability, and representational faithfulness of that information were not fully achieved in large part because of the questions about the reliability of fair value measurement requirements.
The FAF also announced that the PIR team will start a review of Statement 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Revenue recognition and other matters discussed As reported in its "Summary of Board Decisions" publication, the FASB met on May 23, 2013, and discussed the following topics:
Revenue recognition;
Insurance contracts; and
Transfers and servicing: repurchase agreements and similar transactions.
Regarding its project on revenue recognition, the FASB continued redeliberating the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED). The FASB discussed the consequential amendments of its tentative decision in January 2013 relating to transfers of assets that are not an output of the entity’s ordinary activities. The FASB tentatively decided that the guidance in the revenue standard that relates to recognition, measurement (including the constraint), and existence of a contract would apply to sales or transfers to noncustomers of nonfinancial assets, including in substance nonfinancial assets (held directly or in a subsidiary) that do not constitute a business.
The FASB also continued its discussions of the proposed insurance contracts standard. The FASB reviewed the costs and benefits of the decisions reached in the insurance contracts project, as well as the effects of the proposed Accounting Standards Update (ASU) on financial reporting complexity. The FASB directed the staff to draft a proposed ASU for vote by written ballot and also decided to hold public roundtable meetings following the comment letter period to consider the views of, and obtain information from, interested stakeholders about the proposed ASU. The dates, times, and information about how to participate in a public roundtable will be announced separately at a later date.
FASB seeks input on revising US GAAP Financial Reporting Taxonomy The FASB has issued an Invitation to Comment on proposed structural changes to the US GAAP Taxonomy. FASB US GAAP Financial Reporting Taxonomy (UGT): A Proposal to Revise the UGT Calculation Hierarchy sets forth a new calculation hierarchy intended to improve the Taxonomy’s usefulness to preparers and users of financial statements issued by US publicly traded companies. Comments are due by July 14, 2013.
The Taxonomy contains calculation hierarchies that demonstrate the mathematical relationship between various elements of the Taxonomy. It indicates which elements are totals and which elements are added together to compose a total. Currently, the Taxonomy provides a calculation hierarchy (or summation) for every statement or disclosure presentation with summation relationships, regardless of any overlap.
As proposed, the revised hierarchy would eliminate inconsistencies created by these multiple calculation hierarchies, making it more functional for users and easier to navigate for preparers. For example, the 2013 Taxonomy release includes nineteen summations for revenues, several of which are inconsistent. The revised hierarchy would reduce the number of summations to three.
The Taxonomy is a list of computer-readable financial reporting labels coded in a special computer language (eXtensible Business Reporting Language, or XBRL) that enables companies to tag thousands of pieces of financial data (elements) that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for, assemble, and process data so it can be readily accessed and analyzed by investors, analysts, journalists, and regulators.
We have partnered with CCH, a Wolters Kluwer business, to issue our monthly Accounting Insights newsletter. Certain articles have been selected from CCH's Accounting Research Manager (ARM) daily and/or weekly summary. Please feel free to contact Baker Tilly at accounting@bakertilly.com if you have any questions related to these articles or Baker Tilly's accounting and assurance services.
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