When business owners look ahead and make plans, they may not give much thought to upcoming developments at the Financial Accounting Standards Board (FASB), the body that establishes the standards both public and private companies must meet to comply with US Generally Accepted Accounting Principles (GAAP). But the actions the FASB takes can have a significant effect on your financial statements and the impression they leave with users of such statements. Here are the areas the FASB is likely to focus its efforts on in 2016.
The FASB has indicated that it will issue final standards, known as Accounting Standards Updates (ASUs), on several topics by the end of the first quarter of 2016 (note that delays can and do occur):
Leases. This revised recognition and measurement standard is particularly critical for retailers, manufacturers, contractors, and other companies that lease significant amounts of property and equipment. The big news here is that the revisions will not be as extensive as those the FASB originally contemplated. In addition, the standard will not be converged with international accounting rules for leases.
The new standard is intended to increase transparency and comparability among different organizations’ financial statements by recognizing assets and liabilities on the balance sheet for leases with terms of more than 12 months. Organizations also must disclose key information about leasing arrangements. The standard includes provisions affecting the accounting of both the lessee and the lessor.
The revised guidance would not apply for public companies until fiscal years beginning after December 15, 2018, with private businesses enjoying the benefit of an extra year to come into compliance. Once the final standard is issued, however, the FASB will encourage early application.
Revenue recognition amendments. Revenue is one of the most important measures investors use when assessing a company’s performance and prospects. In 2014, the FASB published ASU No. 2014-09, Revenue from Contracts with Customers. The ASU standardizes and simplifies the revenue recognition process for customer contracts across different industries and geographic locations. It also requires more comprehensive footnote disclosures for all types of public and private companies.
In response to complaints that companies need more time to implement the necessary changes to comply with the standard, the FASB decided in April 2015 to delay the effective date. Public companies, certain employee benefit plans, and some not-for-profit organizations need not apply the new standard until their annual financial statements for fiscal years that start after December 15, 2017. Private companies have until their annual financial statements for fiscal years that start after December 15, 2018, to apply ASU 2014-09.
The deadline extension is hardly the only noteworthy development regarding the revenue recognition standard. The FASB has been issuing amendments to clarify areas of the ASU that have caused confusion, while keeping the core of the standard intact.
One amendment related to the identification of performance obligations and licenses would distinguish between two types of licenses. A license would be categorized as “functional,” with its revenue recognized at the point in time the license is granted, if it has significant standalone functionality (for example, licenses for software, films, and television shows). A license without such functionality (for example, licenses for brands, trade names, and franchise rights) would be deemed “symbolic,” and its revenues would be recognized over time to reflect that the value of the property requires ongoing support or maintenance by the company granting the license.
The amendment also would tackle the timing of revenue recognition for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. And the amendment is expected to add guidance on performance obligations involving goods and services that are not material in the context of the contract, as well as proper accounting for shipping and handling activities.
The FASB is also considering other revenue recognition amendments. It is currently working on a final standard intended to clarify the revenue recognition guidance for principal vs. agent arrangements. The board is also reviewing public comments on another proposed standard that contains only narrow-scope improvements and practical expedients for implementing the revenue recognition standard. The effective dates for these revenue recognition amendments would be the same as the revised implementation date for the 2014 revenue recognition standard.
Accounting for financial instruments. The goal of this three-part project is to improve the usefulness of financial instrument reporting for users of financial statements. On January 5, the FASB released ASU 2016-01, the final standard on the recognition and measurement of financial assets and liabilities. It is also expected to release a separate standard on the impairment of financial instruments, which occurs when the fair value of a financial instrument drops below the amount reported on the company’s balance sheet. A proposed ASU (also known as an “exposure draft”) for the third part of this project — improvements to the hedge accounting model for derivative financial instruments — is expected in the first quarter of 2016.
Employee share-based payment accounting. With this narrow-scope project, the FASB intends to reduce complexity and improve the accounting for share-based payments that public and private companies award to employees. Among other things, the standard will require companies to record excess benefits or deficiencies in the income statement (an earnings approach). That means companies would no longer need to track additional paid-in capital (APIC) pools. The standard also would allow for an election to simplify accounting for forfeitures.
Transition to the equity method of accounting. This project is part of the FASB’s Simplification Initiative, which aims to reduce complexity in accounting standards. The board has proposed eliminating the requirement that an equity-method investor account for the basis difference — the difference between the cost of an investment and the investor’s proportionate share of the investee’s net assets.
Under existing accounting rules, an equity-method investor must determine the acquisition-date fair value of the identifiable assets and liabilities assumed in the same manner as it would for a business combination. The investor’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets and liabilities generally must be accounted for in net income in subsequent periods.
Stakeholders had complained that this approach added cost and complexity to financial statement reporting. The proposed standard would allow an investor to recognize its equity method investment at its cost and not bother determining the acquisition-date fair value of the investee’s identifiable assets and liabilities assumed.
The final standard is also expected to eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment previously accounted for under a different method unexpectedly qualifies for the equity method as a result of an increase in the level of ownership interest or degree of influence.
The FASB recently approved Private Company Council (PCC) Issue No. 2015-01, Effective Date and Transition Guidance. When finalized, this standard would give private companies an unconditional, one-time option to adopt four PCC accounting alternatives related to goodwill, hedging, common control leasing arrangements, and intangible assets.
In addition to a proposal on hedge accounting for derivative financial instruments, the FASB has indicated that it will release exposure drafts on three other topics:
Targeted improvements to liabilities and equity. This proposal is the first phase of the FASB’s project to simplify the accounting guidance related to financial instruments with characteristics of both debt and equity. The exposure draft would clarify the guidance on equity-linked financial instruments (for example, warrants and convertible instruments) with “down-round” features that provide for a downward adjustment of the exercise price specified in the contract in certain circumstances.
Classification of debt. This proposal would simplify the process for determining whether to classify a debt as current or long term on the balance sheet. It would replace the existing rules-based guidance in GAAP with an approach that classifies debt as long term only when 1) the debt is due more than 12 months (or beyond the operating cycle) after the balance sheet date, or 2) the company has a legal right to defer settlement for at least 12 months (or beyond the operating cycle) after the balance sheet date. The proposal is expected to include an exception for waivers of debt covenant violations received after the balance sheet date but before the financial statements are issued.
Improving the presentation of the costs of net periodic pension and postretirement benefits costs. This narrow-scope project would simplify the reporting of employers’ “net benefit costs” on their financial statements. During the FASB’s December 11 meeting, it further agreed to issue an exposure draft to clarify eight narrow pieces of guidance for statements of cash flow in the first quarter of 2016. This is the leading cause of financial restatements. The proposal would attempt to address some of the frequent questions that arise about the statement of cash flows.
After the FASB considers the public comments it receives in response to exposure drafts, it follows one of three paths. The board may approve the proposal and announce plans to issue a final ASU in the near future. It might opt to issue a new proposal. Or it could table the project until a future date, or even indefinitely.
The FASB has received feedback and is currently reviewing several proposals it previously issued, including:
The comment period for the FASB’s proposal to clarify the definition of a business, for purposes of evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, ended on January 22, 2016.
The FASB has several projects underway to improve the effectiveness of financial statement disclosures by clearly communicating the information most important to users of each company’s financial statements. Although reducing the volume of the notes to financial statements is not the primary focus of the projects, the board hopes that a sharper focus on important information will result in reduced volume in most cases.
It plans to issue exposure drafts on required disclosures for defined benefit plans. The FASB is also reviewing public feedback on the disclosure framework overall, including how the board and companies determine what’s “material,” or appropriate to disclose in financial statement footnotes.
Public comments on the FASB’s exposure drafts on government assistance and fair value disclosures are due by February 10 and February 29, respectively. And the FASB has begun to address disclosure requirements for income taxes, inventory, and interim reporting.
The FASB is an active body, regularly issuing important accounting updates that can directly affect how users of financial statements regard your company. We will continue to monitor and report on activities most relevant to our clients.
For more information on this topic, or to learn how Baker Tilly assurance specialists can help, contact our team.