As you plan for the year ahead, you may wonder how changes to the accounting standards might affect the information you report on your company’s financial statements, including how it’s presented and what details are disclosed. The Financial Accounting Standards Board (FASB) establishes the standards for public and private companies to follow when they issue financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Here’s an overview of what the FASB is currently working on.
Final standards in the works
Although the FASB sometimes experiences delays in its publication schedule, it expects to issue final standards on the following topics by the end of the first quarter of 2016:
Leases. This revised recognition and measurement standard is big news for retailers, manufacturers, contractors and other companies that lease significant amounts of property and equipment. But the changes won’t be as far reaching as the FASB originally intended — and the standard won’t be aligned with international accounting rules for leases.
The revised standard aims to increase transparency and comparability among organizations by recognizing assets and liabilities on the balance sheet for leases with terms of more than 12 months and disclosing key information about leasing arrangements. The project addresses lease accounting from the perspective of both the lessee and the lessor.
The revised guidance wouldn’t apply for public companies until fiscal years beginning after December 15, 2018. Private businesses would have an extra year. Once the final standard is issued, however, the FASB would encourage early application.
Revenue recognition amendments. Revenue is considered one of the most important measures of a company’s financial health. In 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This standard replaces about 180 pieces of individual guidance under GAAP with a single principles-based model for recognizing revenue from customer contracts worldwide.
After fielding complaints that companies won’t have enough time to apply the standard, the FASB decided in April 2015 to delay the effective date by one year to give companies more time to implement the changes. Public companies, certain employee benefit plans and some not-for-profit organizations can wait to apply the new standard until annual financial statements for fiscal years that start after December 15, 2017. Private companies can wait until annual financial statements for fiscal years that start after December 15, 2018.
In the meantime, the FASB has been issuing amendments to the revenue recognition standard to clarify confusing parts of the standard — but not to change the core of the standard. One amendment aimed at identifying performance obligations and licenses would differentiate between 1) a license to intellectual property that has significant standalone functionality, and thus, satisfies the entity’s promise to the customer to use the intellectual property at a point in time, and 2) a license to symbolic intellectual property that includes support or maintenance of the intellectual property during the license period and, thus, that is satisfied over time.
The amendment also would address when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. In terms of performance obligations, the amendment is expected to add guidance on goods and services that aren’t material in the context of the contract and accounting for shipping and handling activities.
Other revenue recognition amendments are in the works, too. The FASB is currently drafting a final standard to clarify the revenue recognition guidance for principal vs. agent arrangements. And it’s reviewing public comments on another proposal for 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 ASU 2014-09.
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. The FASB plans to publish final standards on: 1) classification and measurement, and 2) impairment, which occurs when the fair value of a financial instrument falls below the amount reported on the company’s balance sheet. The FASB also expects to issue an exposure draft for the third part of this project — improvements to the hedge accounting model — in the first quarter of 2016.
Employee share-based payment accounting. This narrow-scope project aims to reduce complexity and improve the accounting for share-based payments that public and private companies award to employees. It would provide simplifications in accounting for income taxes, including tax benefits and deficiencies arising from the difference between the deduction for tax purposes and the compensation cost in the financial statements. The standard also would allow for an election to simplify accounting for forfeitures.
Transition to the equity method of accounting. Under current accounting, an equity method investor is required to determine the acquisition-date fair value of the identifiable assets and liabilities assumed in the same manner as for a business combination. The entity’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.
This narrow-scope simplification project would eliminate the requirement to separately account for this basis difference. In other words, the equity method investment would be recognized at cost. The final standard is also expected to eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment unexpectedly qualifies for the method as a result of an increase in the level of ownership interest.
Finally, the FASB recently approved Private Company Council (PCC) Issue No. 2015-01, Effective Date and Transition Guidance. When it’s finalized, this standard would allow private companies an unconditional, one-time option to adopt four PCC accounting alternatives that were developed in 2014 related to goodwill, hedging, common control leasing arrangements and intangible assets.
Exposure drafts expected in early 2016
In addition to a proposal on hedge accounting for financial instruments (see above), the FASB has announced that it will issue proposed standards updates — also known as exposure drafts — on the following topics:
Targeted improvements to liabilities and equity. This proposal is the first stage of the FASB’s project to simplify the accounting guidance related to financial instruments with characteristics of both debt and equity. This narrow-scope proposal would clarify the guidance on financial instruments with “down-round” features, such as warrants and convertible instruments. A down-round provision provides for a downward adjustment of the exercise price in accordance with the contract for an equity-linked financial instrument.
Classification of debt. This proposal would simplify the process for determining whether a liability should be classified as current or long term on the balance sheet. It replaces the existing fact-pattern-specific guidance in GAAP with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an entity’s current compliance with debt covenants.
Presentation of the costs of net periodic pension and postretirement benefits. This narrow-scope project would simplify the ways employers report “net benefit costs” on their financial statements.
During the FASB’s December 11 meeting, it also agreed to release a proposal to clarify eight narrow pieces of guidance for cash flow statements in the first quarter of 2016. This is a complex area of accounting — and the leading cause of financial restatements. The proposal would attempt to settle some of the frequent questions that crop up about the statement of cash flows.
Exposure drafts in limbo
After the FASB discusses the public feedback it receives on exposure drafts, it has three options. The first is to approve the proposal and announce plans to issue a final version soon. The second is to go back to the drawing board and issue a new proposal. The third is to table the project until a future date, or even indefinitely.
The FASB has received feedback and is currently redeliberating on several proposals that were previously issued, including:
- Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, and
- Accounting for Income Taxes: Intra-Entity Asset Transfers.
In addition, the comment period ends in January 2016 for the FASB’s proposal to clarify the definition of a business.
Update on disclosure framework projects
The FASB has been working on several projects to simplify the disclosure requirements under GAAP by eliminating disclosures that don’t provide sufficient benefits to justify the costs of collecting the information to provide them. It plans to issue exposure drafts on required disclosures for defined benefit plans. It’s also reviewing public comments on the disclosure framework overall, including how the board and companies decide what’s appropriate to disclose in financial statement footnotes.
Public comments on the FASB’s exposure drafts on fair value and government assistance disclosures are due in February 2016. In addition, the FASB has begun to address disclosure requirements for income taxes, inventory and interim reporting.
For more information
We’ve only scratched the surface of these FASB projects. GAAP is constantly evolving to address the concerns of businesses and other users of financial statements. The FASB plans to conduct additional research and is beginning initial deliberations on many other areas of financial reporting. Contact us for more information and the latest updates on any of the items on the FASB’s current technical agenda.