Final Standards
Modification Accounting for Share-Based Payment Awards
The FASB issued Accounting Standards Update (ASU) 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” on May 10, 2017, to address diversity in practice and provide guidance for which share-based payment award changes require modification accounting. Today, some entities evaluate whether changes are substantive, some apply modification accounting for any change unless it’s purely administrative, and others apply modification accounting when the change results in a change to the fair value, vesting, or classification. In addition, questions had been posed on whether changes for the adoption of ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” – namely, changes to statutory tax withholding requirements – would require modification accounting.
Under the new guidance, modification accounting will apply unless all of the following are the same immediately before and after the modification:
- The award’s fair value – or calculated value or intrinsic value, if an alternative method is used (Note: If the modification does not affect any inputs to the valuation of the award, estimating the value immediately before and after the modification is not required.)
- The award’s vesting provisions
- The award’s classification as an equity instrument or a liability instrument
Current disclosure requirements in Topic 718 apply whether or not an entity is required to use modification accounting.
Effective Dates
For all entities, the ASU is effective for fiscal years beginning after Dec. 15, 2017, and interim periods within, which first applies to March 31, 2018, interim financial statements for calendar year-end entities.
Early adoption is permitted, including in an interim period:
- For public business entities (PBEs) in reporting periods for which financial statements have not yet been issued
- For all other entities in reporting periods for which financial statements have not yet been made available for issuance
Transition
Prospective application is required for awards modified on or after the effective date.
Service Concession Arrangements Between an Operator and a Public Sector Entity
On May 16, 2017, the FASB issued ASU 2017-10, “Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a Consensus of the FASB Emerging Issues Task Force),” to address diversity in practice on how an operating entity determines the customer in service concession arrangements. Service concession arrangements are between a public sector entity (grantor) and an operating entity (the entity that operates the public sector entity’s infrastructure, such as airports, toll roads, bridges, hospitals, prisons, and military bases, for a specified period of time).
When applying existing revenue recognition guidance to these arrangements, clarity is needed on how to determine which entity is the customer, including whether the customer is the public sector entity or the third-party user of the infrastructure. Similar issues could arise in applying the new revenue recognition standard – ASU 2014-09 and clarifying standards – to these arrangements.
The new guidance requires that in all cases, the public sector entity (or the grantor) should be identified as the customer in service concession arrangements in the scope of Accounting Standards Codification (ASC) Topic 853. This will result in a change in generally accepted accounting principles (GAAP) for operating entities that previously concluded the customer to these arrangements was the third-party user (for example, third-party drivers for the operation of a toll road or bridge, and third-party airlines or passengers for the operation of an airport).
Effective Dates
For entities that have not adopted the revenue recognition guidance in Topic 606 prior to May 16, 2017 (issuance date for ASU 2017-10), the effective date for the new guidance is the same as the effective date for Topic 606.
For entities that already have early adopted the guidance in Topic 606 prior to May 16, 2017 (issuance date for ASU 2017-10), the new guidance is effective as follows:
- For PBEs, certain not-for-profit entities, and certain employee benefit plans, in fiscal years beginning after Dec. 15, 2017, including interim periods within
- For all other entities, in fiscal years beginning after Dec. 15, 2018, and interim periods in fiscal years beginning after Dec. 15, 2019
Entities may adopt the new guidance early, including in an interim period.
Transition
For entities that have not adopted Topic 606 prior to May 16, 2017 (issuance date for ASU 2017-10), transition requirements are the same as the requirements for Topic 606. If an entity already has adopted Topic 606, the entity must use either 1) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or 2) a retrospective approach for the new ASU. The transition method for the new ASU is not required to be the same as the transition method used when adopting Topic 606. However, the entity must use the same practical expedients that the entity elected to use in paragraph 606-10-65-1(f) when initially applying Topic 606, as applicable.
If an entity adopts ASU 2017-10 prior to adopting Topic 606, the entity must use either 1) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or 2) a retrospective approach. Also, if early adoption of AS 2017-10 is elected before adopting Topic 606, the practical expedients provided in ASC 606-10-65-1(f) may not be used.
Proposals
Targeted Improvements to the Variable Interest Entity (VIE) Model – Related Party Guidance
On June 22, 2017, the FASB issued a proposal, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities,” that aims to improve VIE guidance for related party matters that have arisen related to the consolidation guidance in ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”
These are elements of the proposal:
- The proposal would expand the private company accounting alternative for common control leasing arrangements provided by ASU 2014-07, “Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements,” beyond just leasing arrangements so that private entities could elect not to apply VIE consolidation guidance to any legal entities that are under common control if neither the parent nor the legal entity is a PBE.
- The proposal would revise the analysis for determining whether a decision-making fee paid by a VIE is a variable interest such that indirect interests in a VIE held through related parties in common control arrangements would be considered on a proportional basis. This revision would be consistent with the analysis for determining whether a reporting entity in a related party group is the primary beneficiary of a VIE by including indirect interests on a proportional basis (pursuant to amendments in ASU 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control”).
- The proposal would eliminate mandatory consolidation for circumstances in which power is shared among related parties or when commonly controlled related parties, as a group, have the characteristics of a controlling financial interest but no reporting entity individually has a controlling financial interest. Instead, a reporting entity in the related party group under common control or in a related party shared power situation would apply a set of four factors to assess its own decision-making power and whether it has a controlling financial interest in the VIE. In addition, when related parties under common control, as a group, have a controlling financial interest, the parent entity would consolidate the VIE unless a scope exception applies.
Comments are due Sept. 5, 2017.
Technical Corrections and Improvements for Steamship Entities
On June 27, 2017, the FASB issued a proposal, “Technical Corrections and Improvements to Topic 995, U.S. Steamship Entities – Elimination of Topic 995,” to eliminate obsolete accounting guidance on deferred taxes for steamship entities that had statutory reserve deposits that were made before Dec. 15, 1992. The 25-year time frame provided for these statutory reserve deposits is expiring this year, and the board believes that the guidance can be eliminated because any remaining unrecognized tax liabilities resulting from deposits would already have been recognized. If an entity has unrecognized deferred income taxes related to statutory reserve deposits made on or before Dec. 15, 1992, the entity would recognize the unrecognized income taxes in accordance with Topic 740.
The board expects no change in current practice.
Comments are due Aug. 28, 2017.
Technical Corrections and Improvements for Depository and Lending Entities
On June 27, 2017, the FASB issued a proposal, “Technical Corrections and Improvements to Topic 942, Financial Services – Depository and Lending – Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans,” to eliminate obsolete accounting guidance on deferred taxes for bad debt reserves of savings and loans that arose after Dec. 31, 1987, and guidance related to the Comptroller of the Currency’s Banking Circular, “Accounting for Net Deferred Tax Charges (Circular 202).” The board believes that these particular post1987 bad debt reserves should have been recaptured by the relevant entities in full by 2008, and the related guidance is no longer relevant.
The board expects no significant change in current practice.
Comments are due Aug. 28, 2017.
Other Projects on Our Watch List
Transition Resource Group (TRG) for Credit Losses
On June 12, 2017, the FASB’s TRG for credit losses met to discuss the following implementation matters for ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
- Consideration of prepayments in the discount rate used in a discounted cash flow method
- When beneficial interests (as defined in the FASB ASC) may be within the scope of purchased credit deteriorated (PCD) asset accounting
- Transitioning pools of purchased credit impaired (PCI) assets to PCD assets
- Forecasting reasonably expected TDRs
- Acceptable methods for estimating the life of a credit card receivable
Issue memos and the agenda are available on the
FASB website. A recording of this meeting also is available for viewing on the
past FASB meetings web page.