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Financial Reporting and Regulatory Update

Fourth Quarter 2017

From the FASB

Final Standards

Elimination of Deferred Tax Guidance for Steamship Entities

On Dec. 6, 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-15, “Codification 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 has expired, and the board believes that the guidance should 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 should recognize the unrecognized deferred income taxes in accordance with Topic 740.

No change is expected in current practice; the FASB observed that all steamship entities to which this guidance may have applied in the past appear to already apply the deferred income tax guidance in Topic 740 to their statutory reserve deposits.

Effective Dates

The ASU applies to fiscal years and first interim periods beginning after Dec. 15, 2018, which means it first applies to March 31, 2019, for calendar year-end entities that issue quarterly reports. Early adoption is permitted for all entities, including adoption in an interim period.

Transition

An entity should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period.

Rescission of SEC Guidance on Revenue Recognition

In November 2017, the FASB released ASU 2017-14, “Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue From Contracts With Customers (Topic 606),” to codify Staff Accounting Bulletin (SAB) 116, which the SEC issued on Aug. 18, 2017. SAB 116 eliminates previous SEC guidance on revenue recognition, to conform to the FASB’s guidance in Accounting Standards Codification (ASC) Topic 606. In particular, it eliminates SAB Topic 13, “Revenue Recognition,” which includes interpretations and four specific criteria for the FASB’s previous revenue model under ASC Topic 605. It also eliminates SAB Topic 8 for department store retailers because the presentation and recognition guidance for leased or licensed store space is superseded.

The ASU also includes the SEC’s rescission of guidance for bill-andhold arrangements. Specifically, it references SEC Release 33-10402, which eliminates existing revenue recognition guidance (specifically, Accounting and Auditing Enforcement Release 108, “In the Matter of Stewart Parness”) for bill-and-hold arrangements (that is, arrangements when delivery has not occurred). Under ASC Topic 606, revenue will be recognized on bill-and-hold arrangements when, as prescribed by the guidance, control has been transferred and other criteria are met.

Finally, the ASU codifies SEC Release 33-10403, to revise guidance from the 2005 “Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement Into the Pediatric Vaccine Stockpile or the Strategic National Stockpile.” Upon the adoption of ASC Topic 606, vaccine manufacturers will be required to recognize revenue and provide required disclosures when vaccines are placed into federal governmental stockpile programs because control of the enumerated vaccines will have been transferred to the customer, and the criteria to recognize revenue in a bill-and-hold arrangement under ASC Topic 606 will have been met. Release 33-10403 is applicable to only the following vaccines: childhood disease vaccines, influenza vaccines, and other vaccines and countermeasures sold to the federal government for placement in the Strategic National Stockpile.

Once the guidance in ASC Topic 606 is adopted, reference to the previous SEC guidance discussed here (that is, SAB Topics 8 and 13, Accounting and Auditing Enforcement Release 108, and the 2005 “Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement Into the Pediatric Vaccine Stockpile or the Strategic National Stockpile”) no longer will be appropriate.

Proposals

Codification Improvements

On Oct. 3, 2017, the FASB issued a proposed ASU, “Codification Improvements,” to clarify the guidance contained in the ASC and correct unintended application of guidance, including these clarifications:

  • Comprehensive income (Subtopic 220-10) – to clarify certain taxes not payable in cash should include only tax benefits related to deductible temporary differences and carryforwards arising from a quasi-reorganization and should be reported as a direct adjustment to paid-in capital
  • Earnings per share (Topic 260) – to clarify the purpose of an illustration on the two-class method
  • Investments in debt and equity securities (Subtopic 320-10) – to clarify disclosure requirements that previously appeared to be redundant
  • Debt modifications and extinguishments (Subtopic 470-50) – to address measurement and recognition of gains or losses on debt extinguishments when the fair value option is elected
  • Distinguishing liabilities from equity (Subtopic 480-10) – to conform an illustration to existing guidance that prohibits the combination of certain freestanding financial instruments with noncontrolling interest
  • Income taxes for stock compensation (ASC 718-740) – to clarify that excess tax benefits (or tax deficiencies) should be recognized in the period when the amount of tax deduction for compensation expense is determined
  • Other expenses (ASC 720-35, 944-30, and 944-720) – to clarify guidance on advertising costs
  • Income taxes for business combinations (ASC 805-740) – to remove three methods for allocating the consolidated tax provision to an acquired entity after acquisition, and instead require that the tax benefit from the tax basis step-up be credited to the acquired entity’s additional paid-in capital consistent with Topic 740
  • Derivatives and hedging (Subtopic 815-10) – to clarify that the intent to set off may not be required in order to offset derivative assets and liabilities when the related instruments are executed with the same counterparty under a master netting agreement
  • Fair value measurement (Subtopic 820-10) – to clarify that an entity should consider transfer restrictions that are characteristics of the asset (and not restrictions that are characteristics of the entity) when measuring the fair value of a liability or instrument classified in owner’s equity when the fair value is based on the quoted price of the corresponding asset
  • Financial services – brokers and dealers (Topic 940) and financial services – depository and lending (Topic 942) – to remove guidance that incorrectly indicated that a broker-dealer could offset securities borrowed and loaned transactions if there are explicit settlement dates, and to replace the guidance by referencing other generally accepted accounting principles (GAAP) that address offsetting securities borrowed and loaned transactions
  • Financial services – depository and lending (Topic 942) – to clarify that disclosure requirements for regulatory capital include all applicable required and actual ratios and amounts

Comments were due Dec. 4, 2017.

Other Projects On Our Watch List

Income and Comprehensive Income Topics

The FASB’s ongoing Codification Improvements project includes simplifying the ASC. To that end, Topic 225, “Income Statement,” and Topic 220, “Comprehensive Income,” have been identified as two topics that cover related guidance and would be simplified by being combined. The board decided the guidance in Topic 225 will be moved to Topic 220. All guidance for the income statement and the statement of comprehensive income will appear in a single topic, “Income Statement – Reporting Comprehensive Income.”

No incremental changes will be made to the guidance.