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Financial Reporting and Regulatory Update

Third Quarter 2019

From the FASB

Final standards

Codification updated to reflect SEC Rules

On July 26, 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, ‘Disclosure Update and Simplification,’ and Nos. 33-10231 and 33-10442, ‘Investment Company Reporting Modernization,’ and Miscellaneous Updates.” This ASU modifies the FASB Accounting Standards Codification (ASC) to reflect previously issued SEC rules for disclosure updates and simplification and investment company reporting modernization. These rules were adopted by the SEC to improve its regulations on financial reporting and disclosures. Other miscellaneous updates were made to agree to the electronic Code of Federal Regulations.

Effective date

This ASU was effective upon issuance.

Proposals

Narrow-scope improvements to credit losses standard

On June 27, 2019, the FASB issued a proposed ASU, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.”

The proposed amendments represent changes to improve certain aspects of the new credit losses standard (ASU 2016-13). Areas of improvement include the following:

  • Negative allowance for purchased financial assets with credit deterioration
  • Transition relief for troubled debt restructurings
  • Disclosures related to accrued interest receivables
  • Financial assets secured by collateral maintenance provisions
  • Conforming amendment to Subtopic 805-20

For entities that have not adopted ASU 2016-13, the effective dates and transition requirements for this proposed ASU would mirror the requirements for ASU 2016-13.

For entities that have adopted ASU 2016-13, the amendments in this proposed ASU would be effective for fiscal years beginning after Dec. 31, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of this proposed ASU as long as an entity has adopted the amendments in ASU 2016-13.

Comments were due on July 29, 2019.

Clarification of the interaction between recognition and measurement of financial instruments and accounting for equity method investments

On July 30, 2019, the FASB issued a proposed ASU, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815,” to clarify the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 and the accounting for certain forward contract and purchased options accounted for under Topic 815.

The amendments in this proposed ASU would clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

The amendments also would clarify that an entity should apply Topic 321 rather than Topic 323 to account for forward contracts and purchased options to acquire an equity instrument that do not meet the definition of a derivative under Topic 815.

The exposure draft does not yet include an effective date.

Comments were due on Aug. 29, 2019.

Improvements in distinguishing liabilities from equity

On July 31, 2019, the FASB issued a proposed ASU, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” to reduce complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity.

The amendments in this proposed ASU would reduce the number of accounting models for convertible debt instruments and convertible preferred stock. In addition, the proposed ASU would improve disclosures for convertible instruments and earnings-per-share guidance. The proposed ASU would revise the derivatives scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events.

The exposure draft does not yet include an effective date.

Comments are due on Oct. 14, 2019.

Deferral of credit impairment, leases, and hedging effective dates for certain entities

On Aug. 15, 2019, the FASB issued a proposed ASU, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” to defer effective dates for the credit losses, derivatives and hedging, and leases standards for certain entities.

The amendments introduce a bucket approach in which effective dates are staggered between larger public companies (bucket one) and all other entities (bucket two). Bucket two entities include private companies, smaller reporting companies (SRCs) as defined by SEC rules, not-for-profit organizations (NFPs), and employee benefit plans (EBPs). The board anticipates staggering bucket two effective dates of major updates for at least two years after bucket one effective dates.

For credit losses (Topic 326), the proposal maintains the current effective date for SEC filers excluding SRCs of fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, including SRCs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2022, including interim periods within, which for calendar year-ends is Jan. 1, 2023.

For leases (Topic 842), the proposal retains the current effective date for public business entities (PBEs), not-for-profit conduit bond obligors, and EBPs that file or furnish financial statements with the SEC of fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

For hedging (Topic 815), the proposal retains the existing effective date for PBEs, which is fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

For calendar year-end entities, the following table reflects the proposed effective dates for the major standards:

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Comments were due on Sept. 16, 2019.The exposure draft is expected to be effective upon issuance.

Effective date deferral of long-duration contracts guidance

On Aug. 21, 2019, the FASB issued a proposed ASU, “Financial Services – Insurance (Topic 944): Effective Date,” to defer the effective date of the amendments in ASU 2018-12, “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts,” for all entities.

For calendar year-end entities, the following table reflects the proposed effective dates for ASU 2018-12:


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Comments were due on Sept. 20, 2019.The exposure draft is expected to be effective upon issuance.

Reference rate reform transitional guidance

On Sept. 5, 2019, the FASB issued a proposed ASU, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In response to risks of interbank offered rates such as the London Interbank Offered Rate (LIBOR), regulators around the world have undertaken reference rate reform initiatives to move away from applying these interbank offered rates and applying alternative reference rates that are more observable and less susceptible to manipulation. This proposed ASU addresses some concerns raised by stakeholders in accounting for contract modifications and hedge accounting due to reference rate reform by providing optional expedients and exceptions in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The proposed guidance would be in effect for only a limited time as it is designed to assist entities through the transition period and not apply to contract modifications made and hedging relationships entered into or evaluated after Dec. 31, 2022. The exposure draft indicates that the proposed ASU would be effective for all entities upon issuance.

Comments were due on Oct. 7, 2019.

Simplifying debt classification

On Sept. 12, 2019, the FASB issued a revision to the proposed ASU “Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current Versus Noncurrent).” The proposed amendments are expected to reduce the costs and complexity for preparers and auditors when determining whether debt should be classified as current or noncurrent on the balance sheet, while providing more consistent and transparent information to financial statement users.

The proposed ASU would require an entity to classify an instrument as noncurrent if either of the following criteria is met as of the balance sheet date:

  • The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.
  • The entity has a contractual right to defer settlement of the liability for a period greater than one year (or operating cycle, if longer) after the balance sheet date.

Entities would continue to classify debt as noncurrent when there has been a debt covenant violation and a waiver or a forbearance agreement is received for that violation that meets certain conditions before the financial statements are issued (or available to be issued). The proposed amendments would require more comprehensive disclosures about defaults resulting from violations of a loan covenant, grace periods within which the debtor may cure a violation, and triggers of a subjective acceleration clause.

The exposure draft does not yet include an effective date.

Comments are due on Oct. 28, 2019.

Current expected credit losses Q&As

Estimating current expected credit losses

On July 17, 2019, the FASB staff issued its second Q&A document focusing on ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Within the Q&A document, the staff provides answers to 16 frequently asked questions on the development of an estimate of expected credit losses. Topics covered include modeling requirements, using historical loss information, internal and external data sources, developing reasonable and supportable forecasts, the reversion to historical loss information, and qualitative factor adjustments.

Additionally, the board authorized the FASB staff to plan a series of current expected credit losses standard (CECL) educational workshops to be held around the country. More information about the workshops will be available on the FASB website.

Other requests for comment

Public company input on segment reporting

The FASB, on June 25, 2019, announced that it is looking for public companies to take part in a study on potential improvements to the segment disclosure requirements. The board is collecting information – all of which will be kept confidential – on the operability of potential improvements to the segment disclosure requirements and identification of potential unintended consequences.

The FASB plans to use the feedback to help inform the board about the costs and benefits of the various improvement ideas being considered. A summary of the findings will be presented to the board at a future public board meeting.

The study, which is expected to last no more than four months, is the FASB’s second study on segment reporting. In 2018, the first study focused on improving the aggregation criteria and determining the reportable segments.
Registration for the study currently is closed.

Request for comment on certain identifiable intangible assets and subsequent accounting for goodwill

The FASB issued, on July 9, 2019, an Invitation to Comment (ITC) that asks for stakeholder input on the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. In conjunction with this ITC, the FASB released a video that provides a background on the accounting and an overview of ITC.

Topics for consideration in the ITC include 1) whether to change the subsequent accounting for goodwill, 2) whether to modify the recognition of intangible assets in a business combination, 3) whether to add or change disclosures about goodwill and intangible assets, and 4) comparability and scope issues. Private companies and not-for-profit organizations currently have accounting alternatives for accounting for certain identifiable intangible assets and goodwill that are not available to PBEs. Prior feedback has been missed; therefore, the staff is seeking additional input from a broad base of stakeholders if changes need to be made by the board.

Comments were due Oct. 7, 2019. The FASB announced on Sept. 30, 2019, that it will be hosting a public roundtable discussion on Nov. 15, 2019, to discuss views on this ITC.