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Financial Reporting and Regulatory Update

Second Quarter 2019

From the FASB

Final standards

Narrow-scope improvements to financial instruments standards

On April 25, 2019, the FASB issued Accounting Standards Update (ASU) 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” to clarify, correct, and improve guidance related to recently issued credit losses, hedging, and recognition and measurement standards. The amendments address the following topics:

  • Topic 1: Codification improvements resulting from the June 11, 2018, and Nov. 1, 2018, Credit Losses Transition Resource Group (TRG) meetings
  • Topic 2: Codification improvements to ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
  • Topic 3: Codification improvements to ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”
  • Topic 4: Codification improvements to ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
  • Topic 5: Codification improvements resulting from the Nov. 1, 2018, Credit Losses TRG meeting

Effective dates

Amendments to ASU 2016-01 are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as long as ASU 2016-01 has been adopted.

Amendments to ASU 2016-13 for entities that have not adopted ASU 2016-13  have the same effective dates as ASU 2016-13. For entities that have adopted ASU 2016-13, amendments in this update are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those years. Early adoption is permitted as long as the entity has adopted ASU 2016-13.

Amendments to ASU 2017-12 for entities that have not adopted ASU 2017-12 as of the issuance date of this ASU have the same effective dates as ASU 2017-12. For entities that have adopted ASU 2017-12 as of the issuance date of this ASU, the effective date is as of the beginning of the annual period beginning after the issuance date of this ASU. Early adoption is permitted as long as ASU 2017-12 has been adopted.

Targeted transition relief in applying credit losses standard

On May 15, 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” which provides clarification and improvements to transition guidance for ASU 2016-13. This ASU provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The fair value option election does not apply to held-to-maturity debt securities. The election is to be applied on an instrument- by-instrument basis.

Effective dates

For entities that have not adopted ASU 2016-13, the effective date and transition methodology for the amendments in this ASU are the same as in ASU 2016-13. If ASU 2016-13 has been adopted, the amendments in this ASU are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance as long as ASU 2016-13 has been adopted.

Private-company accounting alternatives extended to not-for-profit entities

On May 30, 2019, the FASB issued ASU 2019-06, “Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities,” to allow NFP entities to apply certain accounting alternatives that previously were provided only for private companies. Specifically, an NFP entity would be allowed to elect two separate accounting alternatives: 1) amortize goodwill over 10 years or less on a straight-line basis and test for impairment upon a triggering event, as well as have the option to elect to test for impairment at the entity level, and 2) include certain customer-related intangible (CRI) assets that are not capable of being sold or licensed independently, and all noncompete agreements in goodwill as part of a business combination.

An NFP entity may adopt the alternative to amortize goodwill without adopting the alternative to include CRIs and noncompete agreements in goodwill. However, an NFP entity that elects to include certain CRIs and noncompete agreements in goodwill also must adopt the alternative to amortize goodwill.

These alternatives are expected to reduce the costs and complexity of the goodwill test and the accounting for identifiable intangible assets for NFP entities.

Effective date

The amendments are effective upon issuance.

Proposals

Incorporating SEC disclosures in codification

On May 6, 2019, the FASB issued a proposed ASU, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.”

The proposed amendments would incorporate various SEC disclosure requirements into U.S. GAAP. The proposal would add certain interim and annual disclosure requirements to a variety of topics including changes in reporting entity, earnings per share, common control transactions, foreign currency matters, derivative accounting policies, consolidations, preferred shares, debt, assets subject to lien, repurchase   and reverse repurchase agreements, real estate investment trusts, and certain oil- and gas-producing activities.

The exposure draft does not yet include an effective date. Comments were due on June 28, 2019.

Simplifying the accounting for income taxes

On May 14, 2019, the FASB issued a proposed ASU, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is designed to reduce cost and complexity in accounting for income taxes in Topic 740.

The proposed amendments would remove the following exceptions from Topic 740:

  • Exception to the incremental approach for intraperiod tax allocation
  • Exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment becomes a subsidiary
  • Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses

The proposed amendments would improve guidance within Topic 740 related to:

  • Franchise taxes that are based partially on income
  • Transactions with a government that result in a step up in the tax basis of goodwill
  • Separate financial statements of legal entities that are not subject to tax
  • Enacted changes in tax laws in interim periods

The exposure draft does not yet include an effective date. Comments were due on June 28, 2019.

Not-for-profit grants and contracts standard implementation Q&As

On June 6, 2019, the FASB issued a Staff Q&A document, “Subtopic 958-605, Application of the Limited Discretion Indicator and Accounting for Cost-Sharing Provisions in a Grant Agreement,” to address certain application matters related to implementing ASU 2018-08, “Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.”

Subtopic 958-605 contains guidance on determining whether contributions are conditional or unconditional on the basis of whether an agreement includes a barrier that must be overcome as well as either a right of return of assets transferred or a right of release of a promisor‘s obligation to transfer assets. This subtopic also provides indicators that guide the assessment of whether an agreement contains a barrier. Indicators include 1) inclusion of a measurable performance-related or other barrier, 2) stipulations that limit discretion on the conduct of an activity, and 3) stipulations related to the purpose of the agreement. The Staff Q&A was developed to address frequently asked questions relative to two potential barriers:

The answer to question one provides clarification on the application of the limited discretion indicator when determining whether a budget and related stipulations contained in a grant agreement are considered to be a barrier to entitlement.

The answer to question two provides clarification on whether a cost-sharing provision in a grant agreement is a barrier to entitlement.