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Financial Reporting and Regulatory Update

First Quarter 2020

From the FASB

Final standards

Optional guidance on accounting for impacts of reference rate reform

On March 12, 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Regulators and market participants in various jurisdictions around the world have undertaken efforts, generally referred to as reference rate reform, to eliminate certain reference rates (such as the London Interbank Offered Rate or LIBOR) and introduce new reference rates that are based on larger and more liquid populations of observable transactions. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Optional expedients include:

  • Simplify accounting analysis under current GAAP for contract modifications if certain criteria are met.
  • Allow hedging relationships to continue without dedesignation when certain changes in the critical terms of an existing hedging relationship due to reference rate reform occur.
  • Allow a change in the systematic and rational method used to recognize in earnings the components excluded from the assessment of hedge effectiveness.
  • Provide for fair value hedging relationships for which the derivative designated as the hedging instrument is affected by reference rate reform.
  • Provide for cash flow hedging relationships affected by reference rate reform.
  • Allow a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before Jan. 1, 2020.

Effective dates

The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of this ASU (March 12, 2020). An entity may elect to apply the amendments prospectively through Dec. 31, 2022.

Codification improvements to financial instruments

On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The amendments include the following improvements:

Issue 1 – Clarifies that all entities, not just public business entities (PBEs), are required to provide fair value option disclosures.

Issue 2 – Clarifies the applicability of the portfolio exception in measuring fair value for nonfinancial items accounted for as derivatives.

Issue 3 – Clarifies that disclosure requirements in Topic 320 apply to disclosure requirements in Topic 942 for depository and lending institutions.

Issue 4 – Adds cross-reference of line-of-credit or revolving-debt arrangements guidance to guidance in accounting for fees between debtor and creditor and third-party costs directly related to exchanges or modifications of debt instruments.

Issue 5 – Clarifies that fair value measurement disclosure requirements do not apply to entities using the net asset value per share practical expedient.

Issue 6 – Aligns the contractual term to measure expected credit losses for a net investment in a lease under the credit loss standard (Topic 326) with the lease term determined under the leases standard (Topic 842).

Issue 7 – Clarifies that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.

Effective dates

For Issues 1, 2, 4, and 5, the amendments are effective for PBEs upon issuance of this update. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years beginning after Dec. 15, 2020. Early application is permitted.

For Issue 3, the amendments to ASU 2016-01 are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

For Issues 6 and 7, the amendments to ASU 2016-13 are effective for PBEs that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies (SRCs) as defined by the SEC, for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. ASU 2016-13 is effective for all other entities for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years. Early application is permitted. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments are effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.

Codification updates to reflect SEC rules

On Feb. 6, 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU modified the FASB Accounting Standards Codification (ASC) to reflect previously issued SEC interpretations on accounting for loan losses by registrants engaged in lending activities subject to Topic 326. The ASU also modified the ASC to include the SEC staff announcement within Topic 842 that the SEC staff would not object to a public business entity that otherwise would not meet the definition of a PBE except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting Topic 842 for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

Effective date

This ASU was effective upon issuance.

Interactions between accounting for equity securities, equity method investments, and certain derivative instruments

On Jan. 16, 2020, the FASB issued ASU 2020-01, “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.” This ASU was issued to clarify the interaction of accounting for equity securities under Topic 321, investments accounted for 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 ASU improves accounting for certain equity securities upon the application of discontinuation of the equity method of accounting. The amendments 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 ASU also clarifies that when determining the accounting for certain forward contracts and purchased options, an entity should not consider whether, upon settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825.

Effective dates

For PBEs, the amendments are effective for fiscal years beginning after Dec. 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied prospectively.

Proposals

Delay of revenue recognition and leases for certain entities

At its April 8, 2020, board meeting, the FASB decided to propose amendments to the effective dates, for certain entities, of two of its major standards: revenue recognition and leases. On April 21, the FASB issued a proposed ASU, “Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities,” for comment.

For franchisors that are not PBEs, the board is proposing to delay the effective date of Topic 606 to annual reporting periods beginning after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020. The delay would be optional.

For private companies and private NFP entities, the board is proposing to delay the effective date of Topic 842 to annual reporting periods beginning after Dec. 15, 2021, and to interim periods within fiscal years beginning after Dec. 15, 2022.

For NFPs that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (public NFPs), which have not yet issued financial statements, the board is proposing to delay the effective date to be fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Early adoption will continue to be permitted.

The comment period closed May 5, 2020.

Contributed nonfinancial assets

On Feb. 10, 2020, the FASB issued a proposed ASU, “Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets,” to improve transparency on how not-for-profit organizations present and disclose contributed nonfinancial assets.

The amendments specifically address the valuation of contributed nonfinancial assets received and the amount of those contributions used in a not-for-profit organization’s programs and activities. Contributed nonfinancial assets are commonly referred to as gifts-in-kind and may include fixed assets; the use of fixed assets; supplies such as food, clothing, or pharmaceuticals; and contributed services.

The proposed ASU would require not-for-profit organizations to present contributed nonfinancial assets as a separate line in the statement of activities. The proposed ASU also would require disclosures of contributed nonfinancial assets received disaggregated by category and type. Additional disclosures for each category of contributed nonfinancial assets would be required including: a) whether the assets were or are intended to be monetized or utilized during the reporting and future periods; b) if the assets are utilized, a description of the programs or activities for which those assets were or are intended to be utilized; c) a description of any donor restrictions associated with the assets; and d) the valuation techniques and inputs used to arrive at the fair value measure, including the principal or most advantageous market.

The proposed amendments in this update would be applied on a retrospective basis to the first set of financial statements following the effective date. The effective date will be determined after the FASB considers respondents’ feedback. Comments were due April 10, 2020.

Technical inquiries

Cash flow hedge accounting

On April 28, 2020, the FASB issued a staff Q&A, “Topic 815, Cash Flow Hedge Accounting Affected by the COVID-19 Pandemic,” in response to stakeholder questions regarding the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic when applying cash flow hedge accounting under Topic 815, “Derivatives and Hedging.”

Leases and interest income recognition for payment deferrals

At its April 8, 2020, board meeting, the FASB discussed concerns related to effects of COVID-19. Two modification topics included leases, specifically concessions, and interest income recognition.

Related to leases, the board recognizes that lessors might be issuing broad-based and sweeping concessions, which create operational difficulties when applying the modification guidance in ASC 842/840. The FASB received a question whether any concessions related to COVID-19 must be accounted for under the ASC 842/840 modification guidance, citing the operational difficulties and complexities of assessing such concessions on a contract-by-contract basis. The FASB staff notes that ASC 842/840 did not contemplate the current scope of broad and sweeping modifications and concessions given by lessors. For concessions granted that are specifically related to COVID-19, the FASB staff indicates an entity could elect not to apply modification guidance, provided the cash flows in the modified lease are the same as or less than the original contract. The FASB staff also acknowledges judgment will need to be applied. On April 10, the FASB issued a FASB staff Q&A, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.”

For institutions aiding borrowers affected by COVID-19, the FASB staff answered a question about interest income recognition for a fact pattern than involves providing a loan payment holiday where no contractual interest would accrue during the payment holiday. The fact pattern includes that the loan payment holiday is not a troubled debt restructuring (TDR) and the loan payment holiday would not be accounted for as a continuation of the old loan (that is, extinguishment accounting is not applicable). The FASB staff heard two views – in view one, the new effective interest rate of the loan would be applied prospectively from the date of the modification resulting in interest income being recognized during the holiday. In view two, interest income would be recognized using the contractual terms; thus, no interest would accrue during the payment holiday. The FASB staff believes both views are acceptable under GAAP. The tentative conclusions from the April 8 meeting include interest income.

The FASB staff acknowledges diversity might exist for both the leasing question and the loan modification question, and it believes disclosure of an entity’s policies for such transactions are key.