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Financial Reporting and Regulatory Update

Third Quarter 2020

From the FASB

Final standards

Accounting for convertible instruments and contracts in an entity’s own equity

On Aug. 5, 2020, the FASB issued ASU 2020-06, “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.” This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models are 1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and 2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events.

Effective dates

For public business entities (PBEs) that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020.

Contributed nonfinancial assets presentation and disclosure

On Sept. 17, 2020, the FASB issued ASU 2020-07, “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 ASU does not change existing recognition and measurement requirements for those assets.

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; intangible assets; and contributed services.

The ASU requires not-for-profit organizations to present contributed nonfinancial assets as a separate line in the statement of activities. The ASU also requires disclosures of contributed nonfinancial assets received disaggregated by category. Required disclosures for each category of contributed nonfinancial assets recognized include: a) whether the assets were monetized or utilized during the reporting, b) if the assets were utilized, a description of the programs or activities for which those assets were utilized, c) a description of any donor restrictions associated with the contributed assets, and d) the valuation techniques and inputs used to arrive at the fair value measure upon initial recognition. In addition, the principal or most advantageous market used to arrive at a fair value measurement must also be disclosed if the market is one in which the recipient is prohibited by a donor restriction from selling or using the contributed nonfinancial assets.

Effective date

The amendments in the ASU should be applied on a retrospective basis and are effective for annual reporting periods beginning after June 15, 2021, and interim periods with annual reporting periods beginning after June 15, 2022. Early adoption is permitted.

Proposals

Franchisor revenue recognition – private company practical expedient

On Sept. 21, 2020, the FASB issued a proposed ASU, “Franchisors – Revenue From Contracts With Customers (Subtopic 952-606) – Practical Expedient,” to reduce the cost and complexity in accounting for initial franchise fees by private company franchisors and accounting outcome of deferring some or all of the initial franchise fee over the franchise license term. The proposed amendments provide a practical expedient that permits private company franchisors to account for preopening services provided to a franchisee as a single separate performance obligation if the services are consistent with those included in a predefined list with the guidance and they meet certain other conditions. The proposal requires an assessment of the ongoing fees and the relation of those fees to ongoing services. A franchisor would be prohibited from applying the practical expedient if it is not probable that continuing franchise fees will cover the continuing cost of the services plus a reasonable profit.

If a private entity has not adopted Topic 606, the proposed amendments will mirror the effective dates and transition requirements of Topic 606. If a private entity has already adopted Topic 606, the proposed amendments would be effective for annual periods including interim periods beginning after Dec. 15, 2020. Early application would be permitted. For those entities, this proposed guidance would be applied retrospectively to the date Topic 606 was adopted.

Comments were due on Nov. 5, 2020.

Stock compensation – private company practical expedient

On Aug. 17, 2020, the FASB issued a proposed ASU, “Compensation – Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards (a Proposal of the Private Company Council),” to reduce the cost and complexity of determining the fair value of private company traditional stock-option awards at grant date or upon a modification to an award. The proposed practical expedient allows a nonpublic entity to determine the current price input of equity-classified share-option awards issued to both employees and nonemployees using a valuation method performed in accordance with specific regulations of the U.S. Department of the Treasury. As a result, nonpublic entities that elect the expedient will be allowed to use the same external valuation obtained to satisfy Section 409A of the U.S. Internal Revenue Code to then calculate the fair value measurement objective in Topic 718, “Compensation – Stock Compensation.”

The proposed ASU does not yet include an effective date. Early application would be permitted.

Comments were due on Oct. 1, 2020.

Elements of financial statements

On July 16, 2020, the FASB issued a proposed Statement of Financial Accounting Concepts, “Concepts Statement 8 – Conceptual Framework for Financial Reporting – Chapter 4: Elements of Financial Statements,” to define the elements of financial statements such as assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investment by owners, distribution to owners, and comprehensive income. This proposed chapter also defines or describes certain other concepts that underlie or are otherwise related to those elements. The definitions in this proposed chapter apply to both business and not-for-profit entities. This chapter of Concepts Statement 8 would be similar to the rest of the framework in that it establishes concepts that the board would use in developing standards of financial accounting and reporting. In particular, this chapter would provide the board with a framework for developing standards by identifying elements of financial statements that could be appropriate for recognition in the financial statements and relevant to the users of those financial statements.

The proposed statement of financial accounting concept does not yet include an effective date.

Comments were due on Nov. 13, 2020.

Insurance guidance effective date deferral

On July 9, 2020, the FASB issued a proposed ASU, “Financial Services – Insurance (Topic 944): Effective Date and Early Application,” to defer the effective dates of ASU 2018-12, “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts,” by one year.

Under the proposal, ASU 2018-12 would be effective for PBEs (excluding smaller reporting entities) in fiscal years beginning after Dec. 15, 2022, and interim periods within. For all other entities, ASU 2018-12 would be effective for fiscal years beginning after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025. Early adoption is permitted.

Comments were due on Aug. 24, 2020. Subsequently, the board met on Sept. 30, 2020, affirmed its decision to defer the effective date of ASU 2018-12 by one year, revised the proposed early application adoption provisions of ASU 2018-12 to include that the early application transition date would be either the beginning of the prior period or the earliest period presented, and directed the staff to draft an ASU for vote by written ballot.

Agenda prioritization and post-implementation review

At the FASB’s meeting on July 29, 2020, the board discussed staff research and outreach on potential projects related to recent agenda and other implementation requests.

The board added the following projects to the technical agenda:

  • Consider targeted improvements for Topic 842, “Leases,” to address:
    • Sales-type leases with substantial variable lease payments
    • Lease payment remeasurement based on a reference index or rate
    • Reduction of scope in a lease contract
  • Evaluate how underwriting restrictions on the sale of equity securities should be considered in fair value measurements
  • Examine effects of other types of sale restrictions on fair value measurements
  • Consider development of a principle for benchmark interest rates eligible for fair value hedge accounting.

As part of the targeted improvements to leases, the FASB directed the staff to draft a proposal with a 45-day comment period. The board tentatively decided that lessors would be required to classify leases with payments that are predominantly variable as operating leases and that lessees would have an option to remeasure lease liabilities for changes in a reference index or rate affecting future lease payments. Also, the board tentatively determined that when a separate lease component within a contract is terminated and the economics of the remaining lease components remain substantially the same as before the partial termination of that contract, a lessee or lessor would not apply modification accounting to the remaining lease components.

Projects discussed by the board but not added to the agenda include fair value hedge accounting for fixed-rate call option monetization strategies, customer account disclosures, permitting an entity to elect as its functional currency the parent’s reporting currency for all its foreign subsidiaries, and including the current portion of fixed assets as an element of working capital.

Additionally, at the July 29, 2020, FASB board meeting, the staff provided an update on the post-implementation review (PIR) process for leases, current expected credit losses (CECL), and revenue recognition, and announced a dedicated PIR webpage for all items related to PIR.

For more information contact Crowe.